Can Royal Mail deliver?

Royal Mail has struggled in the years since it was privatised. Should investors expect more of the same? Matthew Partridge investigates.


The bad news is priced in

It's been nearly four years since Royal Mail was privatised. Whatever the merits of the decision politically, it's been a poor investment, unless you were among the many small investors who "flipped" your shares early in the process. If you'd invested at the peak in early 2014, when the share price stood at more than 600p, you would have ended up losing nearly 40% of your money. The price has fallen to 376p, below the price at which it first listed. It recently suffered the shame of being demoted from the FTSE 100, which may force several funds to sell their holdings in it.

There are plenty of reasons for investors to be concerned. A dispute over changes to the pension scheme mean there is a strong chance that the company will face industrial action, which would hit revenues and reliability. In the longer term, it faces competition from Amazon, which has shifted from being a major customer to a competitor, investing large sums of money in its own distribution network. And in the longer run, drone delivery and 3D printing could make the whole idea of human beings delivering parcels an anachronism.

However, the fact remains that the company is making substantial strides in dealing with these changes. It has worked hard to cut delivery deals with retailers, including signing agreements with Marks & Spencer, and John Lewis. These contracts have enabled it to benefit from the rise in parcel volumes as retail sales continues to shift away from bricks and mortar towards online commerce. Royal Mail's GLS subsidiary also helps it to benefit from growth in e-commerce in continental Europe. There are also signs that its recent investment in information technology is helping it to streamline costs, making it more competitive with its rivals.

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Even if Royal Mail proves unable to turn the core business around, it is sitting on a lot of valuable real estate, much of it in London. It has already sold some of its surplus property to reduce its debt, but it is still trading at a discount of around 10% to the value of its tangible assets. And if you include intangible assets, this widens to 25%. It also looks cheap compared to earnings it trades on a price/earnings ratio of around 9.6. Its ability to generate lots of cash means that even if the worst comes to the worst, it should be able to keep paying the generous dividend of 5.8%.

At these levels, the bad news seems priced in. So I'd suggest going long on Royal Mail at 377p. IG Index requires a minimum stake of £1 per 1p. I'd suggest increasing this to £2.50 per 1p, and putting on a stop-loss at 177p, limiting your total downside to £500.

Spread betting the forex markets

When it comes to spread betting, surveys suggest that foreign exchange (forex) accounts for around a third of total volume, on a par with stock indices. While virtually all spread-betting firms offer currency trading, there are a few things to watch when picking a firm for forex trades.

As with any spread betting firm, make sure they have UK regulatory approval. Regulated firms have to follow certain practices designed to protect the interests of their clients, such as holding enough capital to ensure they can cover any losses. Spread betting with a regulated firm also grants access to the Financial Services Compensation Scheme in the event that a broker goes bust (this only covers the balance of money in your account, of course, not losses you incur).

Because forex involves using high levels of leverage to make profits from relatively small price movements, low bid/ask spreads are vital. These are usually measured in terms of "pips", and usually to four decimal places (so one pip in GBP/USD is equal to 1/100th of a cent). The good news is that spreads are low for most big brokers. CMC Markets, IG Index and City Index all have spreads of 1 pip or lower for GBP/USD and EUR/USD.

We're not big fans of ultra-short-term strategies. The markets can move so quickly that the price at which you place an order may not be the price you end up getting, and stop-losses can be triggered at below their specified levels. However, as a guideline IG Index states that virtually all foreign-exchange trades are executed without slippage, and that only about 8% of trades with stops are affected for an average of 0.4 pips.

Portfolio report

It's been a little while since we checked our portfolio and we've got some good news to report. Driven in part by uncertainty over North Korea, gold prices surged to more than $1,350 an ounce a few days ago, the level at which we suggested you automatically take profits. While they have fallen back since, you would have made £882 in profit had you bought gold at the suggested level of £7 per $1 back in February (issue 832) when we first suggested the trade.

Not all of our trades have been as successful. Our decision to short Ocado is now nearly £250 in the red after the share price went up to 310p. Our punt on Virgin Money is also losing £147 thanks to a fall in price from 318p in late March, when we first recommended the trade, to 216p today. Some of our newer bets have also had a bit of difficulty, with our high-risk punts on Barclays and the AA managing to lose a combined total of £242 in the space of a fewweeks.

Still, there have also been some strong performers. The Brazilian political crisis may be ongoing, but oil giant Petrobras continues to be a star performer, thanks in part to a new partnership with oil major Shell. Overall, it is up £268 since we tipped it in June. Spread betting firm IG Group has also made £131, and construction firm John Laing Group is also doing well, up £112, having seen solid growth in the value of its net assets.

In addition to automatically closing out gold, we're going to suggest that you close out Mitchells & Butlers, which hasn't really gone anywhere. We also think that you should take losses on Virgin Money.If you've been following our recommendations about timing and position size, the closed trades should now have a cumulative profit of £1,113, while the open positions should be currently sitting on a profit of around £22.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri