Strong foundations of industry leaders, such as LPP or NG2 are paid for by high market share price estimations. This forces us to be careful with these assets.
The industry of sales of durable goods is exceptionally various, practically in all aspects. In most shallow, and at the same time most tangible for investors approach, the variety most often depends on absolutely different directions in which the quotations of the companies go.
On one hand we have such stars, like LPP. The way of manufacturer and distributor of clothing, after getting up from a rapid fall in July and August, is now recording ever high. The list of companies which recorded long-term increases also include NG2 and NFI Empik. Their share prices recorded at least year highs, and in our rank this gave them the most points in “momentum” category. Some other companies managed to reach their 6-month high, what can be treated as a promising sign for the future.
On the other end are listed stocks which cannot get up from a fall. And some of them stay forgotten, with little or no turnover on their shares, and limited liquidity. Such companies are mostly in our rank.
Just like in case of other market segments analyzed by us, you can see a clear correlation between keeping share price and condition of the company shown by total points in six financial categories analyzed by us. This correlation is the strongest for companies from opposite side of the rank. Whereas three Companies with the highest number of points in financial categories (NG2, LPP, Inter Cars) gained in total 25 points in “momentum” category (showing the share quotations), three companies with the worst condition (Gino Rossi, Intersport Polska, Fota) gained in total only 5 points in "momentum" category.
As you can see a very simple rule works here, in compliance with which you need to bet on the leaders who show a tendency of improving their financial results as well as increase trend on stock exchange. These facts seem to confirm the sense of investing in so called “increasing companies”, that is in such companies, which recorded unique results in their base work. Flagship example of such company is LPP.
We could end our rank on this, but for one very important fact. Over average results and promising perspectives of growing companies result very optimistic pricing of share value. Aforementioned three leaders of the branch of industry are quoted with price-to-book value ratio on average 4.94. This is extremely high in current market situation.
Numerous studies and researches show that on longer run the return is higher on stocks with lower values, not with high pricing. Those second can be expected to generate rather poor investment results. This makes it really difficult to choose the right shares to your investment portfolio. In our rank we will try to reach a kind of compromise between reaching positive results in base work and positive “momentum” on stock exchange and market share pricing. The way in which we correct the pricing of shares (penalty points for price-to-book value ratio) leads to surprising conclusions. So being a stock exchange star, LPP is moved to the far end of the list. Maybe in short term the positive “momentum” will keep LPP shares still bring some profits, but long term analysis shows that very high price-to-book ratio (more than 8) is a serious warning. Last time the stocks of LPP were priced so high just before culmination of market slump in 2008.
Right now our rang is mostly experimental (but based on rational premises). In one year time we will be able to say more about its practical use.
The shares of distributor of automotive spare parts seem to be a kind of compromise between strong foundations and market pricing. On one hand the company is constantly on the top of the rank, as regards points in six financial categories of our rank. High profitability, systematic improvement of results and no dead losses in last years and top financial liquidity – all this is in favour of the Company. At the same time, this high number of points have not been lost by to high stock pricing (as it was in case of LPP). Price-to-book ratio is not one of the lowest (in comparison to market sector and to all market), but is just slightly higher than industrial average. It is hard to talk about extreme pricing (in our rank extreme pricing with P-t-B ratio over 3.0). So how is Inter Cars doing?
For half a year the Company is gradually falling (that is why it did not get maximum points for “momentum” factor). But at the same time, within the last three years we can talk about a growing trend and chances of new peaks.
RANK OF MOST VALUABLE COMPANIES FROM DURABLE GOODS SALES SECTOR
Rank methodology
The companies are assessed in sic financial categories, one category of so called “momentum” of share price and one category regarding stocks pricing (in total they can gain 100 points):
- ROE (return on equity, that is net profit / average equity);
- Number of points = percentage value of ratio /2 (max. 10 points);
- Average ROE in last 12 months: Number of points = percentage value of ratio /2 (max. 10 points);
- Earnings per share (EPS) “x” from last 10 quarters in plus: Number of points = “x”;
- Increase of EPS in “x” of last 10 quarters: Number of points = “x”;
- Cash flows increase from operational activity (last 12 months) per share in “x” from last 10 quarters: Number of points = “x”;
- Current liquidity ratio (current assets / short-term liabilities): 5 points, if it is between 1.0 to 1.5; 10 points is it is at least 1.5;
- Shall the share price reach its 6-month high, 5 points added; shall the share price reach its year high, another 5 points added; points are taken away when share price reaches its 6-month or year minimum level;
P-t-B Value ratio: Number of points = P-t-B value ratio +30 ( minimum – 30 points). For minus capitals we give – 30 points.
source: www.parkiet.com
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