Ice creams, markets and gongs

I’m afraid that I hate Black Friday. Mostly this is my grumpy Gen X reaction to American imports. But I will flag one thing here.

Financial scams are rife. They feed off creating a sense of urgency. Quick, do this, or you’ll lose that! Please be alert to emails, texts or calls which purport to be from retailers, delivery firms or other, asking for bank details or personal information to confirm something. Or you’ll lose the deal.

“We’re contacting you about your recent purchase from John Lewis / Amazon / Argos.” You’d have a pretty good hit rate this weekend of randomly selected people who would fall into this category.

Be careful about entering bank details anywhere, or responding to links you are emailed or texted.

Where are the bargains in the stock market?

A press release from Evelyn Partners yesterday (parent to DIY platform Bestinvest) reminded me that “the greatest value opportunities to be had currently are available close to home with the FTSE 100 trading on 9.5 times earnings. This is a 34% discount to the rest of the world and also far below the longer-term of just over 12 times earnings – so represents something of a steal.”

Let me translate this. What is any company worth and how do you work it out? My experience is that the answer is usually “whatever you can persuade someone to pay you for it”, but this makes mathematicians anxious so they put a formula on it to pretend they are in control. One formula is to apply a multiple to earnings.

For example, imagine I own an ice cream van, and last year I sold £25,000 of ice creams with costs of £10,000 - making a profit of £15,000. If I could persuade someone to buy Holly’s Nice Creams for £30,000, that would be a 2 times earnings multiple. Or a P/E ratio of 2, to use the lingo. Today, the collection of the UK’s 100 biggest companies on the stock market (the FTSE100) are trading on 9.5 earnings.

This is quite low, especially when compared to the rest of the world. The S&P 500 over in the States, for example, is currently around 17.5 times earnings. Which suggests that the FTSE100 is cheap.

What is the outlook for 2023?

About 25% of the FTSE100 is exposed to energy and healthcare. Both of these remain pretty immune to recessions. We heat our homes and we brush our teeth regardless. Mostly. Especially if you own an ice cream business.

And the FTSE also consists of many firms which pay nice dividends for people who want their investment stash to pay out an income. So there is lots to like. But here’s the rub - it’s just not sexy. There is no magic growth story. It’s just business as usual with big old boring companies which make dull, important stuff.

Over in the US, although you have to pay about twice as much to own a bunch of companies which will make the same profits TODAY (remember the S&P 500 is trading at 17.5 x earnings, compared to Blighty’s 9.5 x), the hope and belief is that lots of these companies will grow pretty fast and so earnings will rise faster TOMORROW. So it’s all about potential. Tesla, for example, has a price/earnings ratio of 181. Holy guacamole. No wonder that bloke is the world’s richest man!

So Tesla investors are prepared to value the company at 181 times the profits it makes in a year today. If this same metric was applied to Holly’s Nice Creams with my £15,000 profits, the business would be valued at £2.7 million. Which people would pay, if I convinced them that I had a plan to make gazillions with some cunning invention or development for vegan age-defying wrinkle-zapping ice cream or some such miracle.

*Cough* You were going to tell us about the outlook?

Oops sorry! OK, in terms of global shares, there are some key questions.

What do you think will happen to sterling?

Most of the earnings of the FTSE100 are not in pounds. So if sterling tanks, and they report in sterling, their profits look rubbish. This is a risk.

And do you think that the tech sector is in fundamental decline or just having a bad time of it right now?

Hmmm. As much as I think P/E ratios are a bit silly, I also think something established trading on less than 10 x earnings is quite interesting. I have been topping up some FTSE100 trackers I have. However I also think that tech is not a sector, but the infrastructure of everything, and of course I still want to invest in this. So I own a FTSE100 tracker, some US funds and various World trackers/funds. And a collection of sustainable funds. Hedging my bets - as usual.

And as a final aside, someone I respect a lot messaged me yesterday with his grumpy thoughts. “Central Banks have totally screwed up. The Fed has almost certainly overtightened already. Bonds will do well next year. They’ve already had a good run. Corporate bonds have joined in the action.” So voilà! Don’t forget bonds, people. Bonds go up in price when interest rates come down…

The upshot of all of this seems to be the usual message. Diversify! Don’t panic. And beware of Black Friday! Gosh, I’m boring…

I will leave you with the jolly news that I won an Award this week for Investment Week’s Investment Woman of the Year 2022 (Small to Medium Firms). Not quite the award I rehearsed my acceptance speech for into a hairbrush aged 14, but very nice to get all the same!

Have a lovely weekend everyone.

Holly