Fact of the day
What’s been going on?
Well that seems to have done the trick. For now.
Jeremy Hunt’s almighty fiscal handbrake turn pretty much immediately got the UK market back on board on Monday.
In fact, no sooner had the chancellor taken a pickaxe to his predecessor’s tax plans than the bond market offered its hand in a truce.
With a mountain of near-term public borrowing off the table, bond buyers stopped demanding a higher yield for UK gilts (so-called because they had shiny golden edges once upon a time), sending prices higher and settling a few nerves.
We’ll get more detail on the measures when Jez gives his medium-term fiscal plan on 31 October but UK investors clearly took the statement as a chance to get back into UK stocks.
Home-market stock pickers haven’t had a lot to shout about over the past few years. A forward price-to-earnings (P/E) ratio of around 9 currently values the index lower than all other major regions, part of a trend that saw September UK fund outflows of £694m, marking the 16th straight month of net selling, according to Calastone.
Though, this week might turn out to be a turning point if the mood music stays jaunty.
For UK backers with a sunny disposition, Covid’s hopefully now in the rearview mirror, the initial shock of the war in Ukraine has informed market forecasts and national energy plans, supply chains are coming back online, overexcitement in US tech has calmed, inflation is being tackled and rates are rising.
That’s not to say things can’t get worse, they can and often do. But there’s already a significant amount of negative sentiment now baked into valuations and expectations.
On top of that, there’s clearly a tentative truce between the government and the City’s bond vigilantes, with the gilt market giving its own nod of approval.
Even if the absolute market bottom is yet to come, we have to remember that we shouldn’t actually be waiting for someone to fire the starting pistol and send stocks ripping back up the page.
It’s better for our sanity and our long-term portfolios if we identify quality firms trading below their value or at a reasonable price and edge into the market, especially when it’s painful, rather than pace the sidelines waiting to pounce.
Well and truly Warhammered but is Games Workshop (GAW) making a comeback?
The fantasy figurine maker is a big player in a cornered market and could not have asked for better boardgame conditions than the past few years have offered.
The stock rode the Covid wave but a more muted growth trajectory has really taken the shine off the share price over the past year. It’s what tends to happen when a stock is sitting on a punchy valuation above 30x earnings. Sooner or later it has to back that confidence up with some big numbers or have the valuation come down to a more fitting level.
With pre-tax profits dropping, albeit expectedly, to £39m from £45m in 2021, investors have now decided a P/E ratio of 16 has a better ring to it.
But a recent uptick in the stock price might be a sign investors are shaking off the Covid hangover and are ready to strap in for the long haul.
And arguably the long-term view is the best one to have here. GAW regularly talks up how efficient it is at producing good growth from the money it pumps back into its business units.
To be fair, this return on capital employed (ROCE) measure has been impressive over the years at well over the 15-20% a lot of professional investors like.
If the company can deal with cost inflation and keep players around while household purse strings inevitably get tighter, it might just get back to those pandemic highs sooner rather than later.
Got stung 🚑
On The Beach (OTB) is on the ropes.
The package holiday site was hit predictably hard over Covid. And now, falling travel volumes are being exacerbated by investors predicting inflation-conscious consumers will focus on groceries, not holidays.
The gory result is a share price down 75% over five years and 69% in the past 12 months. Ouch.
But could there be a shimmering Marbella sunrise on the horizon for the sector?
Well, maybe. And OTB might have a particular advantage over its tourism pals.
The Association of British Travel Agents (street name: ABTA) recently said twice as many of us in Britain have holidayed abroad this year compared to 2021. Not a tremendously useful comparison given lockdowns, but volumes were up to 70% of 2019 figures. That’s a decent comeback, given UK travel restrictions only fully lifted in March.
So, the wheels are in motion but OTB’s real opportunity comes in ABTA’s forward-looking research. Despite inflationary pressures, 61% of this year’s travellers plan on jetting off next year and, importantly, 35% will opt for a cheaper trip.
While the broader sector hopes for a recovery, OTB could be better equipped to benefit from those choosing to save money on a package holiday.
A P/E ratio of 7 (it has been over 40 in recent years) shows just how out of favour the stock is and how shaky a path it’s treading at the moment. But, if the UK ditches poolside luxury for a lower-cost all-in-one vacation, it could get the bounce its investors are so desperately hoping for.
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