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Racy and Reliable Stocks

THE WEEK: Morningstar columnist Rodney Hobson discusses the latest market pullback and explains how this could be an opportunity to invest in some racy and reliable stocks

Rodney Hobson 22 February, 2013 | 10:43AM

This article is part of Morningstar.co.uk's Equity Investing Week.

The Only Way is Shares

Divided we fall... or to be more precise, central bankers are divided and share prices fall. The heavy slump on the FTSE 100 was both a warning and an opportunity for those who, like me, believe that equities represent the best value investment.

It looked too good to be true when the Footsie topped 6,400 points, reaching its best level since January 2008, five long and tumultuous years ago. There was a serious danger that the build up to the end of the ISA year plus a move out of bonds was propelling shares to unreasonable levels given the uncertainty of the recovery.

And so it proved, as the icing was knocked off the cake by a rather unexpected spoil sport. Step forward Sir Mervyn King, who has decided to have a bit of fun in his final months as Governor of the Bank of England. We all thought he was a dull old stodge (he probably says the same about me) but behind that dour exterior lies the heart of a stand up comedian.

After warning the previous week that the bank was running out of ammunition in the fight to get the economy going without firing up inflation, and in particular hinting that quantitative easing is of limited merit, King has had to come clean. Minutes of this month’s meeting of the bank’s monetary policy committee, released this week, show that he voted for another £25 billion of easing.

What a tease he is! It seems hard to believe that, when he made his remarks, he had forgotten how he had voted only a week earlier. With one other committee member switching to QE as well, three of the nine voted for a further dose of a policy that is, according to the Governor, of limited merit.

Perhaps it was the confusion that caused stock market investors to take fright. When the minutes of the meeting of the Federal Reserve Board in the United States showed sharp divisions among rate setters over whether to continue with quantitative easing, the flow out of shares became a flood and suddenly the Footsie was back below 6,400 points.

These sharp movements in share prices can be quite unnerving but, as I have stressed on many occasions, the dips present buying opportunities that should not be scorned.

The US economy has come through the economic crisis in better shape than the UK and most of Europe, so it will not be a disaster if quantitative easing there is scaled back. If the UK does revert to another dose, then the effect will be to hold down government and, indirectly, corporate borrowing rates, thus making gilts and bonds unattractive. Retail banks will continue to pay a pittance on savings accounts.

One very important sign to watch is whether the stream of new companies coming to market continues. Private companies and their advisers have been cautious about floating while stock market volatility persists. House builder Crest Nicholson (CRST) has set the tone with a successful return to the market. Should others follow, it will be a clear sign that financial advisers believe that equities are solidly underpinned.

Opportunity Knocks

Examples of companies that are worth looking at crop up on almost a daily basis, with supermarket chain Wm Morrison Supermarkets (MRW) catching my eye this week. Regular readers know that I own shares in rival J Sainsbury (SBRY), which has proved an excellent investment in terms of dividends and an improved share price. However, I feel that Sainsbury is now fully priced at more than 330p.

Morrison shares have in contrast slipped backwards over the past 12 months from over 300p to around 250p before recovering a little. There have been genuine concerns over Morrison, which is in danger of being squeezed between the bigger operators and the cut-price outlets. It has been slow to move into convenience stores and online sales. Like-for-like sales have slipped.

However, Morrison continues to grow sales, earnings per share and dividends. The prospective yield is 5% and the price-earnings ratio is an undemanding 10. The chain has bought 49 Blockbuster stores from the administrators to be converted into convenience stores.

I do not want to be invested in more than one supermarket so I will not be buying but if I wanted to expand into the sector then Morrisons looks as attractive as any at the moment.

Racy Investments

If you are seeking something a little more racy, how about car dealer Pendragon (PDG)? Few shares collapsed quite so spectacularly as Pendragon’s during the economic crisis as hard pressed households cut back on expensive items. The shares slumped to 20p.

The UK car market is now improving, in contrast to much of Europe, and Pendragon has at last restored its dividend, albeit at a measly 0.1p a share, with a promise that the payout will gradually increase.

This is a high risk investment but if you believe that a recovery in the UK economy is just around the corner, there is some sense in looking for cheap cyclical stocks at this stage.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

Market Performance: February 18 - 22

FTSE 100 Index: +0.12%
FTSE 250 Index: +0.82%
FTSE All Share: +0.22%
FTSE Small Cap: +0.20%
FTSE AIM 100: -0.75%
FTSE Fledgling: -0.32%

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Crest Nicholson Holdings PLC327.50 GBX0.52-
Pendragon PLC30.25 GBX0.83-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.