Market Report: Home Retail held back by profit-taking

Home Retail Group was caught up in a market-wide round of profit-taking last night, easing as investors moved to secure recent gains.

The stock eased to 305.1p, down 2.1 per cent or 6.6p, with Nomura, which upped its earnings estimates, but moved its recommendation to "neutral", advising clients to pause for breath, saying that while the group offered investors a strong income, a robust balance sheet and the potential for earnings upgrades, at current levels the shares were priced for these upgrades.

"Given the strong recent performance of the stock, we believe the current share price is already factoring in consensus upgrades towards 19-20p of earnings for [the 2009-10 full year]," the broker said, "Therefore given the premium valuation to the sector, we would prefer to take profits on the stock at these levels."

Nomura said it saw DSG International and Marks & Spencer as "more compelling investments at this part of the cycle". Both were held back, however, with DSG down 0.08p to 28.45p, and M&S retreating to 343.6p, down 1.6 per cent or 5.4p.

The wider market was similarly unsettled by profit taking, with the FTSE 100 retreating to 4671.37, down 11.09 points. The mid-cap FTSE 250 index fared better, closing 84.35 points higher at 8242.51

Standard Chartered was the worst performing blue chip of the day, falling to 1328p, down 7.5 per cent or 108p, after the surprising the market by unveiling a placing alongside its interim results. The broader banking space was mixed, with Barclays, up 5.95p at 328.5p, and the Royal Bank of Scotland, up 0.22p at 46.630p, standing firm, but Lloyds, which is due to update the market this morning, relaxing to 84.27p, down 1.2 per cent or 0.98p.

HSBC was also unsettled, retreating to 629p, down 1.1 per cent or 6.9p, as analysts weighed in on its results, which were published at the beginning of this week. A number of target price upgrades were forthcoming. JP Morgan and Bank of America-Merrill Lynch also upped their recommendations, to "overweight" from "neutral" and to "neutral" from "underperform" respectively. But Evolution switched its stance to "sell", telling clients that while the stock may well "go up a few percentage points more in the coming days" owing to strong market momentum, it now appeared fully valued.

Elsewhere, Citigroup issued a "buy" note on Reed Elsevier, which climbed to 449.9p, up 3.4 per cent or 14.9p. "While [Reed] may underperform a rising market [in the] near-term, we believe the market will warm to the 'restructuring story' in time," Citi said, raising its target price for the stock to 515p from 450p. "With 40 per cent of revenues coming from cyclical activities, we note too that [earnings] may rebound hard if [a] recovery does take hold."

Goldman Sachs weighed in on the Ofwat draft price determination, published late last month, saying it left United Utilities, which was added to the broker's "conviction sell" list, in a particularly tough position. "The headline on the day was that the proposed rate of return for the water companies is 4.5 per cent, a lower rate than we had expected (4.8 per cent) and a 60 basis point cut from the current rate of 5.1 per cent," the broker said, adding that a lower rate of return was likely to impact water company earnings and it now included dividend cuts of 20 per cent in its forecasts for United and Severn Trent in 2011. At the close, United was 3p weaker at 450p, while Severn added 12p to 975.5p.

On the second tier, HMV managed to stay afloat, rising by 2.3 per cent or 2.6p to 117p, despite some bearish comment from Morgan Stanley, which reiterated its "underweight" stance on the stock. "Since HMV last reported, trends in the music, video and games markets have been weak. We think this reflects a weak release schedule and capacity withdrawal, but also the structural shift to digital formats," the broker said, "[The group] is benefiting from the withdrawal of Woolworths and Zavvi from the entertainment market. Crucially, however, the data suggests no more so than the market already expects."

Altium Securities reiterated its positive stance on Aegis, which was 0.8p ahead at 85.6p. "We regard Aegis as a good quality play on both a cyclical upturn and longer term structural growth in marketing services spend," the broker said. "Significantly, this sensitivity should be further enhanced by a renewed focus on achieving operational efficiencies and unlocking cost savings, increasing operational gearing and creating the possibility of forecast upgrades."

Also on the up, Bellway was 1p firmer at 760p, following some words of support from KBC Peel Hunt, which said that the group "stood out" due to its ability to deliver acceptable mid-cycle earnings, its relatively limited "legacy" land bank, low debt and cautious management. "While others in the sector sought scale by acquisition and pursued exotic and sizeable debt-heavy capital structures, Bellway continued to largely plough the same furrow," the broker said. "This may [have led] to a slightly lesser performance during the bull market years, but it has caused the share price to fall less far, reflecting the lesser fall in profitability."