UK Edition
This column is usually happier to analyse a stock when sentiment is against it rather than when the good news is flowing and the shares are buoyant, as this means there is more chance to get a bargain and less chance of overpaying.
As a result we may not be inclined to chase after Keystone Law in the wake of last week’s upbeat trading statement. But that does not stop us from holding on to the stock and letting a winner run.
Although the board had already sanctioned the resumption of dividend payments alongside September’s first-half results, to suggest gathering confidence in the outlook, management has been pleasantly surprised by the absence of the usual festive season slowdown in business.
A strong finish means that results for the year to January 2021 will now exceed analysts’ forecasts by some distance. This could be down to the unusual circumstances as no one was out partying and perhaps clients sought solace from a solution to their legal problems instead.
The base for comparison for earnings in the coming financial year could therefore be tougher. But strong demand and high levels of client service do show the resilience of the legal firm’s business model, as most principals and support staff work remotely and investment in staff and technology brings its rewards.
Shareholders will have to wait until May 5 for further news on dividends – the board is committed to a progressive payout policy – but the investment case really rests on growth and the potential for capital gains.
- Sign up to our Business Briefing newsletter for a snapshot of the day’s biggest business stories
- Read Questor’s rules of investment before you follow our tips
Chasing the stock may not therefore be the best plan, as its £175m valuation is lofty at more than 40 times earnings for the year about to end.
That in turn suggests Keystone Law is best suited to risk-tolerant investors who seek growth and momentum plays, although the prospects for upgrades in earnings forecasts mean that the price-to-earnings ratio could be deceptively high.
We already have a paper gain of almost 50pc from the stock, with dividends on top, but there could be more to come.
Questor says: hold
Ticker: KEYS
Share price at close: 565p
Update: Resolute Mining
Incoming US Treasury Secretary Janet Yellen’s call to “go big” on fiscal stimulus hardly suggests that rampant deficit creation is going to come to a juddering halt. Throw in the Federal Reserve’s ongoing $150bn-a-month (£110bn) quantitative easing scheme and there could be plenty of dollars sloshing around.
This may explain why the greenback is trading near three-year lows against other currencies on a trade-weighted basis. More importantly, it stands near all-time lows against gold.
Anyone who fears further monetary and fiscal profligacy may still like some exposure to the precious metal, which is holding firm between $1,850 and $1,900 an ounce.
Where this column keeps falling down is in its choice of gold miners.
Resolute Mining is down by nearly 40pc over the past year and Centamin by 7pc, which is a bit galling when gold is 15pc higher in sterling terms and some junior miners’ or explorers’ share prices have doubled, trebled or more.
Such are the risks and at least Centamin’s latest update last week featured no new nasty surprises. However, Resolute Mining’s statement the previous week was a different matter.
The Australian headquartered firm, whose operations are based in Mali and Senegal, forecast both a 9pc drop in output and a 15pc increase in the “all-in sustaining cost of production”, based on the mid-points of management guidance of 362,500 ounces and $1,237 an ounce respectively.
The shares unfortunately, if understandably, fell as a result. This leaves us with a quandary as the second half of the old saying about running your winners, as with Keystone Law, focuses on being ruthless about cutting your losers.
Yet the monetary authorities’ lack of desire, or perhaps ability, to raise interest rates and the lack of political or public appetite for anything approaching fiscal restraint, given the testing circumstances, suggests gold still has potential as a portfolio diversifier, and the miners with it. Resolute Mining could yet shine if gold prices take another leg up.
Questor says: hold
Ticker: RSG
Share price at close: 39.24p
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.