UK Edition
Regular readers may be disappointed that this column is not finding it easy to come up with a regular flow of brand spanking new stock ideas.
Markets remain torn between the pull from rotten corporate and economic news on the one hand and the push from central bank and government largesse on the other.
In addition, most of the market’s laggards appear to deserve their fate, as they either hail from industries that are structurally challenged (as the internet hollows them out or the pandemic lays bare weaknesses in their operating model) or have balance sheets that do not offer anywhere near the protection that you would like.
Meanwhile, quality names and potential long-term structural winners that look best adapted to a post-viral world carry valuations that may already price in a lot of the good news. To use an extreme example, America’s S&P 500 index has at the time of writing added $900bn in market value over the past 12 months.
Yet just six stocks – Facebook, Alphabet, Amazon, Apple, Microsoft and Netflix – have appreciated by $1.7 trillion between them. That does not say much for the other 494 names and it also means the sextet represents nearly a quarter of the S&P’s current value.
Such lopsided markets are not necessarily healthy ones and such concentration brings to mind the “Nifty Fifty” names of the early Seventies, into which investors herded for safety, regardless of valuation, until the inevitable final reckoning in the bear market of 1973-74.
Given all of these issues, this column is inclined to try to do as little as possible, since its crystal ball is no better than anyone else’s and therefore just as prone to error. No one knows what is coming next and guessing could prove expensive.
It still makes sense to try to buy well placed, well managed stocks where both valuation and balance sheet provide protection should things go wrong and the outbreak, lockdown and resulting economic malaise all last longer than hoped.
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This was the case with Harworth we hope (and this column is indebted to those readers who pointed out that the property firm is actually listed on the main market and not quoted on Aim, as erroneously stated here last week). This strategy also brings us back to Grafton, the builders’ merchant, where this column continues to keep the faith.
While the position is still in loss overall relative to our purchase price in July last year, the shares can at least boast a gain of nearly 20pc since our last look at the company in March, even though analysts have cut their forecasts for 2020’s sales and profits by a fifth and a half respectively since the imposition of the lockdown that month.
This advance reflects a resumption in activity as the lockdown eases and building and construction activity restarts. Last week’s trading update showed that Grafton’s revenues were down by 80pc in April but by “just” 38pc in May; that improvement came even as some sites opened only in the middle of the month and some remained closed.
More pertinently, the gain in the share price reflects Grafton’s financial position, which suggests that the firm may be coming through the worst. Net debt has increased only marginally since December to £38m and, although the company had £543m in lease liabilities on its balance sheet at the end of the year, the annual lease bill of £55m should still prove manageable.
It is encouraging to note that management does not expect to tap the Government’s Covid Corporate Financing Facility, even though the firm is eligible.
This all means that time is on the side of management and shareholders. Assuming that the lockdown continues to ease and the virus is kept at bay, business volumes should improve in both Britain and Ireland to supplement solid ongoing trading in the Netherlands in the near term.
Further into the future, Grafton has every chance of scooping up more market share as the online capabilities of its Selco business win out, its purchase of Leyland SDM in 2018 beds down and IT investment at Buildbase bears fruit.
Grafton feels like a survivor and a potential long-term winner.
Questor says: hold
Ticker: GFTU
Share price at close: 628.5p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am