Tuesday 8 July 2014

Why I am not worried about US employment growth, I still like Bond-Sensitive Income Investments

  1. There is still plenty of spare capacity in the US labour market, lots of people want to work full-time but are still only working part-time;
  2. The Federal Reserve will raise interest rates in 2015, but only very slowly; already priced in by 2-year bonds;
  3. Long-term (30-year) bond yields are still in a falling trend… So the bond market is not worried about the risk of rising inflation;

Conclusion: I still invest in Build America Bonds, Preferred Shares, REITs as they offer a high income and will benefit from falling long-term bond yields. 

Video Link to watch (4 minutes):     


CNBC Europe Guest Host appearance: On the Importance of Dividends...

This morning's TV appearance on CNBC Europe's Squawkbox programme was a good laugh, as anchor Steve Sedgwick is very jolly and combative, a good combination!

Here is a short video segment with me discussing UK dividends with a chap from Markit:


Monday 7 July 2014

Want High Yield and Momentum? Go for Insurance!

Time to Love Non-Life Insurance

One of the key investment themes that I continue to champion is that of the "Hunt for Yield". Here we are, in a period where global central banks are conspiring to keep short- and long-term interest rates as low as possible in order to shore up what is fragile economic growth in the "New Normal" of a post-crisis Developed World. 

At a time when government bonds, and even investment-grade corporate bonds, are no longer offering anything like attractive yields to maturity, where can income investors turn? One solution is to subscribe to Neil Woodford's new fund, which unsurprisingly is stuffed yet again with AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and tobacco companies like Reynolds American, as it was back in his old funds at his former employer Invesco Perpetual. 

I prefer a stock-picking approach, focusing on sustainable value and momentum. Within the UK stock market, the sector that looks best placed on these metrics is the UK non-life insurance sector, containing such high yield gems as Brit (LON:BRIT), Amlin (LON:AML) and Catlin (LON:CGL) within the Lloyds of London reinsurance segment, and the RBS spin-off Direct Line Insurance (LON:DLG) in more classic Property & Casualty insurance. 


High and Sustainable/Growing Yields

Each of these four insurers offer prospective dividend yields in excess of 5%, up to 10% in the case of recently refloated Brit (LON:BRIT)

Dividend payout ratios are of the order of 60% except in the case of Brit (LON:BRIT), and Returns on Equity are typically between 10% and 13% this year and next. All of which suggests that not only are these high dividend yields sustainable (except in the case of a sharp unexpected drop in earnings), but that long-term dividend growth should be in the region of 4-6% going forwards. Perhaps not exceptional, but certainly more than enough to compensate for inflation.  


Value aplenty too

To read the rest of this article, please click on the web link below:



Friday 4 July 2014

Value Small-Cap of the Month: The Mission Group (TMMG) - Media Sector

Every month, I will be focusing on a compelling mid- or small-cap value story. This month, I a going to focus on a UK media company called The Mission Group (code LON:TMMG), whose current market value is £39m, and is listed in the AIM segment of the London market.

What Do They Do?

The Mission Group is comprised of a number of marketing, advertising and public relations agencies (11 in total), based in the UK, San Francisco and Singapore. Key clients include Tesco, Volvo, Scania and Virgin Atlantic. 

You can find a lot more information about The Mission on their web site.

Where is the Value?

In simple terms, The Mission is cheap on a number of traditional value metrics including forecasts P/E, price/book value and price/sales (Figure 1):

1. TMMG is Cheap!
Source: Stockopedia

For lovers of combining Value and Quality criteria, The Mission comes out extremely well on Piotroski's combination of low price/book value ratio (0.6x) and his F-score of quality, where the Company scores a high 8 out of a possible 9. So The Mission looks great value at least. 

The Total Shareholder Yield also looks strong, combining a 2.3% dividend yield with a £1.7m reduction in net debt worth another 5% or the Company's market cap, so a total yield of well over 7%, in line with the Free CashFlow Yield of just under 10%. 

What about Momentum?

Secondly, price momentum over the last 3 and 12 months has been very positive, with the shares gaining some 16% and 82% over these two periods respectively. 

2. TMMG Has Already Made Some Impressive Price Gains

3. But There is a Long Way to Go To Regain Prior Highs


But back in late 2007, the stock reached a high of 150p, if only briefly. So even after such impressive gains over the last 12 months, it would need to nearly triple to get back to historic highs. 

And Is There a Reason to Buy the Company Now?

Key highlights from The Mission's 2013 Annual Report were encouraging:
  • Revenue +9% to £51.6m;
  • Profit Before Tax +3% to £5.0m;
  • Net Debt sharply lower to £10.7m, -£1.6m versus FY2012;
  • Annual dividend of 1.0p put in place, versus nil before.
So operating trends certainly look promising, while back in February this year, the Investor's Chronicle publication highlighted The Mission as a very cheap recovery stock. 

A key driver for the Company, as for all advertising-related companies, is the strong underlying economic growth being experienced in the UK, with London the epicentre. Normally, domestic economic growth has a leveraged effect both on top-line revenues (clients want to spend more on advertising) and also on profitability (as the major cost of ad agencies are their staff salaries, plus office rent, which are largely fixed). 

What are the Risks?


  1. Even after nearly halving the debt in 4 years since 2009, there is still nearly £11m of net debt outstanding (Figure 5).That said, this is less than 1.5x the 2014e forecast EBITDA of £7.7m, so normally this should not be a big issue.
  2. The promised boom for advertising from the growing economy may not materialise as expected.
  3. Most of the stated book value is net Goodwill (£71m), so who knows what the true economic worth of TMMG's intangibles like branding, network etc. really is?  

5. TMMG's Balance Sheet


Investment Summary

Overall then, TMMG is very cheap, with a share price that is moving up nicely (has broken through recent price highs) but which has plenty of scope to move up further before hitting all-time historic highs, together with plenty of leverage to the improving UK economy. 

On Stockopedia's StockRanks system, this all adds up to a near-maximum 99 combined StockRank (Figure 6)!

6. TMMG's Combined StockRank is 99!
Source: Stockopedia

So The Mission (TMMG) is the first company to go into my UK Model Portfolio, at an entry price of 54.75p.

Edmund

CNBC Closing Bell: Guest Host 23 July 23014 (Video)

I appeared on Louisa Bojesen's Closing Bell show on CNBC Europe yesterday as guest host. 

Here is a short video link of me discussing why I like exposure to US shale oil & gas:

Video: Why I like Energy and Technology in a bullish US stock market environment

Why I still like the Energy and Technology sectors while US stock market trends remain bullish: 

Video link here:

Edmund