FEA­TURE

Get in the best in­vest­ment shape for the end of the sum­mer hols with our snapshot of the mar­ket

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Your back to school crib sheet

The ta­bles fea­tured in this ar­ti­cle give you the per­fect start­ing point to swot up on stocks dur­ing the sum­mer lull and be­fore the mar­ket kicks back into gear in the au­tumn.

We’ve pulled to­gether five data-driven snap­shots that should help drive idea gen­er­a­tion for all in­vestors whether or not your fo­cus is on value, growth or in­come.

LOW PE CAN­DI­DATES (PRICE TO EARN­INGS)

The widely-used PE ra­tio is a sim­ple way of es­tab­lish­ing the value of a share. It is the share price di­vided by the earn­ings per share of the com­pany.

Fast-grow­ing com­pa­nies can of­ten com­mand a PE mul­ti­ple in ex­cess of 20; slow, pedes­trian com­pa­nies tend to be val­ued around 10 to 14 times earn­ings; and com­pa­nies with ei­ther fi­nan­cial or trad­ing prob­lems will in­evitably have a PE ra­tio be­low 10.

The trick for in­vestors is to look at those names trad­ing on lowly PEs and try and de­ter­mine if there are any names on which the mar­ket is be­ing overly nega­tive.

Of the names in the ta­ble many are cheap for a rea­son. News­pa­per pub­lisher Reach (RCH) – pre­vi­ously Trin­ity Mir­ror – has stub­bornly traded at a low sin­gle digit earn­ings mul­ti­ple for some time and re­cently an­nounced big write downs as­so­ci­ated with its re­gional news­pa­per busi­ness. Some of the re­sources plays have sig­nif­i­cant bor­row­ings which are re­flected in the val­u­a­tion

(En­quest (ENQ)) and all of them are sus­cep­ti­ble to earn­ings volatil­ity thanks to the un­der­ly­ing swings in com­mod­ity prices.

Es­tate agent Coun­try­wide (CWD) is await­ing share­holder ap­proval for an emer­gency share plac­ing while de­part­ment store Deben­hams (DEB) has its own balance sheet is­sues.

Re­cently de­merged Bank of Ge­or­gia (BGEO) could war­rant fur­ther in­ves­ti­ga­tion given the strong eco­nomic growth in Ge­or­gia and the his­toric good per­for­mance of spin-off com­pa­nies.

BEST EARN­INGS GROWTH

The abil­ity to grow earn­ings con­sis­tently and quickly is typ­i­cally a recipe for strong share price gains. A growth in­vestor may not worry too much about val­u­a­tion and fo­cus in­stead on the size of the op­por­tu­nity a busi­ness is chas­ing. The key is to check that this earn­ings growth is be­ing ac­com­pa­nied by plenty of cash flow.

Many of these firms, which have gen­er­ated the most ma­te­rial ten-year an­nu­alised earn­ings growth of any FTSE All-Share con­stituents, are ex­pen­sive. At 505p and on an April 2019 price to earn­ings ra­tio of 13.7, pack­ag­ing play DS Smith (SMDS) is among the ex­cep­tions. It could be in­ter­est­ing given it is a ben­e­fi­ciary of the growth of on­line shop­ping.

LOW PEG CAN­DI­DATES (PRICE TO EARN­INGS GROWTH)

The PEG ra­tio is a mea­sure of value that com­bines a com­pany’s price to earn­ings (PE) ra­tio and its rate of earn­ings growth, thereby re­fin­ing the PE ra­tio. A low PEG in­di­cates you’ll pay a low price for fu­ture earn­ings growth, any­thing be­low a read­ing of 1.0 is con­sid­ered cheap.

Watch out for very low PEG ra­tios as there could be some­thing fun­da­men­tally wrong with the busi­ness. Some mar­ket com­men­ta­tors say the sweet spot for bag­ging a value in­vest­ment is when the PEG ra­tio is some­where be­tween 0.6 and 0.8.

We have fo­cused on this sweet spot and lim­ited our search to FTSE 350 con­stituents. The oil-re­lated names in Royal Dutch Shell (RDSB) and ser­vices plays

Hunt­ing (HTG) and Wood Group (WG.) have fairly dif­fi­cult to pre­dict earn­ings thanks to their ex­po­sure to see-saw­ing oil prices.

The most in­ter­est­ing names are prob­a­bly in­dus­trial

buy­out spe­cial­ist Mel­rose In­dus­tries (MRO) and air­line Wizz Air (WIZZ). Mel­rose will be look­ing to dis­pel some lin­ger­ing mar­ket skep­ti­cism around its abil­ity to take on the chal­lenge of turn­ing around its big­gest ac­qui­si­tion to date in GKN.

Hun­gary’s Wizz up­graded full year earn­ings guid­ance in May, ben­e­fit­ing from de­cent eco­nomic growth in the ar­eas it op­er­ates in and tight con­trol of costs.

COM­PA­NIES OF­FER­ING HIGH YIELDS

We’ve fil­tered the mar­ket for high-yield­ing stocks where div­i­dends are com­fort­ably cov­ered by earn­ings. Cover be­low 1.5 times im­plies that the busi­ness may not be able to sus­tain the level of div­i­dends presently fore­cast.

Although this guide is not fool­proof as div­i­dends are paid from cash, earn­ings per share fore­casts can be help­ful since they give a broad feel for how a busi­ness is ex­pected to per­form.

The high yields on of­fer from the house­build­ing sec­tor re­flect grow­ing mar­ket skep­ti­cism over this group­ing’s abil­ity to sus­tain cur­rent lev­els of prof­itabil­ity.

Our favourite names from this col­lec­tion in­clude pub group Marston’s (MARS) which re­cently en­joyed a timely boost from the World Cup.

We also reckon over-50s in­sur­ance and travel busi­ness Saga (SAGA) can re­cover from a dif­fi­cult spell given its ex­po­sure to help­ful de­mo­graphic trends.

BEST DIV­I­DEND GROWTH

Div­i­dend growth sig­nals a board’s con­fi­dence in its charge’s long-term cash gen­er­a­tion ca­pa­bil­i­ties. You can draw the con­clu­sion that the board sees scope for value ac­cre­tion in the busi­ness over the com­ing years and there­fore you could see a ris­ing share price plus a steady in­crease in div­i­dends.

This ta­ble shows the com­pa­nies with the best an­nu­alised growth in div­i­dends dur­ing the last decade. Some of these busi­nesses may strug­gle to gen­er­ate such im­pres­sive in­come growth in the fu­ture, notably Mi­cro Fo­cus (MCRO) is strug­gling with its hard-to-swal­low ac­qui­si­tion of HPE Soft­ware.

The out­look may be slightly brighter for

Money­su­per­mar­ket.com (MONY). The com­par­i­son site re­cently won the mar­ket’s at­ten­tion with the un­veil­ing of a new joint ven­ture aimed at de­liv­er­ing com­par­i­son ser­vices on mort­gages (19 Jul).

The mort­gage mar­ket is still largely con­ducted through the phone and on pa­per in the UK and as such is ‘ripe for dis­rup­tion’ ac­cord­ing to Money­su­per­mar­ket.

The 50-50 joint ven­ture en­ti­tled Podium, sees the com­pany team up with the founders of com­par­i­son tool de­vel­oper HD De­ci­sions, Mark Hawkins and Matt Den­ham. (TS)

Source: SharePad, 3 Au­gust 2018, only in­cludes FTSE All-Share com­pa­nies

Source: SharePad, 3 Au­gust 2018, only in­cludes FTSE All-Share com­pa­nies ex-in­vest­ment trusts

Source: SharePad, 3 Au­gust 2018, only in­cludes FTSE 350 com­pa­nies

Source: SharePad, 3 Au­gust 2018, only in­cludes FTSE All-Share com­pa­nies ex-in­vest­ment trusts

Source: SharePad, 3 Au­gust 2018, only in­cludes FTSE All-Share com­pa­nies with div­i­dend cover of at least 1.5 times

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