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Share Prices: Shop as they Drop

THE WEEK: Morningstar columnist extols the benefits of acting quickly to pick up cheap stocks - and rounds up a big week for high street retailers

Rodney Hobson 15 April, 2016 | 10:10AM

The vagaries of stock market investing were brought home this week when three retailers in different parts of the high street produced trading updates on the same day. Two shares went down sharply and one rose. The curious thing was that it was the least favourable update that brought the most positive reaction.

There is no sign of a return to Tesco paying a dividend, but that was hardly a surprise

Regular readers will know I am not a great fan of Tesco (TSCO) but I thought that its latest quarterly update, covering the period to February 27, was its best in years.

The update accompanied annual results that were difficult to assess. The previous year’s figures had included some kitchen sink accounting by new chief executive Dave Lewis that plunged to group into a heavy loss. It was no surprise that Tesco bounced back into profit this time.

Lewis’s assessment for the current year was quite downbeat but he would naturally want to hold down expectations because Tesco cannot afford another disappointing year. There is no sign of a return to paying a dividend yet but that was hardly a surprise.

Tesco shares fell from 420p five years ago to 140p in January, losing two thirds of their value. It’s hard to see why the optimists who drove a small recovery in the past three month expected more than they got but apparently they did, for Tesco was one of the biggest fallers on the day.

The share price of WH Smith (SMWH) has admittedly fared better over the past 12 months, running up from £13.85 this time last year to a peak of £18.78 earlier this month, but it had already slipped back before interim results showed another period of growth, with even the struggling high street outlets holding their own as stations and airports continue to power ahead.

I cannot see any justification for the shares falling back further on the figures, leaving them a full £1 below the peak.

The big winner on the day was cycles and motor accessories retailer Halfords (HFD). The figures were fine, but hardly better than for Tesco and Smith. Yet the shares promptly shot up 37p to £2.43, one of the best gains of the day.

The important point is that irrational share price movements can throw up buying and selling opportunities. After opening lower the day after its figures, Tesco suddenly revived. It was difficult to catch the bottom, but good luck to you if you did.

I dropped in lucky with WH Smith, which I have considered buying into on several occasions over the past few years and always chickened out. As with Tesco, the shares opened lower for a second day but I pounced at 1741p, which proved to be pretty much the bottom, at least for the time being.

There is a trade-off between seizing the opportunity and acting in excessive haste. I would always recommend reading a trading statement thoroughly for any hidden nasties. If that means you miss the opportunity because the shares rose while you dallied, too bad. It is far worse to leap in before the news has been fully digested and see the shares you just bought collapse.

Don’t dwell on missed opportunities that have long since gone. Your decision should be based on the here and now.

Food Retailer Takeover Leaves a Bitter Taste

So now we know the answer to the question whether the board of Premier Foods (PFD) was being too greedy in playing hard to get with potential bidder McCormick or whether it was playing a canny game. The answer was too greedy.

It is always a tricky decision over when to hang on during a takeover battle and when to take a profit. Usually it is best to stay in for the ride but there are signs to watch for that indicate the need for discretion rather than valour.

There was no other bidder for Premier, nor was there likely to be, so there was no pressure pushing McCormick higher. The American group made three all-cash offers, each one higher than the previous one. The final offer was more than double the price at which Premier shares traded before the approach.

You have to be really greedy to double your money and still ask for more.

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.

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
Halfords Group PLC160.69 GBX0.12
Premier Foods PLC38.95 GBX-0.13
Tesco PLC240.30 GBX-1.15
WH Smith PLC2,422.00 GBX-2.02

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.

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