Mighty Jolly Great Britain
UK stock market is on fire. On 22 January, 2014, FTSE 100 Index is less than 1% away from its 6875.62 high on 22 May, 2013. More importantly, the British Pound is at USD 1.657, a relatively high level in the past 5 years and not far from the 1.7043 high in August 2009. Stock market is near historical high and GBP is strong, how wonderful!
Leading the race in 2014 is Next Plc which is up 18% as of 22 January. Next has been a strong performer and a winner in the eCommerce era. It has a good balance of revenue from both online and offline. These days, eCommerce is really cannibalizing business from the traditional brick and mortar retail business. HMV and Blockbuster were slaughtered as their products are 100% data. Clothing has to be physically delivered but consumers are less concerned about fitting especially for office wear and casual wear. If the retailer has good offline services for customers to change the products, online sale could attract offline sale. This drives O2O (online to offline) activities which is a key to success. At GBp 6,350 share price, Next market capitalization has reached GBP 9.8 billion which means how much it takes to buy the entire company at GBp 6,350 per share. The share price has gone up 63% in the past 12 months. It is trading at 18.3 times Price to Earnings Ratio. It means if you are paying 18.3 years of earnings based on last year to own shares in the company. To know whether that is expensive or cheap, you need to compare with other retailers. Interestingly, good old Mark & Spencer is also up 11% already in 2014 or 35% in the past 12 months. At GBp 493.20 share price, Markets & Spencer market capitalization is GBP 8.0 billion, 20% lower than Next. Price to Earnings Ratio is at 16.2 times and with the expected growth in 2013/2014 earnings, Price Earnings Ratio will drop a little bit to 15.8 times. As a business, Mark & Spencers share price is trading at a lower Price to Earnings Ratio than Next. According to analyst estimates compiled by Bloomberg, Next’s pretax profit will overtake that of M&S next year. This reflects why investors are willing to pay for higher Price to Earnings Ratio for Next than M&S.
While we are on the retailers, let’s take a look at the “SuperDry” brand SuperGroup. At share price of GBp 1,556, the stock has gone up 160% in the past 12 months. Market capitalization of GBP 1.3 billion is an infant compared to M&S GBP 8 billion and Next GBP 9.8 billion. Small company is easier to achieve higher growth as it is harder to make an elephant dances. SuperGroup is trading at 41.2 times Price to Earnings Ratio. This is much higher than the 16 to 18 times for M&S and Next. The earnings growth in 2013/2014 is expected to lower the Price to Earnings Ratio to 26.7 times. This is still much higher ratio than Next and M&S. Investors are showing their confidence in SuperGroup growth with their money.
Another usual FTSE100 index member on the podium is Hargreaves Lansdown, the market leading online investment platform. While the distributor is on the podium, the fund manufacturer is on the other end of the scale. Aberdeen Asset Management is the worst performing stock in FTSE100 with negative return of 15.7%. There is significant outflow in Asian and emerging market funds. GBP 4.4 billion of fund was withdrawn from Q4 2013. Another loser is William Hill that is down 15% due to disappointing earnings. The winners and losers even out and the overall FTSE 100 Index is up 1.14% in 2014 as of 22 January, 2014. FTSE100 may hold on to current high level with some index members performing to make up for the lost ground from the losers. For the investors who have been sitting on handsome return in 2012 and 2013 by simply investing into mutual funds that benchmark against FTSE100, 2014 could be similar to 2011 where the index have limited performance. Stock picking skills would be the secret to success.
From Euro Crisis to “you, no crisis”, the European Banks are leading the Eurostoxx 50 index in 2014. Top 10 performing stocks so far have 5 banking stocks: Intesa Sanpaolo, Unicredit, Deutsche Bank, SocGen, BBVA put on 5 to 10% gain already. The EUR is at USD 1.3546, a high level since 2012. In 2009 and 2011, the EUR could reach around USD 1.5 level. That seems so far away and EUR is unlikely to get there in 2014 with US Tapering. The Black Swan that may send EUR back to USD 1.5 level is likely to be USD weakening due to debt ceiling concern, rather than stronger than expected economic growth in the Euro zone.
