Investment View: Hargreaves still a star, but expect a pause for breath

Our view: hold

Price: 951p (-9.5p)

Hargreaves Lansdown has been one of this column's star tips. Despite a valuation of over 20 times earnings with the shares at 508.5p in April, I said buy. Since then they have nearly doubled.

Here's why they can continue to climb. HL has become the Tesco of financial services, meaning Tesco in the days when Sir Terry Leahy was running the show and the group was gobbling up retail space and customers' pounds. That combined with a bit of B&Q.

HL offers an investment superstore, with a "one-stop shop" for a huge range of products for "do it yourself" investors. To sweeten the deal, it also provides research and ratings, and it now administers billions. More is still pouring in – during the three months to 31 March, £1.8bn was invested through HL, a quarterly record. Year-to-date revenues rose by nearly a quarter.

The company found itself in the middle of a sweet spot for two reasons: equity markets have been rising at a time when, if you hold your savings in cash, it will get eaten away by inflation because of near-zero interest rates. And with bonds also a waste of time, shares are an increasingly attractive option.

So is DIY investing, with financial advisers now forced to agree fees upfront with clients rather than being remunerated through commissions. Consumers have never much liked the idea of shelling out £200 an hour to a financial adviser, which is why the commission system was so popular.

Regulatory changes to the way financial products are sold will affect platforms like HL down the line. It could squeeze margins, which the company has anyway indicated are likely to come down.

The other risk on the horizon is a correction in stock markets. Retail investors tend to run when this happens, and HL relies upon retail investors. That said, the shares' performance speaks for itself. The problem is the price is now looking very rich. HL trades on 31 times forecast earnings, with a prospective yield of 2.9 per cent. The company certainly deserves to be on a premium, and its growth up to now and forecast for the future, have been stellar, fully justifying one.

However, I wouldn't be at all surprised if the shares pause for breath for a while. So it's just hold for now. But buy more if the shares show any sign of weakness.

A more conventional retailer, Debenhams, I want to update on after its recent trading statement. I said avoid with the shares at 105p in the middle of January, but indicated that they might be worth a look were they to show weakness.

It hasn't been happy days at the company, and they have been very weak since. But maybe it's time to firm that view up.

Last week's trading statement suggested results will be in line with reduced guidance. Like-for-like sales growth of 3.1 per cent was creditable in the current climate and taking into account the recent cold weather.

What was interesting was that management said online sales were "more profitable" than in-store sales. Investec came up with an interesting take on this. Its analysts said: "At a marginal cost basis, an online sale is more profitable versus the average cost basis profitability of an in-store sale (due to high store fixed costs).

"But on a marginal cost basis, an in-store sale is more profitable than online. Thus, while good that online sales are marginally profitable, when sales are merely transferred from stores to online, instead of being incremental sales, the business will continue to face margin dilution."

This issue is not unique to Debenhams. To win in this environment you need to drive incremental sales online as opposed to transfers from your shops because you're just cannibalising yourself and will lose out on profitability.

But Debenhams can do this. It has a relatively small store portfolio and simply needs to draw sales away from rivals to get its online offering working very nicely.

Debs still needs to build up trust with investors. Accounting quirks complicate forecasts. But at the current price the shares are worth a speculative buy, although I'd be inclined to trade out and book a quick profit if they show some momentum.

On 8.7 times this year's earnings (the year ends on 31 August) falling to 8.2 times, with a 4 per cent forecast yield, they look cheap.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

Britain's Atlantis

Scientific study beneath North Sea could revolutionise how we see the past
The Queen has 'done and said nothing that anybody will remember,' says Starkey

The Queen has 'done and said nothing that anybody will remember'

David Starkey's assessment
Oliver Sacks said his life has been 'an enormous privilege and adventure'

'An enormous privilege and adventure'

Oliver Sacks writing about his life
'Gibraltar is British, and it is going to stay British forever'

'Gibraltar is British, and it is going to stay British forever'

The Rock's Chief Minister hits back at Spanish government's 'lies'
Britain is still addicted to 'dirty coal'

Britain still addicted to 'dirty' coal

Biggest energy suppliers are more dependent on fossil fuel than a decade ago
Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

Orthorexia nervosa

How becoming obsessed with healthy eating can lead to malnutrition
Lady Chatterley is not obscene, says TV director

Lady Chatterley’s Lover

Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
Farmers in tropical forests are training ants to kill off bigger pests

Set a pest to catch a pest

Farmers in tropical forests are training ants to kill off bigger pests
Mexico: A culture that celebrates darkness as an essential part of life

The dark side of Mexico

A culture that celebrates darkness as an essential part of life
Being sexually assaulted was not your fault, Chrissie Hynde. Don't tell other victims it was theirs

Being sexually assaulted was not your fault, Chrissie Hynde

Please don't tell other victims it was theirs
A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935