Don't Bank on a V-Shaped Recovery

The Week: Morningstar columnist Rodney Hobson is working through the recent trading updates and looking for recovery opportunities

Rodney Hobson 1 May, 2020 | 9:09AM
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Talk of a V shaped recovery, where the market rises as fast as it fell, is premature at best and more likely to prove wildly optimistic. I thought I was an incurable optimist looking for long-term buying opportunities to get my ISA allowance underway but even I realise that stock markets don’t work in V shapes.

I’ve commented before in this column, but it needs repeating: bear markets are fast and brutal; bull markets are a slow grind. The next recovery will be no different. Although the FTSE 100 climbed above 6,000 points this week, sellers soon took the opportunity to cut losses or bank profits. There is no guarantee that we have seen the bottom, although I am working on the hope that just under 5,000 points is the pits.

The best policy in these unprecedented times is to crawl through the trading updates, that are coming thick and fast, and look for the best recovery opportunities.

Let’s start with Dixons Carphone (DC.), a stock that was already under the cosh well before the coronavirus struck. It has done its best to alleviate the impact of shop closures, with online sales leaping an eye-catching 166%. Another positive is that all the stores can be reopened within a week once the social distancing rules are relaxed.

However, the problems on the Carphone mobile phones side will still need addressing.  The shares had dropped from 500p at the end of 2015 to 152p before the Covid-19 outbreak but they now trade around 80p. I may be biased as I hold the shares but I think they really have bottomed out at last. The floor looks to be at 60p, although I don’t think we will see that level again unless the crisis goes from dire to even worse.

Retail Updates a Mixed Bag

I was more disappointed by the update from Sainsbury (SBRY), where I also have a stake. Food sales have done well, as expected, with people forced to eat all their meals at home, but this has come at extra cost as the supermarket chain struggled to keep shelves stocked during panic buying. Sales of general merchandise have slumped, particularly at Argos where outlets have been shut. Fuel sales have also vanished. For good measure, any decision on a final dividend has been postponed.

The shares have bounced back from a low of 174p but the optimism that took them back above 200p looks to have fizzled out. I can’t honestly suggest buying at this stage. As people start to run down their panic-induced store cupboards the situation could deteriorate.

Full marks to the board at Next (NXT) for a clear and honest update. Sadly, the fall-off in sales has been steeper and faster than the board had expected just a month ago and Next now reckons sales will be down in the second half of this year as well as the first. Sensible moves have been made to conserve cash by scrapping share buybacks and dividends, costs have been tackled and bank facilities lined up. So despite the worse-than-expected downturn in sales, Next is actually better placed to get through the crisis than it was a month ago.

I don’t like investing in retailers as the High Street has been so competitive, but at least Next will still be there later this year, which is more than you can say for many stores.

You might have expected really bad news from Weir (WEIR) as it supplies equipment for oil and mining, two sectors badly hit by the global downturn, yet it reported a “relatively resilient” first quarter. Oil and gas were slightly better than breakeven. The future, not surprisingly, is uncertain but so far orders are holding up well.

The shares dropped from 1,660p to 660p in the 12 months to the end of March but have pulled off the bottom. If the shutdown here and abroad is not too prolonged then Weir may come out of it reasonably unscathed.

 

 

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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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.