MAY 2020: FTSE 100 OUTPERFORMERS
19th May 2020
Whenever there is a major bout of turbulence in the market, this can often provide us with very valuable technical evidence in our efforts to find the best stocks to invest in, and the ones to avoid. As regards stocks to invest in, what we are looking for are the outperformers. These are the stocks that fall the least when the market is falling - and when the market is rising, they rise by more than the market. This is called the 'relative performance' of the stock, and it is a key part of technical analysis.
The reason why some stocks exhibit strong relative performance, is usually because 'insiders' are buying them. By 'insiders' in this case, I mean investors who know that particular company or sector really well. The big investors in the stockmarket are fund managers, but they are covering the entire market so they are generalists rather than specialists. The specialists are the 'insiders' and they are usually the first to hear the good news (or the bad news), resulting in the stock outperforming (or underperforming) due to their buying (or selling).
It is not enough to just look at how a stock performs in a rising market. If it is outperforming the market, then that may be due to the stock having a high 'beta' factor. The 'beta' factor measures how the stock usually performs against the overall market. If the beta factor is 1, then that stock usually performs in line with the overall market. A beta factor of
1.5 indicates that the stock usually goes up by more than the overall market when the latter rises, and falls by more than the market when the market falls. Companies in the luxury goods sector usually have beta factors higher than 1, as their earnings are highly sensitive to economic conditions.
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In contrast, utilities, which provide essential services such as electricity and water, usually have a beta factor of less than 1, as their earnings are less sensitive to economic conditions.
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It is usually best to avoid stocks in sectors that are particularly 'fashionable' at the time. Yes, these will be outperforming, very often by a spectacular margin. But they are outperforming due to the extensive publicity they are getting on market forums, which is attracting new investors in - not because 'insiders' are buying.
In the past three months, we have seen a rapid decline in share prices, followed by a partial recovery. The stocks in the FTSE 100 index that outperformed during that time are:-
1. Ocado (OCDO)
Share price: £19.50. Up 73% since March 2nd. On-line Grocery (benifiting from lockdown).
2. Polymetal International (POLY)
Share price: £17.11. Up 40% since March 2nd. Gold Miner (gold benefiting as an alternative investment due to
flight to safety and fears about debt sustainability due to government overspending).
3. Hikma Pharmaceuticals (HIK)
Share price: £24.67. Up 30% since March 2nd. Pharmaceuticals (possible vacine for Covid 19).
4. Halma (HLMA)
Share price: £21.97. Up 10% since March 2nd. Electrical, Safety & Medical Equipment (including the manufacture of parts for highly sought after ventilators due to Covid 19).
5. Admiral (ADM)
Share price: £22.87. Up 7% since March 2nd. Insurance Broker.
Stocks 1 to 4 above are all 'Covid 19 stocks'. In other words, these companies are benefiting from the peculiar situation that we are now in with lockdown restrictions etc.
Polymetal International was identified in the 'Overall Market Trend' report on 10th March, when I turned from being bullish to bearish, as being a good stock to buy in these new conditions, and was trading at £12.99 at the time.
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However, there is a danger that all of these stocks, 1 to 4, could now be over-hyped as they are in sectors that are favoured by investors at the current time and have clocked up huge gains in avery short period of time. Beware the old adage: 'What grows rapidly is usually short lived!'
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The most interesting stock per the above is Admiral, a boring car insurance broker that has been around for years. Its gain, at 7%, is much more modest than the others. However, the FTSE 100 index was at 6,655 on March 2nd and closed today at 6,002 - a fall of 10%. Therefore a rise of 7% during that time would normally constitute dramatic outperformance, rather than being left in the shade by Ocado and Polymetal.
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Why is Admiral outperforming? Probably because it is one of the few high dividend payers left on the London market, yielding 3.75% per the Financial Times. This year has seen the demise of many of the high dividend payers, as one after one cut or cancel their dividend due to Covid 19 pressures. Admiral did announce a cancellation of a special dividend that it had intended to pay, in addition to its normal dividends (being 3.75% based on a share price of £23) but the regular dividend looks safe for now. The P/E of 16.3 looks undemanding for a services company and it has a strong on-line presence with its popular car insurance price comparison website:- confused.com.