SuperGroup and easyJet promise mid-cap momentum in the stealth bull market

International Business Times Link to Video, Article:

SuperGroup and easyJet promise mid-cap
 momentum in the stealth bull market

No surprise that financial journalists are seizing on the FTSE 100's proximity to the magic 7,000 level to pen myriad articles, all variations on the "FTSE to hit a new all-time high after 15 years".

But what is perhaps far less well documented in the financial press is the fact that the FTSE Mid 250 index, including more domestically oriented sectors such as house building, non-food retail and media have been in a stealth bull market over this same period, posting a compound annual growth rate of not far shy of 10% per year including reinvested dividends, compared with only 3.9% for the FTSE 100 (Figure 1).

At a new all-time high of over 17,000, it seems as if the FTSE Mid 250 index is poised to capitalise on the economic strength evident in the UK, as we see record employment and the resumption of better wage growth while the inflation rate is the lowest seen in many a year (Figure 2).

There are two ways to invest in the FTSE Mid 250 index as it reaches a new all-time high: buy one of a number of FTSE 250 companies that are performing well and offer good value; or simply buy the entire index via exchange-traded funds (ETFs).

My personal FTSE 250 favourites

If you are taking the first approach, and are keen to buy a handful of FTSE 250 companies, I would suggest looking for exposure to the buoyant UK economy via more domestically-oriented sectors such as:

1. Travel: budget airline easyJet (UK code: EZJ.L) is enjoying ever-higher UK passenger numbers (read my February 18 budget airlines article including easyJet)
2. Non-food retail: SuperGroup (SGP.L) has benefited from a strong Christmas trading period, with 12.4% like-for-like sales growth to 10 January (read my December 22 Santa's Secret Stock Tips article)
3. House builders: Berkeley Group (BKG.L), which is exposed to the buoyant housing market in the affluent south east of England and which offers a near-7% dividend yield (see my February 2 Housebuilders' article)
4. Insurance: Lancashire Holding (LRE.L) is a Lloyd's insurer that has two key attractions: (a) a very generous 9% dividend yield and (b) the potential to become a takeover target given recent purchases of UK competitors Catlin and Brit Insurance. See my recent Lancashire Holding article for more detail.
5. Asset managers: Jupiter Asset Management (JUP.L), one of the UK's largest asset managers that  manages nearly £32bn of assets in its various funds, and which currently pays a near-5% dividend yield. Greater UK investor optimism should benefit Jupiter via higher funds under management, and thus higher management fees and profits.

Recap on the performance of my six secret Santa stock picks

I gave six FTSE 250 stock tips in a pre-Christmas article back on December 22. How have they fared in the intervening two months?

Well I am pleased to report that these stocks have returned an average 6.2% over the two months led by SuperGroup and Amlin, beating the FTSE 100 index handily. (Figure 3)

Don't want to pick single stocks? Buy a FTSE 250 ETF instead

If you prefer the lazier way and just want a single investment to capture the FTSE 250's strong momentum, the cheap way to buy exposure to the UK's economic momentum would be via a FTSE Mid 250 exchange-traded fund (ETF), such as those offered by ETF providers iShares (UK code MIDD.L), Deutsche Bank x-trackers (XMCX.L) or HSBC (HMCX.L) (Figure 4).

Bottom line: Remember the headline FTSE 100 index is more a proxy for the global stock market given its heavy weightings in global industries such as healthcare, mining and oil & gas. In contrast, the FTSE Mid 250 index is a much better proxy for domestic economic growth and has outperformed the FTSE 100 by a country mile over the past 15-plus years.

Secret Santa's festive stock tips including SuperGroup, Close Brothers and easyJet

Festive Greetings!

Here is my article and accompanying video (3mins 20) focusing on 6 top stock tips for 2015!

IBTimes article: Secret Santa's Six Stock Tips for 2015

IBTimes Video: Secret Santa's Six Stock Tips

With annual New ISA allowances now raised by the government to £15,000 per tax year (to 6 April), and cash savings rates no better than 1.5% on the high street, investing in stocks seems an obvious destination for any long-term ISA-bound savings.

With the potential for the traditional year-end Santa Claus rally close at hand after what has been a turbulent last couple of weeks, which stocks should you consider for your ISA?

Focus on mid-cap gems

Figure 1: Long-Term, FTSE Mid 250 Index Beats FTSE 100 Hands Down. 

Source: Bloomberg

Over the long-term in the UK stock market, mid-caps - the FTSE Mid 250 index - (fig.1) have far outperformed the largest companies such as Vodafone, Royal Dutch Shell and HSBC (FTSE 100 index).

So I have focused on mid-cap gems of companies drawn from different industries, all with appealing value, attractive dividend yields and high profitability; all factors that have been proven to lead to outperformance over the long-term (data kindly supplied by Stockopedia.com).

Figure 2. Six Mid-Cap Gems

Source: Bloomberg

Amlin
(AML, 461p, Insurance)

Lloyd's insurer Amlin (code: AML)  has a very strong record of profitability over the last 10 years, consistently holding or raising its dividend each year. 

Figure 3. Amlin (AML)

Source: Bloomberg

What makes Amlin even more interesting is its dividend yield exceeding 6%, plus the fact that one of its Lloyds counterparts, Catlin has just been boosted by a takeover bid from XL Group.

With Lloyd insurers the subject of merger and acquisition activity, Amlin may also become a target in time.

Berkeley (BKG, 2501p): Building & Construction

Berkeley Group (fig. 4) is a residential house builder focusing on London and the south east, benefiting from recent strong house price inflation in and around the metropolis over the last year or so.

Figure 4. Berkeley Group (BKG, 2501p): Building & Construction. 

Source: Bloomberg

The traditional spring time UK house price pick-up should lift Berkeley next year, not to mention the benefit to housing demand from effective lowering of the stamp duty burden on house sales under £937,000. This supports a very high 7.5% dividend yield, backed by £150m of net cash on its balance sheet.

Close Brothers (CBG, 1464p): Banks

Close Brothers (fig. 5) is a UK-based merchant bank offering a range of services to both business and private clients, as well as broking services and asset management.

Figure 5. Close Brothers (CBG, 1464p): Banks. 

Source: Bloomberg

The current growth in new stock market listings is a very positive trend for the company, while the company's book value has grown steadily over the last six years, the mark of a strong banking business model.

Close Brothers should benefit from strong economic growth, allowing them to grow their business loan book. 

Easyjet

(EZJ, 1604p): Airlines

Easyjet (fig. 6) has been a prime beneficiary of the boom in low-cost airline traffic throughout Europe over the past few years.

Figure 6. Easyjet (EZJ, 1604p): Airlines. 

Source: Bloomberg

The recent collapse in oil prices represents a future boost to profitability, as fuel accounts for a large slice of any airline's costs.

Easyjet has carried increasing numbers of passengers at higher passenger yields, resulting in impressive growth in earnings since 2012, which should continue out to 2016 as it focuses increasingly on capturing more European business travellers. 

Soco(SIA, 272p): Oil & Gas. 

Soco International (fig. 7) is an oil exploration and production company with widespread interests in countries including Vietnam and the Republic of Congo.

Figure 7. Soco International (SIA, 272p): Oil & Gas. 

Source: Bloomberg

It is rare among its oil and gas peers in boasting very steady oil production volumes, a superstrong balance sheet with $284m of net cash and the ability to easily support a robust 5.3% dividend yield from its surprisingly stable earnings stream.

A crude oil price recovery would be a key catalyst for Soco, with Brent back down at $61/barrel versus a June high of $115/barrel.

SuperGroup

(SGP, 815p): Retail.

SuperGroup (fig. 8), the retailer of the Superdry fashion brand, has seen its share price fall from a high of over £17 to less than half of that today, as like-for-like sales growth has gone into reverse (-4% as of the latest interim results).

Figure 8. SuperGroup (SGP, 815p): Retail. 

Source: Bloomberg

In spite of that, SuperGroup should achieve revenue growth of 10% of more over the next two years, with the potential to see even higher profitability as it raises gross margins.

And yet, the company's shares are only valued at 12 times next year's profits, a bargain given the expected revenue growth rate.

These six mid-cap gems offer a rare combination of attractive value, high dividend income and are all very profitable, a potent combination offering substantial upside for 2015.

Merry Christmas and a Happy new Year to you!

Edmund Shing

Warm Up on Polar Capital!

Polar Capital: A Good Time To Warm Up

Polar Capital (LON:POLR) is an asset manager, managing a selection of investment trusts (like the Polar Capital Technology Trust, PCT; and the Polar Capital Global Financials Trust, PCFT). They also manage a number of unit trusts and hedge funds, with their Assets Under Management (AUM) up to $13.6bn as of the end of June this year.  

Why I Like Asset Managers

I like asset managers for a number of reasons: 

1. Firstly, their business model tends to be asset-like, but highly profitable. 
2. Secondly, as a result of this they are often serial dividend payers and growers, and 
3. Thirdly, they also tend to hold net cash on their balance sheets, a good buffer to have against periodic stock market and economic downturns. 

They Should Benefit from Financial Repression

We remain mired in a strange economic scenario, where global economic growth is struggling and requires a very helping hand from central banks around the world, in the form of Zero Interest Rate Policies (ZIRPs) and Quantitative Easing (QE) programs. While these ultra-low interest rates have been manna from heaven from borrowers, they have been dreadful news for savers, with UK deposit savings rates falling year on year (Figure 1).

1. UK Deposit Rates Hit a New Historic Low

And yet, scarred no doubt by 2 stock market crashes since the year 2000, the average UK household has preferred to keep a large amount of savings in the form of cash, rather than any other higher-yielding investments like stocks and shares. This is a global trend; In the US and Germany, for example, cash held on deposit by households continues to hit new highs at over 0.4% of GDP (red line and right-hand scale on Figure 2), in spite of the five-year old stock market rally and the US S&P 500 index recently breaching the 2000 level. 

2. US Savers Keep Record Amounts in Cash

As these ultra-low interest rates on cash deposits remain, there will be added pressure over time on households to find better yields elsewhere, in other asset classes like stocks and bonds.

Right Now, Stocks Yield the Most

The Hunt for Yield should push investors towards stocks, given the already-depressed yields now available on government bonds; note that you now have to pay the German government in effect for them to keep your money for 1 year (Figure 3)! While the FTSE 100 index is due to pay out 3.7% this year...

3. Stocks Yield More than Bonds or Cash

So for asset managers like Polar Capital (LON:POLR) who specialise in stock-based funds or higher-yielding specialist areas like emerging market bonds, this should ensure positive inflows over the medium-term. 

Polar Capital: High Dividends, Backed By High Profitability and Cash on Balance Sheet

Running Polar Capital by the numbers reveals a number of strengths that attract me to the stock. Firstly, the dividend yield is high at 7.3% on a prospective basis (Figure 4), although Stockopedia registers an even higher 7.9% yield number. these compare very favourably to yields available elsewhere in the higher-yielding Asset Management sector. Moreover, this dividend has grown steadily from 4.5p for March 2010 to a forecast 30.8p for the fiscal year ending March 2015. 

4. US + UK Asset Managers' Dividend Yields

You might be concerned that Polar Capital's dividend cover ratio is only 1.1x, but there are a couple of further positives that should allay these dividend payment fears. 

Profitability, as measured by last year's Return on Equity, are also generally high across the Asset Management sector, with Polar Capital posting a very respectable 23% ROE (Figure 5):

5. US + UK Asset Managers' Return on Equity

Finally, net cash on balance sheets is high across UK asset managers, averaging over 14% across the sector ex Polar Capital, while Polar Capital itself has an even better 24.6% level of net cash on balance sheet as a percentage of current market capitalisation, better than any other major asset manager bar Man (LON:EMG) (Figure 6):

6. UK Asset Managers' Net Cash on Balance Sheet as % of Current Market Cap.

Basic Valuation Also Looks Attractive

Aside from the high dividend yield, bear in mind that the forecast P/E (once cash on balance sheet is substracted) comes out very cheaply at under 9x for March 2015 and an Enterprise Value/EBIT ratio of only 7.3x, while book value growth has been impressive since 2010 too. 

So What's The Catch? Slowing AUM Growth, Stock Market Risk

a. End-June: First Outflow in 15 Quarters 

The latest statement on assets under management as of 30 June revealed that AUM had only grown 3% in the quarter since the end of March, in effect suffering a net outflow for the first time in 15 quarters. This marks a pause in their impressive growth rate, which had seen AUM grow from just $2.5bn in March 2010 to $13.2bn by March of this year (Figure 7):

7. Polar Capital's Impressive AUM Growth Track Record

b. High Stock Market Beta: Great When Stocks Rise, But Painful in a Bear Market 

Clearly, while asset managers tend to see growth in AUM and thus rising profits in a bull market, they are also very sensitive to a bear market, when they tend to under-perform benchmark stock indices like the FTSE 100, as was the case back in 2008 and 2011, when both US asset managers (black line) and UK asset managers (yellow line) suffered greatly (Figure 8):

8. High Market Beta Means Pain During Bear Markets for Asset Managers

With all this in mind, I still find Polar Capital (LON:POLR) very tempting at the current share price of a tad under 430p, resulting in a single-digit ex-cash P/E valuation, particularly given that one is paid to wait by the generous dividend yield. 

Remember that with 32% of Polar's shares held by directors and employees, their interests are very much aligned with other shareholders!

But of course, Do Your Own Research as ever!

Edmund

- See more at: http://www.stockopedia.com/content/warm-up-on-polar-capital-86071/#sthash.uWUExNkc.dpuf

Stay in May and don’t fly away…

I find that I am greatly tiring of the plethora of articles which arrive around this time of year, urging investors to “sell in May and go away – come back on St Leger’s day”. Every year following May Day it is the same story but I believe the record needs to be set straight…

1. Yes, November to April is the strongest seasonal period for the FTSE 100 Index

As Figure 1 illustrates, the FTSE-100 index has typically posted its strongest seasonal performance over the six months from the beginning of November to the end of April the following year, judging from average monthly returns since 1986. December returns (including dividends) have averaged 2.6%, while April has been the second-best month at 2.1%.

1. FTSE-100 Index Has Posted Strongest Returns in December, April

Source: Author, Bloomberg

Judging from this 29-year history for the FTSE-100, May comes in as the ninth-best month for stockmarket returns, with a 0.3% – not all that impressive but nevertheless a positive average return.

2. And yes, this is true also for emerging market stocks…

Figure 2 shows the average monthly returns since 1990 for the MSCI Emerging Markets index, the main benchmark index used for investing in this geographic segment.

 

2. Emerging Market Stocks Show an Even More Pronounced Seasonal Effect

Source: Author, Bloomberg

 

In the case of emerging markets, the average return has been zero for the month of May, typically following a strong April, which has typically been the second-best month for emerging market gains.

3. The real danger period for UK stocks is between June and October

If we look at the table in Figure 3, which shows monthly returns for the thee UK FTSE stock indices by size, we can see the real danger period for stocks historically has really been June to October, with negative returns registered on average over two to three of these months.

To read the rest of this article, view the conclusions and all the charts,
please click on the link below:

Stay-in-may-and-dont-fly-away

Footsie reaches for the 7000 mark. But there are better places for your money!

A lot has been made in recent days of the fact that the iconic FTSE-100 index (that has existed since 1986) is close to breaking its 14-year high, reached during the technology bubble back in early 2000.

Will the Footsie break through to a new multi-decade high? How much further can it go if it does? These questions are all well and good, but are not really the right questions to be asking.

In the Stock Market, Size is not Everything!

Should you even be looking at the benchmark FTSE-100 index at all? The real value creation in the UK stock market has not been in these largest of companies, dominated over time by Banks, Telecoms companies and Oil majors. Instead, investors have been far better served by the mid- and small-cap segments of the UK market, not only over the past 14 years but even further back as well.

Including reinvested dividends over time, the FTSE-100 has given investors a mere 3.7% on average since the end of 1999 (the line in black on the chart – and that’s not counting management fees even in an index fund); compare this to the 6.5% pre-fees from the Small-Cap index (in green) and an impressive 10.2% pre-fees from the Mid-250 index (in red), nearly three times the average return from large-caps!

This was largely achieved through two key biases:

1. A bias towards domestic economic exposure, which is greater in the mid- and small-cap segments of the stock market. In contrast, FTSE-100 companies tend to be global by nature, and indeed often have little to do with the UK per se (look at the Miners, for example).

2. Low weightings in hard-hit sectors, such as Banks, Insurance, Telecoms and Oil Majors. All of which have come a cropper either during the recent Financial Crisis, or before that post the 1999-2000 Tech bubble.

3. Let us not forget either that smaller companies generally also post higher growth rates in sales and profits too…

Despite this superior performance record for mid- and small-caps, you can’t even make the argument that mid- and small-cap companies are now systematically over-valued with respect to their large-cap counterparts: the estimated Price/Earnings ratio for the FTSE 100 is a little lower than for the Mid 250 index at 12.5x versus 14.6x, but it is not as low as for UK Small Caps, which trade at only 11x estimated end-2014 profit.

To see the charts, and look at the ETF and investment trust selections that I think will beat the FTSE-100 going forwards, please click on the Mindful Money web link below:

Footsie reaches for the 7000 mark. But there are better places for your money!

Until the next time,Edmund

Is The "Great Rotation" Finally Appearing?

Bond prices fall (and long-term interest rates start to rise)

Now that government bonds have been falling for a number of months (with bond yields rising inversely to the falling price), as global economic growth prospects have steadily improved, and also as investors grow increasingly nervous of any change in monetary policy from the US Federal Reserve, potentially slowing the rate at which they currently buy US government bonds (under their Quantitative Easing program) from the US government. 

1. Euro, US government bonds have lost over 5% since April this year

Up to now, the Fed has successfully helped to drive long-term interest rates both in the US and indeed worldwide to new historic lows, in their attempt to support growth in the US economy. However, now all the talk in financial markets over the last couple of months has been about a shift in monetary policy towards "tapering", i.e. not buying quite as many US bonds as they have done up to now, in an effort to begin weaning the US economy off the "easy money" drugs before it becomes too much of a permanent habit. 

US investors take note, respond by pulling money out of bond funds

US retail investors have responded to this expectation of slight change in US Fed policy by selling bond funds in size. 

2. Finally, retail investors start to sell bond funds

Interestingly, the same retail investors have tended to put money into equity funds, chasing the upwards momentum in US and foreign stock markets. 

3. But they continue to put money into equity funds

As economist Ed Yardeni comments: 

"over the past 13 weeks through the week of August 28, the Investment Company Institute estimates that bond funds had net cash outflows totaling $438 billion at an annual rate. Over the same period, equity funds had net cash inflows of $92 billion at an annual rate. I wouldn’t describe that as a “Great Rotation” just yet, but it could be the start of a big swing by retail investors into equities."

Ed Yardeni - Great Rotation?

What does my Multi-Asset Trending System (MATS) have to say?

My proprietary multi-asset trending system, that chooses between equities, bonds and cash once per month in a number of different regions, is invested 60% in equities (UK small-caps, Euro low volatility, Japanese currency hedged shares) and 40% in cash. Note: 0% is invested this month in government bonds, highlighting the poor trend in bond market performance over the past few months. 

Why listen to this systematic (i.e. the asset classes are chosen using a simple mathematical model rather than by yours truly!) investment approach? Because it has gained over 15% net of trading costs in the year to date, that's why! 

The Main Risk: That there is more to come out of bonds, into equities

Judging by ETF flows over 2013 to date, the risk is that this reversal in flows in bonds funds could turn from a trickle into a flood: looking at global bond (fixed income) Exchange-Traded Fund (ETF) flows, this year to date has still been positive to the tune of nearly $19bn, on top of strong positive inflows over 2010-2012. 

Source: BlackRock4. Bond ETF flows have been strongly positive since 2010.

Conclusion: Equity Income Funds look set to attract bond refugees

We can see from the following chart that UK investors have also been putting greater amounts of cash into equity unit trusts this year, while flows into bond funds have been, in contrast, stagnant. 

5. UK retail investors putting increasing amounts into equities too...

My personal theory is that retail investors will look to replace the income generated by their bond funds with equity income funds instead; i.e. that they will buy funds focused on good dividend-paying names in the UK and Continental Europe. 

6. UK Dividend Aristocrats ETF surges upwards

One of my personal favourite ways to buy into solid dividend-paying names without taking too much risk is via the SPDR UK Dividend Aristocrats ETF (UKDV). This ETF focuses on dividend-paying companies in the UK that have managed to raise their dividend consistently each year over at least the past 10 years. As a result of this dependability, this group of dividend payers have the happy side-property of having on average lower volatility (i.e. less risky) than for the overall market. On top of that, it is also an easy way to buy into the outperformance of value strategies over the long-term.

If you want to be more sporty with your investment, then I would look at a portfolio of UK mid-cap and small-cap companies that have not only raised their dividend consistently over the past few years, but that offer a decent dividend yield (over 3%, thus much better than government bonds or cash rates) combined with strong price momentum. 

You might want to look at: Sports Direct (SPD), Tribal Group (TRB), Chesnara (CSN), Aviva (AV), James Latham (LTHM) and ICAP (IAP) as good examples of stocks that fit this description. 

Good luck with your investments,
Edmund

Mid-Caps still leading the way!

Looks like we are getting a classic January effect with mid- and small-caps; the FTSE Mid-250 index has clearly broken to new multi-year highs, while over the other side of the Pond, the small-cap Russell 2000 index has the beating of the large-cap S&P 500 index...

FTSE Mid-250 breaking out!

Russell 2000 surges ahead of S&P 500

Now while I would caution against unbridled enthusiasm for the stock market right now, given the recent rally, I would suggest that this mid- and small-cap effect has further to run this month. You can play this one of two ways: either -

1. Buy a FTSE Mid-250 mid-cap ETF (like the iShares FTSE Mid-250 index ETF, code: MIDD);

2. Buy a selection of mid- and small-cap UK stocks that are breaking to new 52-week price highs at present. 

For the latter, I can suggest looking at the top movers in the index, which according to Yahoo Finance UK today are: Miners Ferrexpo (FXPO) and Bumi (BUMI), plus aerospace & defence stock Chemring (CHG) and homebuilders Bovis Homes (BVS) and Barratt Developments (BDEV).

Disclaimer: I own shares in Chemring