Himsworth (pictured), who has the best track record of any UK equity FE Alpha Manager over 10 years, says that the recent share price falls of Perform Group and RSA show what is likely to happen to companies that fail to meet earnings targets in a fully valued market. Investors should look to some of the out-of-favour sectors which are likely to be affected by mean-reversion in the early part of 2014, he says.
“Anything that misses earnings expectations will get a severe reaction,” he said. “I think that means you stick with a degree of safety into the early period of next year, meaning stocks you are fairly happy with.”
RSA saw its share price fall by almost 25 per cent to the close of the market yesterday after it revealed a black hole in its accounts it had previously estimated to be worth £70m in fact stood at £200m. The chief executive stepped down.
Performance of stock vs index over 1yr
Source: FE Analytics
Perform Group’s fall from grace has been even more dramatic. The company’s share price fell by 58 per cent after it warned that full-year profits would be significantly below expectations.
Performance of stock vs index over 1yr
Source: FE Analytics
The company said that advertising business had grown more slowly than expected in the fourth quarter, the most important for its overall revenue figures.
Himsworth says that protecting yourself from events like these requires carrying out research on the underlying stocks and looking for places where earnings growth is being underestimated.
“I don’t mean defensives necessarily, because buying things like tobacco stocks is just mindless,” he said. “Anyone who goes on about tobacco needs to be taken out and shot for not finding better ideas.”
“We like easier investing stuff that isn’t well trailed – there won’t be surprises to earnings in tobacco, I think we can do better than that.”
“There are certain things early in the year that are likely to see mean reversion in certain sectors that have done badly.”
“There are opportunities in some of the larger companies, maybe not necessarily in defensives, but more mainstream stuff.”
One such sector is the supermarkets, which Himsworth is considering building a position in at the moment.
“In the last couple of days we have been looking at getting back into some food retailers: Sainsbury’s and Morrisons,” he said.
“People are getting excited about the effect of Aldi and Lidl, but they are priced almost as if Christmas has been cancelled.”
Morrisons has been seen as one of the laggards of the sector for some time, but Sainsbury’s fall from grace is more recent.
Performance of stocks vs index over 1yr
Source: FE Analytics
Himsworth says that the gloom surrounding the sector has been overdone. Sainsbury’s is on a P/E [price/earnings] ratio of 10.8 times while Morrisons is trading on 10.3 times. The FTSE All Share is on 14.27 times.
The manager also says there are opportunities opening up in the mining sector thanks to the actions of management.
“In the mining sector a lot of projects have been cancelled, which will translate into high cash-flow next year – cash-flow could go through the roof, so it could be very appealing on a yield of 3.5 to 4 per cent,” he said.
Many UK equity managers have been buying back into the large UK miners Rio Tinto and BHP Billiton, as FE Trustnet recently reported.
There are also opportunities in energy stocks, including oil and gas, Himsworth says.
Centrica in particular is “priced for failure”, while there are opportunities in North Sea oil and gas stocks such as Augean and even some exploration companies.
“Everyone has been getting excited about fracking in the US but the price of oil hasn’t really moved this year but stayed around $100 to $110 a barrel, so there’s a lot of value in that space.”
Himsworth thinks Tullow looks quite attractive, although notes that investors have to be especially wary of stock-specific risks in this area.
He thinks in telecoms investors should sell out of BT and buy Vodafone.
“BT has been one of the best places to be – it’s given me a 65 per cent total return,” he said. “I have sold out totally of BT but it has been a great place to be.”
Vodafone, he says, is being undervalued by the market, which hasn’t appreciated what a good price the company achieved for the sale of its stake in Verizon Wireless.
“Once the Verizon deal comes through, people will see what a cheap price they have sold the stock for – much more than market estimates.”
“I think people will then realise Vodafone will be an attractive business in the future.”
