SuperGroup and easyJet promise mid-cap momentum in the stealth bull market

International Business Times Link to Video, Article:

SuperGroup and easyJet promise mid-cap
 momentum in the stealth bull market

No surprise that financial journalists are seizing on the FTSE 100's proximity to the magic 7,000 level to pen myriad articles, all variations on the "FTSE to hit a new all-time high after 15 years".

But what is perhaps far less well documented in the financial press is the fact that the FTSE Mid 250 index, including more domestically oriented sectors such as house building, non-food retail and media have been in a stealth bull market over this same period, posting a compound annual growth rate of not far shy of 10% per year including reinvested dividends, compared with only 3.9% for the FTSE 100 (Figure 1).

At a new all-time high of over 17,000, it seems as if the FTSE Mid 250 index is poised to capitalise on the economic strength evident in the UK, as we see record employment and the resumption of better wage growth while the inflation rate is the lowest seen in many a year (Figure 2).

There are two ways to invest in the FTSE Mid 250 index as it reaches a new all-time high: buy one of a number of FTSE 250 companies that are performing well and offer good value; or simply buy the entire index via exchange-traded funds (ETFs).

My personal FTSE 250 favourites

If you are taking the first approach, and are keen to buy a handful of FTSE 250 companies, I would suggest looking for exposure to the buoyant UK economy via more domestically-oriented sectors such as:

1. Travel: budget airline easyJet (UK code: EZJ.L) is enjoying ever-higher UK passenger numbers (read my February 18 budget airlines article including easyJet)
2. Non-food retail: SuperGroup (SGP.L) has benefited from a strong Christmas trading period, with 12.4% like-for-like sales growth to 10 January (read my December 22 Santa's Secret Stock Tips article)
3. House builders: Berkeley Group (BKG.L), which is exposed to the buoyant housing market in the affluent south east of England and which offers a near-7% dividend yield (see my February 2 Housebuilders' article)
4. Insurance: Lancashire Holding (LRE.L) is a Lloyd's insurer that has two key attractions: (a) a very generous 9% dividend yield and (b) the potential to become a takeover target given recent purchases of UK competitors Catlin and Brit Insurance. See my recent Lancashire Holding article for more detail.
5. Asset managers: Jupiter Asset Management (JUP.L), one of the UK's largest asset managers that  manages nearly £32bn of assets in its various funds, and which currently pays a near-5% dividend yield. Greater UK investor optimism should benefit Jupiter via higher funds under management, and thus higher management fees and profits.

Recap on the performance of my six secret Santa stock picks

I gave six FTSE 250 stock tips in a pre-Christmas article back on December 22. How have they fared in the intervening two months?

Well I am pleased to report that these stocks have returned an average 6.2% over the two months led by SuperGroup and Amlin, beating the FTSE 100 index handily. (Figure 3)

Don't want to pick single stocks? Buy a FTSE 250 ETF instead

If you prefer the lazier way and just want a single investment to capture the FTSE 250's strong momentum, the cheap way to buy exposure to the UK's economic momentum would be via a FTSE Mid 250 exchange-traded fund (ETF), such as those offered by ETF providers iShares (UK code MIDD.L), Deutsche Bank x-trackers (XMCX.L) or HSBC (HMCX.L) (Figure 4).

Bottom line: Remember the headline FTSE 100 index is more a proxy for the global stock market given its heavy weightings in global industries such as healthcare, mining and oil & gas. In contrast, the FTSE Mid 250 index is a much better proxy for domestic economic growth and has outperformed the FTSE 100 by a country mile over the past 15-plus years.

Video: CNBC Worldwide Exchange Interview On Oil, Greece (amongst other things)

To watch my TV interviews on CNBC's Worldwide Exchange programme from Thursday 19 February, on the subject of Oil and Greece, please click on the links below:

CNBC WWE: Oil Has Hits Its Bottom

CNBC WWE: Capital Controls are a Last Resort

Lancashire Holding (LRE.L) – A Hot Pot Yield!

Who’s next in the Lloyds insurance serial takeover saga? First Catlin Insurance (CGL.L) is acquired by US reinsurer XL for over 700p per share, then last week Brit Insurance (BRIT.L) accepts a bid from Canadian insurer Fairfax Financial for over 300p per share (post dividend payment), both handsome premia to the pre-bid share price! 

Clearly the global catastrophe insurance market is consolidating fast, as besides these two acquisitions, there have already been two other deals in the US reinsurance sector (RenaissanceRe buying Platinum Underwriters, and Axis Holding merging with PartnerRe).

1. Catlin and BRIT have been kind to their shareholders

Source: Bigcharts.com

Of the big five listed Lloyds insurers, that leaves only Beazley (BEZ.L), Novae (NVA.L) and Lancashire Holdings (LRE.L). According to Bloomberg, bid speculation is already swirling around both Lancashire and Novae. Of these three, I am focusing on Lancashire as an attractive investment for a number of reasons, including its status as a potential takeover target.

What exactly does Lancashire do?

But first, a little background on this stock: Lancashire Holding is a Lloyds insurer that offers global specialty insurance and reinsurance products, principally in the fields of Property, Energy, Marine and Aviation. Its two main property reinsurance products include retrocession written on either a single territory or worldwide basis, and catastrophe excess of loss. 

3 Reasons to Like Lancashire: Takeover Target, Pumped-Up Profitability, Dishy Dividend

First of all, catastrophe reinsurance (where insurance companies like Aviva pay specialist reinsurance companies like Lancashire) is very profitable - after all, this is why the world’s greatest investor, Warren Buffett, operates in this insurance segment with the General Re subsidiary of his company Berkshire Hathaway. 

The four merger & acquisition deals listed above highlight that this industry is becoming all about economies of scale – i.e. the bigger you are, the more profitable you are as you can demand higher insurance premiums for the risk you take on. In the UK Lloyd’s insurance market, Lancashire, Novae and Beazley all appear to be viable takeover targets.

Impressive Growth Record

Lancashire has posted impressive growth since 2006, underlined by the impressive long-term growth in book value that the company has achieved, a cumulative 375% growth rate over the last 9 years (Figure 2).

2. Impressive Long-Term Growth in Book Value + Dividends Paid

Source: Lancashire Group

Delicious Dividends

At a time when high income investments are becoming increasingly difficult to find, £LRE stands out in the FTSE 350 index with its outstanding 9.1% dividend yield, far ahead of any other UK insurer and indeed, the second-highest dividend yielder out of the entire FTSE 350 index (Figure3).

 

3. One of the Highest Dividend Yields in the FTSE 350

Source: Stockopedia

You might think that such a high dividend yield is unsustainable – but I would argue otherwise, given that it has paid a bumper special dividend in 6 of the last 7 years (2011 the only exception) in addition to the regular dividend.

Recent Results Rate Highly

February 12’s Q4 results were solid, with broker Numis highlighting the $92m pre-tax profit in the quarter beating the consensus $58m expectation by some distance, and Lancashire announcing a 50c special dividend (ex-dividend date: 19 March). This should boost confidence in 2015 forecasts, particularly the 90.6c dividend forecast and the forecast of modest growth in book value.

Cheapest of the Lloyds’ Reinsurers

Finally, Lancashire remains the cheapest of the five listed Lloyds’ insurers, as can be seen from the table below (Figure 4):

4. Lancashire is the cheapest of the Lloyds Insurers

Source: Stockopedia

Don’t Just Take My Word For It, Check Out These other Articles on LRE

I am not the only one to believe that Lancashire is a compelling income story; both noted blogger @chrisoil and also Steve Evans of seekingalpha.com have highlighted the many investment attractions of Lancashire, here, here and here. So by all means check out their well-informed views on Lancashire too!

If you can find a more interesting 9% yielding income stock than Lancashire in the UK market today, then please do let me know! In the meantime, I think that 9% is simply too good to pass up. Get it while you still can!

Edmund

IBTimes: Airlines easyJet, Ryanair and Dart see soaring share prices

IB Times Article + Video Link:
airlines-easyjet-ryanair-dart-see-soaring-share-prices

It is the best of times for UK budget airlines easyJet (code EZJ), Ryanair (RYA) and Jet2 (owned by Dart Group, DTG)! Medium-haul airline passenger traffic to European destinations just keeps on growing as UK households seek to escape to sunnier climes from the generally gloomy weather at home. European air passenger traffic grew nearly 6% over the last quarter of 2014 (Figure 1).

Source: Market Realist, IATA

With a favourable following wind from the strong UK economy flowing through into:

• higher employment (unemployment rate of 5.8%, lowest since mid-2008),
• stronger wage growth and
• record high consumer confidence (highest reading in over 10 years),

this bullish traffic trend should be sustained over this year and into 2016 (Figure 2).

Source: Bloomberg

Both easyJet and Ryanair have ridden this UK consumer boom with a combination of rising passenger traffic (easyJet +6.3% year-on-year; Ryanair +7.6%; Figure 3) and improving load factors (the amount of seats per flight that are occupied; over 90% for easyJet and 87% for Ryanair). A rising load factor means better efficiency, and higher profits.

Source: Stockopedia

Reinforcing this trend, IAG (parent company for British Airways and Iberia) reported stellar passenger growth in January of 12.1% for its European routes compared with January 2014, far outstripping passenger traffic growth for other regions.

Profits Boosted by Lower Fuel Costs

Of course, fuel costs are a huge part of any airline's overall running costs, so the 50% drop in crude oil prices will have a positive leveraged impact on the bottom line for these three companies (Figure 4) – albeit with a lag, given that they all hedge future fuel costs to some degree to reduce the volatility and to improve the predictability of their cost bases.

Source: Platts, RBS, Digital Look

The near-halving in jet fuel costs since mid-2014 will continue to gradually flow through to the profit lines of airline accounts for the rest of this year and well into 2016, providing a following wind for UK airline earnings.

Profitability, Dividends and Cash All on the Rise

The results of these favourable revenue and cost trends on these UK budget carriers can be seen in improvements in profitability, cash flows and dividends, with returns on equity rising steadily for easyJet, Ryanair and Dart Group since 2011 (Figure 5).

Source: Stockopedia

And Yes, Price Momentum Has Already Been Positive

A glance at the share price charts of these three airlines tells you that the stock market is already looking kindly on this sector, with all three shares enjoying strong rising trends over the past 12 months (Figure 6).

Source: Bloomberg

Comparing easyJet, Ryanair, Dart Group? Which One is Best?

At this point, we can see that UK low-cost airlines are riding on the crest of several positive profit waves; but which one should be choose to invest in?

Source: Stockopedia

From Figure 7, I would choose Dart Group (DTG) if I had to choose only one airline horse to back – it is the cheapest by far on both price/earnings (adjusted for net cash) and EV/EBITDA valuation ratios, has the best cash backing on its balance sheet (around £180m of net cash once you subtract cash held on advance customer bookings) and has relatively lower leverage from the leasing of airplanes, with only 9 out of its 53-strong fleet being leased (the other 44 being owned outright by the airline).

With Dart Group, I would argue that you are getting exposure to a real deep value situation which is already seeing positive price momentum, and with room for growth as ticket sales continue to fly.

But if you prefer a larger company with a decent dividend yield, then by all means opt for Easyjet (EZJ) with its 3.4% yield, which I chose as one of my Santa's Secret 6 Stock Tips back on December 18.

Reuters Article (Quoted): Some fund managers take a punt on small oil firms

•     Some fund managers take a punt on small oil firms 
•     Expect bigger share price rebound with an oil recovery 
•     Focus on companies like Caza Oil, Bowleven, Soco 

  
    By Atul Prakash 

    LONDON, Feb 13 (Reuters) - After a rout in energy stocks on the back of a slump in crude oil prices, some fund managers have started fishing for smaller oil exploration companies, betting that a price recovery will lead them to outperform. 

    Smaller players, especially oil explorers, look much more attractive on valuation grounds than companies like BP  BP.L  and Royal Dutch Shell  RDSa.L  as their shares have fallen much more than oil majors during the sell-off, they said. 

    These stocks are not without risk -- unlike their more diversified and financially more robust bigger rivals, small  firms are usually less able to offset a slump in oil prices. But investors say the potential rewards look attractive. 

    "I feel relatively confident that we have seen the bottom of the oil price. In such a scenario, high-beta (more volatile) plays like smaller oil explorers and service companies are the first to benefit," said Edmund Shing, global equity fund manager at BCS Asset Management. 

     "At these levels, they also become attractive M&A (takeover) targets as it may be cheaper for big companies to buy exploration firms than find new reserves. If oil prices gain, big players will become more confident, accumulate cash, cut capex and look for cheaper reserves." 

    Oil  LCOc1  rose above $60 a barrel on Friday for the first time this year, with prices up more than 30 percent from a multi-year low in mid-January.    

    Shing said that in order to cut some risks, he was investing in firms having low debt and those which had hedged their future output. BCS recently bought Caza Oil & Gas  CAZA.L , Bowleven  BLVN.L , Soco International  SIA.L , Eagle Rock Energy Partners  EROC.O , Memorial Production Partners  MEMP.O  and Emerge Energy Services  EMES.K . 

    Shares in the firms, except Memorial, are up 6 to 34 percent in the first two weeks of this month on a recovery in oil, which has gained 12 percent in February. In contrast oil majors like BP, BG Group and Shell are up 7 percent this month.   

      

INDISCRIMINATE 

    Thomson Reuters data shows smaller oil firms are cheaper. Memorial trades at 14 times its 12 month forward earnings, while firms like Bowleven have a negative price-to-earnings ratio, against 30 times for BG Group and 20 times for BP. The 12-month price-to-book ratio for smaller oil firms hovers between 0.2 to 0.6, against 1.1-1.6 for large players.   

    "Smaller oil companies were hit by a slump in crude oil prices in an indiscriminate manner, so for some that was an over-reaction. It does make sense at this juncture to start 

looking at them," said Chris Rowland, buy-side energy analyst at investment management company Ecofin. 

    "We like those smaller oil-related names that are operating in cheaper oil basins and are well-hedged, and without pressing near-term debt repayments or covenant tests, which is leading us to look to buy selected U.S. names at this stage." 

    Investment banks are also positive on some smaller oil firms, with Morgan Stanley recently raising its stance on Soco to "equal weight" from "underweight" and Exane BNP Paribas hiking its target price for the company. UBS, which has a "buy" rating for Memorial Production, has increased its target price for the stock to $18 from $15 the stock.  ID:nWNAB05XO6   

    That is not to say that Big Oil is no longer attractive -- after all, majors have fought to protect their dividends by cutting spending -- but investors are looking at different ways to play a potential recovery. 

    "We are still positive on the oil sector, but have become very selective," James Butterfill, global equity strategist at Coutts.   

IB Times Video: Gold Glitters Once Again

"Gold is money. Everything else is credit." So said celebrated banker JP Morgan, founder of the eponymous US investment banks, back in 1912.

Did you know gold, when treated as a currency, was the second-best currency performer in the world last year after the US dollar (Figure 1)?

Figure 1. Gold Was the Second Best-Performing Currency Last Year 

Source: Hard Assets Investor, US Global Investors

For investors in the UK or the eurozone, gold has been a strong performer over the past 12 months, with the gold price in sterling rising 12% to the end of January, and up an even more impressive 23% in euro terms over the same period (Figure 2).

You might well ask yourself why gold has been such a strong performing asset of late, given that it does not offer an income yield like shares or bond. There are several reasons for gold's comeback after 2014's sharp slump in price, related to:

• Demand from central banks around the world
• Strong gold jewellery demand from emerging markets such as China and India
• Safe haven demand from investors looking to park their savings in a "hard currency" that will maintain its value over time, protecting against currency devaluation.
• Central banks have been buying gold by the ton

Figure 2: Sterling- or Euro-based Gold Price Has Been Strong
Over the Last Year 

Source: Bloomberg

Central banks around the world have proved a large source of demand for the yellow metal over the past 12 months, led by Russia. The Central Bank of Russia bought a record amount of gold in the first 11 months of 2014 spending an estimated $6.1bn (£4bn, €5.3bn) in an attempt to reduce dependence on the US dollar amid geopolitical tension, (Figure 3).

Figure 3. Central Bank of Russia Keeps Buying Gold 

Source: Casey Research

Aside from the Central Bank of Russia, other central banks have also been net buyers of gold, including the People's Bank of China and the Indian central bank (Figure 4).

Figure 4. Central Banks Have Been Net Buyers of Gold Since 2010 

Source: World Gold Council

The investment case for owning some gold exposure in your portfolio

The classic investment case for an investor to own gold is twofold. Firstly, it acts to diversify your overall investment portfolio, which is generally dominated by stocks and shares on the one hand, and various types of bonds (government and corporate) on the other.

Gold tends to appreciate over the long term but does not move together with either stocks or bonds over time, acting to smooth out the overall investment returns from your long-term savings.

Secondly, it acts to protect the value of your long-term savings against the effects of a weaker currency.

In this case, just look at how sterling has lost 12% against the US dollar from peak in June 2014 to today, while the euro has suffered an even more dramatic 19% drop against the US dollar since hitting a peak in March 2014.

Holding gold would have protected you against the bulk of these declines.

So how can you buy gold exposure?

Well, there are a couple of easy ways that you can by exposure to the yellow metal:

• You can buy gold in the form of coins or small gold bars from the Royal Mint (that produces all of our coins) – it is selling a gold sovereign (containing 0.2354 of a troy ounce) for just under £227, with discounts for buying 25 or more. The problem with this is you are effectively paying the Royal Mint a premium of up to 12% over the actual price of gold per ounce to buy these coins.

• You can invest in a gold bullion exchange-traded fund (ETF), which you can hold in a stocks and shares account or stocks and shares Isa. My preferred gold ETF is the ETF Securities Physical Gold ETF (code: PHGP), which buys you direct investment exposure to the gold price in sterling.

So go on, now is the time to look at getting your hands on some of that shiny yellow metal.

Idle Investor Research: Multi-Asset ETF Trends (Graphs in Presentation)

Idle Investor Research: ETF Spotlight

(Presentation in PDF file format)

Click on the link below to download this presentation:

Idle Investor Research: Examining ETFs, 6 Feb 2015

Contents:

1.Top Multi-Asset Trends 
2.Currency Trends: King $ 
3.Risk Watch: A More Volatile World 
4.Equity Sectors: Best and Worst 
5.ETF Top of the Pops 
6.Featured Theme: The Hunt for Yield is on!

3 Feb 2015 Bloomberg TV Video Interview - my comments on BP, Oil

Please click on the web link below to watch a short video of my interview on Bloomberg TV this morning, discussing BP’s results and prospects for the oil price and oil companies.

Bloomberg TV Video: bcs-s-shing-says-shell-exxon-could-easily-buy-bp

IB Times Article, Video: Barratt, Berkeley and Taylor Wimpey are safe bets for building returns

Please click on the web link below to read the original International Business Times article and watch the short video interview:

Barratt-berkeley-taylor-wimpey-are-safe-bets-building-returns

What should be the investors' mantra in 2015? I would vote for "Income, income, income", given the paltry interest rates on offer from bank and building society savings accounts. You can forget UK gilts (government bonds) as a source of income too, as a 10-year gilt only offers a pre-tax yield of 1.3% per year.

Within UK stocks, one of the most attractive homes for cash is your Isa (don't leave any Isa top-ups to the last minute in April) and any recently liberated private pension savings is in UK house builders such as Barratt Developments (code BDEV), Berkeley Group (BKG) and Taylor Wimpey (TW).

As a group, house builders such as these have enjoyed strong performance in share prices, gaining 20% since June of last year while the FTSE 100 index has struggled to remain flat (Figure 1).

Figure 1. House Builders Leave the FTSE 100 in the Dust

Source: Stockopedia.com

Yes house price inflation is slowing but prices are still rising

Unless you have been living on Mars these past few months, you will most likely be aware that UK house price inflation is slowing, with the Nationwide Building Society reporting a monthly gain in average prices of only 0.3% in January 2015, resulting in a yearly gain of 6.8% and driving the average price of a UK property up to a new all-time high of £188,446 (Figure 2).

Figure 2. House Prices Up 6.8% Over the Last 12 Months to £188,446 Average

Source: Nationwide

There are a number of economic factors that should support house prices over the year ahead, perhaps allowing for modest further house price inflation over 2015:

1. Lower unemployment (latest rate down to 6%) and improving wage growth (+1.6% year-on-year)
2. Lower energy costs on the back of lower petrol prices and lower utilities bills, boosting household discretionary income
3. Lower average mortgage interest rates as banks and building societies become more aggressive in chasing new mortgage and re-mortgaging business, with a two-year fixed rate for a 75% loan-to-value (LTV) mortgages heading down toward a new low of 2% (Figure 3).

Figure 3. UK Average Mortgage Rates Keep Falling 

Source: Bank of England

These economic and house price trends bode well for new build house prices for the remainder of 2015, with the latest Council of Mortgage Lenders' statistics highlighting a surge in first-time buyer mortgage borrowing, a healthy sign for the overall housing market.

Higher house prices herald higher profits

The surge in UK house prices has evidently been a boon for these house builders, with large house-building operations in the hot London and south east regions benefiting from higher prices for new build homes. These price gains have in turn driven higher levels of profitability for this group, reaching a historically elevated average of over 15% in 2014 (as measured by return on equity, Figure 4).

Figure 4. House Builders' Profitability Levels Hit Historic Highs 

Source: Stockopedia.com

Higher profits deliver delicious dividends

The direct result of this growth in house builders' profits is a bumper dividend crop for investors; this is a welcome income stream at a time when yield is becoming increasingly hard to find not only in the UK but indeed around the world.

Expected dividend yields this year range from a relatively lowly 2.6% in the case of Redrow to a very tempting 7.3% offered by Berkeley Group (BKG, Figure 5).

The house-building sector offers an average 5.3% dividend yield, which you can harvest without paying any tax if you buy the shares within a stocks and shares Isa.

Figure 5. House Builders Offer a 5.3% Average Dividend Yield 

Source: Stockopedia.com

All in all, I believe the bumper profits and premium dividend yields on offer from Barratt (BDEV), Berkeley (BKG) and Taylor Wimpey (TW) all merit a closer look for potential inclusion in an Isa or personal pension income portfolio. Why not delve into those delicious dividends?