The Federal Reserve this week gave its strongest indication yet it would raise interest rates before the end of the year. However, markets seemed to welcome news that rates are likely to peak at a level well below the one seen before the financial crisis.
At a stock-specific level, Poundland was one of the biggest casualties this week, falling by 20 per cent on Thursday, but Tempus said this may have pushed it into bargain territory.
Performance of stock on Thursday
Source: FE Analytics
Tuesday
Diploma – Hold
On Tuesday, Questor said investors should keep hold of Diploma. The FTSE 250 distribution firm saw shares rally 18 per cent on Monday in the wake of upbeat results, with the fact that business isn’t being hampered by the slowdown in energy prices giving cause for cheer. It is also managing to work around adverse currency movements – or at least has done so far; the concern is that as currency hedges expire, this will get harder to manage. There is a good income stream on offer, but the move has pushed the stock to trade on a 16-times multiple, which looks a bit high.
Taylor Wimpey – Buy
Tempus said investors should buy Taylor Wimpey. Housebuilders wobbled off the back of a profit warning from estate agent Countrywide, but this looks ever more misplaced as the sector keeps issuing trading updates. Monday’s news from Taylor Wimpey was no different – it is selling properties faster than expected and sites are being completed faster than planned. What’s more, it is focused on the mid-market and away from the south east, giving some valuable exposure to growth. Although this is a cyclical business, the column said there is no reason why this will come to an end any time soon.
Wednesday
Smiths Group – Buy
Questor advised investors to buy Smiths Group on Wednesday. Shares soared on Tuesday after it announced news that its pension deficit was falling, adding another positive to a business that is already seen as a reliable dividend payer – and has the potential to hold further untapped value through disposals or even a merger. Top-up payments to the company pension scheme will fall from £60m to £24m a year, freeing up the balance for other uses – and piquing investor interest – especially as this could bolster an already healthy yield of 4.3 per cent.
British Land – Sell
Avoid British Land, was the message from Tempus on Wednesday. The company is performing solidly enough but there is concern the current market capitalisation doesn’t reflect that much of a discount on net asset value. Some analysts believe the commercial property market may be close to peaking, which is a good reason to exercise some caution. London may have further to go, but this isn’t without risk.
Thursday
Avon Rubber – Hold
Questor said investors should hang on to Avon Rubber, which should benefit as the risk of terrorist attacks drives demand for gas masks. The firm is the sole provider of the equipment to the US military and is currently half way through a 10-year contract. Demand from the Middle East also saw buyers paying a premium for quick delivery, pushing pre-tax profits up 20 per cent for the full year. The company generates a healthy amount of free cash each year and although the dividend yield is modest, this stock continues to forge its way higher, up around 50 per cent this year.
South32 – Sell
Tempus said investors should avoid South32. This company – which holds the southern hemisphere assets of its parent – was demerged from BHP Billiton last May. It has clearly been a tough time for miners and this is no exception, with shares having lost around half their value over the last 18 months. With mines shuttered to save cash, some analysts had hoped for solid dividends to lend support, but even that seems optimistic – 3.2 per cent this year, but falling in the future. The column said these aren’t worth chasing.
Friday
Poundland – Buy
Earlier this morning, Tempus said Poundland looks like a bargain. The column claimed yesterday’s figures held little to upset the market, making the 20 per cent sell-off seem overdone. Although reports of volatile trading conditions were unexpected, the synergies in the wake of its acquisition of the 99p Stores chain should lend support, while projected growth in Ireland has also improved. The sell-off drove the shares down to a 17 times multiple, pushing the stock back into value territory.
Royal Mail – Hold
Questor said investors should hold Royal Mail. Cost-cutting, modernisation – and the full support of the unions for these endeavours – left the column to conclude the stock is worth hanging on to. It’s not all good news however – there is an Ofcom investigation underway as to whether the company has used its dominant position to price competitors out of the market. This will be a tough call given the universal delivery obligations faced by the company and the fact Amazon has waded successfully into the fray, but a new pricing system is apparently coming. Trading on a P/E of just 12 and offering almost a 5 per cent dividend yield, the pricing also seems attractive.
