The stock market’s dismal performance over recent years is tempting some investors to sell up and walk away.
The FTSE 100 index, for instance, has risen by just 2pc over the past five years, while the FTSE 250 index of medium-sized companies has fallen by 8pc over the same period.
Interest rates have risen rapidly: cash savings and bonds yield more than 5pc, so investors finally have realistic alternatives to stocks after more than a decade of ultra-loose monetary policy.
Indeed, individual shares are among the worst-performing holdings in our Wealth Preserver portfolio. Our eight positions, initiated in either June or July 2021, have fallen by 29pc on average.
Despite poor performance to date, we are firmly sticking with them. Interest rates are likely to peak over the coming months before falling as inflation returns to target, so the prospects for stocks are very likely to improve. So too is the economic outlook. The IMF, for example, expects the UK economy to grow by 1pc next year against a paltry 0.4pc this year.
An improving economic outlook bodes well for cyclical companies such as Currys, the retailer. Its shares have fallen by 62pc since we added them to our portfolio as the cost-of-living crisis prompted weaker demand for its wide range of consumer products.
Its latest trading update, released earlier this month, showed that like-for-like sales had declined by 2pc in Britain and by 6pc in international markets in the 17 weeks to Aug 26.
While this is disappointing, the company was able to maintain its gross margin improvements and deliver on its cost saving targets. It is also on track to meet previous financial guidance for the full year.
Currys will require a fundamental shift in the consumer environment to deliver improving sales and profitability, as well as a rising share price.
But as inflation is forecast to decline to less than 3pc within a year and as the economy’s prospects look more upbeat, consumers are likely to be in a position to spend more on domestic appliances, computers, mobile phones and other discretionary items.
Indeed, consumer confidence has dramatically improved over recent months. While it remains downbeat by historical standards, it has nevertheless improved from an all-time low in September last year of minus 49 on the GfK Consumer Confidence Barometer to minus 25 last month. In Questor’s view it should further improve as consumers feel the effects of lower inflation and better economic growth.
In turn, this is likely to prompt a reversal of today’s widespread investor pessimism towards cyclical stocks. Currys’ shares, for example, trade at just seven times forecast earnings. This suggests it is undervalued ahead of a period when operating conditions are poised to improve.
The stock will therefore remain in our Wealth Preserver portfolio. Its wide margin of safety suggests there is clear recovery potential on offer as the economy’s performance improves
Questor says: hold
Share price at close: 49p
Update: Smart Metering Systems
Our holding in Smart Metering Systems has also lost value since its addition to the Wealth Preserver portfolio last year. Shares in the company, which owns smart meters and rents them to utility companies, have fallen by 27pc.
Its half-year results released last week reported a 26pc rise in revenues, while underlying pre-tax profits rose by 9pc
It benefited from the index-linked nature of its revenues during a period of elevated inflation, while the size of its smart meter portfolio increased almost 10pc to 2.3 million during the six-month period
It has a contracted order pipeline of nearly two million smart meters, which are likely to be installed at a faster rate in the second half of the year thanks to increases in its engineering capacity.
It continues to expand into other areas, notably grid-scale batteries. With modest net debt of 21pc of net assets, as well as highly visible future cash flows, its long-term investment potential has not yet been fulfilled.
Trading at around 40 times earnings, Smart Metering Systems remains richly valued despite its recent share price decline.
However, its sound business model, solid financial position and long-term growth potential mean it retains its place in our portfolio.
Questor says: hold
Share price at close: 644p
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