Identifying a stock-picking formula when equity markets are facing meltdown is not easy. Conventional benchmarks such as price-earnings (PE) ratios, dividend forecasts and a company's general financial health are all important, but lose some relevance when institutions make a rush for the exit in order to reduce exposure and generate cash, thereby casting whole sectors to the rubbish tip.
However, there is a prosperous colony of mice doing much better than the general market. Look a little deeper and there are also some large outfits that are worthy of a closer look. At first glance, falling demand, a credit market in near collapse, banks being nationalised, consumers keeping their hands in their pockets and falling house prices would suggest that the opportunities to prosper are limited. Here are a few companies that are showing how it should be done.
When the going gets tough and banks won't lend any money, pawnbrokers such as Albemarle & Bond come into their own. Profits in the year to June this year were up by 39 per cent and the dividend payout rose by 24 per cent. What's more, it has bought Herbert & Brown – the UK's third largest pawnbroker – and now operates from 111 branches. Pawn loans grew by 57 per cent, and there was an added boost from the sharp rise in gold prices, which means that more unredeemed goods can be scrapped without denting profit margins. Management has also toughened up its lending criteria on payday loans and doesn't expect to make any increase in provision levels.
Gambling is an acquired taste, but there is no doubt that the potential to make (or lose) money is greatly enhanced by higher levels of volatility. So current levels of volatility are good news for IG Group, the online spread betting operator. Turnover in the last quarter to the end of August was up 29 per cent to £53m, while the level of bad debts as a percentage of income actually fell. And Japanese investors are keen gamblers, which is why IG has just bought an 87.5 per cent stake in FXOnline Japan, which specialises in retail forex trading and has doubled turnover every year for the past three years.
One of the inevitable consequences of an economic downturn is an increase in the number of companies going bust. And the UK's largest corporate insolvency practitioner, Begbies Traynor, believes that the worst is yet to come. The worry is that banks will give retailers until after Christmas before calling a halt to extended loans. If Christmas sales flop, which seems likely, then more retailers will need the services of Begbies Traynor. Profits in the year to April were hit by one-off costs, but business since then has picked up strongly as banks are already pulling up the drawbridge on lending.
Recessions come and go, but people still need to eat. And Tesco has shown its ability to prosper even in such tough times. Profits in the half-year to August were up 11 per cent, turnover was up and margins were steady at 5.8 per cent. Tesco is also showing its ability to expand abroad, with overseas trading profits now accounting for more than 20 per cent of the group total. And, with its US arm expected to reach break-even next year, some analysts say that half of Tesco's profits could come from outside the UK within the next five years.
Glaxo, like other large pharma companies, is always having to fight competition from generic products. However, Glaxo's new chief executive, Andrew Witty, appears to have stolen a march by concentrating on boosting exposure to vaccines, consumer healthcare and emerging markets. Second-quarter vaccine sales were up an impressive 45 per cent and highlight a shift towards doing more business with governments to combat such threats as flu and hepatitis.
Safe-haven shares
| Company | Share price | Share price August 2007 | Mkt cap | Gearing | Forward PE ratio | Yield |
|---|---|---|---|---|---|---|
| Albemarle & Bond | 192p | 217p | £109m | 89% | 12 | 3.70% |
| IG Group | 292p | 292p | £1.04bn | £472m cash | 12 | 3.10% |
| Begbies Traynor | 150p | 134p | £132m | 36% | 28 | 1.70% |
| Tesco | 402p | 369p | £30.3bn | 61% | 15 | 2.90% |
| Glaxo | 1,209p | 1,271p | £63.6bn | 108% | 12 | 4.50% |
