Wednesday, November 23, 2011

Diary: growth versus value, ptec, jd., tcg, tt.

PTEC - Playtech

PTEC is down nearly 4% to 212p on news that it is to place shares at 215p, representing approx. 19% of the company's issued share capital immediately prior to the placing. The company has identified a number of bolt-on acquisitions and strategic joint ventures which require funding.

This will be an interesting one for me to watch.

The move seems ill-timed in view of the fact that the company is currently on a low rating; implying that the cost of the capital raised is high. Silly rabbits. It is expected that admission will become effective and that dealings will commence on 21-Dec-2011.

JD. - JD Sports

JD. down 4.9% on latest IMS updating progress since 17 Sep. "Continuing downward pressure on all elements of discretionary spending" about says it all.

TCG/TT. - Thomas Cook / Tui Travel

TCG is up 24% in early trading, having slid a monster 75% yesterday.

This chilling article from the Telegraph yesterday:
[It] has been forced to delay full-year results due tomorrow because its auditors cannot sign it off as a "going concern".
Holy Moly.  As a commenter noted:
The damage is done already by the media if nothing else.... The fact that the financial difficulties of this once great company are all over the media will make customers think very hard before booking holidays and flights with them which in the short term is the worst that can happen.
What's not getting a lot of media attention at the moment is TT. (Tui Travel). It had better hope it can steal customers from TCG is all I can say, because it's not looking too pretty either. It has only had been floated since Sep 2007, during which time it has never reported a net profit. z-score is a pitiful 1.03, it has net debts of £1.2bn, and an interest cover of 1.58. I suggest that, like TCG, it is far too vulnerable to setbacks, and should be avoided. TT. is currently up 10.5% in early morning trading.

Growth versus value

I saw an interesting post on Seeking Alpha, dated 02-Feb-2011:
  • When both the CBOE Put/Call Ratio and VIX are high (compared to 6 month average), small cap growth will out-perform value a mean annualized 18.35%.
  • When the CBOE Put/Call Ratio is low and the VIX is high, value stocks will outperform by up to 26%.
Currently, the VIX is high,and so is the CPC . Another interesting indicator is the Yield Curve. CXO Advisory looked at Ken Fisher's investigations into the yield curve. They conclude:
limited analyses do not support the hypothesis that growth (value) stocks systematically outperform when the T-note/T-bill yield spread shrinks (grows).
However, a reader submits that Fisher was not talking about th US yield curve, but about the world yield curve.

Amateur statistician hour now ... as I recently computed quartile PEs for a broad range of companies, excluding market caps. The data is fairly recent, an cover caps over about £200m. Here's the results:

Q1  7.9
Q2 11.1
Q3 15.9

So, we see that the median PE of the market is about 11.1 - an historically low figure. At the lower quartile market (the "value" shares), PEs are about 7.9 - which doesn't seem much of a discount to the market. Also, at the upper quartile (the "growth" shares), it's 15.9. This is slightly above the long-term median of shares, suggesting that you can buy growth shares today at prices which match historical averages (for the "average" shares, not the growth shares).

So, value shares are trading at only a small discount to the market, whilst growth shares are trading at only a small premium. This suggests that your bias should be towards growth shares, not value shares. You are only paying a small premium for growth, so that's where you should put your money.

In low growth environments, growth shares are likely to hold up better. If this whole Euro thing hits the fan, then I see value shares as being crucified further. Or, you're a macro-economist whether you know it or not.

I'll have some things to say about Jeremy Grantham, P/B values, and where that likely puts us in the cycle as regards the desirability of growth relative to value in a future article. Gotta crunch some numbers first, though.

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