Spread betting: long value, short growth

John Laing Group share price chart

Infrastructure’s big moment has arrived, as governments turn to big projects in an attempt to jumpstart growth and productivity. John Laing Group (LSE: JLG) manages various infrastructure schemes around the world, mainly in renewable energy and public/private partnerships.

These range from the Intercity Express in the UK, to windfarms in Australia and the I-77 highway in the United States. The firm is part of one of the consortia shortlisted for Ireland’s National Broadband Plan, which aims to ensure that the entire country is able to benefit from high-speed broadband, and is in the running for four more projects in the US.

As a result, John Laing is expected to grow by around 9% a year over the next three years. Despite these favourable prospects, the shares are currently trading at just six-times forecast earnings for 2018 and at a 4% discount to its book value. The firm also offers an enticing yield of over 3% and has consistently been able to raise its dividend since it went public in 2015. The recent trend in the share price also seems reasonably attractive from a technical perspective, as it is less than 20% off from its 52-week high.

By contrast, online food delivery service Ocado (LSE: OCDO) is coming under increased pressure. Competition from supermarkets is heating up as they improve their online services. Last year Amazon announced a tie-in with Morrisons that will allow Amazon Prime users to order food and have it delivered within one hour. 

Recently, Ocado stated that it might have to consider television advertising in order to maintain momentum, though analysts question whether this will be an effective strategy given that most television viewers are very different from the wealthy, upscale market that currently uses Ocado’s service.

One thing that makes Ocado superficially attractive is its high rates of revenue growth. Indeed, revenue more than doubled between 2011 and 2016. However, the rate of growth is set to slow to single figures by 2020, while the firm has struggled to convert sales into profit – the perennial problems of technology companies whose ambitions have outstripped their abilities.

In any case, the market has already more than priced in any future expansion, as the shares trade at over 60-times forecast 2020 earnings. Given the uncertainty, this is a ludicrously high level, and it is no wonder that it is one of the most heavily shorted shares in the FTSE.

Overall, my recommendation is to go long on John Laing, which looks cheap, and short on Ocado, which is expensive. While the minimum bet with IG is £1 per 1p, for the purposes of our hypothetical portfolio I’d recommend a slightly higher level of £4 per 1p for both John Laing (priced at 259-260 at the time of writing) and Ocado (249-251). I’d suggest that you set a stop-loss of 135p in the case of John Laing and cover the short on Ocado if it reaches 374p. This gives you a downside of £500 on each trade.

The shocking scale of binary option fraud

MoneyWeek doesn’t like binary options: they’re opaque, complicated and closer to gambling, rather than trading. They’ve also become a magnet for fraudsters, with growing numbers of unwary traders being lured into betting (and losing) large sums of money with firms based outside the UK in poorly regulated jurisdictions.

Israel has a particular problem with binary option boiler rooms (firms that prey on unsuspecting traders with high-pressure sales tactics) targeting clients overseas, as the Times of Israel has reported in a series of investigative articles lifting the lid on a “widely fraudulent industry”. Binary options scams and other similar boiler room activity may be raking in $5bn-$10bn a year, equal to a staggering 10%-plus of annual Israeli exports. “Thousands of Israelis have been going to work each day for the past decade, at call centres… to dupe victims all over the world out of their money.” The Israeli government is now considering rules to outlaw binary options altogether (the local regulator has already banned their sale to locals but not foreigners).

The US Federal Bureau of Investigation (FBI) has issued some guidance on how to spot trading scams, which can be found at FBI.gov/news/stories/binary-options-fraud. But the basic principles to avoid being scammed are even simpler than the FBI makes it sound. First, if the returns look too good to be true, they are. Second, if anybody cold calls you to offer investment or trading services, hang up. Third, only ever deal with firms directly regulated by a credible regulator, such as the UK’s Financial Services Authority or the US Securities and Exchange Commission.

Our trades so far

There are now six ongoing trades in our hypothetical portfolio: long Brent crude at $55.43 (issue 828), long gold at $1,221 (issue 832), long Mitchells & Butlers at 249.92p and short JD Wetherspoon at 975.1p (both issue 834), plus the two introduced this week.

Despite optimism among Opec members that their agreement to limit production was succeeding in reducing supply and thus pushing up prices, US inventories have unexpectedly increased. This suggests that higher prices are also encouraging shale oil producers to resume pumping. In turn this has led to suggestions that the agreements will unravel, with countries like Saudi Arabia boosting production in an attempt to drive American producers out of business. As a result, the price of Brent has fallen to around $51.50 per barrel.

It also means that our oil trade is now £358 in the red. We’re going to stick with it for the moment, because I think that the key Opec producers can’t afford for prices to fall any further. However, I’m keeping an eye on this position, and if things don’t improve soon, I will consider closing it.

Gold is also now below the level at which I tipped it. With the Federal Reserve due to announce its decision on interest rates after we go to print, it is possible that it could fall even lower, if the Fed hints that further raises are likely. Still, I think that the US central bank will tread cautiously.

Both Mitchells & Butlers and JD Wetherspoon have fallen by a small amount. Since both trades are in opposite directions, the gains from the fall in Wetherspoon cancel out the losses from the decline in Mitchells & Butlers, leaving us roughly flat.

Merryn

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