Questor: Forget GameStop hype, we’ll stick to our knitting and to the likes of Crest Nicholson

This column apologises in advance to readers who are looking for a new idea every week.

The current environment is tricky as stock markets have had a good run, especially since “Pfizer Monday” in November, while the farrago involving GameStop, the American retailer whose shares have risen meteorically thanks to concerted buying by anti-hedge fund activists and day traders, has waved more than one red flag.

While no tears should be shed for hedge funds that knew the risks involved in “short selling”, a situation in which private investors have piled into stocks to drive up the price, and forced the hedgies to close out their positions and add to the buying frenzy, does not look healthy.

Add in some fizzy action among recently floated stocks, substantial cash raisings by “special purpose acquisition vehicles” and record high levels of margin debt (in America at least) and it feels as if concepts such as fundamentals, valuation and risk are being thrown aside.

Such an approach may work for a while but history suggests it never lasts and this column would rather sit on the sidelines and wait for wider market volatility to throw out a bargain or two. As Warren Buffett put it: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our affairs.”

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This column will fight “Fomo” (fear of missing out) and stick to what it knows, which is fundamental analysis with a focus on valuation to maximise the potential for gains and protect against losses. This approach is working with the housebuilder Crest Nicholson, at least so far, as we are 50pc to the good in three months, and last week’s full-year results suggest there could be more to come in time.

Pre-tax profits, excluding certain asset impairments, came in higher than expected, the balance sheet showed net cash (even after lease and pension liabilities) and Crest Nicholson affirmed its intention to return to the dividend list alongside 2021’s first-half results this summer.

The housing market seems well underpinned by the combination of government support, cheap money and an ongoing imbalance between supply and demand, while the chief executive, Peter Truscott, is determined to make the most of this by driving profit margins up to match those of his rivals after a period of underperformance in this regard.

The shares may be due a breather after their good run. But a return to anything like past peak profits and earnings per share of 66p would leave the stock looking very cheap indeed on a forecast price-to-earnings ratio of barely five times.

To offer us some protection we have net assets of £831m, compared with the £839m market value. So we are paying around book value and net assets should rise as profits recover.

A pull back is possible but there still seems to be plenty of long-term potential. 

Questor says: hold

Ticker: CRST

Share price at close: 326.4p

Update: Burford Capital bonds

Whether or not the Bank of England takes Bank Rate into negative territory on Thursday, the message from Andrew Bailey, the Governor, is surely going to be that increases in returns on cash are unlikely for some time to come.

This takes us back to the Burford Capital 6.125pc 2024 bond, which offers a “yield to maturity” of around 6.6pc because it is currently trading below its par value of £100.

The litigation funder’s bonds have had their wobbles thanks to concerns over the long-running Petersen case in Argentina and the potential implications of Buenos Aires’s latest debt default, but October’s interims soothed a few nerves as the group showed a strong increase in legal case realisations from a wide range of investments.

A conclusion to Petersen, where Burford owns a stake in a substantial legal claim against Argentina for its partial nationalisation of oilfields and expropriation of those assets, is due this year.

Victory would bolster Burford’s finances and underpin coupon payments on the bonds. There is a chance that Argentina would try not to pay but this appears to be factored into the bond’s price already and Burford does not rely on success in Argentina for funding anyway.

The bonds remain an option for income seekers. 

Questor says: hold

Ticker: BUR2

Bond price at close: £98.60

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 5am.