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Finding Shares That Have Been Unfairly Punished

THE WEEK: Morningstar columnist Rodney Hobson is looking for buying opportunities after receiving a pay-out from now unlisted WS Atkins

Rodney Hobson 28 July, 2017 | 11:50AM

I built up a large holding in the recently delisted WS Atkins, having doubled my original stake, and reinvested the dividends. Now I am on the look out for a new home for the cash I have received post-takeover. In particular, I am looking for shares I feel have been unfairly punished in recent weeks – enter stage left Domino’s Pizza (DOM) at 260p.

It’s hard to believe that Domino’s has fallen by a third, from 390p to 260p in less than four months, including a 7% drop when interims were announced this week. I thought the figures and the outlook were not at all bad.

Sales in the UK and Ireland were up 7.3% in the six months to the end of June and were 10.5% higher overall thanks to expansion in Norway, Sweden and Iceland. Underlying profits rose 9.1%. The interim dividend is increased from 3.5% to 3.75p. The only worry is that expansion has ramped up debt but that should be easily manageable.

Perhaps some investors are worried about the rapid growth in UK outlets coming at a time when, as the company itself admits, UK consumers are more cautious about the economic outlook. I can’t see a squeezing of incomes hitting Domino’s too badly. It could benefit from the margarine effect: if you can’t afford butter, margarine sales go up; if you can’t afford to dine out, takeaway pizza sales go up.

Assuming a total dividend of at least 8.5p, the yield is top side of 3% with the shares at 260p. Not the greatest on the stock market but pretty good for a growth company.

National Express Worth Buying on the Dips

I have a long-standing holding in transport group National Express (NEX) that has served me well enough in terms of dividends and share price gains although I have occasionally fretted over the performance in the UK or the US, and over its rail arm or its buses. Mercifully it has never fallen apart in all places at once.

Currently it is the UK end that is soft. The North American operations delivered record profits in the first half of 2017, as did the Spanish and Moroccan arm. It is particularly gratifying to see that the US school bus operations, so often a source of worry, are doing well with routes retained and price rises secured. The weakness of sterling means that these gains in dollars and euros translate into more pounds.

Some lessons have been learnt: although strong cash flow means National Express can afford to make more acquisitions in the US it is turning down unattractive opportunities rather than expanding for the sake of it.

The UK rail arm has been sold, which is almost certainly for the best. UK bus and coach have suffered because the lower price of petrol encourages more passengers to get in their cars. Nonetheless, the downturn is not severe.

Taken as a whole, National Express has seen revenue rise 6.5% and profits by 11% for continuing operations. The interim dividend is increased by 10% to 4.26p. The shares gained 2.7% on the results but have bounced up and down these past 12 months and are worth buying on the dips. The long-term trend is up.

I cautioned against buying Thomas Cook (TCG) shares four years ago after they had risen strongly to around 100p. I felt that was far enough for a company that has seen too many ups and downs in the package holiday market. The shares ran on to 190p before losing two thirds of their value.

Now they are back up to 100p and I repeat my warning that, whatever the short term gains, it is all likely to end in tears.

Cook has had a strong third quarter to 30 June, which augurs well for the summer season, with revenue and profits higher despite a squeeze on margins. The shares jumped 4%. If you choose to get on board, be just as ready to disembark when the tide turns.

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, nor are they the opinions of Morningstar.

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
Domino's Pizza Group PLC268.50 GBX-1.68-
National Express Group PLC362.50 GBX-1.92-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.