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Stock options

Stock Market imageAre you bored by what the stock market has to say about estate agencies and property portals? You shouldn’t be.

Although it’s difficult to tell from some of what you see reported in the papers, the fact is that listed company reports and the stock market’s reaction to what it’s being told can deliver some useful information to you and your business. But to get that, you may need to look a bit beyond the headlines.

The listed sector is a bit of an odd one. While in retail, you’ll find pretty much the whole High Street represented by listed companies: Marks & Spencer, Sainsbury’s, Tesco, the lot – there’s only a smattering of listed agents. It does contain some of the key names in the sector: Foxtons, Countrywide, Reeds Rains and Your Move (as LSL Property Services), Belvoir Lettings, Winkworth and MartinCo – as well as the multidisciplinary Savills and Fletcher King, and Purplebricks representing the online agents. There are two major portals, Rightmove and Zoopla. Then there are a umber of housebuilders, whose results and outlook statements are always interesting for the light they cast on residential prices and transaction levels.

More recently these companies have been joined by a number of residential investors such as UNITE and Empiric Student Property. Their residential investments can’t be compared directly to single-occupancy houses and flats, but nonetheless the ratings given to these companies have something to say about how desirable property is as an asset class and what kind of yield residential property is delivering.

SO WHY SHOULD YOU CARE ABOUT THESE COMPANIES AND THEIR PERFORMANCE?

Let’s just consider what you can get from the information that the London Stock Exchange requires them to publish. First of all, it’s worth reading the full text of their results and trading outlook statements to see what CEOs have to say about the market and about the company’s strategy. Not all of this will be reported in the press, even in the trade press. Some of the larger companies also publish the presentations they give to investors on their websites.

Countrywide imageEven though companies try hard to give investors a general idea of strategy without giving away too many commercial secrets to the competition, you may find some quite interesting details of major investments in the results. Reading the annual reports can give you useful insights into the way rivals are running their businesses and how they see the market, as well as how they are branding themselves to investors. (An interesting feature of results recently has been the prominence of financial services business, which appears to be growing faster than either sales or lettings at LSL, and is now being targeted by MartinCo; obviously they’ve decided it’s time to diversify their income sources.)

It’s worth taking your calculator to some of the figures. Take a look at the margins that agencies are getting. If they’re falling, that may be because agents are cutting commissions to try to get increasingly hard-to-source inventory on the books. What’s happening to transaction levels? What’s happened to the number of branches – and more importantly, for growing companies, are new branches pulling their weight? While the national press is always keen to report the house price indices, it’s often less helpful when it comes to the business of estate agency and the nitty gritty of the market.

Emoov CEO Russell Quirk came up with an interesting story when he applied some basic maths to Foxtons’ latest earnings release. He pointed out that revenue per branch had fallen nine per cent, while costs per branch had risen by the same amount. If you’re competing with Foxtons, that gives you some interesting food for thought.

SO, OBVIOUSLY, YOU SHOULD CARE ABOUT COMPANIES’ RESULTS. BUT WHY SHOULD YOU CARE ABOUT ANALYSTS’ RECOMMENDATION, OR ABOUT MOVES IN THE SHARE PRI?

This is where you need to take on board a bit of economic theory, the efficient market hypothesis. According to this, the price of a share reflects everything that is currently known about its future prospects; the share price changes because the view of its future prospects changes, because new information becomes available. So a share price that keeps going down, while the company appears to be performing well, reflects investor anxiety about some aspect of the company’s operations.

UK housebuilders’ share prices are down seven per cent so far this year. That’s partly driven by fears of Brexit. But another prices are looking stretched, and they think after four years of outperformance, the valuations of housebuilders’ shares are also looking toppy. That isn’t a prediction of falling house prices, but it does suggest analysts expect profit growth to decelerate.

As for recommendations, the really interesting stuff isn’t whether they are a ‘buy’ or a ‘sell’ – it’s the reason why. Sometimes, an analyst will simply put ‘sell’ on a stock because it’s doubled since they recommended it as a buy; the recommendation reflects the share price rise, not any new information about the business. At other times, there’s a very specific reason for changing the recommendation. Back in November last year, broker Peel Hunt slapped a ‘sell’ on Foxtons because it felt the agent was too highly rated in view of its vulnerability to cut-price competition – exactly the problem Russell Quirk claims to have identified in the latest results.

Reading the annual reports of listed agencies can give you useful insights to the way they are running their businesses and how they see the market.

It’s worth taking a while to look at analysts’ forecasts of companies’ revenues and profitability. They can be a useful benchmark for your own sales and profit expectations. Are you falling behind the market? Or too optimistic for your own good? It’s worth asking how other companies are improving their earnings; whether they’re increasing their market share, cutting their costs, or making acquisitions.

Keep an eye not just on share prices but on the price/earnings ratio, that is, the relationship of the share prices to the company’s earnings per share. A share price could fall because the company’s earnings fall, but it could also be reduced because investors think the shares should have a cheaper (lower) PE ratio, if there’s a doubt about the quality or sustainability of earnings. Or the share price could rise because investors feel that the company’s prospects have improved and uncertainties have been removed – this is called a ‘rerating’. Just after the credit crunch, Barratt Developments traded on only 4.4 times its projected 2008 earnings; by 2015 it was trading on more than double that multiple at 9.5 times expected earnings. (As so often with the stock market, it’s the expected earnings that are of most interest to analysts trying to value a stock, rather than the historic figures.) That reflects investors’ despair in 2007 and their gradual regaining of confidence in the sector.

Where can you get hold of all this information? One good place to look for company information is the companies’ own websites – there’s usually a ‘for investors’ section. But that will usually only show you historic information. For forward-looking information such as brokers’ forecasts, sites such as Digitallook and Morningstar as well as Google Finance can be useful, but you may not get much detail. FT.com also has basic data on companies, together with the interesting detail of how consensus recommendations have changed over the past year. Many of these sites let you load a portfolio or watch list, making it easy to track companies’ fortunes. Full company announcements can be found at investegate.co.uk – though an awful lot of those announcements are stock market specific returns that you don’t need to know about, the annual and interim statements will always be available on the site in full.

Winkworth image

Winkworth, franchised and listed on AIM.

Few stockbrokers or investment banks circulate their notes to private clients. However, some independent research houses have notes available on their websites: Edison Investment Research covers LSL and M Winkworth, while Hardman & Co covers Purplebricks. News reports on some of the larger companies will also sometimes mention analyst comment, though often rather skimpily – even the largest agencies aren’t all that big in terms of the stock market as a whole, so they are not well reported. You might find more interesting news, together with discussions, on the Motley Fool website.

You may not become a stock market wizard, but knowing your way around the basic concepts and keeping an eye on shifts in investor sentiment and competitors’ strategies can add an edge to your thinking and performance. And of course, if you ever think about selling your business, or raising money through the market, you’ll be streets ahead if you already have a good idea just what it might be worth.

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