Questor: market-leading positions, low debt, strong growth … this share is one to avoid

But throw in the firm’s highly acquisitive nature, the lack of clarity on underlying organic growth, management incentives that focus on earnings per share and return on capital over a three-year period but not cash flow, and enough questions can be asked as to why that earnings multiple should go any higher.

And while the quantity of this year’s interim profits may have looked good, the quality merited inspection. The interims revealed that underlying volumes in liquefied petroleum gas (LPG) had risen only slightly while retail and oil volumes were flat, showing that a lot of the growth came from acquisitions.

Last week’s trading update increased the company’s planned spending on deals from £550m to £670m for the full year to March. Any further acceleration in activity could be a signal that underlying progress is proving hard to generate, something that again would call into question the lofty price tag.

DCC is on a valuation that demands organic and not M&A-fuelled growth, so investors may be best served by avoiding this one for now.

Questor says: avoid

Ticker: DCC

Share price at close: £69.00

Update: TalkTalk

The latest falling knife to have inflicted a wound on this column is TalkTalk, the telecoms group. Our initial analysis of almost exactly a year ago, when Sir Charles Dunstone arrived as executive chairman, appeared at first to be on the mark, as the shares motored from around 160p to around 220p, but it has been downhill all the way since then.

The first dividend cut was expected but the second one, from 7.5p to 2.5p a year, announced alongside last week’s third-quarter results, was not – and neither were the profit warning and the £200m rights issue.

TalkTalk’s strategy to partner with an infrastructure fund run by M&G Prudential and roll out super-fast fibre broadband appears to be sensible and the company has begun to win back trust, judging by its 73,000 net customer additions across the first nine months and management’s increased forecast for customer wins for the financial year as a whole. Average revenue per user is rising too.

But all of this is coming at the cost of extra investment, hence the profit and share price upset.

More generally there are three lessons that can be drawn from this chastening experience.

First, after an unnaturally long period of calm the market is becoming very intolerant of any slips or failure. Now is a good time to check portfolios and ensure that all holdings are within your tolerance for risk (which means tolerance for loss). If in doubt, throw it out.

Second, after Carillion, Capita and now TalkTalk it’s time to thoroughly check stocks with fat yields to ensure that you do not fall into the trap of becoming “blind capital chasing its 5pc”, to quote JH Clapham in An Economic History of Modern Britain.

Third, telecom stocks do best when investment is going down and cash flow going up, not the other way around, as the latter scenario lessens the scope for dividend increases (and raises the risk of cuts). As an aside, this is interesting in the context of Vodafone’s putative plan to buy parts of the European cable TV business Liberty Global.

This column rarely has a beef with firms that invest in their competitive position and accordingly it is inclined to stick with Sir Charles’s plan, especially as the damage to the share price and the dividend has already been done.

Questor says: hold

Ticker: TALK

Share price at close: 108.5p

Russ Mould is investment director at 
AJ Bell, the stockbroker