While long term investment requires a great amount of patience, sometimes it makes sense to sell up and look elsewhere for future gains. This is obviously best done after a major share price rally, with profit being taken and a larger amount of capital being invested elsewhere. However, it can equally be applied to a loss-making position where the prospects are dire and mean that things could get a whole lot worse.
In the case of National Grid (LSE: NG) and Severn Trent (LSE: SVT), it is most certainly the former since the utility companies have risen by 64% and 51% respectively in the last five years. That compares well to the FTSE 100’s gain of 7% in the same timeframe and shows that defensive companies can perform well in favourable market conditions.
Of course, a key appeal of National Grid and Severn Trent has been their income potential, with the two companies offering index-beating yields during most of their recent past. This has held huge appeal for investors during a time of low interest rates but, looking ahead, a tightening of monetary policy is very much on the cards and many investors fear that this could act as a brake on the their future share price performance.
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That’s not only because a 4%+ yield will become less attractive relative to other asset classes, but also because highly indebted companies such as National Grid and Severn Trent could see their profitability growth come under pressure as the cost of servicing borrowings rises. This could hurt their dividend growth potential and, with neither of them being growth stocks, may lessen their appeal.
Although there is a risk to both companies from higher interest rates, the reality is that interest rates are unlikely to move higher at a rapid rate. Policymakers in the US and UK are closely aligned on the topic of monetary policy tightening, with them both publically being of the view that a slow and steady approach will work best. As such, the income appeal and profitability of National Grid and Severn Trent remains strong and both stocks appear to offer relatively high total return potential in the long run.
Meanwhile, Lonmin (LSE: LMI) is also viewed by many investors as a potential sell at the moment and, unfortunately, that is because its future outlook is rather bleak. For example, it only recently raised funds via a rights in issue in order to firm up its financial outlook since the company’s performance has been hugely disappointing. And, looking ahead to its next full-year results, Lonmin is expected to remain a loss-making entity, with a pretax loss of £31m being forecast by the market.
Clearly, Lonmin’s shares are relatively cheap at the present time after having lost most of their value during the current year. For example, the company trades on a price to book value (P/B) ratio of less than 0.3 (using September 2015’s net asset value figure), which indicates that its shares are exceptionally cheap.
And, while things could get worse for the business and now may not be the right time to buy, it could be worth holding on to Lonmin due to its low valuation and the potential for a rise in commodity prices in the long run.
