Private Investor: Mighty Mittal poses threat to Corus's impressive revival
Saturday 30 October 2004
Some folk go for fundamentals and some for charts. I'm a great believer in gut feeling and right now I feel like avoiding the high street and buying into housing.
That means betting against the market trend, something I hate doing, and I have the nagging feeling that sheer obstinacy could be blinding me. None of us like to admit we were wrong and I have been a fan of housebuilders for some time, while I think retailers are being hopelessly squeezed by price wars that can only end in tears.
I have watched Sainsbury shares rise this week in a triumph of hope over reality. In my opinion, only bid rumours can justify holding these shares and I don't really buy the rumours. OK, so Allan Leighton is stepping down from the chair at Lastminute. com and could link up with Archie Norman, who is quitting politics at the next general election to spend more time with his groceries.
Sainsbury must be tempting for this duo, as it is in as big a mess as Asda was before they turned it round, but the next election is still some way off and Norman may not be in any hurry to put himself through a repeat ordeal in the supermarket stakes. The sector has become much more concentrated over the past few years. Tesco dominates it in a way that Sainsbury never did when it was top dog, Asda now has the might of Wal-Mart behind it and Morrison has mopped up Safeway. The Sainsbury challenge is daunting.
The one chain that fascinates me now is Somerfield, which has taken a real bashing from time to time. This week it bought 114 Safeway stores from Morrison for £260m. That's something Somerfield could not have contemplated even a year ago. Somerfield shares have been sliding for most of this year. I reckon this could be the time to get in on the cheap as it gets back into expansion mode.
I also fancy one or two housebuilders, on the same principle that the shares have fallen more than enough. It seems that the constant drip of stories claiming that house sales and prices will slump is having an effect, and I was disappointed on Thursday to read that the Nationwide house price index had slipped 0.4 per cent in October. Yikes! So prices are only 15.3 per cent higher than this time last year.
I stick to the view that the market has flattened out from its unsustainable rise and is unlikely to fall far. The fact is, there is a shortage of housing and interest rates are near or at their peak in the current cycle - I go with the popular opinion on that one. Shares in the sector will be held back for a while by current adverse sentiment, but Barratt and Persimmon look pretty solid to me.
Another old favourite, Corus, sprung to mind when I read on Tuesday about Lakshmi Mittal putting together three steel companies in an £11.4bn deal to create the world's biggest steel group. My first reaction was that this demonstration of faith in the industry, which has been boosted by strong demand from China's roaring economy, is good news for all steel producers. Then I started to worry about how Corus, valued at a mere £2.2bn on the stock market, will cope with such a mighty competitor. As Mittal paid himself £1.1bn in dividends, in a couple of years he will have as much as the whole Corus group.
Corus is only the seventh largest steelmaker in the world. With China's economy driving steel prices higher this year, Corus is set to make a profit for the first time. Mittal's move brings him closer to big customers in Asia such as Toyota and it also gives him a group of mills in the US. I reckon that is shrewd in case we get a repeat of the George Bush protectionist measures that hurt Corus.
Corus shares have risen over the past 18 months from 4p in March 2003 to around 50p now. This is the highest for two years and is quite an achievement for a company that will fail to pay a dividend for the fourth year in a row. For 2005, analysts think Corus could pay out as much as 2p a share but I have an aversion for lossmaking companies unless I am convinced they will move into sustainable profits and start paying up. Corus doesn't quite stack up.
The writer is editor of Hemscott Invest, www.hemscott.net
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