Neil Woodford’s fund last month bought more shares in British American Tobacco (LSE: BATS), NEXT (LSE: NXT) and G4S (LSE:GFS). Meanwhile, it got rid of Reckitt (LSE: RB) stock. Here’s why Mr Woodford may be on the wrong side of the trade.
Outlook
In short, in the last quarter of the year investors may want to position their portfolios as follows: a) avoid/sell G4S; b) reduce exposure to BAT and NEXT; c) consider/add Reckitt.
If the FTSE 100 index keeps looking for direction, the shares of BAT, NEXT and G4S may underperform those of more defensive companies such as pharmaceuticals and goods manufacturers, for instance. And if the market bounces back, the shares of BAT, NEXT and G4S may well underperform those of miners and banks, which have been under pressure for some time.
Either way, the shares of Reckitt should continue to do well for a long time. Extraordinary corporate activity will help the UK consumer giant release value, in my view.
NEXT: A Solid Business, But…
Let’s set the record straight: Next is an outstanding business. Time and again, management have shown they can deliver. The retailer is a long-term value proposition. The problem is that if growth prospects deteriorate, its stock price could easily drop by 15% or more from its current level. Profit margins may also come under pressure next year.
Management’s latest statement pointed to a review of the guidance for the year, which sent the stock down 4% on 29 September. Rich trading multiples point to downside in the short term for shareholders. I’d certainly retain exposure to Next, but I’d trim my holdings now. The stock is up 17% in 2014 but has lost 10% of value since its six-month high in early September. The bears were proved right in the last few weeks. By contrast, Ted Baker stock is up 10.3% in the last four weeks of trading.
BAT & G4S: Averaging Down
“Although BAT is a better investment proposition than Imperial Tobacco, BAT shares are unlikely to offer meaningful upside for some time,” I wrote on 1 September. The shares are down 2% over the period.
Mr Woodford said that his fund bought more stock in British American Tobacco and G4S in September for one very simple reason: “undeserved share price weakness”. Mr Woodford is averaging down the overall cost of the investment, rather than stating that BAT is a terrific value opportunity, in my view. The same applies to G4S, which is a completely different business both in terms of operations and fundamentals. G4S is a company that may destroy value over time, although it must be noted that Mr Woodford’s exposure to G4s is irrelevant compared to the amount of stock he holds in BAT. In his portfolio, one may argue that G4S — whose stock is down 3% since 1 September — is a calculated risk.
Reckitt: What’s Not To Like?
Reckitt is a solid company. According to Mr Woodford, its shares are too expensive right now — but are they?
Reckitt is a highly profitable goods producer, with strong operating and net income margins. Its balance sheet is solid. Its dividend yield is only slightly below that of the market, so what’s not to like about it?
Reckitt stock trades on rich forward multiples based on revenue projections, true. But when it comes to trading multiples for cash flow, Reckitt doesn’t strike me as being a particularly expensive equity investment. Moreover, how about large M&A? And disposals? And shareholder-friendly activity? More upside could be on the cards for its shareholders.
These are all elements that could help Reckitt stock surge in the next 12 months. The shares are down 1.8% since early September.
