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Friday Email: 27 January 2017

Every Friday morning our lead analyst Mark Riding sends out his weekly run-down and upcoming events in the investor calendar, like this one:

The FTSE 100 is virtually unchanged on the week whilst the Dow has reached all time highs finally breaking through the 20000 barrier.

The past week has seen some big falls in blue chip stocks that are currently out of favour such as Next and Easyjet. The falls in their share prices look well overdone. Easyjet go ex-dividend for 53.8p on the 23rd February, which represents a yield of over 5% with them currently trading under £10 per share.

With all of the pessimism around and after 17 years of what effectively has been a long bear market, i was reminded by Mark Dampier of Hargreaves Lansdown of the words of legendary investor John Templeton who said that bull markets are 'born on pessimism, grow on scepticism, mature on optimism and die on Euphoria'. In my view we are in the pessimism stage, supported by the very large yield gap that I believe must close. I remember the last long term bull market that ran from the mid 1970's until the year 2000. I was following the markets very closely in the Optimism and Euphoria stages of the mid 1980's through to the year 2000. I remember looking at valuations then and being just as incredulous about them as I am now. The difference being that then, you could not believe how high they were whereas now I cannot believe how low they are, particularly with regard to real yield.(the difference between dividend yield and inflation)

Classic examples of this pessimism came last year when the miners and natural resource stocks were sold down to extremely low levels and this year we see great pessimism in the retail sectors and perceived Brexit stocks. One example of this is Next, which for many years was a darling of the market and has very quickly become a dog. They now trade on under 10 times forward earnings and this year will go ex for an interim and final dividend of 158p and four special dividends amounting to 180p for a total of 338p; all-ex dividend by mid-January 2018. They were trading below £38 earlier this week for a yield approaching almost 9%. Another big yield from a debt free retailer comes from Shoe Zone who go ex-dividend for a final and a special on the same day as Easyjet (23rd February) and will pay 14.8p against a share price of 181p for a yield of almost 8.2%.

How much longer will this pessimism stage last? I woke up this morning to hear talk of a 20% import tax being levied on all Mexican imports into the U.S. to pay for a wall.......so possibly quite a bit longer, but the Dow is through 20,000.

 

 

This email was originally sent on Friday 27 January 2017

The Friday email is delivered to over 20,000 subscriber’s every week, and remains a widely read run-down of recent events and what investors can expect in the week ahead written by our chief analyst Mark Riding.

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