Specialist recruitment firm Hays is geographically diversified and cheap.
Recruitment might not be the most glamorous sector, but it can be lucrative. Between 2014 and 2018 Hays (LSE: HAS) saw its revenue grow by 56% and its profits nearly double. At the same time it managed to achieve returns on capital of 25%. Given the backdrop of stagnant or falling real wages during this period, one would expect it to do even better now we’re starting to see the first real wage growth in more than a decade and companies are fighting harder to find good staff.
However, this hasn’t been reflected in Hays’s share price, which has fallen by around a quarter from its peak of 209p last October. One big reason for this decline is the risk of a slowdown in the global economy. This would not only reduce the number of people being hired, but also hit wages. As Hays’s revenue comes from commission linked to salaries, it’s not hard to see why this could be bad for the bottom line.
Brexit fears are overblown
Another, more localised, risk is the uncertainty surrounding Brexit. Some fear a no-deal Brexit could not only push the UK into an immediate recession, but lead to banks and other financial services firms fleeing the UK en masse for Frankfurt, Dublin and Paris. Indeed, some argue that even if Parliament were to change its mind and approve Theresa May’s withdrawal agreement, the City would still suffer from the
loss of passporting rights (which currently give British banks automatic rights to trade throughout the 31 countries that comprise the European Economic Area).
In our view, however, these fears are overblown. While some sort of global slowdown seems inevitable at some point after more than a decade of economic expansion, a modest recession still seems much more likely than a repeat of the meltdown we saw during the financial crisis. Similarly, if the current political deadlock results in a softer Brexit than originally intended (ideally along the lines of the Norway-style solution that we’ve been advocating), then the FTSE could be in for a sustained rally, with shares in companies such as Hays doing particularly well.
Even if the worst happens, Hays has diversified its business by opening offices around the world.
It now operates in 33 countries, getting the majority of its fee income from emerging markets. Not only does this reduce the impact of a country-specific event like Brexit, but it also allows the firm to exploit the fact that these countries are growing far more quickly than more established markets. Summing up, the 2019 price/earnings ratio of 12.4 looks extremely attractive.
We’d therefore suggest you place a stop-order, going long once the price hits 160p (which is close to the 100-day moving average). In this case you should bet on it at £25 per 1p (compared with IG’s minimum of £1) with a stop-loss of 120p.
This would give you a total downside of £1,000.
How my tips have fared
The past fortnight has been kind to our long positions. After pushing through the 400p level, where we suggested you put a stop-order, JD Sports reached 437p. Similarly, Greene King rose from 553p to 596p, helped in part by optimism over the appointment of Nick Mackenzie as the new CEO. John Laing increased to 351p (from 333p). Only Cineworld declined, from 273p to 257p. But that wasn’t enough to prevent our four longs from making a total profit of £554, up from £180.
However, if the rise in shares around the world was good for our long positions, it did nothing for our shorts. Indeed, every one of our six share shorts went against us. Netflix rose from $297 to $339, Twitter increased from $29.95 to $33.27, Just Eat is now 649p (compared with 601p), while Weis Markets sells for $49.07 and Rightmove for 477p.
Even Snap ticked up, from $5.95 to $6.18, despite yet another senior executive leaving the company. Indeed, the only boost for our portfolio came from bitcoin, which slipped to $3,586 (compared with $4,018). Our short positions are making an overall profit of £1,596 (down from £2,561).
We now have two positions (Greene King and bitcoin) that we’ve held for more than six months. While both trades are currently profitable I’m going to take money off the table by raising the stop-loss to 525p in the case of Greene King, while I’d suggest you take your profits on bitcoin if it goes above $4,500.
I’m not going to make any other changes yet, though if the Netflix position doesn’t become profitable within the next few weeks, I’m going to implement my six-month rule and suggest closing it, even though I still think the firm is overvalued and heading for a fall.
Trading techniques… the Fibonacci sequence
The Italian mathematician Leonardo Fibonacci pinpointed the numerical pattern now named after him in the 13th century after studying how the number of rabbits increases over time. It is a sequence of numbers produced by adding the last two numbers together.
It goes 0, 1, 1, 2, 3 and then 5 (3+2), 8 (5+3) and so on. As the sequence progresses, the ratio between the last two numbers gets closer and closer to 1.618, which Fibonacci regarded as the “golden ratio”, because it occurs frequently in nature, for example in the patterns of sea shells. As a result, many traders think that the pattern should also have a subconscious impact on short-term price movements.
In its simplest form, many traders use Fibonacci’s ratio to help them produce support and resistance points. Support points are the price below which traders think shares should not fall in the short term, while resistance points are the levels above which a share should not rise. To find the support point you multiply a recent trough by 1.618 and to produce a resistance point you divide a peak by the same amount. So, in the case of a share with a recent peak of 150p, the support point would be 93p (150/1.618). Similarly, in the case of a share with a trough of 80p, the resistance would be 129p (80 x 1.618).
As with all charting techniques, it is subjective: you have to judge for yourself when the recent peak and trough occurred. Some traders complicate matters by mixing
in other non-Fibonacci ratios (such as 50%). Nor is there a consensus on how to use these support and resistance points. Some think a share changes direction once it approaches support or resistance. Others assume that a breach of a support or resistance level implies continued movement in that direction.