We wouldn't normally revisit a screen less than three months on from when we first ran it. However, in the case of our high-risk/high-reward screen, which we originally ran in anticipation of another round of quantitative easing (QE), we think recent events justify a rerun. The idea behind the screen, which we published on 4 July, was to find cheap, high-risk shares that were likely to take off as the printing presses started to roll again. The notion was hardly rocket science but nevertheless the five stocks that the screen selected have done extremely well (see table). Following the announcement of unrestricted QE from the Federal Reserve, the stocks are ahead by almost 20 per cent in only 11 weeks, or 22 per cent on a total return basis (share price change plus dividends). That compares with 4.7 per cent from the FTSE All-Share or 5.6 per cent on a total return basis.
High-risk/high-return stock performance 4 Jul 2012 - 17 Sep 2012:
| Name | TIDM | Price change | Total return |
|---|---|---|---|
| EVRAZ | EVR | 10.2% | 13.8% |
| VEDANTA RESOURCES | VED | 15.7% | 18.5% |
| KAZAKHMYS | KAZ | 2.9% | 3.3% |
| BARCLAYS | BARC | 38.0% | 38.8% |
| INTERNATIONAL PERSONAL FINANCE | IPFI | 31.9% | 33.3% |
| FTSE ALL-SHARE | 4.7% | 5.6% | |
| AVERAGE | 19.7% | 21.5% |
While significant gains have been made in anticipation of this round of money printing, and the market has recently gone into retreat following an initial surge when the news broke, in the past QE has been a significant benefit to risky assets while the policy has run its course (Profit from QE3/QE's small-cap winners). We're therefore rerunning our high-risk screen again to see what it throws up now, at the start of this new period of money creation. The stocks we're looking for are in many ways the real dregs of the market, being both high risk and cheap, and based on our fundamental analysis, all but one of the five are rated "sell"! However, if we end up having another 'dash for trash' that could be just the ticket.
Our criteria are:
■ Risk:
A one year and five-year beta both over 1.5. Beta measures a stock's sensitivity to movements in the wider market with anything over 1 suggesting a stock has outperformed in the past when markets have risen.
■ Value:
Stocks must either have a dividend yield that is among the highest quarter of yields on offer, or both a historical and forecast PE ratio among the lowest quarter of all stocks.
■ Safety:
In our previous screen we set out four 'safety' tests that a stock had to past. However, now QE has actually been announced in the US and the European Central Bank (ECB) has committed to its bond purchase programme, we're being more gung-ho. We've dropped the £250m market cap cut off test and also now only require stocks to pass one of the following tests:
• Current ratio of less than one
• Net debt less than three times cash profits
• Interest payments at least twice covered by earnings
The clear theme evident in the stocks that have come through the screen is one of poor sentiment towards the resources sector. Indeed, fears about falling demand due to the weakening Chinese economy along with rising input costs have been a bane for mining stocks this year as they also have for companies that serve the mining industry. In the past, industrial metals stocks have been one of the main beneficiaries of QE though, but this was at times when China was still playing ball. Our list of stocks below are ordered by risk (highest to lowest one-year beta).
Buy the stinkers?
| TIDM | Market cap | Price | Year high | Year low |
|---|---|---|---|---|
| LSE:EVR | £3.9bn | 294p | 465p | 207p |
| DY | PE | Forecast PE | Forecast EPS growth | 1-yr Beta | 5-yr Beta |
|---|---|---|---|---|---|
| 6.1% | 38 | 15 | -77% | 2.3 | - |
Source: S&P CapitalIQ
Despite performing well since our last high-risk screen, Russian steel firm EVRAZ is one of only two stocks that have reappeared. The valuation criteria that gets the stock through the screen is its stonking great dividend yield. Indeed, when it reported half-year results last month it was the 64 per cent dividend increase that really impressed. It was hard to muster much enthusiasm for the rest of the first-half performance which included a 28 per cent fall in cash profits due to falling demand and falling steel prices. Problems in the South African mining industry will also cause production delays for the group’s EVRAZ Highveld Steel operation in the second half.
Last IC view: Sell, 231p, 31 Aug 2012
| TIDM | Market cap | Price | Year high | Year low |
|---|---|---|---|---|
| LSE:FXPO | £1.3bn | 225p | 387p | 139p |
| DY | PE | Forecast PE | Forecast EPS growth | 1-yr Beta | 5-yr Beta |
|---|---|---|---|---|---|
| 1.9% | 5 | 6 | -50% | 2.0 | 2.2 |
Iron-ore miner Ferrexpo is another company battling against the pressures of falling demand and falling prices. Over its first half iron ore prices were down 20 per cent, although the company’s own ore pellet prices eased a relatively modest 12 per cent. Like other miners, the group is also fighting against rising overheads with increases in things like tax and fuel prices pushing up production costs. The company has been able to offset some of this by reducing its transport costs though. Development of a new mine has also dragged on cash flows. That said, the stock’s rating is certainly far from challenging.
Last IC view: Hold, 194p, 22 Aug 2012
| TIDM | Market cap | Price | Year high | Year low |
|---|---|---|---|---|
| LSE:KAZ | £4.0bn | 773p | 1,223p | 569p |
| DY | PE | Forecast PE | Forecast EPS growth | 1-yr Beta | 5-yr Beta |
|---|---|---|---|---|---|
| 1.9% | 10 | 8 | -47% | 1.9 | 2.1 |
Most of the stocks from our last screen have performed so strongly that they no longer meet the screen’s valuation criteria. Not Kazakhmys, though. The Kazakh copper miner is in fact the only stock from our last screen that has underperformed the FTSE All-Share index and a brief look at the company’s recent half-year results, that were published last month, gives ample reasons for the disappointment. The company is producing lower amounts of metal due to falling ore quality at the same time as costs are racing ahead. It is also investing heavily in new mines, which has had a negative impact on cash flow. While the group hopes to increase production in the current half, overall it is not a pretty picture.
Last IC view: Sell, 680p, 23 Aug 2012
| TIDM | Market cap | Price | Year high | Year low |
|---|---|---|---|---|
| LSE:LAM | £305m | 117p | 369p | 67p |
| DY | PE | Forecast PE | Forecast EPS growth | 1-yr Beta | 5-yr Beta |
|---|---|---|---|---|---|
| 4.4% | NM | 19 | - | 1.9 | 2.0 |
Specialist rig engineer Lamprell has had an awful 2012 during which it has been forced to issue no less than three profit warnings. At the centre of the group’s woes has been supply-chain problems and delivery delays on its Windcarrier turbine installers. The financial consequences of the problems have caused the group to break its banking covenants and the first-half dividend was pulled. The shares certainly offer some recovery potential and the group order book was riding high at $1.5bn at the end of the first half. However, Lamprell's management may need to show it has got to grips with the problems the business is facing before the market will give it the benefit of the doubt.
Last IC view: Sell, 90p, 29 Aug 2011
| TIDM | Market cap | Price | Year high | Year low |
|---|---|---|---|---|
| LSE:PUB | £42m | 6.3p | 13p | 5.5p |
| DY | PE | Forecast PE | Forecast EPS growth | 1-yr Beta | 5-yr Beta |
|---|---|---|---|---|---|
| - | 1 | 1 | -23% | 1.8 | 1.9 |
In the City, Punch Tavern is perhaps as well known for its overstretched balance sheet as it is for the pubs it owns. The pubs themselves are largely held as security against the company’s massive debts and since the credit crunch the group has been going through a gruelling process of restructuring aimed at getting borrowing under control and ultimately creating some value for shareholders from what is left. The most recent third-quarter trading news from the company was disappointing, but full-year results are expected soon. The company also has a holding in drinks distributor Matthew Clark which is unencumbered by the debts and valued by some analysts at about 7p a share, more than the current share price.
Last IC view: Sell, 9.75p, 12 Apr 2012
