UK Edition
Britain’s better-than-expected economic growth figure for November is causing a frisson of excitement but from an investment point of view these data are entirely useless for two reasons.
First, they are backward-looking and relate to events last year, while stock markets are forward-looking “discounting” mechanisms that seek to anticipate and price in – or “discount” – future events.
Second and consequently, the economy and the stock market march to entirely different beats.
Builders’ merchant Grafton is a case in point. With the economy still fragile and heavily indebted, consumer confidence low and mortgage approvals sliding back to levels last seen in 2012, before the launch of Help to Buy, many investors would be wary of exposure to a business that supplies British builders.
There can be little denying that housing demand is cooling and the lockdown-inspired DIY boom is slowing right down. But Grafton’s shares all but halved in 2022 so the bad news, or at least a good portion of it, may already be in the price, especially as the shares trade at barely 10 times forecast earnings and offer a yield of 3.5pc, more than twice covered by earnings and backed by a robust balance sheet, which boasts net cash even once £447m of leases are taken into account.
This may be why the shares have responded favourably to last week’s trading update. It suggested that business was not as bad as the earlier share price swoon implied.
As the old saying goes, you can have good news and cheap shares, just not both at the same time, and since valuation – rather than an interesting story – is the ultimate arbiter of investment returns, the combination of bad news and a low share price is an alluring one, especially as it may not take much to give investors a positive surprise.
In the case of Grafton, it may be that the news is starting to improve (or at least look less testing). Average daily like-for-like sales rose by 10.4pc in the first quarter, fell by 2pc in the second, rose by 1.8pc between July and October and then, according to last week’s trading statement, increased by 2pc in the final two months of the year.
Better still, the new chief executive, Eric Born, said underlying earnings for the whole of 2022 would slightly exceed analysts’ forecasts.
Trading in Britain was still tough, as average like-for-like sales fell by 0.5pc in November and December, but that was still an improvement on the 3.4pc drop between July to October.
Moreover, more than half of revenues come from Ireland, the Netherlands and Finland, while the £2.1bn company does seem able to pass on price increases thanks to its strong competitive position.
Having ridden the shares up and then down, we do not have a huge amount to show for our support for the stock over the past three years, but our 11.7pc gain is supplemented by 73.25p a share in dividends and the company is running a share buyback programme.
The combination of low expectations, a sound balance sheet and a tempting valuation for a well run business suggests that patient, long-term investors might like to keep hold of their shares, even if the near-term economic outlook remains difficult to judge. Hold.
Questor says: hold
Ticker: GFTU
Share price at close: 918p
Update: Nichols
This column’s patient support of the soft drinks maker Nichols has yet to provide much by way of fizz: we are carrying a book loss of nearly 30pc, although dividends of 146.2p a share in the interim offer some comfort.
Covid and lockdowns have not helped and neither have sporadic carbon dioxide shortages, but the fault ultimately remains ours, as we simply paid too high a valuation multiple at the start.
Last week’s trading update reported the latest set of challenges in the form of input cost inflation and a slowdown in out-of-home consumption thanks to the ongoing cost-of-living crisis. As a result, management expects broadly flat profits in 2023.
However, the company has no debt and generates returns on capital of more than 20pc thanks to its well-tended brands such as Vimto, while the results of a strategic review of the out-of-home business will be released alongside the full-year results on March 1.
This may well include plans for margin improvements and lay the foundations for a return to profit growth in 2024.
Nichols could yet pop higher. Hold.
Questor says: hold
Ticker: NICL
Share price at close: £11
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.
Read Questor’s rules of investment before you follow our tips