The FTSE 100 is down 270 points at the time of writing, for a daily performance that reads -4.3%.
Scary stuff!
Shockwaves have been felt across a multitude of sectors in the last week or so, but certain stocks have held up relatively well despite rising volatility. Take Vodafone (LSE: VOD), Benchmark Holdings (LSE: BMK) and Admiral (LSE: ADM): their shares have been more resilient than I thought. Why is that?
Hidden Problems
A low-beta stock, Vodafone stock is under pressure today but is intrinsically less volatile than other more cyclical investments. True, it is down 9% in value this month, but that’s not much of a drop, really — its shares should trade much lower than their current value of 214p based on the telecom group’s fundamentals, in my view!
Investors seem to shrug off concerns about Vodafone’s lowly core growth rates and high indebtedness, which is never a nice combination; in fact, they seem to assume that Vodafone will be able to generate enough free cash flow to de-lever its balance sheet over time, while paying out hefty dividends.
This is why, I reckon, Vodafone is still trading 20% above its 52-week low of 179p a share. Its stock is flat in 2015, but the second half of its fiscal year 2016 could be more challenging, whether or not volatility is here to stay.
According to my calculations, its core cash flows could be £500m/£1bn lower than expected at the end of its fiscal year based on its projected revenues and core margins. In short, I’d keep a close eye on its next trading update in November to determine whether its shares have further to fall, given their projected price-to-earnings ratio of 78.
A Less Cyclical Bet
The shares of Benchmark Holdings are down only 2% at the time of writing, which is a respectable performance and comes on the back of prolonged strength in recent days and weeks, having risen 45% over the last month of trade. Is its current valuation of 92p a share an opportunity or a threat, though?
Its high trading multiples based on core cash flows do not point to “bargain territory”, and that’s plainly obvious. Yet at this stage of maturity, value hinges on its pipeline of products and its broader growth strategy.
Well, this health science business could surely deliver more growth and higher returns to shareholders over the medium term, as I recently argued.
Its valuation is less likely to be affected by market volatility, which has doubled to 28 in recent days, as gauged by the Vix Index, but it could benefit from a rebound in stock prices — so you may be right to buy and hold its stock right now!
Admiral: Fully Priced
Its shares are giving up some of the gains that they have recorded in recent weeks, but they are in positive territory over the last month of trading.
When its first-half results were released last week, chief executive Henry Engelhardt said that it turned out to be “a good start to a challenging year”. “Profits are up, customer numbers are up, earnings per share is up, the dividend is up … you might say it was a pretty ‘up’ first half!“
Its recent trading update confirmed that Admiral is growing, but in my view there’s not enough growth in the business to justify a stock price valuation that is above 16 times its forward earnings per share. Based on 1H15 results, its sales are up only 2%; pre-tax is profit is up 1%; earnings per share are up 4%; and the dividend is up 3%.
There are obvious regulatory risks in the sector. Admiral said that it continues to make “good progress towards full compliance with the requirements of the Solvency II regime in advance of it taking effect in January 2016 and expects to be fully compliant from that date,” and is developing an “internal economic capital model” which will be used to calculate regulatory capital requirements following approvals from regulators.
These elements bring uncertainty, which is not going to affect your all-in returns only if you choose other stocks!
