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Two contrarian stocks for your pension that FE Alpha Managers are backing

19 October 2014

Henderson’s James Henderson and JOHCM’s Alex Savvides reveal the unloved stocks they have recently picked up with a long-term view.

By Daniel Lanyon,

Reporter, FE Trustnet

Buying bombed-out stocks is no guarantee of future market gains but with the FTSE taking a battering, for an investor with a long-term horizon the past few days represent arguably the best entry point in over a year to scoop up stocks that have seen material declines.

Here, two FE Alpha Managers reveal their latest purchases, both representing just 0.5 per cent of their portfolios, which they have very recently bought on a view between three and five years.

Tellingly both stocks don’t appear in any other funds’ top 10 holdings, having been amongst the worst performing in the FTSE 100 this year.


James Henderson – Royal Mail

The manager of the £564m Henderson UK Equity Income & Growth fund has bought back into one of the most controversial stocks in the index, Royal Mail.

Almost a year to the day since its frantic initial public offering in October 2013, Henderson bought the stock having held it after floatation and then selling it several months later.

He says it has reached an attractive entry point after falling more than 25 per cent year to date.

“It is a long-term thing and it may have a disappointing set of numbers or two but there is a restructuring story. It is currently a 5 or 6 per cent margin business but could become an 8 per cent margin business and that is not in current forecasts.”

According to FE Analytics, where data starts from the close of its first day’s trading, Royal Mail soared a further 35 per cent following its frantic debut but has plummeted 26.46 per cent since the start of 2014 while the FTSE 100 index is down 5.24 per cent.

Performance of stock and index in 2014

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Source: FE Analytics


The market has been concerned over its heady valuations and secular decline in its core business – letters – as well as potential strike action and a lawsuit threatening its European parcels business.

However, with the index down 8.65 per cent over the past month, Royal Mail has lost significantly less – 3.62 per cent.


Performance of stock and index over 1 month

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Source: FE Analytics


Henderson says while he bought it for the only open-ended fund he manages, he is looking to add positions across the investment trusts he runs: the Lowland Investment Company, Henderson Opportunities Trust and Law Debenture Corporation.

ALT_TAG However, Graham Spooner (pictured), analyst at The Share Centre, told FE Trustnet last week that Royal Mail’s weaknesses are still unanswered and that it could tumble further.

“Investors should probably stay on the side lines for a while. It has fallen a long way but don’t forget that the share price got a bit carried away when it came to the market a year ago. There is pressure on margins,” he said.


Alex Savvides – Morrisons


The manager of the £250m JOHCM UK Dynamic fund has taken a position in beleaguered supermarket chain Morrisons, believing that despite huge headwinds its strong property portfolio backs up its current valuation.

“I can’t say how long it will take or if Morrisons will still be here but the idea is that you have a lot of margin for safety at this valuation despite what is being said. There is huge negativity in the sector – I have never seen anything like it. I can only relate it to the bank sector in 2008/9,” he said.

Morrisons has had a torrid year as Aldi and Lidl have eroded its market share and forced the chain to slash prices, thereby hampering profits.

The food retail market in general has become increasingly split between the discounters and the higher end of the market, such as Waitrose and Ocado, while the move toward online shopping has hit those not prepared.

Morrisons is still yet to launch an online offering, following a tie up with Ocado in 2013. Over the past year it has lost 39.78 per cent while the FTSE All Share is down 1.81 per cent.

Performance of stock and index over 1yr

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Source: FE Analytics



Savvides says the attractions of Morrisons are quite wide-ranging, although he concedes it is a very risky bet.

“First and foremost this is a business that went into the downturn in the supermarket sector first. They lost the most market share and they had the biggest like for like issue,” he said.

“The crisis of confidence that has resulted among shareholders took the shares to the lowest discount to net asset value [NAV] of all the stocks in the supermarket sector. This is very important because their NAV is made up in the majority of property they own. It is about 90 per cent freehold estate and the only leasehold bits are in their M Local shops that they are now building.”

“So I think you have some NAV support and some tangible asset support. There are questions marks over the yield that you would apply to these businesses. However, the reason they are up today is because bond yields in the UK are falling to new lows.”

Savvides prefers Morrisons to Tesco, which has also made huge losses in its share price, because he says it has a stronger balance sheet.

“There is no pension whereas Tesco has a big pension and very limited lease liability and the net debt is manageable in my view. On top of that you have a very clear cash flow strategy; this is the most important thing. Because [Morrisons] went into the downturn first, they are the ones most focused on generating cash.”

“They have the biggest issues and that has given them the biggest kick to do the right thing, which is to shrink working capital, cut back cap ex to the bare bones for now, protect the balance sheet and cut costs out of the business and drive cash flow.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.