WH Smith in the Wrong Place at the Wrong Time

The Week: Morningstar columnist Rodney Hobson says the books and stationery retailer is a good example of company that has been oversold in the crisis

Rodney Hobson 15 May, 2020 | 9:02AM
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So the first quarter of 2020 wasn’t quite as bad economically in the UK as was expected, with just one lost month. It hurts a cock-eyed optimist like me to say it, but the second quarter will inevitably be much, much worse with at least two lost months. Then it starts to get better but probably not all that quickly.

Even so, there are still opportunities for investors among the swathes of trading updates spawned by the Covid-19 crisis. Take time to look through them and use the scope provided by the frequent share price crashes to invest while stocks are still cheap. One possibility is to look for companies that have just been downright unlucky to be in the wrong place at the wrong time. They have the best chance of coming good as life slowly gets back to normal.

Books and stationery retailer WH Smith (SMWH), in which I have a holding, is a case in point. It has for years followed a policy of allowing the High Street outlets to shrink while investing in the more lucrative travel sector. This sensible strategy hit the buffers when people stopped travelling. However, train stations are opening up again and while airports will continue as ghost towns for the rest of this year, we will learn to fly again.

Results for the six months to the end of February were pretty good but, as Smith rightly warns, the worst months will fall in the second half.

The shares are down from 2,650p at the start of the year to around 850p. I think that losing two-thirds of their value is sufficient allowance for the bad news.   

Missed Opportunity for B&Q

Prospects ought to be better for do-it-yourself group Kingfisher (KGF) but this is a share that persistently disappoints and I can’t see that changing soon, if ever. Technically all the B&Q stores could have stayed open and they are big enough for people to use without coming too close to each other but it has taken a month to get them all running with social distancing measures in place.

Shoppers may have initially flocked to the reopened outlets but I fear a great opportunity has been missed to sell to people forced to spend more time at home. As they drift back to work there will be neither the time nor inclination to tackle those household flaws that were so annoying when you were forced to sit and look at them all day.

The shares have already recovered from a low of 124p to around 170p. I can’t see any reason for chasing them higher.

I prefer to consider paving stones provider Marshalls (MSLH). At least it is less reliant on sales to homeowners. Sales fell 27% in the first four months of 2020, but that included six weeks of much steeper decline during lockdown. There has been some sales pick-up in May, though only back to about half last year’s levels.

Marshalls has taken the opportunity to reduce staffing levels and permanently close some sites, which is tough on those affected but puts the company on a sounder financial footing. The shares are down from 876p to 570p, with investors taking the update badly. I think a recovery is in prospect.

Is TUI Worth the Risk?

If you really want a walk on the wild side, take a look at travel company TUI (TUI), which enjoyed five great months booking customers into summer holidays that it can no longer deliver. March was a disaster and the rest of this year is a write-off.

However, reports from the travel industry suggest that people are still raring to get back into the holiday mood as soon as they are allowed. TUI is one of the strongest companies in the sector and it could recover well as weaker rivals go to the wall. The shares are only for the brave, which counts me out, but the brave may in time be well rewarded.

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.