A Great Opportunity or a Doomed Stock?

THE WEEK: Morningstar columnist Rodney Hobson muses on missed opportunities, investment philosophies and the stocks that got away

Rodney Hobson 23 November, 2018 | 1:13PM

a great opportunity or a doomed stock equities uk

Every investor should keep an open mind. Today’s success stories can soon become tomorrow’s failures and vice versa, particularly in this fast-changing world.

As one who invests according to gut instinct as well as fundamental data, I find it easy to get fixed ideas about companies and sectors, and hard to change my mind. While it means I don’t chop and change in haste, it can result in missing great opportunities.

I was reminded about this when I commented on Twitter about results from easyJet (EZJ), which flew more passengers at higher prices in fuller planes in the year to 30 September.

That sounds like a recipe for success, a success that translated into a sharp rise in the dividend total from 40.9p to 58.6p. Yet the shares fell 5.5% to just above £11 when the figures came out. That meant they had lost nearly 40% since the June high when they looked set to break above £18.

The reaction seemed odd to me. Perhaps investors were concerned that revenue is projected to be flat in the current financial year while costs are rising. I took the view that anyone who has been thinking of investing in the company now has a great opportunity to pick up the shares comparatively cheaply with a yield of more than 4%.

“Anyone” does not include me, however. I have kept well clear of airlines because the sector has proved highly competitive and highly erratic over the years. Yet I cannot deny that I have invested in competitive areas – I hold Domino’s Pizza (DOM), Sainsbury (SBRY) and Greggs (GRG) for example – and some of my investments have proved quite erratic.

The point is that I don’t deliberately invest in shares I expect to perform erratically. It just works out that way. Many airlines big and small have disappeared over the past 40 years and it is still happening, with Monarch and Air Berlin springing to mind. That reduces competition, but it doesn’t instil confidence in the sector.

EasyJet and Ryanair (RYA) are still slugging it out and they seem to rise and fall in equal proportions. Ryanair is the one suffering at the moment, but I worry that the tables could be turned any day now. I’m keeping my feet on the ground.

Emissions Cleaner Bucks Auto Concerns

Hooray for a little cheery light among the polluting gloom. Johnson Matthey (JMAT), the company making catalytic converters that remove poisons and particulates from vehicle exhausts, reported 10% growth in sales and profits up 19% in the half year to 30 September.

There have been plenty of question marks over Johnson in the light of falling car sales. However, there are not many serious challengers to its catalysts and it has taken its market share from 45% to 60%.

There are admittedly question marks over future sales as we switch to electric cars but for the moment chief executive Robert MacLeod forecasts that turnover will continue to grow at a similar pace and he is confident enough to raise the interim dividend by nearly 7%.

The shares had lost more than a quarter of their value over the past few months, which I felt, as a shareholder, was grossly overdone but they gained 13% on the day of the results. I don’t feel they are overpriced at around 3,000p.  

Steer Clear of this Struggling Empire

The idea of diversifying, either in terms of products or markets, is that there’s always at least one good bit to see you through when any part of the empire is struggling. Some companies, however, have the misfortune of at least one part of the business dragging the rest down.

Kingfisher (KGF) is a prime example of the latter category. It always seems to be running some sort of transformation programme, but it never morphs into anything better. Once again in the third quarter, the main but not sole problem is with the Castorama DIY chain in France. That struggle will continue, although at least Kingfisher is getting rid of its lossmaking operations in Russia, Spain and Portugal.

Screwfix, the trade outlet in the UK, remains the one bright spark, though not bright enough to carry the whole group. Stay well clear.

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 PLC244.20 GBX3.04-
easyJet PLC1,065.00 GBX1.04-
Greggs PLC1,327.00 GBX-0.08-
Johnson Matthey PLC2,692.00 GBX2.75
Kingfisher PLC232.90 GBX1.09
Ryanair Holdings PLC10.77 EUR1.94-
Sainsbury (J) PLC296.40 GBX0.65

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.