...that you may not have heard of has reported a pre close trading update today. The stock concerned is called James Halstead (JHD) which is a commercial flooring manufacturer and distributor with a £570 million market cap. As there are lots of results today which will get lots of comment I thought I would highlight this one to provide you with something different.
I call it a quality stock because it has a high return on capital employed of 37.2% currently and this has averaged around 40% over the last five years according to Stockopedia. Their operating margin is currently around 18 to 19% and this has averaged 18.8% over the last five years. They also have around £38 million of cash on their balance sheet and have increased their dividend every year for the last 37 years and in the statement they say they expect this years dividend to be increased again - nice.
In the statement they also mentioned that after the slow first half with limited turnover growth the second half had seen a pick up leading to their confidence in raising the dividend. They did however mention currency and while they said the strength of sterling would not hit margins due primarily to offsetting raw material costs they did highlight that it will impact on translation of of profits in common with other companies with overseas activities.
The other thing I like about them apart from the Global nature of their operations is the way they invest in improving the business to the benefit of their customers, staff and shareholders alike. As a shareholder you would want them to reinvest in the business if they can given the financial metrics. From the graphic above you can see they have done this over the years and you can click on this to read more about them and their products.
So the shares themselves have done well over the years but have stalled more recently around the 300 to 340 pence level as trading became more difficult and the rating had got rather full. Consequently I sold out and do not currently have a position, but it is certainly one I'm looking to get back into at some point on a bad day, so it is on my watch list. On the chart it seems to have found support in the 240 pence to 260 pence region recently. Thus for now I would expect it to trade in a 240 to 340 pence range until they deliver further or there is another economic downturn which might curtail their growth further, especially as flooring tends to be late cycle. The current 17x or so next years earnings and forecast 3.6% yield are the low and higher end respectively of what they have been in recent years, so I wouldn't put you off if you have done your own work on it and are prepared to pay up and take a longer term view. However, when I have bought this one in the past it has been on much lower ratings so I'm inclined to wait for a better opportunity for now.
I have written previously about the FCA website and the file that you can download from there which details the short interests in UK stocks disclosed by fund managers. However I stumbled across a useful looking site recently which aggregates the data and presents new or changed positions each day. It also allows you search for a particular company that you might be interested in, as well as links for all shorts listed by Company or Manager. It is called Shorttracker.co.uk which is a site run by Castellain Capital a fund management outfit I had never heard of - probably because they were only founded in 2009. You can also follow it on Twitter @UKShortTracker if you are one of the Twitterati.
The home page gives the Top 5 most shorted stocks and the most visited stocks that day. Interestingly after my post yesterday I note that Sainsbury's comes in at number 4 with a 7.3% short interest. However while this is interesting you shouldn't perhaps read too much into it as W.H.Smith is the most shorted stock with 10.9% outstanding and I believe it has been for some time. Nevertheless the shares have continued to perform well on the back of good results from managing a declining high street business while growing the travel business. But who knows maybe the shorts will be right eventually?
So any way don't get too spooked if one of your stocks is on the list as sometimes there may be genuine reasons that the institution concerned has to hedge their position with a short, but sometimes it will be genuine hedge funds or short operators attacking what they perceive to be a vulnerable business or overvalued share. So you need to look at the funds involved and judge each one on its own merits and decide if it puts you off or not.
A point to note is that they don't track positions when they go below 0.5% although they state it is possible that the manager concerned might still have a position. On the whole a useful way to keep abreast of new short positions and for checking on existing outstanding positions. I hope you might find it useful but I wouldn't recommend short selling personally (probably via spread betting or CFD's) unless you really know what you are doing as the losses can in theory be unlimited.
Watched an interesting documentary about the travails of the UK food retailing industry last night on Channel 4 Dispatches. It is not on their catch up service so you can probably still catch it if you want on another of their channels this week or if it is repeated.
I had intended to do a thorough review here but I lost all my work so I'll just do a few bullets - which may actually be better.
Finally, I would note that there are new executives in place at JS and Tesco although only the new guy at Tesco is a genuine new pair of hands as it were. I also note that former Tesco executive Andrew Higginson has been announced as the new Chairman elect of Morrison's. So as I say more questions than answers I'm afraid but it does make it seem like the apparent value on offer in the sector may still be a trap and it will be interesting to see what effect the new guy at Tesco has.
XP Power which is a leading international provider of essential power control solutions has reported interim results today. These seem fine although like many other Companies that report in Sterling the figures have been impacted by the strength of the Pound when converting their overseas turnover and profits. In this case it reduced an underlying 9% increase in revenues to just a 2% gain.
Conversely it did help to reduce their operating costs by £0.3 million which in addition to their own cost cutting efforts enabled them to improve gross margins from 48.6% to 49.8%. This fed through to an increased operating margin of 24.5% versus 21.6% last year although I note they did capitalize £1.2 million of product development expenses. Their own products do now however account for 66% of revenues with lots of new immature products developed over the last few years yet to have fully contributed to results.
This rise in turnover and margins together led to a 17.3% rise in Pre Tax Profits and a 20.8% increase in earnings and strong cash flow which reduced debt from £8.5 million to £1.5 million. On the back of this they increased the first half dividend by 9% which is now being paid quarterly and I note that they say this has compounded dividends at the rate of 15% over the last 10 years.
Summary and Conlusion
In summary a reasonable set of numbers despite headwinds from currency effects which also demonstrated their operational gearing and the benefits of their moving up the value chain with new products and support offerings. The group seems reasonably well placed to benefit from its historic investment in its own manufacturing facilities and new products that they have developed. In addition the business is reasonably diversified by end industry with in the first half healthcare representing 31% (2013: 30%), industrial 49% (2013: 48%) and technology 20% (2013: 22%). While the customer base continues to be highly diversified with the largest customer accounting for only 5% of revenue, spread over 100 different programs / part numbers. In terms of the outlook the Company sounded cautiously optimistic when they said:
"While global capital goods markets remain subdued overall, our order intake remains encouraging and we believe that we continue to take market share. We expect to grow revenues in 2014, although this underlying growth is expected to be impacted by the currency translation effects.... Predicting the likely performance of the US Dollar relative to Sterling in the coming period is difficult but the high proportion of our costs that are also Dollar-denominated will mitigate the impact on earnings.
A broad, up to date product portfolio and the development of an industry leading in-house manufacturing capability are at the core of our strategy and, when combined with excellent service and support, are leading to continued new program wins which should drive our future growth. This greater penetration of a Blue Chip customer base and significant design win success bode well for the future of XP."
in conclusion I like the steady delivery here and the moves they have made to increase the value added in their business plus the fact that it is reasonably well diversified by customer and industry. The shares in common with some other small and mid cap stocks have come back by around 20% from their peak earlier this year and seem to be finding some support between 1400 and 1500 pence on the chart. They have however lost some momentum as a result and currently trade below their 200 day moving average which may put some people off. I see Edison have left their earnings estimates unchanged and they are just below consensus of 101.6 pence so probably nothing to get too excited about in these numbers. However I think they look reasonable value on around 14x with a 4% yield backed up by strong cash flow and little or no debt so on that basis I'm happy to run with it.
I wrote recently about Stock and Property Cycles in which I talked about a book called Stock Cycles which details a roughly 17 year stock cycle. Given we are still trying to hit the last 17 year peak seen in the year 2000, based on this we should be looking for an end to the current volatile sideways low return phase in around 2017. Saw an interesting piece called Consensus Building for 2016 Stock Market Bubble, Crash, from Cris Sheridan at Financial Sense. See also from the same site The Coming Market Melt Up and 2106 Recession by Lance Roberts, from which the above graphic is sourced.
From these and some of the other articles they reference it is suggested that after a correction this year we might be able to look forward to one last hurrah and the third and final more manic stage of the bull market in 2015. This is then expected to be followed by a market downturn in 2016 prompted by Central Bank tightening causing a future recession. if any of this comes to pass then it would tie in neatly with the Stock Cycle theory covered in the book with next low coming in perhaps 2017?
It seems that an Mergers and Acquisition boom is also currently helping to keep the market bubbling away, as suggested by Jeremy Grantham at GMO, but am I the only one that finds it a bit spooky that Time Warner is again the subject of a big bid battle much as it was in 1999 / 2000 when it controversially merged with AOL? Any way much like the weather in the UK I guess we should enjoy the good times while they last even if it is all on the back of Central bank liquidity and a further build up in debt!