Market Wrap: Value And Momentum (Friday 22 April, 2022)

22nd Apr '22 by Ben Hobson

23 comments 4143 reads

Welcome to this week’s Market Wrap. April has been a fairly flat month so far in terms of market moves. In most western territories the index falls that followed Russia’s invasion of Ukraine in late February have been recovered. But how the war will continue to influence a number of important variables (not least inflation) is far from clear.

The UK’s defensive natured FTSE 100 index has fared better than most in recent months. Double-digit relative price strength over three months is well in evidence in defensive names like BAE Systems (LON:BA.), AstraZeneca (LON:AZN), Pearson (LON:PSN), Glencore (LON:GLEN), Bunzl (LON:BNZL) and SSE (LON:SSE). Meanwhile, small-caps remain very subdued, and it’s still a tricky market for individual investors with a preference for more speculative growth plays.

Index changes

	This Week	1 Month	1 Year
FTSE 100	-0.4%	+1.2%	+9.1%
FTSE AIM All Share	-0.2%	+1.5%	-16.6%
S&P 500	-0.0%	-1.5%	+5.3%
FTSEuroFirst 300 (ex-UK)	+0.2%	-1.2%	+1.9%
S&P/ASX All Ordinaries	-1.3%	+1.9%	+6.1%

Source: Stockopedia, London Stock Exchange

Financial headlines in what was a shorter week because of the Easter holiday weekend, seemed to focus on Elon Musk. For a start, Tesla (NSQ:TSLA) smashed analyst forecasts in the first quarter of 2022. Revenues at the EV company were up by 81% year-on-year to US$18.8 billion. Q1 operating profits came in at $3.6 billion versus analyst consensus target of $2.6 billion.

Elsewhere, Musk also raised eyebrows with further details of a possible bid for Twitter (NYQ:TWTR). After buying a 9.2% stake in the social media company earlier this month, he’s now set out details of a $46.5 billion funding package that would help him take full control.

Elsewhere, streaming service Netflix (NSQ:NFLX) saw its shares tumble 35% on news that it had lost a couple of hundred thousand subscribers during Q1 - and may lose a couple of million more this year. A subplot to this story concerned Bill Ackman, the hitherto activist investor who spent years trying to influence management at companies like Herbalife and Valeant Pharma. Ackman bought a $1 billion+ stake in Netflix in January but sold out instantly on this week’s news, taking a loss of around $400 million.

Value still the biggest influence

In terms of profit drivers, Value continues to be a persistent theme in a lot of the StockRank strategies tracked by Stockopedia. High exposure Value and Value+Momentum baskets are among the top performers on a one-year basis across the US, UK,…

Unlock with Email

Unlock with Google

Already have an account?
Login here

DWit199

23rd Apr '22

Hi Ben,

I find these articles interesting but I am not sure that I agree with your headline statement that Value is still the biggest influence.

Using Stockopedia data, the chart below represents the average total returns of the top 250 shares ranked by Value (green), Momentum (yellow) and Quality (grey) relative to the average return of all shares in my UK investment universe of around 750 shares. The data is presented as annualised performance over a 6 week rolling window with the markers representing the centre of the 6 week period. To give an idea of the significance of the observations I have included +-2SD bars calculated from the average performance over 6 weeks of randomly selected 250 share portfolios.

Looking at sector performance the Stocko momentum rank can yield some insights. The first chart shows the average sector momentum rank over the last year or so. It is a slightly muddled chart so I have broken this down into ten chartlets showing each sector (right click-open image in new tab to see the details more clearly) and finally a bar chart showing the current position.

BnB

I like the pets theme and already hold Zoetis (animal pharma) and IDEXX (animal diagnostics). Pets At Home (LON:PETS) might nicely round out my exposure with its focus on nutrition, treats, grooming and veterinary. The shares look good value relative to history. But I ask myself why, despite steady revenue growth, have earnings been so flat for so long, and look set to resume their moribund growth following the pandemic boost?

simoan

To back up what Terry Smith said, Fundsmith Equity currently has IDEXX in its top 10 holdings and he also holds Zoetis in the Fundsmith Sustainable Fund. Going right back to the early knockings of Fundsmith Equity he held Del Monte for pet exposure, and then JM Smucker following their takeover of Del Monte. He subsequently sold JM Smucker a few years back. So he has put his money where his mouth is. Here's an interesting article from the FT:

https://www.ft.com/content/fb4...

I'm not sure I agree with you on Pets At Home (LON:PETS) and prefer to look at free cashflow which has grown nicely in the past few years and the company is currently standing on a measly 7.5x TTM FCF which looks really cheap to me. That's a stonking FCF yield! Throw in a near 4% dividend yield (covered 4x by FCF) and a nicely rising trend in operating margins and the share price decline looks a little perplexing at first glance. There's been a decent turnaround in the past few years going back to pre-Covid days and it seems a major reason for the negativity is the CEO responsible is leaving. Add in the usual worries about inflation, a consumer led slowdown, and the increasing overheads of retail more generally, and it's not difficult to see why the price is down in the current climate. FY22 results are due on 25th May which I will read with interest before taking any action.

All the best, Si

The Phoenix

Hi would you mind outlining what data one needs to enter to get the sector bar charts at the bottom of your post, no drama if its a bit of a ball ache to do. Regards Andy

abtan

Pets At Home (LON:PETS)

Hi Si

Pets At Home (LON:PETS) is on my radar at the moment too, but it's actually the 'weak' cash generation that has put me off.

I would be interested to understand where that x7.5 TTM FCF figure came from?

Looking at the FY20 AR report (YE March 26th 2020) for example, I deduce FCF to be around £65m, which seems expensive for a company with a market cap of £1.5b.

For clarity my rough working take the Operating Cash Flow before working capital movements (£219.9m) and then deduct the following:

£30.8m tax paid
£39.6m PPE
£67.0m on lease payments
£14.0m lease interest

----

For something a little more recent I did the same exercise with the FY21 results:

OCF before working capital movements = £220.1m
less £17.5m tax paid
less £34.9m PPE
less £66.6m on lease payments
less £12.8m lease interest

= £88.3m

That's of course better, but still looks pricey vs the current market cap.
Additionally I'm sure there are some tax benefits, rent deferrals, etc...that might be muddying the waters somewhat.

---

Perhaps the company deserves such a rich premium and I see that I have a 300p price alert so I'm clearly still interested (though I don't recall why I chose this particular price point).
I imagine that I will wait for the full year results before deciding my next steps.

Cheers

Thanks for the write-up Ben.

A quick comment on Netflix (NSQ:NFLX), which I sadly bought a week before Ackman and still hold.

You said 'that it had lost a couple of hundred thousand subscribers during Q1 - and may lose a couple of million more this year.'

I watched the earnings call and it was interesting that right at the end, just as the call was about to end, the CFO asked to make one more comment, which was that the company was still forecasting user numbers to grow by the end of the year.

I found this last snippet fascinating given that everything I've read in the last few days talks about the user base dwindling from here on.

As I've done the work, if anyone is curious on the regional YOY revenue growth rates, split by price/volume, here are my workings (although please DYOR - I may have made a mistake somewhere!)

I'm still contemplating whether to top-up. Is the recent YOY 9.8% growth against strong comps really such a bad thing?

timarr

24th Apr '22

I suppose the question comes down to: what is free cashflow?

The company's own FCF figure for FY 21 (which they label as "underlying") gives this as £67 million, which is a hell of a long way from the £204 million that Stockopedia is quoting largely because they don't make the adjustments abtan shows.

I do wonder whether the adjustment for PPE will be recurring - I popped into my local PETS yesterday and none of the staff seemed to be wearing masks. And, of course, we can have the debate about IFRS lease adjustments. But still, the majority of their leases have between 1 and 5 years to run, so the actual costs aren't likely to disappear, they can't just stop paying the rent and keep the lights on.

Have been mulling this over for a while but still undecided.

The bull case for Netflix has always been based not just on growth but on its pricing power, and that has been fundamentally altered for the foreseeable future. Furthermore, the reason that it is the only FAANGM in which I have never invested lies in its business model. Broadcasters constantly need to renew content at great cost in order to ensure the commitment of their subscribers/viewers. A far cry from the leverage enjoyed by businesses with a pure software focus.

For the more authoritative, and admirably concise, view of my bank: “ we do not view this drop as a buying opportunity“

I’m probably prone to a little too much tweaking, but I’d be more inclined to repurpose the original investment than to top up. Within big tech, FB has fallen just as far and is even more attractive on valuation - if, unlike me, you can still stomach the endless bad press - but I would favour Alphabet, looking very good value following regulatory pressure. Or I’d look among the stars of tech in high conviction areas like cybersecurity that have fallen to the great rotation/revaluation. Semiconductors look very beaten up too, with the added attraction of very low PERs for the growth across the cycle, if you hold the view that they have become less cyclical as digitalisation marches on. I like the semi equipment manufacturers for a picks and shovels approach.

As an aside, an interesting point about the crushing of tech valuations is that medtech has has not suffered anything like the same falls. In fact many speculative names were near ATHs before last week’s moderation. The logical inference is that the market can still sustain speculative valuations at high multiples of revenues and that the tech wreck is as much about rotation as it is valuation.

Strange. Sharepad shows the very opposite of your “nicely rising trend in operating margins” at Pets At Home (LON:PETS), with them having fallen by a quarter in the last 5 years. Often that can be due to a change in the revenue mix rather than an indication of a wider problem, but I haven’t dug deep enough yet to comprehend the reason. Perhaps you have more insight?

On the cash flow yield, 7.5x does look to be near peak historical levels and a return to the more normal 5.5x would be a solid gain, hence the twitch in my divining rod.

The P/FCF TTM figure was taken the current StockReport. Actually, after my last post I noticed there was something very suspicious in the Stockopedia numbers and haven't had time to investigate further yet. In particular the EPS to FCF conversion looks too good to be true, so I suspect the cashflow numbers shown are wrong. Thanks for sharing your calculations which look more realistic and paint quite a different picture to the StockReport with the "real" P/FCF for FY21 being more like 17.

I'm not normally interested in retailers but the numbers on the SR were indicating a really good margin of error. I will take a look through the FY21 results myself when I have time tomorrow but if your estimates of cashflow above are right, my interest in Pets At Home (LON:PETS) has just ended.

The StockReport shows a rising trend in the last few years from FY2019 onwards but I haven't double checked any EBIT adjustments that lead to these numbers. When I had access to Sharepad I often found discrepancies with the Stockopedia numbers. so it wouldn't surprise me if the two data sources handled underlying EBIT differently.

I need to go through the last AR and take a view of the adjustments myself and double check the cashflow statement. See the post by abtan below - the "real" free cashflow could be a lot lower than indicated by Stockopedia. In which case, as they say on TV, "I'm Out" :-)

would you mind outlining what data one needs to enter to get the sector bar charts at the bottom of your post

The simplest way is to go to the Browse - Market Data - Sectors page on the Stockopedia site and use the average momentum column https://www.stockopedia.com/sectors Unfortunately this page has no download option but you can copy and paste the numbers into a spreadsheet.

But, the numbers here are different from mine. It is not clear to me which companies are included in the Stockopedia calculation and anyway I am not interested in highly speculative UK micro caps or foreign companies listed on the International Order Book. I have my own investment universe which is Mkt Cap >£35m, member of FT All Share, Fledgling or AIM All share index and excluding REITS or collective investments, about 750 shares to choose from. I have some screens set up on Stocko and most weekends I spend a few minutes downloading the results as csv files which I store in a database. This is the data I use to create my own charts.

The chart below compares the two sets of calculations. Overall the pattern is fairly similar so either could be used as a quick assessment of the relative merits of the different sectors.

Hi BnB,

OK. A quick scan of the FY21 and HY22 results show that a non-underlying item (proceeds from a £30.2m disposal) is included in the Stockopedia EBIT numbers for 2021 and TTM. It may be that Sharepad uses true underlying EBIT? Sorry I haven't got time to look at this further today.

A quick scan of the FY21 and HY22 results show that a non-underlying item (proceeds from a £30.2m disposal) is included in the Stockopedia EBIT numbers

Well spotted. With abtan’s observations on FCF adding to the doubts, perhaps a case of great theme, not so great company. Frankly, both IDEXX and Zoetis are so much off highs that I could just as well top them up with any money potentially targeted at £PETS ! Giving the company the benefit of the doubt, however, I can wait until results come out next month.

Hi BnB

Thanks for your thoughts on Netflix.

I actually disagree on the wide concerns about Netflix's content expenditure.

The company is already generating cash above and beyond its capex requirements and is producing across multiple geographies.

I think this latter point it often overlooked, especially in light of relatively new EU legislation enforcing minimum locally-produced content (30% for most territories from what I've read).

https://seekingalpha.com/news/...
https://variety.com/2020/strea...

As per the articles above Disney is way behind on this minimum threshold and as a 2 month subscriber (bought for the kids during covid quarantine, now cancelled) I can't see much non-English content on there.

I'm fully aware that it has the resources to catch up.

I also don't quite understand how Amazon Prime works globally. The company only operates out of 13 countries. Will this make it harder for them to attract sign-ups in say Argentina or Chile?

I also have reservations about Apple's ability to grow its digital content services outside its usual affluent markets, but perhaps that's my Android biases clouding my judgement?

As you pointed out, one of the key attractions for Netflix is its pricing power, especially in its established markets. It's actually what attracted me in the first place.

And I'm not worried about customer attrition. The company lost users in US + Canada in Q2 2021 and no-one seemed to care then. At least this last quarter the quarter-on-quarter drop is explained by the company pulling out of Russia.

I think it's worth adding that the company has never had a year-on-year drop in customer numbers in any of its regions, including the one just reported.

It will certainly be interesting to see how the company develops its freemium, gaming and hopefully music offering in the future.

As a final point on your bank's comments, I largely ignore these sorts of 'authoritative' statements due to having lost money in the past from blindly following analyst recommendations - please see Avanti Communications. That was a not-so-fun money-losing few year, albeit an invaluable lesson.

I hope Netflix works out for you. Always good to share perspectives. I like the connected TV theme but prefer to play it via streaming platform-independent adtech, much of which is also looking very cheap today - The Trade Desk aside - but still vulnerable to heightened recession concerns.

john2

Hmm, I'm not sure about the future for Netflix. They lost 200,00 subscribers in the quarter. but that was less than 0.1% of their subscriber base.

I think that the real problem that they face is that not only are they not now the only streaming platform, but they are up against Apple and Amazon in the contest for content. Apple and Amazon both have enormous profits from their other business activities to subsidise their streaming platforms.

Albertos

At a slight tangent - where does this leave £ITV

Itv (LON:ITV) (I hold)

By complete coincidence I was just reviewing this a few minutes ago.

I like it a lot and was quite baffled by the recent drop - the company was already on its digital journey via Britbox and the ITVX push seemed not only practical, but imperative.

Anyone, some bullet points from my last notes from exactly 1 month ago:

£650m Adj FCF vs EV c£3.8b (adj actually includes deferred VAT and pension payment from 2020, so this should be higher)
Assume this drops to £500m Adj FCF pa over the next 2-3 years as ITVX grows...Britbox International still profitable.
Based on Joyne numbers (Germany) I imagine Britbox will grow to 10m subscribers.
Studios growing nicely, including international productions, helped by EU minimum local language directive.
Advertising still strong. Even if this falls, it should be offset by growth elsewhere.
Nice affordable dividend whilst waiting for things to happen.

25th Apr '22

At a slight tangent - where does this leave Itv (LON:ITV)

I hold both Netflix and ITV, although considerably more of the latter than the former. I'm struggling to understand the price of the latter, even allowing for the ITXV investment and fears about advertising spend. I suppose also, if you assume that people are switching off streamers to save money, this might benefit ITV - although younger people would be equally likely to move to gaming or social media (older people too, if some of my acquaintances are anything to go by).

ITV ought to be a takeover target but there are two hurdles - the UK Public Service Broadcasting requirement and the 9.9% stake held by John Malone's Liberty. Ultimately it's hard to see why either of those would be a blocker to a determined bidder. But who's buying right now (and the rumours of ITV buying C4 don't help)?

Anyway, I will continue to hold and wait for something to happen. Netflix ... well, that's harder. But having spent the weekend wading through heaps of negative press about the company you'd think they were about to go bust. The one thing that is notable from the coverage is the complete lack of consideration of negative effects on other streamers. There was an article last week in the Guardian that suggested UK viewers were preferentialy keeping Netflix and Amazon, but turning off others to save money. And I'd agree with abtan's analysis of Disney+ from earlier in the thread - and I hold Disney (although from pre-streaming days).

If anyone is really determined to buy into the streaming story then the newly merged Warner Bros Discovery might be worth a look. But probably this is a sector you should wait for the movie of, rather than one to participate in.

Market Wrap: Value and momentum (Friday 22 April, 2022)

Value still the biggest influence

Unlock the rest of this article with a 14 day trial

About the Author

Ben Hobson

23 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...