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Did you notice that when reviewing outperformers in the first part of my look back at tips in 2021, I concluded mostly with “hold”?
Perhaps it is overly critical to say I should increase my “sell” stances, given equities outperform most other assets over the long run. Yet the volatility of several stocks since mid-year begs the question whether a more ruthless stance than “hold” should have been taken.
Possibly, the market also became more risk-averse since late summer, hence these stocks now rate “buy”?
Boohoo: ‘hold‘ at 279p in August, currently 120p
This is being harsh as I returned to review Boohoo (LSE:BOO) having been a fan from 35p at end-2015 to 250p in September 2017 – asserting “sell” at that point after it leapfrogged ASOS (LSE:ASC) to rate 60x forward earnings and 100x historic profits.
Yet this was premature. After dropping below 150p, Boohoo soared to over 400p by June 2020 when lockdown favoured online retailers.
I looked again at the stock after it fell from around 340p last April, although in no way suggested “buy” given competition from Shein, a privately owned Chinese rival becoming very popular with young people globally – partly by stealing a march on TikTok.
A non-executive director bought 100,000 shares at 335p last February and same amount at 327p in June.
With fresh money, I concluded to await more evidence from operating results before buying, and a “hold” stance appeared fair.
The stock plunged briefly below 100p after a 16 December profit warning cited various disruptive factors, including “significantly higher return rates” of clothing items.
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A forward price/earnings (PE) ratio possibly in the high teens, versus about 22x for ASOS, reflects a current hit to management credibility. Some differential is to be expected, but might both stocks’ de-ratings since mid-year also reflect inevitable mean-reversion to more sensible multiples? Both companies cite supply chain issues and cost pressures persisting in 2022.
It makes for a very tricky time, defining a stance, because much depends also on how capable Boohoo proves in response. All scenarios are possible, although the usual hedge fund culprits have started to gather on the short side – with 3.4% of issued equity out on loan, possibly more given a disclosure level of 0.5%.
Boohoo looks a gamble; I would avoid its stock given real risks within a fair rating. ASOS is lower risk given management’s record and firm strategy.
A “hold” stance lacks teeth but given multiple scenarios are possible is a necessary compromise, showing the limitations with ratings, perhaps.
Reach: upgrade to ‘buy’
Is media stock Reach (LSE:RCH) (previously Trinity Mirror) another example of how banking gains is more essential with hot stocks?
The share price soared over 400% after I rated it “buy” in September 2020 at 75p following interim results. Management looked to be getting strong media results from digitising national media titles and acquiring regional titles.
By mid-year, digital registrations had risen 150% to 6.7 million, and management was confident of achieving 10 million by end-2022. Interim digital revenues had risen 45% to £69 million or 23% of group total. There remains a dilutive effect to such growth from Reach’s majority print side, in steady but modest decline.
Consensus for £114 million net profit this year has since edged up to £117 million, although the expectation for a flat 2022 remains.
Despite me saying “it is hard to see this stock de-rating by much” from early last September Reach fell from over 400p to 257p – despite a 23 November trading update raised the full-year revenue expectation. This was not quantified, although for July to November group revenue had edged up 1.2% with digital up 17.2% and traditional print activities easing 3.5% (their decline moderating however).
The next stage of the investment case will require organic revenue growth, moving on from cost-cutting and acquisitions that helped drive an earlier sense of turnaround. Yet the latest update contained nothing untoward in this regard.
Given the stock rates near 7x targeted 2021 and 2022 earnings, the risk/reward profile looks favourable despite a modest 2.7% prospective yield. I find Reach’s online media often features in Google searches or showcasing in the Microsoft Edge browser headlines.
I downgraded the stock to "hold" last December, but the de-rating from its peak in August looks more related to trend-following than fundamentals, hence I upgrade to “buy”.
Ted Baker: second bite of the cherry
This is an accentuated version how many stocks had a strong first-half-year then retraced. Is anything serious implied about company fundamentals, or is it chiefly crowd sentiment?
After its December 2020 interims, I drew attention to “lifestyle items” retailer Ted Baker (LSE:TED) at 117p. The rationale for a “buy” rating was a new CEO one year into the role raised the chances of turnaround success.
This stock has capitulated from £27 six years ago, slumping from £15 in 2019 below 300p that year after a catalogue of woe. Net assets around 91p a share did however appear to limit downside risk.
A new CFO (also) was addressing costs and a global creative director had been appointed from Topshop. A loyal customer base was reflected by Trustpilot reviewers giving Ted Baker an overall “excellent” 4.4 out of 5 stars.
Like other successful turnarounds, there looked to be fresh impetus and discipline, with the stock close to net asset value.
It rose 80% to 212p by last May; the annual results to 30 January being delayed to June and proving the proverbial “kitchen sinking” of bad news. Yet the CEO proclaimed good progress with her transformation plan in the first year of three.
Guidance for the January 2022 year was a circa £8 million loss on £470 million revenue, with the carrot dangled of a “structurally more profitable business with higher return on capital employed also free cash generation.” However, I took this opportunity to downgrade to "hold".
A September update in respect of April to August then cited a 50% sales recovery in line with expectations, and YouGov recognising Ted Baker as the UK’s second-most popular luxury brand.
Interim results to 14 August showed the like-for-like pre-tax loss reducing from £86 million to £25 million on revenue up 18% to £199 million. Net cash had fallen 74% below £13 million, but the business was targeted to “achieve a net cash position” by the end of the January 2022 year. This was badly-worded but appeared to mean “net cash generative”.
Consensus is a turnaround producing a £24 million net profit on £558 million revenue in the January 2023 year, hence earnings per share around 13p and a forward PE of 8x. I would treat this with a big pinch of salt, but for the next year or two Ted Baker need only get usefully into profit.
Net asset value in August had been 84p a share or 55p on a net tangible basis, though I would respect brand value.
Logistics issues were not cited in the update, all key performance targets are being met or exceeded, and a new e-commerce platform is soon to launch.
There being no tradition of a Christmas trading statement, the next update would appear for the fourth quarter, in early February.
Though speculative, I broadly upgrade to “buy”.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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