Hobson: Time to Buy When the Missiles Fly

THE WEEK: Morningstar columnist Rodney Hobson on nuclear war, Ladbrokes Coral and a recruitment firm that's exceeding expectations

Rodney Hobson 1 September, 2017 | 3:04PM
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North Korea fires missle

The firing of a missile by North Korea over Japan caused yet another short-lived crisis on stock markets. Shares slumped heavily across the board and across the globe on Tuesday but were already recovering before the day was out. Within 48 hours the FTSE 100 index was back above 7,400 points.

If Armageddon occurs, then nothing will be of much value – and that includes radioactive gold. If the threat of nuclear war recedes, as it has done so far, then equities remain the investment of choice. For that reason, these downward lurches are a buying opportunity. Well done to any brave souls who got in smartly at the bottom. I remain fully invested in shares.

Betting Merger Beats the Odds

Ten months into the much-scorned merger of gambling groups Ladbrokes (LCL) and Coral, the latest results are inevitably messy, since they compared the first half of the enlarged group this time with the pre-merger Ladbrokes accounts last year.

On a pro forma basis, which assesses comparable results, revenue was up just 1% but operating profits have improved 7%. Pretax profits were knocked by the one-off cost of the merger but the group is now forecasting more cost-savings than expected. Ladbrokes talks of synergies but is a misuse of the word: I am very dubious whether putting the two together really can drum up more trade.

That petty point aside, the merger does seem to have gone rather better than many expected and Ladbrokes is confident enough to double the interim dividend. Cash generation should reduce debt to more manageable levels before interest rates rise in earnest. The group is sufficiently confident to double the interim dividend.

I do not invest in gambling companies because I think their shares are too much of a gamble. Profits can be quite elastic, depending on which team or individual wins in various sports. Nonetheless, those investors with more of an eye for riskier opportunities may care to consider if Ladbrokes, for so long regarded as an inferior choice to William Hill (WMH), may now be the better bet.  If you do make this choice, be prepared to bail out if it starts to turn sour.

Recruitment Opportunities

Many investors have been wary of recruitment companies since the financial crisis and it is true that they are susceptible to any global downturn. However, such fears can be overplayed.

I bought shares in Hays (HAS) some years ago when I felt that they were unfairly depressed. Results for the year to June 30 issued this week reassured me.

It is true that markets have been tough in the UK and Ireland, where net fees were down 7% and operating profits 21%. While private sector recruitment fell markedly after the referendum, the second half of the financial year showed some recovery and the year ended with moderate growth. The rest of the world was well ahead.

Chief executive Alistair Cox is sufficiently confident to raise the full-year dividend by 11% and throw in a special dividend of 4.25p.

The shares have nearly doubled since June last year and reacted well to the results. I don’t feel that they are overpriced so will continue to hold – although clearly the best chance to buy in has long since gone.

Taking Money off the Table

I really cannot see why investors reacted so well to interim results from Restaurant Group (RTN). Sales are down and so are underlying profits. There is nothing concrete in the statement to justify a sharp rise in the share price. The best one can say is that current trading is in line with expectations. I would like more evidence that problems are well and truly in the past. Otherwise the share price rise presents an opportunity to get out.    ut.     

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Hays PLC102.80 GBX-0.39
Restaurant Group (The) PLC  

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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