Investing is, by its very nature, an inexact science. When things go badly, it is generally right to fear, as the market does, that more bad news will follow. There are occasions, though, when the pessimism is overdone and even moderately poor figures can spark what seems like an unjustified rise in the shares.
After taking a fair bashing over several months, with a fall from 235p to 165p, Dixons Carphone (DC.) shares rose 3% on news that like for like sales were flat in the 13 weeks to 28 July: flat in UK and Ireland, flat in Scandinavia. Only the smaller Greek market showed decent improvement, a reflection of the improved economic situation there.
The benefit of the football World Cup in the consumer electronics department was offset by lower sales of white goods and computers as hot weather discouraged shopping. Sales of mobile phones continued to disappoint.
However, news that Dixons is still in line to produce the forecast pre-tax profits of about £300 million was enough to satisfy investors, although I personally remain disappointed as a shareholder. I bought when I thought, erroneously, the worst was over and am consequently nursing a loss.
I still believe that recovery is around the corner but I’m not so certain that I am prepared to top up my holding. The rest of the year will be a nervous time for me and my fellow shareholders.
Is this Train Stock Running Out of Steam?
As it happened, Dixons fell back from its intra-day peak before trading closed that evening and the same can be said of public transport operator Go-Ahead Group (GOG), whose shares added a remarkable 16% at one stage thanks to a 6.5% jump in pre-tax profits, from £136.8 million to £145.7 million, for the year to the end of June.
As always, it paid to read the full announcement. Profits this time were boosted by a £25.1 million exceptional gain from a change in the valuation of its pension liabilities, which is very welcome but a mere technicality. Revenue was slightly down.
What prompted buyers to pile in was that the market expected worse, with the loss of the London Midland rail franchise knocking profits and revenue.
There are encouraging signs. The board expect the current financial year to go well and free cash flow should be strong, resulting in a further reduction in net debt just as interest rates have started to rise.
The shares have been on a downward path for best part of three years now and earlier this year stood at a five-year low. I don’t see a lot of downside at the moment, but transport companies have had an unhappy knack of always having at least one part of the business in trouble. Go-Ahead continues to take all the flak from the chaos on Southern Railway caused in large part by carrying out the Government’s instructions. I’m not yet convinced that it is an attractive investment.
Greene around the Gills
To complete a trio of companies whose shares jumped only to ease back, we have pubs group Greene King (GNK) with a trading statement for the 18 weeks to 2 September. Like-for-like sales were up 2.8% against a market average of 1.2%, with the best weeks coming during hot weather and the World Cup.
Yes, but just over 100 pubs are being closed and only nine opened, so fewer pubs need to grow sales faster to make up. This is an industry that continues to run its assets into the ground.
The shares slumped from 643p in late June to 475p before the update pulled them back up 9%. If, unlike me, you are interested I suggest you let them settle back below 500p.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
