Investment Column: Leave something for the next man and book a gain
It does something that's very much in vogue on the high street right now: it sells its wares cheap
Friday 03 May 2013
Our view Take profits
Price 821.5p (-31p)
Our view Take profits
Price 819.5p (-6p)
David Buik, the veteran City commentator, has a good rule for investment: when you sell a share leave something in for the next man.
What that means is don't hold on too long. If the shares have had a good run, sell up, book your profits, and celebrate. If the shares carry on rising, well, you've still made good money, so why worry?
These two companies have both been featured in this column over the last couple of years, and both have recently had a stellar run. For long-term investors, they have some attractions, and may be worth holding. But now would be a good time to book some gains. Even if that does mean, as Mr Buik says, you have to leave something in the tank.
First up Dunelm, owner of Dunelm Mill, which I recommended as a buy in March last year despite members of the founding family selling a hefty chunk of stock.
Usually this would represent a red flag: if the bosses or founders don't have any faith in the prospects of a company, then why should you? However, I had good reasons for ignoring this potential warning sign. The home-furnishing chain is growing like a weed because it does something that's very much in vogue on the high street right now: it sells its wares cheap.
Will Adderley, a scion of the founding family holding the position of executive deputy chairman, and his wife, Nadine, had sold 7.5 million of their shares, netting them a combined £36m a few days before I wrote. The sale attracted adverse comment even though they had pledged to retain a substantial investment in the group and were still in control.
It actually doesn't look all that clever now: Dunelm's wares might be keenly priced but the shares aren't, at least not any more. When I wrote they were trading at just over 500p. Since then they have leapt in value by around two-thirds, smashing through the 800p barrier and beyond. The Adderleys would have made something closer to £60m had they held on. But, then, you could argue that they were simply following Mr Buik's advice.
Part of the reason for the shares' spurt is that Dunelm sits in a pantheon of retailers whose time has come. Sports Direct, Aldi, Primark, they are a diverse bunch, but they have all been massively successful thanks to their "value proposition". That means they offer great value to shoppers whose incomes have been squeezed.
This can be seen in Dunelm's results. The most recent trading statement showed revenue for the third quarter grew 15.4 per cent, including a contribution from three openings.
Like-for-like sales, which excludes new openings, grew 5.2 per cent. Although that benefited from both a later end to the group's winter sale and an earlier Easter than the prior year, it's still a creditable number.
The shares now trade on just over 21 times forecast earnings for the year ending 30 June, yielding 1.9 per cent. That's a frothy price for a retailer (the aforementioned Sports Direct is on 18 times, Primark's owner Associated British Foods is on about 20).
I think the price is now more or less up with events. If you bought in when I said buy and you like to trade, take some profits now.
National Grid, which I last featured in the middle of November, recommending a hold but suggesting you buy on any weakness, has been another racy stock. The shares were at 688p when I made the recommendation and there has been no sign of any weakness, the price having been chased above 800p in the space of a few months.
The group's financial statements have been upbeat over the last year or so, which helps to explain the shares' rapid appreciation. But there are storm clouds on the horizon.
The company is facing unrest from unions on both sides of the Atlantic. On Friday, members of the Brotherhood of Utility Workers Union, made up of six separate local unions in Massachusetts and Rhode Island, had voted overwhelmingly to approve a strike. They complain of low staffing levels, inadequate storm responses and payroll issues.
Over here the issue that has incited unrest is the £1bn pension deficit. National Grid started informal briefings with shop stewards from the GMB union last week and more than 5,600 workers might see the terms of their pension scheme changed. Unions fear their members' contributions could treble.
With these clouds on the horizon, and the shares looking toppish now on 14.6 times forecast earnings, albiet with a very attractive prospective yield above 5 per cent, it would seem like a good time to take profit. At least one broker has downgraded its recommendation recently, although if you want income it's worth hanging on to that 5 per cent.
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