Yahoo Finance StockRanks - upgrades and downgrades - November 11th. RGU: IPEL: HWDN: MAE
Lets proceed with the same approach that we used in previous editions of this StockRanks column. We'll compare two companies from each industry: one with a rising StockRank; one with a falling StockRank. We'll explore the industrials and consumer cyclicals sectors, and I'll tell you about one of my many investment mistakes in the process.
Industrials
Regus currently has a StockRank of 39, down 2 from last week, while Impellam has a StockRank of 91, up from 84 last week.
Regus (RGU)
Regus was one of my personal blunders. I bought the shares at around 208p in February 2014, saw the price rise by 12% within less than a month, before the price fell as low as 165p by the middle of October. I currently hold no shares in the company, but I want to share (no pun intended) this experience with you because I committed several cardinal sins that you should hear about.
Cardinal Sin Number 1
First of all, I was being a sucker and bought into a story stock. Regus is a multinational corporation that provides flexible workplace solutions. I was swayed by news that Regus intended to operate from at least 2,000 centres by 2014, up from 1,411 in 2012 and 1,084 in 2010.
In my investment diary, I wrote that this "expansion presents a significant opportunity for growth because of the international shift to flexible work – set to accelerate as technological changes, namely the proliferation of smartphones, laptops and cloud-based systems, enable a growing number of staff to operate from various locations."
Cardinal Sin Number 2
That was the narrative, but I also had a misguided faith in gurus. The first investment book I read was Jim Slater's Zulu Principle. I was therefore delighted to see that Mark Slater (Jim's son) was also bullish about Regus and had recently bought shares in the firm.
The company had also been tipped as a ‘Buy’ by the Investors Chronicle as late as October 2013, so I concluded it must be a good stock...
Why I should have checked the numbers
Arguably - stories can be subjective, while data is more objective. The P/E ratio for Regus was already 26 and the overall ValueRank was just 50, suggesting that the prospects for growth had already been factored into the share price.
I was aware of the high PE, but noticed that brokers expected earnings to grow by 54% in the year ending December 2014. This would have given Regus a PEG ratio of just 0.5. In other words, Regus looked like a dynamic growth share that was selling at a reasonable price.
The subsequent price collapse seems to have proved me wrong. I should have known that companies can't sprint forever. Earnings grew by 662% in 2011 and 71% in 2012, but soon enough Regus started to run out of steam. While brokers first expected earnings to grow by 54% in 2014, they are now expected to fall by 5%...
Impellam (IPEL)
Impellam is a staffing company that has had better fortunes than Regus. On the 10 November, the firm announced that it had completed the acquisition of Lorien Limited - the largest independent specialist IT recruitment business in the UK. Impellam expect the acquisition to be 'earnings enhancing in its first full year of ownership'. The brokers seem to agree with this analysis. Since August 2014, EPS estimates have risen from 61p to 66p.
These broker upgrades, combined with strong share price appreciation over the last 12 months, support Impellam's high MomentumRank (91).
The company is also very cash generative. Over the last 12 months, operating cash flows (71.5p) have been higher than the expected EPS for 2014 (61.1p) and also 2015 (64.4p). 71.5p would also cover the 16p (3.3%) dividend that Impellam is expected to pay in 2015.
Consumer Cyclicals
Howden Joinery has a StockRank of 90, up 6 from last week. Mallet has a StockRank of 39, down 3 from last week.
Howden Joinery (HWDN)
Howden Joinery sells kitchen and joinery products. The company has grown earnings by 12% over the last 12 months. This growth was supported by the opening of 4 new depots in the first half of 2014, and the firm is on course to open 30 new depots in the whole of 2014.
The latest management statement is very optimistic indeed, noting that 'the Group has seen a good sales performance throughout the second half of the year'. The management team therefore 'expect profit before tax for the year to be above the range of market expectations'. Since the management team made this announcement on 5 November, Howden's share price has appreciated by nearly 10%.
The company has an overall MomentumRank of 95, as Howden has beaten the market by 16% over the last year and now trades within 5% of its 52 week high.
The QualityRank is also very high (98). This is supported by a Piotroski Score of 7 out of 9, which indicates the the company becoming more profitable, efficient and is better positioned to service debt.
Howden's overall StockRank is 90, though the firm does have a relatively low ValueRank of 33.
Mallett (MAE)
Mallett Plc is an antiques dealer. The company has failed to make any profits over the last twelve months, or during any year since 2008 for that matter. Mallett therefore has no P/E ratio. The company does have an overall ValueRank of 71, indicating that the firm is relatively cheap, but perhaps it is cheap for a reason as it hardly makes any money. Mallett does generate revenues, but these have fallen on average by nearly 4% each year over the last three years.
The company's latest interim report puts this down to a 'succession of comparatively quiet trading months in the US' and 'the fickle market that we trade in'. The company also has unstable profit margins, falling from 3.6% in 2011 to -1.8% (2012), before rising again to 4.5% (2013). The latest interim statement notes that a 'significant proportion of Mallett's business is driven by the sale of a relatively small number of very high value pieces which have the ability to significantly affect our results.'
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As always, these are not share tips and should not be read as investment advice. Please do you own research before investing.
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