The Stocks Set To Prosper On Shock Tory Win

8th May '15 by Ben Hobson

7 comments 25717 reads

It's remarkable in this day and age of high technology and the millions thrown at polls that nobody called this election right. When it came to the crunch England voted resoundingly against uncertainty and for a continuation of the Conservative economic plan. Unsurprisingly the investment community is looking relieved with sterling and stock markets rallying.

With fuzzy heads after lots of late night channel switching we've had a look at which stocks are winning in the immediate election aftermath. The FTSE 250 mid-caps have stomped to new highs and amongst them are some big moves in high StockRank “conservative" winners.

There are many areas of the market that might continue to prosper in the more stable tax & regulatory environment - we've highlighted a few of the more interesting movers for subscribers below.

Housebuilders

In coalition, the Conservative and Lib Dem government put in place policies that were designed to stimulate the housing market including the original Help to Buy scheme and, latterly, the Help to Buy ISA. These, along with the low interest rate environment and ongoing green belt review, proved to be a massive boost for most of the country's main housebuilders, including Persimmon, Bellway and Barratt Developments, with Barratt seeing its share price rise by 350% over the past five years.

Many housebuilders continue to command high StockRanks, including Persimmon (99), Bellway (91), Bovis Homes (97) and Taylor Wimpey (93). Among the big initial winners in the aftermath of the election result were Berkley Group, up 9.3%, Bellway, up 6.5%, Redrow, up 5.5%, Persimmon, up 5.5% and Crest Nicholson, up 5.1%. You can see Stockopedia's full Homebuilders Sector page here.

At the UK Investor Show Bellway was one of Mark Slater's top picks while Berkeley Group made the cut in Ed Croft's presentation as one of the top five Value & Momentum Ranked stocks in the UK market.

Gambling

Shares in bookies like Ladbrokes and William Hill took a hit earlier this year when Labour announced that it would give councils the freedom to ban high stakes gaming machines. These, of course, are a huge profit source for traditional high street betting shops. So with a…

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marben100

8th May '15

Another interesting mid-cap beneficiary of the election result, from the outsourcing sector Is Interserve (LON:IRV) , which is also up around 5% today. I observe that it only has a stockrank of 70. I suspect that's because it's Piotroski is only 3, pulling down it's quality rank. However, IMO the F-score is heavily distorted due to last year's major acquisition of the Initial Facilities business from Rentokil Initial (LON:RTO) . That acquisition impacted free-cashflow in 2014 significantly (I note from the annual report that the firm is targeting 100% cash conversion going forward), required some (modest) equity issuance and a significant increase in net debt.

I believe that this was a very shrewd move by management, diversifying Interserve's customer base away from heavy reliance on the public sector, to greater private sector exposure, whilst benefitting from economies of scale and synergies in offering similar FM services to both sectors. If Interserve's management (who have proved highly competent to date) and I am right, we'll see this reflected in much improved quality metrics when 2015 results are published, in which I expect to see FCF improve and net debt reduce as a result.

Disclosure: Interserve is one of my largest holdings.

Ben, if you have time to look into it, I'd be interested whether my thoughts on what is pulling Interserve's rank down is correct, or whether there are other factors I'm overlooking.

Cheers,

Mark

Edward Croft

Mark - yes it's probably a big contributing factor. The F-Score is up to 35% of the overall Quality Rank. So a jump from 3 up to 9 would likely add another 20+ score to the QualityRank and at minimum 7 to the StockRank.

It's also far cheaper on forecast earnings than historic earnings - so the ValueRank could be considered higher if forecast earnings were included. We have and are considering using a rolling P/E in the ValueRank instead of the historic.

Lots of ways round the numbers - that's why you do the research of course !

Thanks Ed, I'm not suggesting you should change anything. What is interesting about this situation is that all the factors that the stockranks encapsulate, and which other asset managers pay attention to, explain why the stock appears so undervalued to me! Effectively, I'm betting on an improvement in the stockrank - which could be dramatic, with all of value, quality and momentum potentially contributing (for the reasons you highlight). Time will tell whether my qualitative analysis beats the quantitative (& largely historic) one, on this occasion.

I've been a holder for a long time (since the 200p crisis era), so have gained a fair understanding of what is quite a complex business, with a lot of "moving parts". The market cap. still seems low to me, for a business that now employs some 80,000 people globally.

Cheers,
Mark

cig

How much of what they do is construction? It may look less cheap relatively if you (proportionally) benchmark it to construction companies -- the whole sector is on low ratings.

Not much, especially in the UK: 10.8% of operating profit is UK construction, 7.6% international construction. However, a further 18.7% of operating profit is from "equipment services", which is design, hire & sales of formwork & falsework for construction projects, mostly outside the UK, with significant Middle East focus. It really does belong in the "support services" sector, not construction.

The bulk of revenues & profits relate to facilities management & similar services. Have a look around: in many public places (e.g. hospitals, railway stations, conference centres) you'll see their staff taking care of things. I've spoken to them, on occasion, & they seem happy with Interserve as an employer.

What may have raised some pre-election concern is that they have contracts under the government's work programme and recently won contracts with the Ministry of Justice for the probation service: http://www.investegate.co.uk/interserve-plc--irv-/rns/probation-and-rehabilitation-services-contracts/201412181038201564A/

That's another reason why I think it's a strategically sound move to gain more exposure to private sector business by acquiring Initial Facilities, mitigating the impact of any adverse unexpected changes to government policy. That acquisition brought over 20,000 additional employees into the business - giving some idea of the scale.

12th May '15

Just as a footnote to my earlier comments in #3 above, I attended Interserve's AGM this morning. After the meeting, I approached the CEO & found him in a conversation with their house broker, JP Morgan Cazenove. He was bemoaning the poor market reaction to the company's solid results. Interestingly, the broker emphasised that what the market was looking for was improved quality of earnings - very much in line with my suspicions!

So, if earnings quality improves, we could see a good positive nudge to momentum, as well as to the quality metric itself. I believe such an improvement is almost bound to happen, as the Initial acquisition is digested, debt starts to come down & integration costs drop out. Today's in-line trading update appears to confirm the likelihood of that occurring to me.

FREng

14th Dec '17

Capita (LON:CPI) is down to £4 today, with a negative NAV. The election in May 15 just about set the peak, at about £13.

There must be a lesson here, but I can't put my finger on it ...

The stocks set to prosper on shock Tory win

Housebuilders

Gambling

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Ben Hobson

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