Questor share tip: the shipping broker has all the attributes of a good company, but its valuation puts it at risk if global trade stalls
While this column is pleased (not to say relieved) to see the London stock market recover its poise after the sell-off suffered late last year, it is a concern that share prices are rising while global economic data appear to be weakening and estimates for corporate profits flatlining.
The explanation for this divergence probably lies with the about-turn on monetary policy exercised first by the US Federal Reserve and then, in quick succession, central banks in Europe, the UK, Australia and New Zealand, to name but four. All have put interest rate increases on hold and in doing so seemingly lit the blue touch paper for a “risk-on” rally.
The reserve banks of New Zealand and Australia have even hinted that the next move in headline borrowing costs could be down, not up.
But this prompts two questions. First, what is frightening central banks so much? Second, how will markets respond if central banks do feel the need to cut interest rates – because surely this would be telling us that the economic outlook is not good and by implication that company profit growth forecasts are at risk?
The precedents of the past two cycles are not good. Stock markets tanked on both sides of the Atlantic during the periods 2000-03 and 2007-09 even as the Bank of England and the Federal Reserve slashed interest rates, because equity bull runs had left stock valuations at levels that could not withstand earnings disappointment.
This column wonders whether we are nearing such a situation once more. Patient portfolio builders who are saving for their pensions, dream home or school fees over the longer term may choose to simply hunker down and weather any storm that may develop.
But after the bumper stock market returns from the first quarter, anyone operating on a shorter time horizon might at least look to calibrate risk by locking in some welcome profits.
The question then is what to sell, and a quick screen of the best performers in the FTSE 350 index and their respective valuations may be one place to start. This brings us, perhaps a little harshly, to Clarkson, the shipping services specialist.
- Read Questor’s rules of investment before you follow our tips
And we say “harshly” because Clarkson has all the attributes of a good company, as a track record of 16 consecutive increases in its annual dividend suggests.
The company, a member of the FTSE 250 index, also continues to invest in what it offers its customers, so it can provide more value-added services beyond ship broking, such as research data and financial services, to help smooth out the effect of the shipping cycle. And best of all, it has net cash on its balance sheet to again help it prepare for the inevitable industry squalls.
Throw in changes in environmental regulations for tankers regarding sulphur emissions that come into force at the end of the year, with the possible effect of providing the long-awaited boost in daily tanker price rates, and the investment case looks strong.
Unfortunately there is the risk that much of this good news is already in the share price, which has risen by nearly 30pc from its December lows after this year’s excellent run.
Clarkson now trades on 21 times earnings for 2019, the sort of multiple normally reserved for stocks that offer consistent, non-cyclical growth year in and year out.
Yet it is only a year since a profit warning badly holed the shares, thanks to lower tanker rates, unhelpful currency movements and concerns over the threat to global trade posed by tariffs between America and China (and frankly the rest of the world).
And management’s outlook for 2019, given alongside last month’s full-year results, indicated that most of this year’s profits would be earned in the second half, a forecast that only raises the near-term risks.
With the latest CPB World Trade Monitor from the Netherlands Bureau for Economic Policy Analysis showing weak trade flow growth, with volumes flat on a year-on-year basis after December’s 1.8pc drop, the risk of near-term earnings disappointment from Clarkson could be high, for all of the quality of the services that it provides.
We first steamed into Clarkson at £19.75 in November 2016 and it may be worth locking in a tidy profit.
Questor says: sell
Share price at close: £23.70
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.