Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
Consumer packaging isn’t one of the most glamorous industries, but you should still pay attention to it because it’s currently undergoing considerable change. In the past few years consumers have realised that plastic packaging can be bad for the environment because it is very difficult to recycle and usually ends up buried in a landfill or even dumped in the ocean. As a result, supermarkets and retailers are coming under increasing pressure to reduce the amount of plastic packaging they use and find a way to eliminate it entirely from their stores.
This may be bad news for some retailers and manufacturers since it will cost significant sums of money to find alternative materials that are as effective as plastics. After promising to go plastics-free by 2023, Iceland recently had to go back to the drawing board, after removing plastics in one store reduced sales by 20%. However, the anti-plastic movement is also good news for DS Smith (LSE: SMDS), which focuses on making corrugated packaging (cardboard containers) for clients in 37 countries, mostly in Europe and North America.
A tailwind from online retail
Because cardboard-based products are much easier to recycle than plastics, as well as biodegradable, many retailers are embracing them as being more environmentally friendly. Environmental concerns aren’t the only reason the volume of cardboard packaging has been increasing. The rise of online retailing, which requires packaging to be cheap, durable and light, has further boosted demand for cardboard.
DS Smith doesn’t just make its money from packaging. It also helps companies pack and ship the containers and operates a recycling and waste-management division. The company is set to take advantage of the increased awareness of environmental issues by significantly expanding its recycling operations in Europe. This will help maintain its record of strong growth, with DS Smith’s sales growing by over 60% over the past four years. Net profits have expanded even faster, rising by 75% during the same period. The return on capital, a key gauge of profitability, is a solid 7%.
Despite its strong growth, DS Smith is still valued at a relatively modest 10.7 times 2020 earnings, with a solid dividend yield of 4.6%.
There is always a chance that an economic slowdown could hit profits by reducing the volume of packaging needed. However, as Chris Hiorns, manager of the Amity European fund at EdenTree Investment Management, points out, most of its clients operate in relatively defensive sectors such as consumer staples and food. This puts it in a good position to weather any downturn.
With DS Smith’s shares just below their 52-week high, I recommend that you go long at the current price of 384p at 10p per £1. I also suggest that you set a stop-loss at 289p, which would give you a total downside of £950.
How my tips have fared
This has been a good fortnight for my seven long tips, with all but one of them rising. JD Sports went up from 751p to 794p, Safestore surged from 697p to 736p and Bellway increased from 3,253p to 3,414p.
Bausch Health Companies rose from $26.21 to $27.70 and International Consolidated Airlines Group advanced from 541p to 569p. Taylor Wimpey also went up from 172p to 175p.
The only long tip that declined was Volkswagen, which fell from €181 to €176. Not only is every long tip making a profit, but collectively they are also making £6,433, up from £5,078 two weeks ago.
Most of my short tips moved against me, however, with four out of five of them appreciating. Netflix went up from $293 to $315, Uber from $26.71 to $29.11 and Wayfair from $81 to $85.
Twitter also went up from $29.21 to $30.54. The only tip that went in my favour was bitcoin, which fell from $8,723 to $7,094. Still, three out of my five short tips are still making money, with the shorts making a collective profit of £1,926. Nonetheless, this is down from £2,767 a fortnight ago.
Counting DS Smith, I will be bringing eight long tips and five shorts into the next fortnight. Not only does this mean that I have far more long tips than shorts, but having 13 different positions also makes my portfolio a bit unwieldy.
As a result, while I am not inclined to recommend that you close any of the positions immediately, I have decided to have a big clear out at the end of the year, with a view to taking profits on some long-standing long tips, some of which are nearly a year old.
Until then, I’m going to raise the stop-losses on JD Sports to 750p (from 700p), Safe store to 675p (from 650p) and Bellway to 3,200p (from 3,000p).
Trading techniques: elections and sterling
Stocks usually rally the day after an election finishes. However, this doesn’t seem to apply to sterling. On the last 12 occasions it fell against the dollar the day after the vote seven times, barely budged three times and rose only twice. While the two increases took place after unexpected Conservative victories in 1992 and 2015, the falls occurred after hung parliaments (1974, 2010 and 2017), Tory landslides (1983 and 1987) as well as Labour victories (2001 and 2005).
The good news for those considering backing sterling is that in the medium term the position is reversed. In nine out of the last 12 elections sterling has ended up higher against the dollar three months after election day, rising by as much as 9.1% between May and October 1979. Sadly for traders there doesn’t seem to be any consistent pattern to the times that it falls, with the declines occurring in 1983 and 1987 (when the Tories won large majorities), as well as 2005 (when Labour won a comfortable majority).
Increasing the time frame to a year after election day changes the picture further, with sterling up against the dollar in seven out of the last 12 elections and down in the other five. Again, though, the winning party or the size of any majority doesn’t seem to have any impact on sterling’s performance, with sterling up on the one-year anniversary of the Conservative victories in 1979 and 1987, but down a year after their wins in 1983, 1992 and 2015. These results suggest that there is unlikely to be any special benefit from buying or selling sterling during, or immediately after an election.