Vodafone (LSE: VOD) and Stanley Gibbons (LSE: SGI) are two stocks I’m steering clear of for 2016. Let me explain why.
Vodafone
Vodafone’s financial year ending 31 March 2016 is expected to mark the low point for earnings as the FTSE 100 mobile giant’s Project Spring investment programme is completed with a capex splurge of £8.5bn to £9bn. For the year to March 2017, capex is expected to drop to £5.7bn, in line with Vodafone’s long-term historical level of 13% to 14% of revenue.
However, the forecast 18% boost to earnings provided by the return to normal capex still leaves it trading on a sky-high price-to-earnings (P/E) ratio of 38, compared with the FTSE 100 long-term forward average of around 14. Vodafone’s price-to-earnings growth (PEG) ratio is also unattractive at 2.1. On the PEG scale, growth at a reasonable price is represented by a number below 1, so Vodafone’s PEG of 2.1 suggests investors are paying over the odds.
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Heavy exposure to the eurozone is also a concern. We might have expected last year’s European Central Bank stimulus to feed through to improving analyst earnings forecasts for Vodafone for 2016/17. In fact, City number-crunchers have been reducing their forecasts. The macro outlook for Europe remains fragile and Vodafone earnings forecasts could continue to trend lower. Of course, the effect of that would be to push the P/E and PEG even higher… unless the share price falls to compensate.
Finally, converged services (combinations of fixed line, broadband, public Wifi, TV and mobile) are increasingly looking like the future, and Vodafone is behind the curve on the infrastructure and content to provide them. Management is onto this – an asset swap with Liberty Global was discussed last year – but becoming a major player in converged services is a big challenge. Furthermore, while Vodafone’s dividend is attractive (the forecast yield is 5.2%), a mega-merger/acquisition could lead to a rethink on the dividend policy.
There are many more appealingly valued companies with more certain outlooks, so I’m avoiding it, for now.
Stanley Gibbons
AIM-listed stamps and collectibles group Stanley Gibbons is a company I’ve never been very keen on. The stuff it deals in has little “intrinsic value”, so a rising market value depends largely on the “greater fool theory” – stamp buyers believe others will be willing to pay an even higher price in the future. Even if we concede that stamps and suchlike have some appeal as an “alternative asset class”, investing in the business isn’t the same as investing in the asset class.
In August 2008, as the financial crisis was snowballing, Stanley Gibbons crowed: “The benefits of investing in collectibles as an alternative asset class have never been clearer … [Prices] show no correlation with the stock market … a safe haven in difficult economic conditions”.
However, its shares didn’t provide a safe haven. The company issued a profit warning five months later as management deferred the booking of some sales originally slated for 2008 to 2009. Those sales didn’t materialise and there was a further profit warning in January 2010.
The position is similar today, with the company having warned on profits in October, “as a result of the weakness being experienced in our Asian operations and the continued illiquidity in high value stock items”. The share price has collapsed, putting Stanley Gibbons on a seemingly bargain single-digit P/E. However, I’m not prepared to bet against there being a further profit warning during 2016/17, so this is another stock I’m avoiding.
