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Questor: a bombshell for the portfolio as one stock falls by almost a quarter. What should we do?
Questor Income portfolio: ULS Technology was bought for its growth potential but has now said it will be hit by the housing slowdown
Readers who keep a close eye on this portfolio will have been shocked to see one of our holdings lose 23.5pc of its value on Wednesday. The stock, ULS Technology, fell after it released a trading statement for the first half of its financial year.
The company’s technology-based services bring together property buyers and sellers with conveyancers, lenders and mortgage brokers. Its fortunes are therefore linked to activity in the housing market but also to the extent to which people who are not moving house switch to new mortgages.
Our decision to buy the stock was based partly on a belief that eventual interest-rate rises would encourage the latter group to consider remortgaging. When rates are low there is less incentive to seek out the very best mortgage deals. However, we were also impressed by the company’s ability to increase its share of the market thanks to its growing range of technology-enabled services.
This week’s update from the firm said that, while trading had been in line with its expectations over the six months to the end of September, a slowing housing market was “likely to have some impact on the group’s second-half results”.
A short phrase of this nature is enough, in today’s nervous market conditions, to cause a stock to lose almost a quarter of its value.
ULS pointed to a 10.1pc fall in high-street bank mortgage approvals for house purchases in September as evidence for the slowing of the housing market. It said it was “likely that uncertainty over Brexit is a major factor”.
The group added that it “continues to increase its market share and win new introducers as well as having an extensive pipeline of prospects [and] it continues to invest in developing new products, with major launches planned for 2019”.
Analysts at Numis, the stockbroker, said: “We now assume a 10pc fall in [housing] market transactions over ULS’s second half. We also model somewhat lower gains in market share than previously.
“While we expect the group to control costs very tightly in the period, as has been the case in prior downward moves, we downgrade revenue and profit forecasts for the full financial year.” The broker now expects profits before tax of £5.3m this year, compared with its previous prediction of £5.8m, and £5.8m in 2020, down from £6.1m.
Earnings per share would be 6.2p and 6.8p in the two years. The latter figure would put the stock on a price-to-earnings ratio of just 12.5, which is low for a growing company.
Numis said “we believe ULS has highly attractive long-term prospects” and put a price target of 135p on the stock. We paid 99p in March last year when we invested a cautious £10,000.
The share price fall looks overdone and we are happy to hold this stock, which offers the chance of strong growth to complement our portfolio’s high yielders.
Update: Next
It’s only five weeks since we reported Next’s interim results but this week the retailer published another trading update, this time for the three months to Oct 27. This one went down less well with investors, who had sent the shares 8pc higher after last month’s announcement: the share price fell by almost 2pc on Wednesday, although it later recovered.
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Next’s message was very much “steady as she goes”. Its profit forecast for the full year was left unchanged at £727m and the trend of falling sales in shops contrasting with rising online revenues was also maintained. “Full-price” turnover in bricks-and-mortar outlets fell by 8pc in the third quarter and by 6.3pc over the year so far; internet sales on the same basis rose by 12.7pc and 14.8pc respectively.
The company’s expectations for growth in earnings per share were also unchanged at 5pc for the full year. As this figure reflects a stock’s scope for dividend increases we remain confident about Next’s status as a reliable income producer and continue to rate the shares a hold.
We included the performance table for the portfolio two weeks ago when it reached its two-year anniversary so have not included it this week in the normal way.