Stock Market Bottom and IC Share Tips?

This morning (6/4/2020) the stock market bounced upwards on faint indications that the virus epidemic might be slowing. Have we reached the bottom yet? I am not so sure. A lot of companies in the worst hit sectors are closed for business and running out of cash. They are likely to remain closed for a long and unpredictable time.

We have also not yet seen in financial results news the impact of the virus on the general economy, other than the sectors more specifically hit. But with so many people now out of work there will be a significant impact in due course on companies higher up the supply chain, i.e. the businesses that actually produce goods and distribute them.

I certainly won’t be buying many shares until a clear upward trend is apparent and where the financial results of a company are clearer.

There were a couple of companies which were tipped in this week’s Investors Chronicle as “BUYS” which are worth commenting upon. Diageo (DGE) the drinks company was one. I don’t currently hold it but did so until a few months back. The current share price is now significantly lower.

It’s interesting to look back at the forecast p/e and yield when I purchased an initial holding in November 2018. I always keep a sheet, printed out from Stockopedia, when I first take a stake so that I can look back at my good or bad decisions. The p/e was 22 and the dividend yield was 2.4%.  It’s now on a forecast p/e of 20 and a yield of 2.8%. It’s not really become much cheaper.

Analyst’s profit forecasts have come down but not by much. The company did give a Trading Update on the 26th February. It said this: “Public health measures across impacted countries in Asia Pacific, principally in China, have resulted in: restrictions on public gatherings, the postponement of events and the closure of many hospitality and retail outlets”. It hardly mentioned the impact on the rest of the world probably because on that date the epidemic was mainly concentrated in China.

We really do need more information on the sales status in Europe, the USA and South America to have any idea on the likely impact on profits for the current year. The Investors Chronicle gives positive comments about the company’s “brand power” and “global reach” but I will be restraining myself from jumping into another holding before the picture is a lot clearer. The same applies to many other companies.

Another share that IC tipped was Polar Capital Technology Trust (PCT) which I currently hold. The article included some interesting comments from fund manager Ben Rogoff. He said “We are focused on maintaining a portfolio of high-quality growth companies with secular tailwinds, and have a strong bias to those with clean balance sheets in areas we believe will be less impacted by an economic downturn and are likely to emerge stronger once this challenging period has passed. Companies with high levels of recurring revenue and strong balance sheets should be able to withstand a couple of very challenging quarters”.

He also said “We have rotated away from most cyclical areas, including travel, payments, small business and advertising, industrial/auto and associated robotics, and semiconductor stocks”.

These seem eminently sensible comments. The company’s share price has recovered from a dip in mid-March when both private investors and institutions were dumping stocks regardless and moving into cash. But after the share price bounce this morning, PCT shares appear to be at a premium to the Net Asset Value. In other words, it’s not cheap either. So another share not to rush into buying I suggest until it becomes clearer what the impact on the companies it holds in the portfolio will be. If there is a general economic recession in major countries there will be nowhere to hide.

DGE and PCT may both be quality operations but they are not great bargains I suggest at present. The only companies whose share prices have fallen a long way are those where their businesses are either closed or may be suffering in a big way. Until we have a clearer picture of the impact on the general economy, these are not ones to buy either I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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