The hunt for yield has driven many income-minded investors into sharemarkets around the world – so what happens when interest rates rise?
At this point some investors start seeking both income and growth attributes in stocks, in a similar vein to well-known investor, Peter Lynch, who coined the term “growth at a reasonable price” or GARP.
There are a variety of metrics used to ferret out GARP candidates, but income through dividend payments and future revenue and earnings growth are at the top of the list for GARP investors.
The AFR recently highlighted a stock screen for companies with a minimum analyst consensus forecast of 15% for both compounded annual revenue and earnings per share growth. The screen was limited to stocks in the ASX 200. The results include some potential GARP stocks along with some growth stocks that remain hot. Here is the table:
The table is ordered by highest percentage revenue growth. Note, there are six stocks here with dividend yields above 4%, which most GARP investors would regard as one qualification for potential investing.
Interestingly, four stocks in the table made the list of the Top Ten Performing Stocks in 2013 in terms of percentage increase in share price. Before we dig into the GARP prospects, let us briefly review the price performance of the still high-flying growth stocks.
• Slater & Gordon (SGH) boasted the best price performance of any stock on the ASX in 2013, with a 123% increase. The 2013 closing share price was $4.84 and the stock has cooled a bit, trading around $4.55.
• REA Group (REA) finished 2013 with a closing price of $37.76, a 109.8% increase. The stock trades now around $46.11.
• TPG Telecom (TPM) was up 105.4% for 2013, closing the year at $5.32. The price as of 09 April was $6.28.
• G8 Education (GEM) rose 93.87% in 2013, finishing out the trading year at a share price of $3.16. It is now around $4.49.
Certainly these four companies stand as a testament for the Buy High Sell Higher School of investing. But now let us move on to the stocks that have the potential to attract growth and value investors.
52 Week % Change
5 Year Estimated P/EG
2 Year Dividend Growth Forecast
3 Year Total Shareholder Return
5 Year Total Shareholder Return
Bank of Queensland (BOQ)
Goodman Group Ltd
Charter Hall Group Ltd
Bank of Queensland (BOQ) offers core banking and insurance products and services through an innovative franchising business model. During 2010, concerns over mounting bad debt affected sentiment, but as a five year chart shows, BOQ has recovered. Here is the chart:
Management at BOQ embarked on strengthening the bank’s fundamentals, which appears to be paying off. In September 2012 ratings agency Standard & Poor upgraded BOQ’s long term credit rating and Moody’s followed suit, upgrading the bank’s long term rating on 06 March 2014. The share price reached a 52 week high of $13 on 26 March, eclipsing an earlier high of $12.80 set a few days earlier.
Despite the impressive growth estimates, BOQ appears to have joined the ranks of the Big Four on the “worry” list of analysts and experts who wonder how long the banks can continue at such a torrid pace. There are only two analysts with a Strong Buy on BOQ; 3 at Buy; 9 at Hold; and 2 rate BOQ at Underperform.
Half Year 2014 results were released on 10 April and they were strong, showing a 17% rise in cash earnings along with a 34% increase in statutory net profit. In addition, the bank increased its interim dividend payment by $0.04, which was expected.
While Biotech Company Acrux Ltd (ACR) may have a bright future according to analyst estimates; it has taken shareholders on a wild ride over the past ten years. Here is the price chart for ACR:
The company has multiple drugs in the market and in late stage trials that are applied directly through the skin. In theory the product diversity should protect investors but in practice one drug – Axiron – has driven the share price.
Axiron has been billed by some as a “sex drug” since it is used to treat testosterone deficiency in males. With positive results in early trials the share price took off as the drug approached the end of the regulatory gauntlet. It went into high gear following the announcement of a licensing deal between Acrux and US Pharmaceutical giant Eli Lilly.
Despite making deals in Brazil and more recently in Germany, the share price has been in free fall for the past year, shedding 53% of its value year over year.
Axiron comes with health warnings of multiple side-effects and as such is subject to continued regulatory scrutiny. This may explain why short sellers are interested in the stock; Axiron went into a trading halt following the announcement in January 2014 that the US FDA (Food and Drug Administration) was to investigate the risks of stroke and heart attack from testosterone replacement therapies, not limited to Axiron. The investigation was prompted by two earlier published studies, which may have been reading fodder for the shorts. Approximately one year ago Acrux shares were trading at over $4.00, and the shares currently sit at $1.74. Acrux CEO termed the market reaction as premature and overdone.
Diversified financial services provider FlexiGroup Ltd (FXL) has the best track record of total shareholder return of any stock in the table, at 54.1% over five years. The company has increased revenue, net profit, and dividends per share every year for the last three, with NPAT increases of about 10% per year. Half Year Results for 2014 released in February were impressive as well, with a 14% increase in statutory profit. To the delight of analysts and investors, company management issued positive guidance, forecasting 17% to 19% profit growth and 16% growth in revenues for the full year. The share price is up 500% over five years. Here is the chart:
FlexiGroup provides consumer direct financial services such as loans and credit cards and has an impressive array of 11,000 merchant, vendor and retail partners through which it provides leasing and payment services. It has operations in Australia, New Zealand, and Ireland. The company made two key acquisitions in 2013, buying the Australian and New Zealand operations (Rent Smart) of US based Think Smart Limited and credit card provider Once Credit. Analysts are largely bullish on FXL, with 8 Buy recommendations, 1 Hold, and 1 Underperform.
Despite this, the share price has dropped from approximately $4.80 to $3.80 over the last six months and hit an all-time low of $3.51 on 28 March. In mid-February, Deutsche Bank reiterated its Buy recommendation on FXL with a price target of $4.90.
IRESS Ltd (IRE) provides a wide range of software services to wealth management companies and equity trading businesses and associated financial markets in Australia, New Zealand, Canada, the UK, and South Africa. With an estimated P/E for FY 2014 of 21.5, IRESS seems a tad pricey for true value and GARP investors. In addition, the company’s NPAT dropped from $41.3 million in FY2011 to $24.2 million in FY2013, a 38.2% drop from FY2012. Revenues rose 21.1% and both were the result of the acquisition of UK based Avelo Ltd, a financial services technology provider, at a cost of $17.5 million, along with another $2.5 million in non-recurring costs. The Full Year 2013 results were released on 26 February and investors didn’t like what they heard. Here is a six month chart:
Goodman Group (GMG) and Charter Hall Group (CHC) are both in the property sector. Goodman is an integrated commercial and industrial property group, operating in the Asia Pacific and European markets. The company develops, owns, and operates a variety of commercial and industrial properties ranging from business parks, to office space, to warehousing facilities. Goodman also offers property investment funds.
Charter Hall is similar, but adds retail property to the mix, with large retail centres anchored by supermarkets like Coles and others. The company also offers property investment funds that include retail as well.
Like others in the sector Goodman was hit hard by the GFC and while operating profit has recovered somewhat, the company is plagued with one-offs and related abnormals that impact net profit after tax. Due to its global reach, the company hedges extensively. In contrast, Charter Hall operates in Australia and New Zealand only.
Over five years, the share price performances of these two companies are virtual mirrors of each other. Here is the chart:
The Fiscal Year for Goodman and Charter Hall ends in June. Full Year 2013 results for Goodman showed a drop in NPAT from $408 million to $161 million, while Charter Hall’s NPAT rose from $16.7 million to $54.8 million. For companies like these, NPAT cuts through the accounting clutter to present a number ordinary investors can comprehend.
On 13 February Goodman reported 2014 Half Year results. The results were similar – an operating profit of $296 million shrunk to a statutory profit of $160 million, with management explaining the complexities of its hedging policy. On 25 February Charter Hall reported its Half Year results showing less drastic shrinkage. While operating profit rose 13.1%, statutory profit dropped from $29.9 million to $28.6 million, a 4.3% decline. The company went into a trading halt on the same day and emerged on 26 February with the announcement of a successful institutional placement of $140 million. The share prices of CHC and GMG began moving in opposite directions following these events. Here is a six month price movement chart for the two:
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.
Click on the links below to read other articles from this week’s newsletter