Paul Hill, one of Britain's most successful private investors picks the worst tip from the week's press and brokers' reports. This week, a 'cheap play' on the property market which is anything but.
Turkey of the week:
Savills (SVS: 572p), tipped by The Sunday Telegraph
In the investment world, there's a well-known but still pertinent saying, which definitely applies to Savills: "Sell at the top." However, The Sunday Telegraph suggests buying the stock because it believes that it is a "cheap play on the property market". If 16.5 times forecast earnings is cheap, then I'd hate to buy something expensive. Let me explain.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
I think UK property values are stretched. The bears have been droning on about this for years, only to be proved wrong time and again, but even so, on just about every measure, the property sector looks toppy to me. Buy-to-let and commercial rental yields are barely covering mortgage payments, while house prices have reached all-time highs.
As another indication of the frenzy, the FT reported last week that "a number of specialist lenders are drawing up plans for instant mortgage approvals that would give house hunters access to immediate mortgage offers without even requiring them to obtain a formal property valuation". This is mildly worrying, and smacks of a property market over-heating, with buyers hurriedly making a final dash to get on the housing ladder.
The $60,000 question is, can this irrational exuberance continue? Well, of course, the answer is yes, but speaking as an experienced investor, I believe the chances of further improvements in the property market are substantially lower than of a soft or hard landing.
Savills, like many UK estate agents, property consultants and home owners, has been a major beneficiary of this prolonged bull run in property, bolstered by a continuous flow of investment funds from around the world, the introduction of real estate investment trusts (Reits), record City bonuses and the recycling of petro-dollars from the wealthy Opec nations. If growth slows, I see commercial and residential property prices cooling, which would hit transactional volumes and property funds and Savills' share price.
Analysts predict earnings per share of 34.2p and 36.9p respectively, for 2006 and 2007, representing earnings growth at a pedestrian 8%. At the May trading update, the board said that it was "confident" that it could turn in a "satisfactory" performance in 2006. My interpretation is that management does not expect a booming market, and it will be difficult for Savills to exceed these forecasts. At 584p, the shares are on punchy p/e and p/e-to-growth ratios of 16.5 and 2 respectively, which, I think, is far too rich for a property adviser.
Finally, in the last 12 months, many of the directors have sold stock at prices between 399p and 632p. I suggest following suit. The party cannot go on forever.
Recommendation: sell at 572p
Paul Hill's personal portfolio has gone up by 483% over the last five years.
To find out more about his own specialist share-tipping service, Precision Guided Investments', click on the link below:
Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published