Two picks to prosper from a new investment trend.
Collectables are the new gold. That's a massive exaggeration, but it's certainly the case that stamps, coins and other collectables are becoming an increasingly attractive asset class just as gold's lustre as a store of value is fading.
Investing into collectables is the obvious way of capitalising on the trend. But the shares of two AIM-listed companies, Stanley Gibbons (LSE: SGI) and Noble Investments (LSE: NBL), have been riding the same wave and offer an alternative play on the phenomenon. Unlike stamps and coins, they pay dividends as well.
While Stanley Gibbons is best known for stamps and Noble for coins, both are engaged in several markets. And both have recently reported unsatisfied demand for higher-priced items, citing supply of product as a constraint on their business.
That demand is being boosted by the increasing interest in collectables as an investment asset in -- yes, you've guessed it -- China and the Far East. It's hard to find an investment case these days that doesn't start with China. With little available in the way of financial investment products, wary of a property sector that has boomed and busted, and anticipating the potential for inflation, wealthy Chinese are increasingly attracted to hard assets such as gold, diamonds, art, wine and collectables.
But even in the Western world, financial advisers are becoming more comfortable recommending collectables. Dismal interest rates on savings, paper-thin gilt yields, the bear case for gold and prospects for inflation have encouraged the net to be cast wider in the search for safe assets.
Collectables -- which include stamps, coins, medals, autographs and other precious documents -- have proved resilient investments, at least at the higher end of the price scale. The 30 rarest UK stamps have increased in value by around 11% per annum since Stanley Gibbons started tracking them with its GB30 Rarities Index in 1998, and indeed have risen in value by 9.7% p.a. since 1954.
The unsatisfied demand reported by both companies suggests this trend will continue. Demand in excess of supply will push up prices, which makes collectables more attractive as investment products, thus increasing demand in a virtuous circle.
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Stanley Gibbons is the larger of the two companies, with a market cap of £54m. Sales in 2011 rose 35%, with profits up 19% to £5m. The gross margin dropped with an increasing proportion of high value rarities and Chinese stamps and coins in the sales mix, both of which generate lower trading spreads. The dividend, covered three times, was increased by 9%.
There is downside protection in the balance sheet. Stock and net cash together make up over 80% of net assets. Tangible net asset per share is 90p against a share price of 211.5p, but the company's broker Peel Hunt reckons that if the stock were market to market, tangible net asset cover would be about 85%.
The company's strategy is to:
- Move more sales online: online sales rose by over 70% in 2011, from a low base.
- Open overseas presences: a Hong Kong office was opened last year, and the company is looking at the US and financial centres such as Singapore and Rio.
- Increase the proportion of sales going to auction.
- Diversify into other collectables categories.
- Become more of a market facilitator, earning commission as agent, to boost return on capital (though this will reduce the benefit of rising inventory values).
- Launch an investment fund in 2012. This is a long standing project whose time seems finally to have come.
Noble is smaller, with a market cap of £29m. Formed in 2003, its principle trading subsidiary, A.H. Baldwin and Sons, was founded in 1872 and runs auctions of coins in London, New York and Hong Kong.
Its most recent result, for the half year to 29 February 2012, show pre-tax profits up 59% to £2.4m on revenues up 9%. Its margin moved in the opposite direction from Stanley Gibbons as a greater proportion of its business went through the more lucrative auction route rather than retail sales. The interim dividend, four times covered, was increased by 29%.
It, too, has a sound balance sheet, with inventories and cash comprising three quarters of net assets. Tangible net assets per share are 102p against a share price of 185p, but there's likely a good hidden value there as well.
Nobles' strategy is similar to Stanley Gibbons: building its global presence, more online sales, diversification and emphasis on auctions.
Noble is the cheaper share, trading on a forward price-to-earnings ratio of 9.3 against Stanley Gibbons' 11.1, but yielding slightly less at a prospective 2.7% versus 3.1%. Both shares are up over the year but have dipped on the recent sell-off. They are both a good play on a robust investment theme.
If you prefer to look at the underlying collectables themselves, you can find out how to make money from stamps in this interview with David Kuo.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!
Further investment opportunities:
> Tony has shares in Stanley Gibbons and Noble.