Contrarian BOGOF Opportunity In The Stock Market

When you go to the supermarket for your weekly shopping (even if you are a Waitrose shopper) you do I assume try and keep your costs down by following the offers like buy one get one free  (BOGOF) or stocking up on steak and Chianti if it is on offer. It is an old axiom in the stock market that you should also buy low and sell high. Easy to say not so easy to do.

Thus if you do want to try and do it I would suggest you check out Morrisons (MRW) which has been in the news recently for all the wrong reasons and as a result I think it is now offering value and it is certainly low in share price terms. In a way this is a continuation of my recent housing and property theme. As I suggest this one it is a BOGOF because it is trading at around or even at a discount to the likely value of it properties. So you get a property portfolio (albeit of food retail related premises) with a profitable supermarket and food manufacturing operation attached, which is expected to make about £450 to 500 million in pre exceptional profits for this year after their recently announced investment in prices. This compares with many property companies currently trading at a premium to their asset values. Indeed one of my other holdings Schroders Real Estate Investment Trust (SREI) is having a C share issue at a small premium and this pays an uncovered yield of just under 5%.

Morrisons have promised a 13.65 pence dividend for this year which will give a 6.5% yield at a the current price of 210p. Now this may not grow much more in the years after that as cover is rebuilt, but the cash flow and ROCE are expected to improve as they seek to deliver £1 billion of self help measures over three years from cost cutting, working capital and reduced capital expenditure, so hopefully it'll get paid while investors wait for a turn around. They are also talking about disposing of £1 billion of property too and the return of surplus capital as appropriate. Now I know you'll have lots of objections as to why this is the wrong time to do this and how it will get worse, which it might, but therein lies the opportunity.

Personally, I think Morrisons can succeed by offering better deals and with its own meat and bakery products as a point of differentiation, they did after all avoid the horse meat scandal. It may also actually benefit from playing catch up in IT, loyalty schemes, local stores and home delivery. The clincher for me was the recent cluster of director buying which is usually a good predictor of future out performance and interesting that it has occurred at this time in what seems like such a dire situation. I was also encouraged to read today that the chief executive, Dalton Phillips has turned down his £374,000 cash and shares bonus for last year (probably in embarrassment) although I'm not quite sure how he even qualified for one given the results last year, guess he must have done some things right, must take a closer look at their incentive scheme. 

Still I understand if you vehemently disagree with this suggestion and indeed I could well be wrong if a full scale price war develops, then the customers will be the big winners! However, so far it seems the oligopoly is holding together so far. But just to show I have considered the counter arguments here is a negative piece from Money Week which suggest avoiding the sector and that Morrisons could have to write its property down further and cut its dividend. All of which could come to pass and this one could turn out to be a value trap. I guess it would be safer to wait for evidence of a turn around in operational performance, but by then the shares would probably be a lot higher. So you pay your money and you take your choice, I chose to buy a few and take the 6.5% yield on offer for now (plus the 4.3% from the 9.16 pence final, XD 7th May 2014, Paid 11th June 2014) and take the risk that it is a value trap. If nothing else at least it should pay me more than 10.8% in the next 14 months or so.

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