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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Wincanton: starting to deliverApril 12 2014, 7:00am
A glance at the above chart of the FTSE 100 shows it has been a volatile week for equities following last week’s key US employment report as unease grows over valuations.
The S&P 500 hit a record high last Friday immediately after the release of the March non-farm payrolls report, which pointed to a relatively healthy labour market, but not so robust that it would require faster tightening of Federal Reserve policy. The euphoria, however, did not last long, amid growing concerns that valuations were looking too stretched.
Minutes from the Federal Reserve’s latest policy meeting supported equities, after suggesting the Fed may be more cautious towards raising interest rates than markets had thought. Expectations of the Fed’s first rate increase have been pushed back to late 2016, with analysts now pricing it in around October, compared to previous predictions for August.
The US reporting season kicked off this week, with aluminium giant Alcoa, typically the first large U.S. corporation to report its results every quarter, beating analyst’s expectations despite revenue narrowly missing estimates, sending the markets higher. Investors are concerned that corporate earnings for the first three months of the year will be slowed by the severe winter weather that plagued most of the country, which could be the first time corporate profits have fallen since the third quarter of 2012.
Emerging markets remained strong, with the MSCI EM index hitting a four month high, while the Shanghai Composite index jumped to its highest level for six weeks, despite poor trade data from China. After a rough first quarter, cash has started flowing back into the developing economies, with more than $4 billion invested in two ETFs that track emerging market equity indices since the end of March.
Confidence in Europe also improved and peripheral sovereign bond yields fell as Greece returned to the international bond markets to raise funds for the first time in four years. The yield on 10-year bonds fell below 6% for the first time since March 2010, while Portuguese and Italian yields also fell.
German industrial output accelerated faster than forecast in February, indicating the manufacturing sector is gaining momentum. Production climbed 0.4% compared to expectations for a 0.3% rise, with further growth expected as new orders remain strong and inventories are at 30 month low. Mario Draghi, ECD president, also boosted sentiment after saying he would back more radical measures, including quantitative easing, to counter a prolonged period of low inflation.
On the domestic front, Sterling improved as economic data and survey evidence helped bolster optimism about the UK economy. Industrial production rose 0.9% in February, easily beating expectations, while British services firms reported the fastest growth in exports on record. The latest quarterly report from the British Chambers of Commerce showed businesses were upbeat about the recovery.
Technical analysis of the FTSE 100 is fairly lacklustre, with the index rangebound between historical support at 6520 and recent resistance at 6695. The oscillators are also mid-range, although the bullish divergence suggests that momentum is improving. Support is seen at 6580 and 6520, while a move above 6700 is needed to reinvigorate the bulls.
In conclusion, markets continue to benefit from this so-called “Goldilocks scenario”, with strong data combined with supportive global policy, creating a favourable environment for equities. Investors will be watching the US earnings reports, but after expectations have been lowered, there is potential to outperform. With May approaching, many are starting to quote the old adage “sell in May and go away”, yet I believe the FTSE could re-test its highs before this month is over.
Given the strength of recent domestic data, I have been focussing on equities that offer a geared play on the UK economy. Wincanton (LON:WIN), a leading provider of supply chain solutions in the UK and Ireland, is responsible for transport of goods and petrol around the country, leaving it highly sensitive to economic activity.
Interim results on 6th February revealed the year started well, with a recovery in the UK construction industry, representing 12% of group sales, being behind solid levels of business. The group successfully renewed a number of contracts including WH Smith, for its transport management services for an additional three years and won a number of new clients. The company announced an agreement with US based oil refiner Phillips 66, US furniture retailer Williams-Sonoma and UK high street retailer Argos.
Aside from construction, Wincanton is well diversified, with 13% in petrol tankers, 15% in fast moving consumer goods, 25% in groceries, 25% in general merchandise and the balance in other haulage.
Since the financial crisis and a series of poorly timed debt-fuelled acquisitions, Wincanton has suffered from an overextended balance sheet, although February’s results show a vast improvement. After disposing of its mainland European operations, net debt now stands at £87 million, less than half the level reported in 2008, although the pension deficit continues to weigh heavily on the shares. At £142 million, it is close to the value of the whole company, although the defined benefit scheme has now been closed to all future accrual and the company is working hard to resolve this risk.
The group now trades on 8.3x earnings, falling to 7.6x next year, which looks cheap for a company that is benefiting from a UK recovery and is winning contracts both domestically and in the US.
The chart of Wincanton illustrates the recent weakness, with the shares losing 25% since the start of the year. The 200-day moving average is likely to offer support at 115p, while the improving oscillators suggest momentum is improving. The MACD histogram has just stepped into positive territory, with the signal line intersecting to the upside, implying a new upward trend may be forming.
At the time of writing the share price is 118.25p, which I believe is too low given their market leading position in an improving economic enviroment. Near term targets are seen at 125.3p, 132.4p and 147.5p, while a stop-loss below support at 112.9p might be considered to contain risk.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Wincanton, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and Wincanton’s corporate website.