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Do these four shares really have it all?

With markets pushing ever higher, ever fewer shares genuinely seem to have what it takes to qualify for my Have-It-All stock screen
January 18, 2017

After having enjoyed a strong five-year run, my Have-It-All screen has come a cropper over the past 12 months as the 14 stocks selected last year massively underperformed the FTSE All-Share, which enjoyed a strong run turbocharged by the recovery in the resources sector.

Viewed in isolation, the screen's 4.8 per cent total return, while uninspiring, is not a disaster. But set against the 28.6 per cent return from the index, it looks woeful. Part of the disappointment is due to the performance of the size-weighted All-Share index being heavily influenced by the stratospheric recovery in the resources space, which has been magnified by the large size of many UK-listed resources companies. However, it is important to remember that in prior years when the resources sector was plummeting, comparisons between the equal-weighted screens and the index will have been flattered.

Despite the bad spell, over five years the screen has delivered a strong 134 per cent total return or 123 per cent if a notional 1 per cent yearly charge is factored in. That compares with 67 per cent from the FTSE All-Share. If the cumulative calculation is based only on the performance of the four shares with the best screen scores from last year (an explanation of this can be found below) the cumulative return comes in at 145 per cent or 133 per cent with the charge.

 

Have-It-All versus FTSE All-Share

 

Disappointments from the last 12 months aside, I feel somewhat worried about this year's selection from the screen based on the fact that a number of the stocks picked may actually reflect the screens' flaws rather than its strengths. I may well be proved wholly wrong about my niggles over the course of the next 12 months (indeed, challenging one's own biases and angst is an important argument for using screens) but my write-ups of four 'Have-It-All' stocks below explore some of the reasons why the screen has highlighted situations that arguably do not fit the brief.

The brief in question is to find low-priced, high-quality companies producing strong growth. The screen uses a number of classic measures of value and quality to try to find such stocks. The fact that the screen tries to cover so many bases is the reason for its name. The Have-It-All criteria are:

 

■ Forecast next-12-months price-to-earnings (PE) ratio among the lowest third of all stocks screened.

■ Historic dividend yield in the highest third of all stocks screened.

■ Average forecast EPS growth in the next two financial years of 5 per cent or more.

■ Three-year EPS compound average growth rate (CAGR) of 10 per cent or more.

■ Three-year free cash flow CAGR of 10 per cent or more.

■ Three-year dividend CAGR of 5 per cent or more.

■ Return on equity (RoE) of 10 per cent or more.

■ Three-year average RoE of 15 per cent or more.

 

A key issue faced by the screen is that as the current bull market has got longer in the tooth, it has become harder and harder to find companies that meet all the criteria. Indeed, last year, in order to get any results from the screen, I was forced to construct a main portfolio of four stocks based on shares passing seven of the eight screening tests. These did better than the rest delivering a total return of 9.6 per cent between them. The other 10 shares I gave details of last year passed only six out of the screen's eight tests.

 

2016 performance

NameTIDMTotal return
AshteadAHT71.1%
British Polythene*BPI48.3%
MondiMNDI43.6%
Telecom PlusTEP39.2%
PersimmonPSN11.4%
Imperial BrandsIMB4.9%
Galliford TryGFRD2.8%
BerkeleyBKG-10.6%
Marks and SpencerMKS-13.1%
Laura AshleyALY-20.4%
LookersLOOK-24.7%
Sports DirectSPD-26.9%
InterserveIRV-28.9%
EasyJetEZJ-30.1%
FTSE All-Share-28.6%
Average-4.8%
Top scoring 4-9.6%

*Taken over

Source: Thomson Datastream

 

This year, too, only four shares have passed seven of the screens tests and none have passed all eight. Given where we are in the cycle, it only looks fair to question how fit for purpose the screen currently is. For those shares passing the weaker version of the screen (six out of eight tests including both the dividend yield and PE valuation test) there are a number that, despite what could prove contrarian virtues, do not fit with the premise of the screen. For example, Next is seeing forecasts slashed due to poor trading.

 

DO THESE FOUR SHARES HAVE IT ALL?

Persimmon and Taylor Wimpey

The Have-It-All-Screen has alighted on a number of housebuilders this year. Regardless of what the sector has going for it, the screen's identification of these shares as cheap, quality, growth plays looks increasingly misplaced. That's because housebuilders' shares can be regarded as being 'cheap for a reason', and at the moment they actually look very expensive by their own historic standards. The reason ratings in the sector tend to be low is that the industry is highly cyclical. The dangers associated with this are compounded by the fact that housebuilders have huge working capital requirements (land, building materials along with part-built and yet-to-sell houses). This combination means downturns in house prices and sales volumes cause substantial pain to balance sheets as well as profits - hence the relatively low price-to-earnings multiples compared with the rest of the market.

The dividend yields on offer from housebuilders are a real attraction at the moment. However, as well as being a show of business strength, the high yields that companies such as Persimmon (PSN) and Taylor Wimpey (TW.) are currently offering are a recognition of the dangers of overexpanding into the cycle. Management teams have chosen to return cash to shareholders rather than plough it into business expansion and risk being caught out by a turn in the market - such turns tend to be very hard to foresee and plan for, especially over the length of time it takes to turn plots of land into houses.

The sector is now at a point where investors have had to start asking if things can actually get any better in terms of either valuation or returns, and a big post-Brexit wobble can be interpreted in part as a reflection of such nervousness. The graph below shows Persimmon's 20-year valuation range based on the popular sector valuation metric of price-to-tangible-book-value. Alongside this valuation is the company's return on equity and operating margins, which respectively reflect profits as a proportion of net assets and sales.

 

Persimmon 20-year valuation and returns range

 

 

The graph illustrates that over the past two decades Persimmon has rarely been more expensive and its business has rarely been on finer form. A graph for Taylor Wimpey would tell a similar story. As the housing market is inherently cyclical, the question is whether this is simply as good as it gets and if it is just a matter of time before returns and ratings start falling in tandem. That said, Persimmon and Taylor Wimpey are impressive operators and recent trading continues to be very good. For those looking for clouds on the horizon, an anticipated white paper on housing could create issues.

Last IC view: Persimmon, Buy, 1,878p, 23 Aug 2016/Taylor Wimpey, Buy, 151p, 27 Jul 2016

 

Galliford Try

Like Persimmon and Taylor Wimpey, Galliford Try (GFRD) is a housebuilder and generated 31 per cent of last year's turnover and 93 per cent of profit from its Linden Homes business. However, it is also involved with other building activities. The company has a division that specialises in affordable housing and regeneration, which generated 11 per cent of last year's turnover and 7 per cent of profit. Trading here has been robust with profit up 24 per cent last year. Given the crisis in housing affordability, this could prove an attractive specialism in coming years.

Galliford is also involved in general construction activities, which accounts for 56 per cent of turnover but just 10 per cent of profit. Like housebuilding, this is a cyclical industry; however, unlike housebuilding the cycle does not appear advanced. There are growing hopes that a political push for more infrastructure spending could see an upturn in the industry. What's more, depressed levels of spending in the years since the credit crunch means there should be significant pent-up demand.

Meanwhile, Galliford has slowly but surely been working its way through low-margin legacy contracts while winning new work. This should provide the foundations for a rebound in the division's anaemic underlying operating margin of 0.7 per cent.

Last IC view: Buy, 1,197p, 14 Sep 2016

 

Hansteen

Property group Hansteen (HSTN) is perhaps the stock out of the four passing seven screen tests which looks most in keeping with the screening objectives. That's because, in a sector that was hard hit by the Brexit vote, it stands out as being in an enviable position compared with many of its UK-listed peers.

The company is focused on light industrial property which is something of a property hotspot due to the demand being generated by the growth of online retailers and their need for warehouse space from which to distribute their goods. This has led to rising demand, rents and property values. Still, there is expected to be a market-wide hit from the combination of the uncertainty created by Brexit and falling bond prices, which property values are linked to.

That said, while Hansteen's shares were hit by the UK's vote to leave the EU, the fact that over two-fifths of its investment properties by value are in Europe, including 59 per cent in Germany, means it is actually benefiting from sterling's depreciation against the euro. Also, at the time of its December portfolio update, management said that after an initial post-referendum hiatus, it had seen a marked increase in investor appetite for its type of multi-let, light industrial assets from both overseas and national investors.

Last IC view: Buy, 116p, 23 Aug 2016

 

NameTIDMMkt capPriceFwd NTM PEDYPEGP/ BVFwd EPS grth FY+1Fwd EPS grth FY+23-mth momNet cash/ debt (-)Test(s) failed
Persimmon PSN£6,160m1,997p105.5%1.42.615%2%16%£462m3yr DPS
Taylor Wimpey TW.£5,637m173p106.3%1.12.219%2%17%£117mDY
Galliford Try GFRD£1,110m1,349p96.1%0.71.914%12%-1%-£13m3yr FCF
HansteenHSTN£834m112p154.7%0.11.0220%-16%0%-£577mFwd PE
BellwayBWY£3,207m2,612p84.1%1.81.77%2%11%£26mFwd EPS grth, 3yr FCF
Britvic BVIC£1,538m586p124.2%125.5-3%5%1%-£517mFwd EPS grth, 3yr FCF
Communisis CMS£84m40p75.5%0.60.714%5%16%-£26mRoE, 3yr av. RoE
Crest NicholsonCRST£1,309m515p83.8%0.62.026%5%22%-£26m3yr EPS, 3yr FCF
Legal & GeneralLGEN£14,736m249p125.4%1.72.214%2%17%-£1,814mRoE, 3yr av. RoE
LSL Property Services LSL£222m217p95.8%-2.1-23%-8%11%-£89mFwd EPS grth, RoE
Next NXT£5,768m4,042p109.8%-31.60%-6%-12%-£972mFwd EPS grth, 3yr FCF
Norcros NXR£108m177p73.7%-4.8-8%8%23%-£28mFwd EPS grth, 3yr FCF
Pendragon PDG£484m34p94.1%2.11.34%2%21%-£47mFwd EPS grth, 3yr FCF
TalkTalk TelecomTALK£1,594m168p129.4%-10.259%7%-22%-£880m3yr EPS, 3yr FCF
Go-AheadGOG£954m2,229p114.3%-5.6-4%2%10%£324mFwd EPS grth, 3yr FCF

Source: S&P Capital IQ