What price a stock bounce? The boom that has analysts scratching their heads

Amid warnings that some shares have risen too far, Mark Leftly takes a critical look at the FTSE, and its market sectors

A leading FTSE chief executive groans when asked the question: "How big is the company now? About 130th on the Ftse?"

His group has been performing well through the financial crisis, with revenue and profit continuing to grow fast. As other companies stared into the abyss, this company has been slowly climbing the ranks, allowing management to dream of a FTSE 100 place in the not-too-distant future.

"No, we've slipped back to 150-to-160ish," he sighs. "Some housebuilders have bounced back and overtaken us. Who would have thought it, housebuilders? Do investors know that there is a housing crisis?"

There are plenty of examples in that sector: Taylor Wimpey has grown nearly 300 per cent since March to approaching 40p, while Barratt is back above two quid after languishing at less than half that for six months.

Similarly, Lloyds Banking Group surprised some seasoned observers with its rally on Wednesday, when shares grew 9 per cent despite the announcement of a £9.7bn charge for bad debts. However, there are at least some explanations for a bounce in these stocks: the housing market has shown signs of improvement, while Lloyds pointed out that its merger with HBOS will result in £1.5bn a year of cost savings to 2011.

What analysts are scratching their heads about are stocks that are booming despite little discernable good news. As investors find little reason to save cash in a low interest rate economy, so they appear to be taking punts on stocks showing little upside.

It is as though, argues one analyst, investors are ignoring the figures and are willing to take risks on the back of the FTSE's recent storming rise. Buying shares is back in vogue, and the FTSE's rally has gathered such momentum that stocks everywhere are benefiting.

Here are five examples of stocks that suggest that during this boom, now might well be a good time to announce bad news.

Retail: DSG International

Electronics retailer DSG was badly hit in the wake of the Lehman Brothers collapse, falling from a 12-month high of 69p in September to just 9.5p in December. There have been several rallies since, with the most recent taking it from 20p on 8 July to nearly 30p last week. Investors seem to be oblivious to what was a poor set of annual results in June, with sales in its UK divisions falling 11 per cent to under £4.23bn. UK profit was down nearly £100m to £58.7m, while the overall group collapsed from £225.6m to £50.5m.

"There has been a big fall in profits, UK pressures, DSG is still losing money in Italy, and there are still general pressures on big ticket items [such as electrical goods]," says Nick Bubb, analyst at Pali International. "Management has got to turn all of that around."

Industrials: Cookson Group

Cookson, a supplier of materials including ceramics and precious metals to industrial groups, has had a rough year. In October, there were 500 job losses, followed by 700 in January and 600 announced just three months ago. Yet the company's share price has been broadly on the up since November. Most notably, investors continued to snap up shares after a worrying admission in its half-year results last week: Cookson could be in breach of its debt covenants, or terms, the next two times they are tested, on 31 December and 30 June 2010. Revenue also fell by one-third to £929m, though all divisions remained profitable. Shareholders weren't worried and at close of trading the same day stock was up 7.5p to 372.6p. An engineering analyst says: "The general attitude to risk has really turned around recently, and we think some stocks have risen too far. Cookson looks to be an example of this, considering its share price has gone up three times since March."

Leisure: SABMiller

Brewer SABMiller is on a tremendous run, hitting £13.88 on 31 July, a year high after falling below 800p in October. The company is in a relatively strong position, with May's full-year results showing group revenue up $1.5bn to $25.3bn. However, there are factors of which investors should be wary. Sam Hart, Leisure analyst at Charles Stanley, points out that the Peroni and Tyskie brewer faces "significant headwinds" from losses in currency conversions and higher commodity costs. "SABMiller hedges forward commodity costs by 18 months," explains Hart. "Which means that they've missed out on the fall in spot prices, particularly grain." Hart believes that SABMiller has gained from positive market sentiment towards the company's exposure to growing markets in Latin America and Eastern Europe. A management statement at the end of July, which referred to the global downturn impacting consumer demand, has led to a very slight fall in the share price since.

Support services: Ashtead Group

Since mid-June, Ashtead's share price has risen from just under 55p to nearly 75p. In some ways this isn't surprising. Ashtead, which supplies construction equipment in the UK and US, announced a strong set of annual results in June, with pre-tax profit at £87.4m, against a loss of £86.6m last year. However, investors appear to have ignored analyst forecasts, which have been cut following a trading statement in May when the company admitted profit next year would be "below the board's earlier expectation". Consensus figures suggest that pre-tax profit will be around £25m, below previous estimates of around £45m. Mike Foster, analyst at Fairfax, suggests that the group could even "struggle to break even" by 2012-13, when the recession should really start to bite. At the moment, Ashtead is still performing well because it has work from public-sector contracts, but they are likely to start drying up.

Mining: Xstrata

Since March, when shareholders overwhelmingly voted in favour of a £4.1bn rights issue, Xstrata has been on the rise, with shares moving from 193p to nearly 870p at one point last week. The famously acquisitive mining group has also benefited from its stated intention to pursue a "merger of equals" with Anglo American – long the ambition of Xstrata boss Mick Davis. But Charles Kernot, mining analyst at Evolution Securities, is recommending investors reduce their stakes in Xstrata, warning that at $13.1bn, its debt level is still high. "Debt remains a risk should there be any hiccup in the global economy," says Kernot, adding that it appears that Xstrata will have to pay a premium if it wants to merge with Anglo. "The deal might end up being 60 per cent Anglo and 40 per cent Xstrata – and then the argument is that Anglo is in fact taking over Xstrata." And so Anglo's shareholders, rather than Xstrata's, would be the main beneficiaries.

PROMOTED VIDEO
Extras
indybest
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
Arts and Entertainment
tv
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
News
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Life and Style
Pick of the bunch: Sudi Pigott puts together roasted tomatoes with peppers, aubergines and Labneh cheese for a tomato-inspired vegetarian main dish
food + drink
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape