Tuesday, 16 September 2014

UK Housing Becoming a Buyers' Market? Not good for estate agents...

The UK media has not tired of bombarding readers with news stories about the runaway nature of the London property market in particular, and the UK housing market in general, this year. As I have been looking to buy a bolt-hole in London, this strong price momentum has been particularly annoying, with properties literally flying off the shelves soon after being put up for sale.


This trend looks finally to be on the turn, despite continued reports of London seeing 19% price growth in the year to July, according to the Office for National Statistics. 


RICS Survey Points to Big Slowdown

The Royal Institute of Chartered Surveyors' latest monthly survey for August highlights this London slowdown in a number of revealing charts (Figures 1-3):

1. Newly Agreed Sales Are Slowing Fast


2. New Buyers Are Cooling Their Interest Given High Prices


3. Particularly in London

European House Prices Hardly Advance

While UK house prices have gained 12% in the year to July, the latest Knight Frank Global House Price Survey reveals that European house prices overall have only gained 2% over the last 12 months, with certain markets such as Spain still seeing falling prices.  In fact in Europe, only Turkey (+14%) and Ireland (+12.5%) have seen faster house price growth than the UK. But remember, in the case of Ireland, that this rebound in house prices has only come after a terrible 50%+ fall in house prices during the Global Financial Crisis, a far cry from the UK situation today. 

Can we really expect the UK housing market to continue to march upwards, even as affordability ratios deteriorate rapidly and force ever more 20- and 30-year olds live at home for longer in order to try to save up a deposit? And what if the Bank of England decides to begin raising its base rate, even if only gently? This could have a further negative impact on affordability to add to this price growth. 

Seasonal Effects: Q4 is the Weakest Period of the Year for House Prices

I have looked at the quarterly variation in UK house prices from the Nationwide house price index going back to 1952: From this, it is quite clear that Q4 (October-December) is the weakest of the year from the point of view of house price momentum (Figure 4): 

4. Q4 is on Average 0.7% Below Year Average House Price Growth

If we delve deeper and look by month using the Halifax House Price index data back to 1983, we see an even more obvious seasonal effect with August-January registering average house price growth well below the overall long-term average (Figure 5), with a similar if not exactly the same seasonal effect also found in Rightmove monthly asking prices (going back to 2001, Figure 6): 

5. August-January Sees Pronounced Seasonal Weakness in House Prices

6. Rightmove Asking Prices Also See A Weak August-January Trend

Two Conclusions To Reach

  1. With discounts of achieved to asking prices currently widening according to Hometrack, it is time for homebuyers, especially in the pricier London and the South East regions, to be more discerning and to bid lower, particularly if a cash or non-chain buyer and thus able to complete relatively quickly.

  2. Estate agents like Foxtons (FOXT.L) and online property listing websites like Rightmove (RMV.L) and the recently-listed Zoopla (ZPLA.L) should see their premium valuations come under further attack as top-line growth inevitably slows along with overall housing market activity. I see a forward P/E of 22x for Rightmove and 27x for Zoopla as far too high when their core market is slowing, particularly as their dominance and cost to estate agents is spawning rivals like Agents' Mutual. Even estate agents are seeing their percentage-based fee structure under attack from fast-growing online estate agents charging a flat fee (e.g. £500) such as sellmyhome.co.uk. Rightmove and Zoopla could thus be interesting short candidates...

There will be a Time when Estate Agents Are Interesting Stocks

There will inevitably be a time to look at estate agents such as Foxtons and LSL Property Services (LSL.L), but I feel that this will be when they trade on single-digit P/Es and dividend yields of well above 5%. Foxtons may have nearly halved from its post-IPO high but has not hit these valuation levels yet, while LSL is not far away (9.8x forcast P/E and 4.9% dividend yield according to Stockopedia) and may warrant further attention in the months ahead. 

But for the moment, I shall be biding my time and keeping a close eye on house price developments, in the hope of buying either a London property in the months ahead, or at least snapping up the shares of a bargain basement estate agent!

Edmund



Thursday, 11 September 2014

Warm Up on Polar Capital!

Polar Capital: A Good Time To Warm Up

Polar Capital (LON:POLR) is an asset manager, managing a selection of investment trusts (like the Polar Capital Technology Trust, PCT; and the Polar Capital Global Financials Trust, PCFT). They also manage a number of unit trusts and hedge funds, with their Assets Under Management (AUM) up to $13.6bn as of the end of June this year.  

Why I Like Asset Managers

I like asset managers for a number of reasons: 

  1. Firstly, their business model tends to be asset-like, but highly profitable. 
  2. Secondly, as a result of this they are often serial dividend payers and growers, and 
  3. Thirdly, they also tend to hold net cash on their balance sheets, a good buffer to have against periodic stock market and economic downturns. 

They Should Benefit from Financial Repression

We remain mired in a strange economic scenario, where global economic growth is struggling and requires a very helping hand from central banks around the world, in the form of Zero Interest Rate Policies (ZIRPs) and Quantitative Easing (QE) programs. While these ultra-low interest rates have been manna from heaven from borrowers, they have been dreadful news for savers, with UK deposit savings rates falling year on year (Figure 1).

1. UK Deposit Rates Hit a New Historic Low



And yet, scarred no doubt by 2 stock market crashes since the year 2000, the average UK household has preferred to keep a large amount of savings in the form of cash, rather than any other higher-yielding investments like stocks and shares. This is a global trend; In the US and Germany, for example, cash held on deposit by households continues to hit new highs at over 0.4% of GDP (red line and right-hand scale on Figure 2), in spite of the five-year old stock market rally and the US S&P 500 index recently breaching the 2000 level. 

2. US Savers Keep Record Amounts in Cash



As these ultra-low interest rates on cash deposits remain, there will be added pressure over time on households to find better yields elsewhere, in other asset classes like stocks and bonds.

Right Now, Stocks Yield the Most

The Hunt for Yield should push investors towards stocks, given the already-depressed yields now available on government bonds; note that you now have to pay the German government in effect for them to keep your money for 1 year (Figure 3)! While the FTSE 100 index is due to pay out 3.7% this year...

3. Stocks Yield More than Bonds or Cash



So for asset managers like Polar Capital (LON:POLR) who specialise in stock-based funds or higher-yielding specialist areas like emerging market bonds, this should ensure positive inflows over the medium-term. 

Polar Capital: High Dividends, Backed By High Profitability and Cash on Balance Sheet

Running Polar Capital by the numbers reveals a number of strengths that attract me to the stock. Firstly, the dividend yield is high at 7.3% on a prospective basis (Figure 4), although Stockopedia registers an even higher 7.9% yield number. these compare very favourably to yields available elsewhere in the higher-yielding Asset Management sector. Moreover, this dividend has grown steadily from 4.5p for March 2010 to a forecast 30.8p for the fiscal year ending March 2015. 

4. US + UK Asset Managers' Dividend Yields



You might be concerned that Polar Capital's dividend cover ratio is only 1.1x, but there are a couple of further positives that should allay these dividend payment fears. 

Profitability, as measured by last year's Return on Equity, are also generally high across the Asset Management sector, with Polar Capital posting a very respectable 23% ROE (Figure 5):

5. US + UK Asset Managers' Return on Equity


Finally, net cash on balance sheets is high across UK asset managers, averaging over 14% across the sector ex Polar Capital, while Polar Capital itself has an even better 24.6% level of net cash on balance sheet as a percentage of current market capitalisation, better than any other major asset manager bar Man (LON:EMG) (Figure 6):

6. UK Asset Managers' Net Cash on Balance Sheet as % of Current Market Cap.



Basic Valuation Also Looks Attractive

Aside from the high dividend yield, bear in mind that the forecast P/E (once cash on balance sheet is substracted) comes out very cheaply at under 9x for March 2015 and an Enterprise Value/EBIT ratio of only 7.3x, while book value growth has been impressive since 2010 too. 

So What's The Catch? Slowing AUM Growth, Stock Market Risk

a. End-June: First Outflow in 15 Quarters 

The latest statement on assets under management as of 30 June revealed that AUM had only grown 3% in the quarter since the end of March, in effect suffering a net outflow for the first time in 15 quarters. This marks a pause in their impressive growth rate, which had seen AUM grow from just $2.5bn in March 2010 to $13.2bn by March of this year (Figure 7):

7. Polar Capital's Impressive AUM Growth Track Record



b. High Stock Market Beta: Great When Stocks Rise, But Painful in a Bear Market 

Clearly, while asset managers tend to see growth in AUM and thus rising profits in a bull market, they are also very sensitive to a bear market, when they tend to under-perform benchmark stock indices like the FTSE 100, as was the case back in 2008 and 2011, when both US asset managers (black line) and UK asset managers (yellow line) suffered greatly (Figure 8):

8. High Market Beta Means Pain During Bear Markets for Asset Managers



With all this in mind, I still find Polar Capital (LON:POLR) very tempting at the current share price of a tad under 430p, resulting in a single-digit ex-cash P/E valuation, particularly given that one is paid to wait by the generous dividend yield. 

Remember that with 32% of Polar's shares held by directors and employees, their interests are very much aligned with other shareholders!

But of course, Do Your Own Research as ever!

Edmund

- See more at: http://www.stockopedia.com/content/warm-up-on-polar-capital-86071/#sthash.uWUExNkc.dpuf

Friday, 29 August 2014

VIDEO: Why September is a Danger Month for Equities; but better for Bonds, NatGas, Gold...

Click below for a 3-minute Video Presentation on the Seasonal Dangers for Stocks,
and Why September is Better for Bonds, Gold, Gas



Thursday, 28 August 2014

Blinkx, and You May Miss the Rebound!

53fef1c9dd608blinkx_logo_grey.png   Okay, since I managed to stir up a little controversy with my look at debt management company Fairpoint (LON:FRP) last time around, I thought I would stick with this theme and look at another controversial company, this time Blinkx (LON:BLNX).

What Does Blinkx Do?

The official blurb: 
blinkx is an Internet media company that connects consumers and brands through premium content online. Founded in 2004, blinkx pioneered Internet Video Search using its patented COncept Recognition Engine (CORE). This technology leverages speech recognition, text and image analysis to deeply understand the meaning and context of video content to generate improved search relevancy for consumers and a brand safe environment for advertisers. Through its partnerships with hundreds of media companies, including NBC, Conde Nast, Reuters and Bloomberg, blinkx has indexed and search enabled millions of hours of video content. blinkx powers video search, discovery or monetization on thousands of online properties including Lycos, Discovery Networks, CBS and FoxSports. blinkx is headquartered in San Francisco, California with 15 offices worldwide. 
Or, in the words of the website itself, it is:
A simple way to discover and share great videos.
Still confused as to what they do? Well, here is a link to a video demonstrating how to use the site:

What Is their Business Model?

London/San Francisco-headquartered Blinkx distributes ad-supported content, but has planted its flag firmly in video search and discovery. So it gets a cut of the advertising revenues.

Why has Blinkx Been Under Attack from Short Sellers?

This article on Bloomberg.com highlights a very critical blog post by a Harvard Business School professor, which triggered the stock’s biggest plunge ever.
In the Jan. 28 blog, entitled “The Darker Side of Blinkx", Benjamin Edelman, an associate professor of business administration, said his research indicated that the London-based company used deceptive software to inflate traffic counts and capture commissions. Edelman wrote that he prepared the research for an unnamed client. 
At least 5 hedge fund short sellers have subsequently sold Blinkx short: the investment companies are Luxor Capital Group LP, Blau GmbH, Jericho Capital Asset Management LP, Valiant Capital Management LP and Oxford Asset Management LLP, according to European regulatory filings.

July 2 Profit Warning Underlines Problems at Blinkx

To add grist to the short sellers' mill, at the time of their trading statement on July 2, the company then issued a profit warning for H1 2015, highlighting lower-than-expected demand within their Desktop segment (as people increasingly access the internet via mobile devices rather than desktop PCs), hurting both sales and profits with full-year EBITDA some $5m below management's prior expectations.
The two volume spikes at the time of (a) the publication of the critical blog post at the end of January, and then (b) the profit warning at the beginning of July sent Blinkx's shares down from 217p in mid-January to 32p on July 2. By any stretch of the imagination, this made for an impressive return for anyone shorting the shares!
As a result of all this, one of the biggest investment banking cheerleaders for Blinkx, Goldman Sachs, waved the white flag and cut its analyst rating on Blinkx on July 7 from Buy to Neutral. Goldmans had previously led a Blinkx stock placing of 45.68m shares at 120p at the time of their acquisition of Rhythm NewMedia in June 2013...

So Why Bother with Blinkx Now? 
1. Valuation Is Appealing

Let's look at some simple valuation metrics:
Enterprise Value/Sales is 0.45x for a company that generated a 6.9% operating margin for FY2014:
Note the high net cash element of $126.9m, which highlights the company's solid balance sheet. This seems pretty cheap to me, at least on basic metrics. 
Net free cashflow pre-acquisitions, post investments has been pretty solid too, averaging out at over $29m per year over FY2013 and FY2014, giving a free cash flow yield on enterprise value of 26%!

2. Insider Buying: The CEO Bought at 34p

Interestingly, as a show of faith in the company, the CEO Subhransu Mukherjee bought 250,000 shares at 34p immediately after the profit warning, with insiders now owning 2.11% of the company's shares.. 

3. The Company Now Has Authorisation to Buy Back Shares

Following the July 15 AGM, Blinkx (LON:BLNX) now has authorisation to buy back shares, which would be a better use of some of its net cash position than embarking on more acquisitions... This could at least provide a solid floor for the stock.

4. Change in US-Based Short Positions

According to this latest filing, US-based short positions as of mid-August are down to 5% of what they were at the end of April this year, representing just 0.02% of the outstanding share float.
What is more, major shareholder Blackrock (10.04% of the stock as of July 4) now refuse to lend out their Blinkx shares to short sellers, underlining their commitment to the stock.
BLINKX PLC ("BLNKF-0")
- OTC Short Positions on 2014/08/15      76,540      -2,315      0.52
                                    Net            Total      Last              Total           Price   Date                Change       Shorted     Price        Volume       Range
 2014/08/15       -2,315            76,540     0.52         49,200    0.50 - 0.59
2014/07/31        4,124            78,855     0.57          47,700    0.56 - 0.66
2014/07/15        2,025           74,731     0.63       576,600    0.53 - 1.10
2014/06/30         -838            72,706     1.07       98,100    1.00 - 1.15
2014/06/13       -1,900           73,544        -            46,700    1.06 - 1.19
2014/05/30     -136,672        75,444        -            30,500    1.24 - 1.37
2014/05/15   -1,272,791    212,116     1.24       178,000    1.08 - 1.62
2014/04/30     -516,692  1,484,907     1.48         56,800    1.35 - 1.48
  * - Indicates that the closing price used is the last non-zero closing price and is not the closing price on the report date.

Summary: Still Very Risky, But Potentially Interesting Upside...

In short, blinkx has been the subject of a concerted short selling attack, has not helped itself by then following this with a profit warning, but now resides at an extremely attractive valuation level, IF you believe in the business model. Not a stock to put your granny's life savings into, certainly, but perhaps one worthy of consideration for a modest long position.
I personally am looking for an initial price target at around 50p. But more than ever with this stock, Do Your Own Research!
Edmund
Disclosure: I have bought some Blinkx (LON:BLNX) shares in my NISA. 
- See more at: http://www.stockopedia.com/content/blinkx-and-you-may-miss-the-rebound-85674/#sthash.Jv4Yg0rP.dpuf

Wednesday, 27 August 2014

Fairpoint plc: Ditch the Ethical Qualms, Buy It

53fca44913552fairpoint.png  Brief intro to Fairpoint (£FRP): from their own website 
(http://www.fairpoint.co.uk/):

Fairpoint is a consumer financial services business focused on serving financially stressed consumers. Our mission is 'Making money go further'.
Our business is structured into the following primary business lines in order to serve the needs of this consumer group:
  1. Individual Voluntary Arrangements (IVAs)
  2. Debt Management Plans (DMPs)
  3. Claims Management
Fairpoint's Key Brands
53fca75f67422FRP_brands.JPG

Reasons to Be Attracted to Fairpoint (LON:FRP)

While you may not approve of the types of debt management services that Fairpoint provide (e.g. there are free debt management services available to indebted individuals), there are a number of solid investment reasons underlying my enthusiasm for this £58m market cap small-cap stock: 
  1. Valuation is attractive;
  2. Profitability and cash generation are impressive;
  3. Income return is good in this ZIRP environment with a 5% dividend yield;
  4. Stock price momentum is picking up, breaking resistance levels to the upside;
  5. Acquisition strategy is cautious and sensible, delivering growth at a decent price.
This is all summarised nicely in Fairpoint's UK StockRank:
53fca62591323FRP_stockrank.JPG

Valuation: Cheap as Chips!

Whichever way you look at it, Fairpoint (LON:FRP) looks good value with a single-digit P/E and 9% free cash flow yield:
53fca7cc6b247FRP_Value.JPG

Income: a 5% Yield is not to be sniffed at!

Note not only that Fairpoint (LON:FRP) pays a 5% yield today, but that it is well covered at only a 40% payout ratio; not further that dividends have been steadily increased since they were initiated in 2010. 

Growth: Double-Digit Top-Line Growth

Thanks in part to a prudent acquisition of law firm Simpson Millar, paid in part in shares via an earn-out (on targets set for June 2015 and June 2016), top-line growth should be double-digit both this year and next, driving sales from £28.4m at end-2013 to a forecast £36.1m by end-2015. 
We can look at profit growth through the lens of the simplest 1-stage Gordon Growth Model, according to which, Fairpoint's internal growth rate is:
ROE x (1 - Payout Ratio) 
= 11% x (1 - 40%) = 6.6%
This would in turn imply a long-term total return rate at around 12%, including the 5.1% dividend yield. But don't forget, Fairpoint's balance sheet is somewhat inefficient, with a net cash balance of £2.8m, which suggests that the underlying ex-cash ROE is closer to 13%, pushing the internal growth rate beyond 7%.

Profitability and Cash Generation: Very Solid

As the 96 Quality Rank implies, Fairpoint is high quality when running it by the numbers whether looking at profitability or cash flow:
53fcabae90ef0frp_qUAL.JPG
53fcabc25406cfrP_HEADER.JPG
53fcabe1bca54FRP_CF.JPG

Stock Momentum: Interesting Breakout 

Fairpoint is breaking above a key horizontal resistance level of 135p; my first price target is thus 155p, the price gap that opened up on May 20. Beyond that, I am looking to around 231p, last seen in mid-2008 when business was strong (due to the weakening economy). 
53fcb485a8f00FRP_chart.JPG

Stock Ownership: Extremely Concentrated Already

Another interesting feature of this stock is that stock ownership is extremely concentrated, making the stock vulnerable to an upwards stock squeeze in the event of any good news:
53fcb505d562bFRP_shareholders.JPG
Three small-cap specialist fund management firms hold nearly 60% of the outstanding shares, including the top-ranked UK small-cap fund manager Gervais Williams at Miton (who runs The Diverse Income Trust plc amongst other funds - in which Fairpoint (LON:FRP) is the third-largest holding at 1.8% of the investment trust).
So any good news could see a big upwards squeeze in the shares in short order!
As always, please Do Your Own Research, however I have hopefully given you some points to chew over!
Disclosure: I hold Fairpoint shares in my SIPP
Edmund