No one puffs as many fags as Mark Barnett. The manager of Edinburgh Investment Trust has £200 million in shares of British American Tobacco, Imperial Brands and Altria Group, the owner of Philip Morris, in his £1.6 billion portfolio. Tobacco is overwhelmingly his single biggest bet. No wonder he looks a bit green about the gills (Patrick Hosking writes).
Tobacco stocks have been hammered, most recently as the US Food and Drug Administration said it wanted to ban menthol cigarettes.
Perhaps fortunately for EIT, the latest lurch down in Big Tobacco came too late to be included in the investment trust’s results for the six months to September 30. As a result, it was able to report a solid 8.7 per cent increase in net asset value, just ahead of the 8.3 per cent from the benchmark FTSE All-Share index.
Mr Barnett, who in 2014 took over from Neil Woodford after he jumped ship to start his fund management firm, has done all right, thanks to a handful of winners. BAE, one of his top ten bets, outperformed thanks to contract wins for the arms maker. BCA Marketplace, the used car auction house, did well thanks to an abortive takeover bid. Capita also showed signs of recovery after its emergency rights issue. But there have been disappointments too. Thomas Cook has nosedived on the back of a profit warning. Provident Financial, the doorstep lender, has yet to convince the market that its recovery is assured. EasyJet has been on a downward flight path.
And then there is tobacco. Barnett argues the pessimism is overdone. He thinks the crackdown will hit vaping companies targeting the under-18s more than tobacco and claims there is no scientific evidence to support a ban on menthol.
In the meantime, tobacco is now looking extremely cheap he says: BAT, for example, trades on a lowly 9.2 times earnings, its lowest rating since the dotcom boom, and yields 7.5 per cent. Mr Barnett has been doubling down on both BAT and Imperial, buying more of each.
EIT’s other main themes are to back UK-centric companies because, Mr Barnett believes, Brexit gloom is overdone and their share prices are discounting a sharp deterioration in profits and an economic slowdown, which is “overly pessimistic”. That means big chunks of Aviva, Tesco, Next and BT in the portfolio.
A third strategy is to buy stocks uncorrelated to the economic cycle: catastrophe insurers Hiscox and Beazley, the litigation funder Burford Capital, which is now its third biggest holding, and alternative lenders like P2P Global Investments.
EIT is sceptical of some of the claims made for technology companies and other disruptors. One big bet is to back companies invested in shops and shopping centres, defying what many see a permanent shift towards online retailing.
These strategies are not without risk. It’s been several years since EIT shone among its UK equity income investment trust peer group. Over the past year it has ranked 20th out of 27 trusts for total returns. Over five years, it’s a respectable 10th out of 26, though its return was a below-average 28 per cent.
The shares pushed 1.5 per cent higher to 628p yesterday. That is a 16 per cent discount to the 749.1p NAV per share, wider than the 7-11 per cent range in which the discount has been bobbing for the past year or so. That reflects the worry in some quarters that Mr Barnett has lost his mojo. More likely, the pendulum will swing back to the value stocks he likes and away from growth/momentum. The current wobble in technology shares suggests this isn’t a good time to desert him.
ADVICE Hold
WHY In a bad patch, but well placed to rally if pendulum swings back to value stocks and Brexit nerves prove overdone
Breedon Group
They don’t come much more physical than Breedon Group, which is at the heavy end of the building and construction business (Miles Costello writes). Based in the Leicestershire town of the same name and the site of one of its stone quarries, Breedon supplies concretes, aggregates and asphalts to housebuilders and the developers of big infrastructure projects in the UK and the Republic of Ireland.
It operates two cement and 40 asphalt plants and about 80 quarries, as well as concrete, slate and clay production sites and other facilities. Founded in its current form just eight years ago, it has expanded through acquisitions to become the biggest independent construction materials group in Britain.
The nature of its business means that Breedon’s fortunes are bound up in the health of the construction sector, where confidence has been shattered by Brexit uncertainty. Against that backdrop, Breedon’s shares have fallen more than 17 per cent since January.
The shares fell again yesterday, down 1¼p to 69½p, as analysts ticked down their annual profits forecasts — in Numis’s case by 4 per cent, or £4.5 million — after Breedon pointed to rising materials costs, not all of which it will necessarily be able to pass on to its customers.
Breedon has much to commend it. A 32 per cent increase in revenues to £739 million over the ten months to the end of October is nothing to sniff at, and trading was boosted by six months of figures from Lagan, the materials business in the Republic of Ireland that it bought in April.
UK construction is forecast to be flat this year and grow only modestly next year before picking up in 2020. While Breedon should in theory benefit from the government’s infrastructure and housebuilding drive, the reality is less clear. Projects such as the second phase of the HS2 rail line, linking Birmingham and the north of England, have been delayed, while progress on the government’s aim of delivering more new homes has been painfully slow.
The shares, trading at about 17.5 times earnings, are not expensive, but the company does not pay a dividend, even more off-putting, particularly given where the shares are. All in all, not compelling.
ADVICE Avoid
WHY Too exposed to perils of delays and cost pressures
