What to Do When the Stock Market Seems Irrational

THE WEEK: Morningstar columnist Rodney Hobson struggles to comprehend why stocks fall when company results are positive

Rodney Hobson 8 June, 2018 | 11:40AM
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WHSmith is one of the few retail stocks Rodney Hobson thinks will rally UK shop retailer retail sales

I can’t believe it’s happened again. For I think the fourth time – I’ve lost count – plastic maker RPC (RPC) has produced great figures only to see its share price slump, and this time quite spectacularly.

The shares fell 17% at one point and despite attracting the attention of bottom fishers ended the results day off 12%, which is some going by anyone’s reckoning. RPC has lost a fifth of its value so far this year.

Pre-tax profits for the year to the end of March doubled to £316.6 million on revenue up by a third to £3.75 billion. The final dividend of 20.2p gives a total 28p, a 17% increase on the previous financial year. That makes 25 years of consecutive dividend increases. The company is stepping up its investments, including opening a new factory in Shanghai to meet strong demand in China.

Investing in the business did knock a 4% hole in free cash flow but if that increases future profits, where’s the harm? The other negative consideration is the increased international awareness of plastic pollution, but that is an ongoing matter that can hardly justify such a sharp fall on one day. Tobacco companies have lived with growing official hostility yet they continue to prosper.

RPC remains a solid, dependable company whose markets are not going to shrink any day soon. I have twice bought on dips and I’m happy to hold. The stock market can be an irrational place at times but sense always prevails in the end.

WHSmith Propped Up by Travel Business

 At least newsagent and stationer WH Smith (SMWH) gets a favourable response for producing more of the same. Although as a shareholder I was pleased to see the shares rise 7.5% on its trading update for the 13 weeks to 2 June, that was an overreaction in the opposite direction to RPC.

Sales in its travel business were up 8% overall and 3% on a like-for-like basis while once again High Street stores slipped 1%. This is a well established trend that has been reinforced for several years now by a deliberate and sensible policy of putting resources into the growing part of the business, outlets at airports and stations.

The High Street outlets are criticised as shabby but that is not the cause of their slow demise. Rather, they have been neglected because no reasonably price action could boost their profits.

The shares are still down on the start of the year. They may well make up that deficit before year end, especially if Smith does well in the key summer quarter, the final period of its financial year.

RBS: Abandon All Hope Investors

Those who persist with their foolish fascination for Royal Bank of Scotland (RBS) shares have as long a wait as the Government to get any degree of satisfaction.

The Government, on behalf of taxpayers, has finally abandoned all hope of getting back the money it pumped into the RBS bailout. Another slug of shares, 7.7%, has been disposed of, but inevitably at a discount to the prevailing market price and at a massive discount to the cost incurred by the taxpayer. Even now, there is still a slug of 62.4% to be disposed of, which will overhang the market for months if not years to come.

There is a small crumb of comfort in the growing hope of a tiny dividend being paid, perhaps even this year, but the prospective yield is tiny. Shareholders should follow the Government lead and get out for what you can get.

FTSE Hits New High

The FTSE 100 Index hit a new high of 7,877 points while I was away lecturing on a cruise. I must go away more often. It does give me an excuse to repeat my forecast in January that the index will top 8,000 points before the year is out. I am not only staying fully invested but looking for new opportunities to continue investing my ISA allowance.

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
NatWest Group PLC314.80 GBX-1.78Rating
WH Smith PLC1,171.00 GBX0.00

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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