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.

Value Small-Cap of the Month: The Mission Group (TMMG) - Media Sector

Every month, I will be focusing on a compelling mid- or small-cap value story. This month, I a going to focus on a UK media company called The Mission Group (code LON:TMMG), whose current market value is £39m, and is listed in the AIM segment of the London market.

What Do They Do?

The Mission Group is comprised of a number of marketing, advertising and public relations agencies (11 in total), based in the UK, San Francisco and Singapore. Key clients include Tesco, Volvo, Scania and Virgin Atlantic. 

You can find a lot more information about The Mission on their web site.

Where is the Value?

In simple terms, The Mission is cheap on a number of traditional value metrics including forecasts P/E, price/book value and price/sales (Figure 1):

1. TMMG is Cheap!

Source: Stockopedia

For lovers of combining Value and Quality criteria, The Mission comes out extremely well on Piotroski's combination of low price/book value ratio (0.6x) and his F-score of quality, where the Company scores a high 8 out of a possible 9. So The Mission looks great value at least. 

The Total Shareholder Yield also looks strong, combining a 2.3% dividend yield with a £1.7m reduction in net debt worth another 5% or the Company's market cap, so a total yield of well over 7%, in line with the Free CashFlow Yield of just under 10%. 

What about Momentum?

Secondly, price momentum over the last 3 and 12 months has been very positive, with the shares gaining some 16% and 82% over these two periods respectively. 

2. TMMG Has Already Made Some Impressive Price Gains

3. But There is a Long Way to Go To Regain Prior Highs

But back in late 2007, the stock reached a high of 150p, if only briefly. So even after such impressive gains over the last 12 months, it would need to nearly triple to get back to historic highs. 

And Is There a Reason to Buy the Company Now?

Key highlights from The Mission's 2013 Annual Report were encouraging:

• Revenue +9% to £51.6m;
• Profit Before Tax +3% to £5.0m;
• Net Debt sharply lower to £10.7m, -£1.6m versus FY2012;
• Annual dividend of 1.0p put in place, versus nil before.

So operating trends certainly look promising, while back in February this year, the Investor's Chronicle publication highlighted The Mission as a very cheap recovery stock. 

A key driver for the Company, as for all advertising-related companies, is the strong underlying economic growth being experienced in the UK, with London the epicentre. Normally, domestic economic growth has a leveraged effect both on top-line revenues (clients want to spend more on advertising) and also on profitability (as the major cost of ad agencies are their staff salaries, plus office rent, which are largely fixed). 

What are the Risks?

1. Even after nearly halving the debt in 4 years since 2009, there is still nearly £11m of net debt outstanding (Figure 5).That said, this is less than 1.5x the 2014e forecast EBITDA of £7.7m, so normally this should not be a big issue.
2. The promised boom for advertising from the growing economy may not materialise as expected.
3. Most of the stated book value is net Goodwill (£71m), so who knows what the true economic worth of TMMG's intangibles like branding, network etc. really is?  

5. TMMG's Balance Sheet

Investment Summary

Overall then, TMMG is very cheap, with a share price that is moving up nicely (has broken through recent price highs) but which has plenty of scope to move up further before hitting all-time historic highs, together with plenty of leverage to the improving UK economy. 

On Stockopedia's StockRanks system, this all adds up to a near-maximum 99 combined StockRank (Figure 6)!

6. TMMG's Combined StockRank is 99!

Source: Stockopedia

So The Mission (TMMG) is the first company to go into my UK Model Portfolio, at an entry price of 54.75p.

Edmund

AstraZeneca gets a Pfizer boost

I highlighted the potential value in AstraZeneca (AZN.L) back in December of last year (AstraZeneca: why it should defy the bears and perform in the long term) when it sat at just above £36, pointing to excessive bearishness on the part of professional analysts and investors, and the potential for a revaluation of its pipeline of new drugs under development.

It seems from the weekend press (The Sunday Times reported a mooted $101bn bid for AstraZeneca by Pfizer) that the US drug giant Pfizer would agree, as Pfizer is reported to have been recently in talks with AstraZeneca to merge their two companies.

Such a deal would bring Pfizer further drugs under development in the field of cancer treatments (oncology) that use the body’s own immune system to attack cancer.

This has taken AstraZeneca up this morning back above the £40 price mark, close to the highs around £41 hit back in late February of this year (Figure 1).

1. ASTRAZENECA GETS A PFIZER BOOST

Source: Bigcharts.com

Not the only Pharma deal today

Note that merger & acquisition activity is firmly back on the stock market agenda today, with not only this Pfizer/AstraZeneca talk, but also a big deal taking place between the Swiss company Novartis and the UK’s GlaxoSmithKline, with Novartis buying Glaxo’s cancer business for as much as $16bn, with Glaxo buying Novartis’ vaccines business in return for just over $7bn.

So after a long period where there had been little such activity, it seems that M&A is back on the Healthcare sector’s menu.

Highlights the latent value in Astra

Just to remind you, AstraZeneca is still relatively good value, offering a dividend yield in excess of 4% at the current £40.49 share price. At a forecast 11x EV/EBITDA valuation ratio, Astra is no longer as cheap as it was back at the end of last year, but nevertheless could offer further upside should a deal with Pfizer finally materialise.

Weekly Newsletter, March 10 2014

Is The Ukraine Question Going To Hit Markets Again?

And things seemed to be going so well for global stock markets! Mid- and Small-cap indices hitting new highs, then followed by the large-cap benchmark indices such as the S&P 500 in the US and the Euro STOXX 50 in the Eurozone. Then comes President Putin with his move into the Crimea (where the Russians maintain a strategically-important Black Sea naval port), and hey presto, we suffer a nasty, if short-lived, dose of market volatility.

But notice also that the trend in mid-term volatility (shown below) has been rising from the lows hit in early January, well before the Ukrainian-triggered flare-up in volatility over February.

1. US Mid-Term VIX Volatility Gently Rising

Source: Bigcharts.com

Whether or not this market volatility will worsen will depend on whether the US and Europe press ahead with any form of economic sanctions against Russia.

I believe that Europe in particular will not be hasty to pursue this course of action, given the value of Russian gas to the Old Continent.

A Few Energy Policy Considerations

This political instability in Ukraine underlines the fragility of European energy policy, given that one-third of Europe’s natural gas supplies come from Russia via the Ukraine (particularly important for Germany and the Netherlands). Thus, any economic sanctions against Russia are very likely to have a heavy hit for the European economy too, which is precisely why sanctions look unlikely in the near-term.

Of course, this means that European nations will not want to rely too heavily on Russia for natural gas output in the future, as this recent episode has underlined just how toothless they are in the face of volatile Russian foreign policy.

As they are committed in general to reducing their reliance on nuclear power (Germany in particular, but also France), what can they do about the precarious natural gas supply situation?

Industries That Should Benefit From This Situation

Renewables will benefit of course (solar, wind, hydro, biomass), which is one reason why clean energy funds have been performing so well (see chart below).

2. PowerShares Clean Energy ETF is Roaring Away

Source: Bigcharts.com

Algeria also benefits from French largesse as the French pay over the odds for Algerian natural gas supply for diversification reasons (and historic reasons too).

But I believe that the ultimate winner will be shale gas exploration and production in Europe, led of course by the UK. But other nations will inevitably follow…

I remain a big long-term fan of oil service companies can that enable/facilitate shale oil/gas exploration, extraction and processing/transportation. I would rather take exposure to these companies (who provide the “shovels”) rather than the exploration companies themselves, given the uncertain hit-and-miss nature of exploration activity.

The Oil Service companies have shown some excellent share price performance over the last month, with the IEZ iShares US Oil Equipment & Services ETF up 15% in a month!

3. iShares US Oil Equipment & Services ETF +15% in Feb.

Source: Bigcharts.com

UK-listed oil service companies that continue to do well on the back of this theme include: 

Kentz Corporation (KENZ.L), Petrofac (PFC.L), Wood Group (WG.L), 

KBC Technology (KBC.L) and AMEC (AMEC.L).

An Interesting Perspective on the Current Bull Market

This week, the bull market that started in 2009 celebrated its fifth anniversary. Now, there was a big correction back in 2011 at the peak of the Euro financial crisis, when the S&P 500 index lost almost 20% form peak to trough. Since then, we have surged back to hit new highs.

The chart below from www.chartoftheday.com puts the current stock market rally in to historic context. It highlights that the current rally in the US S&P 500 index is, thus far, nothing particularly remarkable or stretched when compared against previous historical bull market rallies.

4. Similar in Duration to the Average Rally, But Not As Strong!

Source:  www.chartoftheday.com

This all suggests to me that, should we navigate these choppy Eastern European without a full-scale “new cold war”, there is still further upside potential over the medium-term for developed stock markets, while economic growth momentum continues to slowly build up steam on both sides of the Atlantic Ocean.