Vol. 4, No. 9 — Keep calm and carry on
Vol. 4, No. 9 — Keep calm and carry on
British stocks aren’t cheap; Going short cocoa; Rich countries are deleveraging; Stocks still look a little expensive; Value in financial services
Read time: 36 minutes
In this issue
Quote | William Feather
Cartoon | Whatever you say, Mr-Boss-Man
Finance | Keep calm and carry on
Finance | Is it time to short cocoa?
Economics | Paying it back
Finance | Hello from the pricey side
Investment idea | Value in financial services
Quote | William Feather
“Every time one person buys, another sells, and both think they are astute."
Cartoon | Whatever you say, Mr-Boss-Man
Finance | British stocks aren’t cheap
Keep calm and carry on
Despite what some pundits reckon, British stocks are too low-growth to be cheap
The price of stocks in London just hit their highest level ever. On Monday, the FTSE 100 index of big British companies rose above 8,000 for the first time. That is quite the reversal from their lacklustre performance in years past. You’d think this would give global value investors pause. But it hasn’t quietened the chorus of value seekers who reckon the island is still a treasure trove of undervalued securities. So, are British stocks still cheap? Some might be. But, in aggregate, no, they’re not. Value hunters should update their expectations.
British stocks are not cheap on a discounted cash flow basis. They’re almost bang-on fair value. According to 𝑉𝑎𝑙𝑢𝑎𝑏𝑙’s model, the 500 largest British stocks are worth about £2.5trn ($3.1trn) when lumped together. This valuation used analysts’ consensus estimates for each company’s top and bottom lines. That valuation figure is almost identical to those stocks’ current £2.5trn combined market capitalisations, suggesting there’s little value in British stocks as a whole. While analysts might be wrong about specific forecasts and companies, there is no margin of safety between the value and price. Value hunters shouldn’t get excited.
British earnings multiples are also not low anymore. The market as a whole—I used the 500 largest public companies again—trades at 17x forward earnings per share, and most companies in my sample trade at a multiple between five and 15. While these pricing ratios aren’t particularly high, they don’t scream cheap. Although British stocks have lower multiples than their American counterparts, they’re also forecast to grow much more slowly. Low-growth financial services and consumer goods firms dominate the British market.
That brings us to the final point: Britain is a stagnant market. A 17x multiple isn’t a low price for a group of companies that analysts expect will grow their combined top lines by less than 2% a year. Further, analysts only expect one in five British companies to grow their revenues by more than 10% a year. Stagnant top lines don’t deserve premium multiples. British stocks would look much more attractive at their current price if growth were to pick up substantially. But until that happens, keep calm and carry on searching elsewhere. ■
Finance | Going short cocoa
Is it time to short cocoa?
It’s probably a sweet time for speculators to punt on falling cocoa prices
You might have noticed that your chocolate bars are smaller than they used to be. For example, Swiss chocolatier Nestlé cut the weight of its fun-sized Kit Kats by a fifth. They’re now just 14g each. Shrinkflation, a portmanteau of shrink and inflation, where companies reduce the size of products instead of increasing the price, has gripped the chocolate world. Higher cocoa prices are to blame. Cocoa prices have risen three-fold this year to over $11,000 a tonne.
These high prices have irked confectioners but attracted speculators. And some have even jumped in to start shorting cocoa. So, should you join them? Given the extreme pessimism about cocoa supplies, the current price has probably overlooked how cyclical markets can be. The payoff when prices normalise would be decent for those adventurous souls who time a short sale right. And for the risk-seekers, WisdomTree, a global exchange-traded fund provider, have some leveraged cocoa indexes that could juice the upside but also the downside.