Bearing all that in mind, I have found 10 interesting short-term stocks with a good story to tell and the energy for a sprint. The formal screening criteria were: a market cap above £50m; analysts' ratings of buy, outperform or hold; and a beta above two. After that I applied a bit of common sense and took a wide spread across industries that could reasonably be said to have good prospects, or at least have been heavily oversold and are gathering for a rebound.
Capital & Regional (CAL)
Retail property fund manager Capital & Regional (C&R) is firmly in recovery mode, following a major £1.1bn refinancing in July. The company can be classed as a greyhound because its gearing allowed it to report the highest increases in net asset value in the sector. Of course that may turn out to be a two-edged sword if we get a double dip. The positive NAV also allowed it to report a return to profit in the last half-year. C&R has added just 10 per cent since our buy tip in August, but with the discount to NAV still over 20 per cent it’s definitely worth a closer look.
Enterprise Inns (ETI)
On a fundamental basis, we are sellers of Enterprise owing to its huge debts. But that same debt gives it huge gearing to any improvement in trading conditions – and you don't have to believe that this is a good or exciting business to see how the process of paying down debt could end up producing a very healthy surplus. Although those trading conditions don't yet include any real improvement in sales – these were flat year on year – at least the realisation of value in surplus pubs is going well. So far this year that is 402 pubs for £124m, most realising a premium over book value. After much pressure on the terms of leases to publicans, Enterprise and its peers are working hard to make sure that its tenants have a choice of terms that suit their requirements. So for all our worries about debt, Enterprise's share price could bounce.
GKN (GKN)
GKN's story is quite simply that it represents a globally diversified play on the recovering car industry. While indigenous UK car manufacturers have gone away or fallen into the arms of companies from Germany or – unthinkable a generation ago – emerging powerhouse India, Britain's engineering heritage is well established in all global markets through GKN. The company has powered its way back from a horrible 2008 with resumed dividends and better sales. While third-quarter margins were squeezed a little by steel prices, the company is poised to take a profitable ride from the car-hungry middle classes in emerging markets, particularly in China where GKN has a hefty market share.
Gulf Keystone (GKP)
Having exited its Algerian operation, Gulf Keystone has struck it lucky with its Shaikan discovery in the Kurdish area of Northern Iraq. What it needs now is some good luck politically within the fractured Iraqi government to ensure that this huge reserve, which could be anywhere between 1.9bn and 7.4bn barrels, flows freely. These are early days, but appraisal wells are likely to add to the news momentum, with broker Daniel Stewart expecting this busy little company to break even for the full year.
Howden Joinery (HWDN)
You might think that no-one is going to be splashing out on a new kitchen given the depth of cuts in the public spending review, but we shouldn't forget that the paralysis of the housing market is feeding the boom in the private letting sector. Upgrading a kitchen means a better rent, and the tradesmen brought in to do this work are flocking to Howden for ideas and materials. Formerly known as Galiform, Howden is expanding new outlets across the country. So far in 2010, 16 have been opened, in line with a usual target of 20-30. If the business model is robust enough to grow in the current property market climate, Howden looks to be well set for better times.
Inchcape (INCH)
Car distributor Inchcape is, like GKN, riding the recovery in global car demand. It has sizeable operations spread from Russia to Hong Kong and China to Australia, with some flat markets being outweighed by the booming ones. Third quarter results this month showed strong growth for luxury vehicles in South America, and a recovery in demand for SUVs in Russia. A £25m planned cut in costs will lead to an £18m charge against fourth-quarter profits, but with a geared exposure to improving demand and a better-than-expected earnings recovery forecast for the full year, there's plenty left in the Inchcape tank.
Kenmare (KMR)
Mozambique-based titanium producer Kenmare entered the FTSE 250 last month, testimony to the geared exposure that its low-cost ilmenite and zirconite reserves are to the booming Chinese demand for paint, in which titanium is the main whitener. The proceeds of a recent $270m placing to finance the Moma mine's 50 per cent output mean that shareholders are unlikely to be tapped for extra funds for the foreseeable future. Even though the shares have paused for breath in recent weeks, the global demand for titanium keeps pushing prices higher, while production costs are declining. So, although the group remains loss-making for now, a breakthrough to profit can be expected by 2011.
Lamprell (LAM)
With most of its operations at three sites in the United Arab Emirates, drilling rig builder and contractor Lamprell is right where the action – and money – is for future oil supplies. So long as the Middle East dominates oil supply and price rises spur further exploration and production, Lamprell's trajectory seems assured. There is already a shortage in the jack-up rigs in which the firm specialises, which is helping keep rates firm. The company has facilities in other countries too, including Thailand, and an interesting sideline in liftboat vessels, which are used to construct offshore windfarms. That makes the company seem well balanced between the worlds of old energy and new.
When they were up, they were up Share prices have the curious tendency to continue moving along in the same direction for much longer than one might expect. According to academic research by Jegadeesh and Titman in 1993 and again in 1999, stocks with strong past performance continue to outperform stocks with poor past performance in the next period by around 1 per cent a month. That contradicts rational markets theories, which imply perfect knowledge, rational pricing and a much quicker correction. However, it seems fairly obvious that markets reflect the herd instincts of humanity as a whole in which conformity is valued above judgment. One of the obvious factors that contributes to beta is debt. Just as an investment trust can gear up to outperform, so the internal momentum of a company can be geared by borrowings, which then show up in beta. Some of the stocks that improve most rapidly are those, like DSG International, Capital & Regional and Enterprise Inns, that are heavily weighed with debt. Barratt, the most indebted of the many builders that could have been included, fails like the sector as a whole to have a good short-term story to tell. Quite simply, people are too terrified of losing their jobs to buy houses right now. DSG International, on the other hand has a good story, but really isn't showing much momentum. It could be one to watch when it does. The point is that the time to use beta is when you are sure that the market is going to take you in the right direction. |
Travis Perkins (TPK)
Builders merchant Travis Perkins has expanded its profile – first in 2004 with the purchase of Wickes, and again this year with the takeover of BSS Plumbing at a bargain price, pending regulatory approval. Travis Perkins may now be more consumer facing, but it is well balanced between exposure to public sector work (about 10 per cent according to Shore Capital) and the more defensive repairs businesses for pipework, radiators and boilers which drives BSS. Given that the company has a good record on integrating acquisitions, beating cost-saving targets and has already reinstated dividends, the foundations have been laid for a geared benefit to economic recovery.
DS Smith (SMDS)
Packaging groups are as cyclical as they come, but with DS Smith well-placed in fast-moving consumer goods and spread over 16 countries in industrial packaging, the company is poised to benefit from recovery. First-quarter results showed improved volume in corrugated packaging, something that should be aided by the E246m (£200m) acquisition of Otars in July. A better product mix at paper wholesaler Spicers and good volumes in paper recycling, where it is the UK leader, were also beneficial.
