The FTSE 100 soared 8.4% higher in July, extending its gains since the March bottom to over 30%. These five shares did much better, with one jumping 87%.
The market had a stunning July, jumping 8.4% to end the month over the 4,600 level. It was the best month since April 2003 and the eleventh best month since the FTSE 100 was created in 1984. Given the doom and gloom of March, a time when many people were convinced the index would plunge below 3,000, this is heaven.
It's worth remembering the FTSE 100 index of the UK's leading shares is still down 12.5% over the past 12 months and off 32% from its 2007 high. Whilst it's great to regain some ground, many portfolios will still be underwater. There is still plenty of work to be done!
As to what's next for this market, who knows? Will it surge even higher from here, testing 5,000, or will it slump back to 3,500, plunging us all into a depressive state? Answers in the comments box below, please…
Anyway, as ever, there were some bright shining lights. If you'd bought these five cheap shares near the beginning of July, you'd be cheering from the rafters.
The Shares You Should Have Bought
Obviously a one-month time period is a rather short space of time over which to measure investing success. Share price gains could be due much more to luck than to good management. But whatever the reason, investors in those five companies won't be complaining!
Why Such Juicy Gains?
So why did the companies listed above move so much in just a one month period?
International Personal Finance (IPF) provides small-sum, short-term unsecured loans largely to consumers in emerging markets like Poland, the Czech Republic, Hungary, Slovakia, Mexico, Romania and Russia. It would be hard to find a more non-Foolish company, but one thing is for sure -- there is big money to be made by charging unsophisticated consumers huge rates of interest.
In July, IPF announced profits had slumped 65%, yet the shares surged based largely on the CEO's bullish outlook statement "Overall, you can't be very certain, but we may have seen the worst of the downturn."
I simply can't get excited about this company because a) I don't like the business and b) whilst we may have seen the worst of the downturn, I'm not convinced the economy will recover quickly. There are better pickings out there.
Picking Over The Pieces
Morse is an IT solutions company, including the supply of infrastructure and the provision of related professional services. Shares in this former high flyer peaked at over 1,000p during the dot com boom. Amazingly, they bottomed at just 4.7p last year and traded as low as 6.25p during 2009.
Morse operates in an incredibly competitive market, and even though their annual sales are over £250m, they are small fry in the IT business. There is simply not much profit to be had distributing IT equipment, as attested by their razor sharp operating margins of between 2% and 4%.
Yet it seems everything has a price, and Morse shares have jumped over 30p after they recently received preliminary approaches at 25p per share "which the board believes significantly undervalues the company." I'm happy to sit on the sidelines and let the predators pick over the pieces of this low-quality company.
400% Too Late
Kitchen supplier Galiform's shares soared after it said sales were falling at a slower rate and it could resume store openings in the autumn. Galiform owns Howden Joinery, which supplies kitchen units to small builders from 454 depots.
The CEO reckons there is scope for 600 depots in total. In their most recent results, he said "I'd like to think, given normal trading, we could open between five and ten (new depots) before Christmas."
The market obviously liked what it heard, sending the shares soaring higher in July. It's a competitive business, and margins are relatively low. Still, in 2006 Galiform's shares traded on an average P/E of 20. There may be better days ahead, but sadly it looks like the time to buy Galiford was earlier this year, some 400% ago. C'est la vie.
It's Not As Bad As It Was
Travis Perkins is a similar story to Galiford. Shares in the builder's merchant have jumped 250% from their 2009 low. Their shares jumped in July on the back of the now familiar "it's bad but not as bad as it was" theme. Specifically, the company said "Although some signs of stability in our markets have appeared recently, there remain short term risks on the downside". Cue shares up 50% in the month. Go figure.
Finally, shares in model train company Hornby rose after they said "…we now look forward to restoring the momentum in sales and profits that we have achieved in the past." The market clearly thinks they'll be able to deliver on that hope, pushing the shares up 50% in July alone. Still, from here, I'd suggest there will be plenty of twists and turns in the tracks.
Finding The Shares That Might Take Off In August
What does all this prove? Two things…
1) Share prices can take off, sometimes unexpectedly, at unexpected times, and by surprisingly large percentages.
2) Patience is required. Some of the companies mentioned above have seen their share prices absolutely hammered from their 2007 and 2008 peaks. But all need not be lost. Just because a company has lost 60% or 70% of its value, doesn't mean it can't rise from the ashes and enrich investors who were brave and skilful enough to buy when all about them were panic selling.
If you are looking for cheap shares that might be about to take off in August and beyond, look no further than The Motley Fool's Champion Shares premium share picking service. A free 30-day trial gives you instant access to all Maynard Paton's current buy recommendations.
> Sadly, Bruce Jackson didn't own any of the companies mentioned in this article at the beginning of July and nor at the end of July.
