No-one gets it right all the time and the same is true of the stock market in general: while shares reach their right level eventually, there are a lot of hiccups along the way creating buying or selling opportunities. This week brought some questionable responses to trading updates that sent shares in individual companies in what I believe was the wrong direction.
This was particularly evident in the sharp share price fall at housebuilder Bovis (BVS). There is no disputing that housebuilders have bounced back spectacularly along with the economic recovery and that there are growing constraints in finding sufficient skilled labour, which will gradually push up costs.
However, supply of housing remains way short of demand and builders have bought up a fair chunk of cheap land to keep them going. Perhaps one day the housing bubble will burst again but that is a few years down the road.
An array of housebuilders have produced positive updates in the latest reporting season, all have done well this year and all are likely to do better in 2016. I hold shares in Barratt Developments (BDEV) and Taylor Wimpey (TW.) and have no intention of cashing in substantial gains any time soon.
What is the True Value of Poundland?
As with Bovis, I felt that a 20% slump in Poundland (PLND) shares was heavily overdone, although there was somewhat more justification for it. Poundland has been spending heavily on opening new stores and it was up against strong comparatives in the first half to September but the only really worrying bit of the statement was the word “volatile” to describe trading.
Poundland shares were already down from 420p in February to 280p and one might feel that a drop of one third allows for quite a bit of bad news. I’m not keen on the retail sector but for anyone hoping to get in to Poundland at the bottom, this week surely provided a great opportunity for an admittedly risky punt.
Posting Positive Returns in the Mail
On consecutive days we saw UK Mail (UKM) fall and its much larger rival Royal Mail (RMG) rise. The former was justified, the latter less so. It’s intriguing how tables have been turned. Many, including myself, feared that Royal Mail would suffer from rivals cherry picking the most lucrative city routes, leaving Royal Mail with the unprofitable rural deliveries. In fact, it’s the rivals who have struggled and some have gone out of business.
Problems at UK Mail’s new Midlands hub are worse than expected and will last longer than previous indications. Profits have slumped, the group has moved into debt and the dividend is reduced. I wouldn’t go anywhere near it.
However, I can’t feel enthusiasm for Royal Mail either. Letters continue to dwindle and while parcel volumes were up 4%, revenue from them grew by only 1%. Amazon is proving a sterner competitor in this field than smaller rivals have been.
Royal Mail is running on job cuts. I do wonder how many more people can be sacked before the service grinds to a halt.
What Next for Interest Rates?
Interest rates have not seesawed much during the past six years but attitudes to the first rate rise since the recession have. One of the major factors dragging down stock markets this summer was the threat of interest rate rises in the US and the UK.
While such an event is normally a depressant for sharer prices, since it makes bank deposits more attractive and borrowing to buy shares conversely more expensive, I have long argued that any rise will be an indication that the two economies are at last getting back to normal, that it would be a vote of confidence in their ability to withstand higher borrowing costs. In any case, any such rises will be minimal and very gradual.
It now seems that investors have come round to that point of view. The prospect of a rise in US rates in December, rather than delaying until next year, spurred global stock markets this week. I still think the Fed will wait until January but it doesn’t really matter all that much. The increase, when it comes, will be a sign to buy shares, not sell.
