Today I thought I would briefly cover what may be a contrarian value opportunity or may be I'm off my trolley and it is a value trap? Any way I'll present a few bull and bear bullet points and let you decide for yourself.

Bull Points

• Cheapish looking rating of around 10 to 11x with a 4 to 5% yield based on current forecast & 2 times dividend cover policy.
• Priced at around 0.7x book value which includes lots of freehold property.
• Cutting costs by £500m over three years and have reduced capital expenditure.
• Bid for Argos cleared and have increased synergy target to £160m per annum over three years, could be upgrades once this completes.
• Brings more household goods exposure and adds to their financial services business plus furthers on line / click & collect ambitions.
• Food price inflation may turn positive after Sterling devaluation
• Qatar Holdings still hold 25% having bid for it in the past.

Bear Point

• On going price war and  with and threat from discounters expansion.
• Changing shopping habits and potential for Amazon to disrupt the market further in the medium term.
• Argos bid may be a distraction or not deliver the expected returns.
• Debt quite high and there is also a sizeable Pension deficit.
• There have been and may be more dividend cuts given the 2x cover policy.
• Food price inflation may stay negative despite higher costs from weaker sterling leading to a further margin squeeze.
• Qatar could place their stake

 
Any way as ever you pay your money and take your choice. As I have had no Food retail exposure to speak of since selling out of JS and Tesco before all the recent turmoil I have decided to take a small stake in this one as it seems to offer value and has managed the decline quite well. I'm sure I may live to regret that as it is going  against my own Scoring system although I note it does Score 93 on the Stockopedia Stock Ranks.

The final prompt for me to get involved again was that this should be a relatively defensive sector if we are heading for a recession, although they have just gone more heavily into general retail with the Argos acquisition. Plus I like the look of the long term chart and possible support in the low 200's (see chart at the end).

So there you go, as ever time will tell and you pay your money and take your choice or not as the case may be.

Apologies for the lack of posts recently, have been following all the economic and political fall out from BREXIT but not been doing that much in the market. One thing I did come across recently though was an interesting presentation about the merits of dividend growth investing which as you know is something I believe in.

I attach the presentation at the end of this post and although it is mostly based on US data I believe the findings it highlights are relevant to overseas markets as shown in the graphic from the presentation below which looked at this. As you can see it suggests that focussing on those stocks that pay a growing dividend and avoiding those that pay no dividend is a good idea. Those that offer growing dividends seem to offer higher returns at lower risk which is ultimately what everyone should be aiming for.

Other interesting observations included a look at levels of dividend cover which is something else I also focus on in addition to dividend growth. This found that those with middling levels of cover or the inverse as they looked at payout ratios delivered the best returns. So in terms of payout ratios it was the 3rd and 4th Quintiles which did best while Quintiles 1 (lowest payout ratio) and Quintile 5 (highest payout ratio) did worst. Interesting that those with the lowest payouts did consistently badly - maybe this is to do with them being growth companies and retaining capital which subsequently got wasted perhaps?

While by taking a very long term view and looking at rolling 15 year returns for US stocks they also demonstrate that dividend paying and those that grow their dividends have outperformed 100% of the time, although maybe that is just data mining for marketing purposes? Having said that though I think focussing on this type of stock for the long run will serve you well & don't forget that is exactly the type of stock that the Compound Income Scores seeks to identify.

Finally I saw today that Institutional investors have recently  raised cash to record levels and reduced their equity exposure which probably helps to explain some of the volatility we have seen this year. However looking at one final graphic from the presentation suggested that at the end of last year that equities were not that over valued based on dividend yields versus their 20 year history.

Now the dust has settled on the BREXIT vote here a few thoughts on possible outcomes, although with all the economic uncertainty and political turmoil nothing is guaranteed of course just my views. For what it is worth I would like to see Andrea Leadsome as the new PM, but it seems to me that the Tory establishment are dead set on securing the role for their preferred candidate Teresa May.

Economy & Housing Market
The remain camp or project fear emphasised the likely damage to these in their campaign, but arguably went too far in the scaremongering as witnessed by George Osbourne's panicky "punishment" budget threat and talk of tax rises, spending cuts, interest rates going up and house prices collapsing etc. As we now know he has now done a U turn on this with no post BREXIT budget and indeed he had now gone full circle to do perhaps an O turn by now suggesting tax cuts (for Companies) and quickly abandoning his balanced budget ambitions to avoid the need for spending cuts and let the deficit take the strain. Not that surprising I guess, but it was more surprising that he and everyone else made such ridiculous claims before the vote.

I also note that the Bank of England, as always seemed likely, is now talking of rate cuts, liquidity support and in all likelihood more quantitative easing. Again not really what Carney was saying before hand. I note that predictions of a fall in Sterling have come to pass and it is possible that this will impact on inflation in the short term which could also put another squeeze on consumers real incomes. It is however likely that the Bank will ignore this again and keep rates low as they ignored 5% inflation a few years ago and the global background seems to remain deflationary generally. The weaker pound will be potentially positive for exporters although worth bearing in mind that hedging programmes may delay the effects coming through to the bottom line.

Having said that though it is fair to say that all the political turmoil & business uncertainty does seem likely to take the edge off of economic growth, although I don't think it will lead to a full blown recession like 2008, but I guess we could potentially see a couple of negative quarter in a row which is the technical definition of a recession. Unless of course we end up with a global downturn / banking crisis again on the back of it which I guess you can't rule out yet given the state of European banks for example.

On the housing market / house builders I would also tend to be more sanguine than the consensus, but as Persimmon said today it is too early to judge the effects. Nevertheless I think the supply & demand imbalance, lower mortgage rates etc. should provide support but the uncertainty  may hit reservations and volumes in more vulnerable areas like London which I'd be more cautious on in the short term. For the builders I think they should be able to manage their way through it by varying their mix and using their land banks to deliver continued decent profits, earnings and dividends.

Stock Market
As ever it is a market of stocks and we have seen quite a divergence between large international and defensive names and the more UK exposed mid and small cap names. If my view of a not too serious downturn is any where near right, then it is possible that there could be some good opportunities in these latter areas. However, if it is more serious than I think then the recent trend of large cap out performance is likely to continue, as ever time will tell. Ratings in the main look OK and yields are certainly attractive compared to bond and cash deposit rates. You will however need to be careful taking figures at face value as we have already seen a few profits warnings and the volume of these is likely to increase in the next six months as the full effects of the exit vote become clearer, so definitely worth treading cautiously I would say. Dividend cover has also come down generally so also worth looking at this and economic sensitivity when you come across a stock with a good yield.

That's all I have for you for now, not sure if it helps? I'll leave you with links to a couple of posts from the Nadeem Walayat at the Market Oracle site who I have followed since the financial crisis in 2008 and who has made some pretty good calls along the way. If you are not familiar with his work he certainly puts out a lot of thoughts on a range of subjects and while you might not agree with all his views his economic and market analysis has been pretty good in the last few years. His site if you are not already familiar with it also has many other opinion pieces from a lot of other analysts too which may or may not be of interest too.

So here is the first one on BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics...

& the second one looking at BrExit Implications for UK Economy, Interest Rates, Bonds, Markets, Debt & Deficit, Inflation...

I'll leave you with one chart demonstrating the BRXIT effect on defensive stocks...

...in politics as they say and it has certainly felt like a long time in the market this week with all the ups and downs and the political shenanigans. To be honest it has felt more like a circus in the political arena with Boris the clown & his trusty assistant David unleashing all sorts of chaos before waving goodbye and leaving someone else to clear up the mess before they head off to a Bullingdon Club reunion later this summer, perhaps? While in the City it has felt more like the Casino, that everyone accuses it of being, while we are now left worrying about some of the high rollers leaving the tables and heading out of town.

I have deliberately not posted this week because quite frankly we now seem to be in uncharted waters with the whole political and economic arrangements with Europe and the rest of the world being re-cast. With all that going on and to be decided nobody really knows what the outcome is going to be, but there have been some big moves in markets as they get over the shock and start to discount what they think will be the outcome. This seems to be an expectation of a domestic recession (two quarters of negative GDP growth) with perhaps around 70% of economists in a survey I saw on Bloomberg recently expecting one either this year or next. Thus domestic focussed and cyclical stocks related to the housing market plus banks and property companies have been the largest fallers, while the larger cap names and exporters who will benefit from weaker Sterling have been the obvious immediate winners.

This has been reflected in the headline indices this month with the FTSE 100 leading the way with a positive total return of over 4%, while the FTSE 350 and FTSE All Share were also up on the month but to a lesser extent due to their mid cap and small cap exposure. These parts of the market, reflecting their heavier exposure to domestic companies and sectors, took most of the pain with the FTSE Mid 250 being down over 5% and the Small Cap index by over 2%. Having said that though there were obviously individual stocks and sectors within that, like the house builders for example, which got hit much harder than that. Thus if you have a bias in you portfolio towards these parts of the market, as I do, then all the talk of the "market" being back to levels it was at before the referendum will certainly not reflect what you have seen in your portfolio.

Any way in terms of the Monthly Timing Indicators for the UK Market that I follow, which are based on total return indices, these also reflect this divergent performance from last month. Thus FTSE 100 has moved further above its 10 month moving average to be some 6% above it which is bizarrely the most bullish it has been since I started following these at the start of 2014 and quite a turnaround from its bearish trend which ran from August last year to March of this year (see Chart at the end). The other headline indices, the All share & 350 are also still more than 4% above their moving averages, being dragged down a bit by their mid and small cap exposure as discussed above. While on these the Mid 250 is back below its moving average by 2.6% having been above by asimilar amount last month, so quite volatile to say the least. While the Small Cap Index is just about hanging onto its moving average being 0.1% above it. 

So quite an abrupt turnaround in the performance just when it looked last month as though all the indices were turning bullish. As discussed above this reflects the shock of the referendum result and the move by investors to discount a recession in fairly short order. As suggested last month I'm not too sure I would put too much faith in this indicator at the moment given the outcome of the referendum.

The 64 million dollar question from here is if there will be a recession and if so how severe might it be. Somewhat surprisingly I heard that Mark Carney is now suggesting rate cuts on the back of this having before the vote suggested that rates and mortgage rates etc. would rise. We have also not yet seen George Osbourne's punishment budget, but I guess we could still see something in the Autumn, but again, given the background, I guess there is a chance that this looks to support the economy by letting the deficit take the strain rather than cutting spending and raising taxes as threatened. I also note that mortgage rates are likely to come down on the back of the lower bond yields from the flight to safety that we saw, again the opposite of what was suggested. Who knows with all these opposite outcomes perhaps the Referendum result in this Boris in Blunderland political story May be that we end up staying in the EU!

Summary & Conclusion
So we are at the end of a momentous week for the UK with the whole political establishment tearing itself apart after the general public seemed to stage a backlash / protest vote against the banks, big business and the political elite in London as some commentators have suggested. Which still leaves me worried that they may still try to ride rough shod over this by insisting that we have another vote on this down the line until the masses come up with the "right" result as far as the political elite are concerned. Well lets hope they stick to what they are saying at the moment about respecting the outcome but I'll believe it when I see it.

As for markets the turnaround in the indices discussed above reflects this new changed reality and when times get tough it is more normal for large caps to out perform and Mid and Small caps to struggle more, so this may just be the start of the new trend for now until the economic picture becomes clearer in the months ahead. Conversely it may be that the fears of a recession have been over done and not that much damage will be done, a slow down rather than a recession perhaps? In that case some of the sell off may be an opportunity in certain sectors like the house builders perhaps rather than a reason to panic? As ever though you pay your money and take your choice on those potential binary outcomes and time will tell.