Hobson: I've Already Invested My New ISA Allowance

THE WEEK: Morningstar columnist Rodney Hobson navigates the buying opportunities created by the Fed, and benefits from a takeover bid

Rodney Hobson 7 April, 2017 | 5:10PM
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Stock markets reacted badly to the Federal Reserve indicating that the US central bank will, some time this year, start to unwind the bond portfolio it built up during quantitative easing. Shares fell sharply in New York, Tokyo and London.

Shareholders should not take fright. This is excellent news. Ten years on from the start of the financial crisis, another step has been taken to get back to normality. The Fed has $4.5 trillion of bonds on its books, a figure so huge it is beyond comprehension. This will not be dumped on the market unceremoniously. The Fed will probably simply redeem the bonds as they expire.

So the US economy is now strong enough to withstand a gentle un-easing, China continues to expand at an admittedly slower rate and the UK stays its patchy recovery. Let’s stay positive. In fact, after the initial reaction shares did start to pick up again on both sides of the Atlantic. Buying opportunities do not always last for long.

This is important because a new financial year, and thus a new £20,000 ISA allowance, started this week. A dip in the markets provided an early buying opportunity.

Will Dominos’ Shares Deliver?

I don’t like pizzas delivered to my door. The cardboard delivery boxes give them soggy bottoms. Clearly other people are not so picky, for Dominos Pizza (DOM) has been one of the great success stories of the UK culinary scene – and of the London Stock Exchange.

It’s shares have, however, been under the cosh of late, an issue raised on Twitter by a sensible investor called Imran Khan – not the cricketer turned politician – whom I follow. He had a stop loss on his holding but wondered whether to cancel it on the grounds that the shares must surely bounce back eventually.

Any medium or longer term investors should avoid arbitrary stop losses. Selling a loss maker is a tough decision that most of us fail to face up to but selling should always be based on a fundamental assessment, never on a figure plucked out of the air, unless you are a day trader.

The shares dropped 52p from £3.94 to £3.42, on March 9 after results showing a continued strong surge in sales and profits and a 15.6% rise in the dividend. What spooked investors was that like-for-like sales growth had slowed from 11.7% to 7.5% and in the first nine weeks of 2017 to 3.5%.

For heaven’s sake. How many other retailers can claim such figures? With more stores opening all the time, profits will carry on growing. Nonetheless, the shares have continued to slide and this week reached 306p. At that level the yield was 2.6% and the price/earnings ratio 23, not compelling figures but perfectly fair for a company that has continued to deliver in more ways than one.

So I decided to put my money where my mouth is and £5,000 of my new ISA allowance went on Dominos on the first day of the new financial year.

Benefiting from a Takeover Bid

I have been a very happy investor in WS Atkins (ATK), the engineering consultant. Shares have risen strongly since I bought and the dividend has provided a strong income stream. I would have been happy to carry on holding but I can’t feel to cross with SNC-Lavalin, a Canadian company that proposes a takeover, offering £20.80 a share.

That means my holding is worth 33% more than it was less than two weeks ago, and the £5 a share gain will become £6 when the bid goes through, as I expect it to do. While I don’t expect a counterbid, I see no point in selling. I shall hold on and accept in due course with alacrity.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Domino's Pizza Group PLC327.80 GBX-0.12

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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