Change in stockrank

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30th Dec '14 by valuemonster

4 comments 8579 reads

Back in August (and until quite recently I think) Grainger had a high stockrank of circa 96.

See:
http://www.stockopedia.com/content/stockranks-upgrades-and-downgrades-august-5th-85172/

Today (30/12/14) it is languishing at 37. Does anyone know what happened?

Regards David

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Valuemonster

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4 comments

Damian Cannon

31st Dec '14

Hi David,

It's an interesting question and helpfully Stockopedia provides a way to look back in time - just click on the arrow by the Print button to get a monthly list of pdf snapshots. With these we can see that the Rank on 1/11 was still 90 and it remained pretty high at 85 on 6/12. So the bulk of the decline has taken place in December and most of this is down to Quality plunging from 85/80 to 30 (although both Value and Momentum have fallen sharply).

Now the Quality Rank is designed to be predictive and so it focuses on what, statistically, is likely to happen in the future (rather than on how great the past was) and it seems to have been hit in several key areas:

1) Piotroski score: This has dropped from 8 to 5 because the expected cash generation didn't turn up in the recent results (out on 20/11) and the gross margin is down

2) Free cash flow: Historically Grainger has generated good cashflow but this turned sharply negative in the last results. An unwelcome surprise?

3) Broker consensus: Forecasts kept being upgraded until the summer but since then it's been downgrades all of the way. So earnings are forecast to half over the next year and this is not suggestive of a quality business.

Now I haven't dug into the numbers myself but these forecasts do seem to be at odds with the commentary in the last report - here there is talk of high cash generation, continued profitability and improving markets. The only notes of caution concern the upcoming election, the potential mansion tax and a change in focus as reversionary assets become harder to find.

So I can see why the ranking has plummeted but you need to DYOR to discover if you agree with this change.

Damian

valuemonster

31st Dec '14

Hi Damian,

Many thanks for the heads up on how to access historical reports - very useful and interesting.

I've been trying (and failing) to get my head around everything in the final results. They are quite detailed! What I can see is that there has been a strong increase in the book value per share. The increase in book value (72.2M) is significantly higher than the decrease in cash (15.9M).

Coupled with the sentiment of the results the decrease in stockrank feels harsh imho. It's interesting to note the contrast in the broker forecasts to the comments about the future in the results.

I only have a small stake so I'm happy to hold and see how it pans out.

Thanks again for your reply.

David

intuitive6191

31st Dec '14

The Broker consensus is probably the least reliable feature on Stockopedia as it tries to convert very soft subjective information into hard figures and analysis.

Stockopedia states that there are 5 brokers contributing to the trend but in fact gives 7 broker views which read as

Hold 2
Buy 2
Strong Buy 3

This is completely at odds with their declining eps forecast. Not helpful at all.

In addition to Random's very good post above I would add that much of Grainger's portfolio is in the London area and probably suffering from the fear of a London slowdown. As it changes its focus towards development it could also be increasingly compared to other mainstream housing developers rather than its current niche.

Assured tenancies are inevitably becoming extinct however other revisionary business should still contribute to the Grainger portfolio. As the UK continues its shift from a home-owning to rental environment, companies like Grainger should be able to do reasonably well with its build to rent program

Damian Cannon

31st Dec '14

No problem David. Along with intuitive6191 I don't really understand the broker views on Grainger and how these marry up with the director forecasts. Looking around (e.g. http://sharedealing.nandp.co.uk/broker-views/GRI/Grainger) it's clear that most of the brokers are positive about the company and have a target far in excess of today's price.

At the same time I've found some commentary from Numis which came out just after the results:

"Results are slightly ahead of our estimates and we will leave forecasts unchanged for 2015/16,’ he said. ‘Whilst we note that the housing market has cooled since the first half of 2014, Grainger’s pipeline continues to show progress due to its prudent valuation approach and the portfolio’s defensive characteristics."

So the cooling housing market is being taken into account - although will that lead to profits being slashed in half?

Numis further point out:

"Despite this the shares are trading at a 36% discount to forecast September 2015 net asset value which we feel is unwarranted, given the reversionary surplus embedded in the portfolio and Grainger’s track record of outperforming the wider housing market."

So who knows? I think looking into the negative cashflow figure in the last results is a good place to start as that's definitely had an impact on the quality ranking. Otherwise let's just wait and see!

Damian

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Valuemonster

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