Buy: EasyJet (EZJ)

Capacity growth for the full 2020 financial year is expected to be at the lower end of easyJet’s historic range, writes Julia Faurschou.

Investors in airlines are often sensitive to any perceived difficulty in passenger numbers not keeping up with increases in capacity. This could be behind the significant slide in easyJet’s share price following a preliminary trading update for the year to September.

While the number of passengers carried increased by 8.6 per cent to 96m, this did not keep pace with a 10.3 per cent increase in capacity to 105m seats available, leading to a 1.4 percentage point decline in load factor to 91.5 per cent.

Strikes at British Airways and Ryanair were to the benefit of easyJet in its second half. This, along with “self-help initiatives” to drive passenger yield, mean that headline pre-tax profit is expected to be between £420m and £430m, towards the upper end of previous guidance of between £400m and £440m. Total revenue per seat at constant currency for the second half is expected to increase by about 0.8 per cent, better than management’s previous assessment that it would be “slightly down”, due in part to the strike action disruption at competitors.

The increase in capacity also contributed to an increase in total headline cost for the full year, expected to be up around 12 per cent, with higher fuel costs at about £1.42bn and adverse foreign exchange movements also impacting that figure. Excluding fuel, cost per seat at constant currency is expected to fall by around 0.8 per cent, despite the impact of storms and technical issues at Gatwick airport.

Hold: YouGov (YOU)

Figures for full-year 2019 suggest YouGov is onto a good thing, even though a forward price/earnings ratio of 34 indicates that the market is in agreement, writes Alex Hamer.

It’s a good time to be in the data opinion and analysis business. YouGov has continued to generate more revenue and cash profits, as it shifts away from a rigid focus on standard market research activities in favour of real-time data analytics. The group has taken a “big bet”, according to chief executive Stephan Shakespeare, on the willingness of clients to pay for detailed access to personal information such as live banking data. “It lets you do things that would be creepy, if it wasn’t for the fact that actually the person selling it is wanting to do that,” he said.

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YouGov Direct is a relatively new division aimed at linking people with companies who want to utilise specific data. Mr Shakespeare said that out of a group of 800 people, 250 said they were happy to share live banking data with a third party in exchange for a cash payment — another manifestation, perhaps, of the Facebook era.

Looking at the more established YouGov divisions, the data products section saw the biggest growth year on year, with revenue climbing 36 per cent to £41.5m, outperforming the customs research division, where revenue was up 2 per cent to £60m. However, a pointer to the evolution of the product offering is provided by data services, which comprises fast-turnaround research services. Revenue here rose 28 per cent to £37.2m.

YouGov, in true Soviet style, is now into its second five-year-plan. The first set higher revenue and profit goals and a reshaping of the business around the data products and services division. The current objectives centre on doubling revenue and the adjusted operating profit margin by 2023, while targeting adjusted earnings growth at a compound rate of 30 per cent a year.

Mr Shakespeare said this would partly come from clients using more of their product range, ergo cross-selling opportunities. “The most important thing is that…we get more and more clients using two or three of the pieces, not just one,” he said.

Broker Numis forecasts adjusted earnings per share at 16p for July 2020, rising to full-year 2021, with respective adjusted cash profits at £150m and £162m.

Buy: GVC (GVC)

Strong trading in the third quarter has prompted GVC to upgrade profit guidance for the full year. The bookie now expects to generate cash profits of between £670m and £680m during the 2019 financial year, up from the £650m-£670m range previously expected, writes Julia Faurschou.

Chief executive Kenny Alexander said this upgrade was driven by strong online momentum across all territories, with net gaming revenue (NGR) up 12 per cent during the third quarter, despite part of the football World Cup falling in the comparative period. Mr Alexander also called the September launch of the BetMGM app in New Jersey a “key milestone”, adding that the joint venture with MGM is well placed to take advantage of the US sports betting market.

So far, the impact of the maximum stake cut from £100 to £2 on fixed-odds betting terminals in UK retail shops hasn’t proved as detrimental to trading as initially expected. Management said trends in UK retail “remain ahead of initial guidance”, with like-for-like NGR down 18 per cent, as a 36 per cent decline from machines was partially mitigated by a 7 per cent improvement in over-the-counter NGR.

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The shares were up around 6 per cent following the announcement, continuing the recovery that began over the summer, to trade at 795p or 13 times forecast earnings.

Chris Dillow: The danger of risk aversion

In recent weeks we’ve seen shares slip and gilt yields fall. This can only mean one of two things – that investors have become either more pessimistic about economic growth, or more reluctant to take on risk (or a bit of both).

The distinction matters. If investors have become more risk-averse then the market should bounce back, because high returns should in theory be the reward for taking risks that others are avoiding. If, on the other hand, shares have fallen because of expectations of lower growth they will only recover if those expectations prove too pessimistic. Otherwise, lower future growth means lower dividends than previously expected, which should mean permanently lower prices.

How can we tell which it is? Theory says we should be able to do so by looking at high-beta stocks. If these underperform while gilt yields are falling, it is a sign that investors are becoming more reluctant to take risk. If theory is right that good returns are a reward for taking risk, this should lead to shares generally rising.

Sadly, however, the evidence for this is mixed. It is the case that falls in 10-year gilt yields over a six-month period more often than not lead to rises in the All-Share index in the following six months. But the correlation, while statistically significant, is modest at just 0.23 over the past 15 years.

Worse still, the link between the performance of high-beta stocks and subsequent returns on the All-Share index is the opposite to what theory predicts. Using my high-beta portfolio as a measure tells us that six-month periods in which high-beta stocks underperform the market are more likely than not to lead to the All-Share index falling rather than rising in the next six months. When investors become more reluctant to take on market risk, it is a sign not that shares generally are about to recover, but the exact opposite – that they could fall further.

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This contradicts conventional theory. It is, however, consistent with other evidence. Andrew Lo at the MIT, and the UCLA’s Tyler Muir and Alan Moreira at the University of Rochester, have separately shown that rises in market volatility tend to lead to shares falling. This implies that it does not pay to take on risk when others are avoiding it. This is consistent with the bold claim made by Eric Falkenstein at Pine River Capital Management that there is actually no correlation between risk and return.

We can, however, salvage the theory. There’s one indicator that does have some predictive power. It’s the performance of high-beta stocks relative to value stocks (as measured by my high-yield portfolio). When beta underperforms value, the All-Share index tends to subsequently rise: since 2004 the correlation for six-month changes has been 0.35. Poor performance by high-beta stocks relative to value in 2012, late 2014 and mid 2016 all led to the All-Share rising, while outperformance by beta stocks in 2008 and early 2018 led to it falling.

What’s going on here is straightforward. Deep value stocks are a barometer of investors’ expectations of near-term growth prospects; their collapse in 2008, for example, was a harbinger of recession. If they hold up while high-beta stocks fall, therefore, it is a sign that investors are comfortable with growth prospects but are more risk-averse. And this should (and does!) lead to shares generally rising, as that risk aversion dissipates.

Herein lies some good news. In the past six months high-beta stocks have indeed underperformed value, implying that aversion to market risk has risen while attitudes to growth haven’t changed much (albeit by remaining downbeat). History suggests this is the combination that tends to lead to equities generally rising.

Granted, this indicator, while statistically significant, isn’t very powerful. But it is consistent with two other bullish indicators. One is that we’re approaching the time of year when equities traditionally do well. The other is that the dividend yield on the All-Share index is well above its longer-term average.

It might not feel like it, therefore, but there are reasons for equity investors to be mildly optimistic.

Chris Dillow is an economics commentator for Investors Chronicle

The Financial Times and its journalism, including Investors Chronicle content, are subject to a self-regulation regime under the FT Editorial Code of Practice: FT.com/editorialcode



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