“Greed is good,” said Gordon Gecko, the anti-hero of the 1987 film, Wall Street.
When the you-know-what hits the fan, however, “dull is delightful”, in the view of many investors.
When the stock market is bucking and shucking like a demented rodeo rider, a stock with a track record of largely ignoring the movements of the market can be a comfort to an investor who enjoys a good night’s sleep.
A stock with this sort of trait – a “keep calm and carry on” sort of stock – is said to have a low beta coefficient. A beta of less than one is regarded as being less volatile than the market.
I know what you are thinking. The market is not especially volatile at the moment but that’s because the you-know-what has yet to hit the fan.
Messy Brexit? Hung parliament? Extinction Rebellion?
In view of the probability of a messy Brexit (or a hung parliament following a general election), now might be a good time to check out some seriously dull stocks.
We’ve run a scan of companies with a market capitalisation of more than £100mln that have had an absolute beta coefficient of less than 0.4 over 10 years, three years (i.e. roughly the post-Brexit referendum period) and one year.
We also screened out stocks with a price/earnings ratio (PER) of more than 15.
Because PERs above this value tended to have investment guru Benjamin Graham, the “father of value investing” and Warren Buffett’s mentor, reaching for his barge pole.
Not surprisingly, the stock filter generated a lot of infrastructure companies: HICL Infrastructure PLC (LON:HICL), 3i Infrastructure Ltd (LON:3IN), Greencoat UK Wind PLC (LON:UKW), Renewables Infrastructure Group Ltd (LON:TRIG) and GCP Infrastructure Investments Limited (LON:GCP).
By their very nature, these are businesses that take a very long-term view; a messy Brexit could cause a hangover of a decade or more and that would probably still be regarded as a blip by the infrastructure sector.
“There are a number of … economic benefits of renewables,” according to David Jane, manager of Miton’s multi-asset fund range.
“One is that they are less about very large long-life capital projects, such as gas-fired power stations. They are often small, modular incremental investments which by their very nature are less risky. This attraction is often underplayed, as is the benefit of certainty. We know the sun will rise tomorrow but no-one can predict the price or availability of oil and gas sourced from often unstable countries,” Jane said.
“As the cost of energy sources such as solar and wind continues to fall, and new storage technologies come on stream, it becomes inevitable that suppliers will switch to the cheapest form of energy and this will drive the change, irrespective of any government intervention to accelerate it,” Jane believes.
Wind in its sails
Of the five infrastructure stocks mentioned above, Greencoat UK Wind has the lowest earnings multiple, with a PER of just 7.7; the share currently yields 4.8%, a decent enough yield but inferior to all the other infrastructure companies mentioned except 3i, which yields 3.1%.
GCP, with a yield of 6.0%, is the best payer but its PER, at 14.6, is almost twice that of Greencoat.
It’s probable that our old friend Benjamin Graham would like the valuation of Greencoat for another reason, too.
Just as Colonel Sanders has his “special blend of herbs and spices” so Graham had a formula – the result of which is now referred to as a “Graham number”, in his honour – that acted as a flag to determine whether a stock is cheap or not.
The magic formula is the square root of (22.5 * earnings per share * book value per share).
The use of the number 22.5 may seem a bit random but you will remember Graham’s view that a PER should not be more than 15; well, he also had a belief that the price-to-book ratio should 1.5 or lower, so if multiply the PER cut-off value of 15 by the book value multiple of 1.5, we get that seemingly random number of 22.5.
The Graham number for Greencoat is 230.49, whereas the shares currently trade at around 142p; the gap between the two is 88p or thereabouts, and the Graham ratio – the Graham number divided by the share price – is 0.6.
That Graham ratio is on a par with GCP and better than the other three infrastructure plays, all of which have a Graham ratio of 0.7 (a lower number is better).
Coincidentally, the day I ran this screen, Greencoat UK Wind announced the proposed acquisition of another wind farm, the Glen Kyllachy project, located 11 miles south of Inverness.
Construction of the wind farm is ready to commence, with the transaction targeted to complete in October 2021, once the wind farm is fully operational.
Greencoat will pay £57.5mln to Innogy Renewables UK Limited on completion of the project.
“We are delighted to partner again with Innogy, who have the expertise and resources to deliver a high-quality operational wind farm, said Tim Ingram, the chairman of Greencoat UK Wind.
The acquisition took Greencoat’s commitments to subsidy-free wind farms to a little over £100mln.