Not all stocks in traditional sectors are quality businesses, although the low valuations and high y...
Not all stocks in traditional sectors are quality businesses, although the low valuations and high yields available do provide a temptation to buyers.
Cheap investment into longstanding, respectable companies when there is little chance of recovery has always been a problem, says Adrian Gosden, fund manager at SG Asset Management, noting this has been the case in the retail sector.
He says: "Investors search for stocks with high yields, often due to the company being in decline, which can lead to a value trap."
Patrick Edwardson, income fund manager at Baillie Gifford, says: "It is exacerbated by the explosion of the new economy over the past two years, leading to a fall in the old economy-oriented companies.
"Low prices do not equal good value, it is important to be aware of the company sales prospects."
Gosden says the retail sector has seen a lot of changes recently. Mobile phones are taking high street spending away and a split in clothing retail has developed.
Gosden says: "The major buying group are 18 to 25 year olds who don't want Marks & Spencer clothing, they want either a £10 functional item or a £100 designer top. M&S has failed to grab the polarity.
"The internet is also a cheap and easier option for the consumer, proving tough competition for the high street retailer."
Edwardson adds: "The mistake people make is to look at historic valuations of the company. In the current competitive market, many value stocks will not recover."
There is more hope in industrials and utilities, he says. Although some regulatory reviews have been severe and reduced company profits by a third, he says others have provided a better environment.
Enodis, an industrial kitchens company, has a yield of 6.4%, while United Utilities offers 6.6%. Industrials are high yielding says Gosden, but it is important to stock pick.
"Yields move around depending on the economy. If the stock is popular, the prices increase and the yield reduces," he says.
Edwardson agrees that utilities can provide opportunity. He says: "The sector was hard hit in second half of last year and the first quarter of this year, due to tough regulations hitting water companies.
Around this time there was a rush into new economy and a stampede out of utilities." He bought into these companies when they had yields of 6-8%.
Edwardson highlights tobacco companies as old value stocks to keep an eye on. He says: "Tobacco companies are traditional stocks, which generally have high yields. This is because people believe they are ex-growth stocks and there are high risks of court cases."
Baillie Gifford holds Imperial and Gallagher, which Edwardson says have had profit growth above the market in the past two years, due to cost cutting and moving overseas.
The top five active positions include Intec Telecom, which has no yield, Hepworth on a yield of 4.4%, Arriva yielding 6.4%, Amey on a yield of 1% and Bristol Water with 7%.
A combination of these stocks leads to a 4% yield, while the market yield is low at 2.2%, Edwardson says.
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