Telecom Plus TEP Topup and McCarthy & Stone MCS Buy Rationale

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THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY.
As ever, I am tight for time so I decided to do a short Blog which just explains the thinking behind the 2 Buys I did on Friday 6th November.

Telecom Plus TEP Topup
I already hold a lot of TEP in my Income Portfolio ISA and I have been watching them for what seems like ages in order to add a little more to a Spreadbet Position that I have on them, I am pretty Bullish on the Markets and I want to have full exposures to good Stocks where I can and I felt the TEP Position was a bit small.

TEP disappointed the Market with a Trading Update back in April 2015 which included an unexpected £11m Write-down of Unbilled Debtors and the Shares took quite a hit but since that, the Company put out Final Results in June and a big recovery in the Share Price started from that point - and it is clear that Market Sentiment is very much back on TEP’s side and maybe it can regain its former Stockmarket Darling status - I think it will.

In August they put out an AGM Statement and the shares fell back after that but have now recovered and I think the Chart setup looks quite good so I decided to add to my Holding as I am very keen to have all my Exposure into the Market for the Seasonally strongest part of the year. The Company said it would raise the Dividend by 15% and this is what the Market likes.

Valuation
Please see the ShareScope ‘Details’ screenshot below. If you look in the Top Right Hand corner you should see ‘Norm EPS (p)’ for ‘Mar 2017 Forecast’ as 63.02p. At my Buy Price of 1091p, this gives a Forward P/E Ratio of 17.3 (1091p divided by 63.02p) - not at all cheap but TEP has a strong record of consistent growth over many years and I think it is sensible to pay up for this. If TEP can maintain its growth, then this P/E will soon fall as Earnings grow in coming years.

At my Buy Price of 1091p, the Forward Divvy Yield will be 4.7% (51.074p divided by 1091p and multiplied by 100%). So, even though this is not a cheap Stock, it has quite a nice dividend and I think this will continue to attract Buyers in when Interest Rates and Yields on anything are so low. In addition, this Dividend Yield should put a nice floor of Support under the Price.

TEP has Interim Results due on Tuesday 24th November and it is likely they can do pretty well on the run up to these.

Risks

• As with most Stocks I hold it seems, various Market Pundits have been questioning the Accounting Practices of TEP since the £11m Debtor Write-down. As ever, I am very suspicious of such talk and it is my view that there are many people who tend to over-analyse things and this does not really help them make money, and with a rising Cash Dividend being paid year after year, there really cannot be a lot wrong. There is a bit of Short Interest in this Stock and I can’t help thinking the Accounting Rumours and the Short Interest are related !!
• The Regulatory environment for Electricity and Gas prices is getting huge Political Attention - and of course as we go into the colder Winter period it is likely that this will heat up pressure on the Government that ‘something must be done’. This could cause TEP some problems but will of course apply to any Utility Stocks. TEP has a wide range of Products and some new ones coming down the track like Home Emergency Cover which should help mitigate some of these Regulatory Risks.
• Debt has been increasing in recent years - this is not too much of a problem as TEP is a very stable business with large Cash Flows - however, it is something that mustn’t get out of hand.
• Please check my previous blog for more Risks - link at the bottom of this blog.

Technicals
As I mentioned above, I have been stalking TEP for a while with intent to topup my Position. The Charts below are from Friday 6th November 2015 - normally I would show you the Charts up to Thursday - the Night when I made my Decision to Buy (regular readers will know I like to make Trading Decisions outside of Market Hours when I am less affected by Intraday Emotional turmoil) - but for no good reason I updated ShareScope with Friday’s data and I have no idea how to unwind it to just show up to Thursday !!

The ShareScope Screenshot below shows the TEP Chart since early 2006. You should be able to see that the Stock had an amazing run up to a Peak around 1950p back at the end of 2013 and had been in a Downtrend Channel for a long period - as I have shown with the 2 parallel Red Lines.

Note that the Price Broke-out of the Downtrend Channel back in July 2015.

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On the Chart below, I have zoomed in to just the last 2 years or so, and you should be able to clearly see the Breakout which I have marked with the Blue Arrow. My Green Arrow marks a ‘Golden Cross’ between the 50 Day Moving Average (darker blue wiggle line) and the 200 Day Moving Average (the light blue, slower moving, wiggly line) - this is usually a Bullish Development for people with a Medium Term time horizon.

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On the Chart below I have drawn in a Black Line (marked with the Black Arrow) which makes Support underneath the recent Price Action. My Blue Arrow is pointing to a Nice White Up Candlestick which was produced on Thursday 5th November and which prompted my Buy Decision to a large extent. It signalled to me that the Price seems to want to turn up.

Note however, that because I did the Friday Update, we can see that in the Very Short Term the Up Candle from Thursday did not predict more moves up and on Friday the Price fell a lot. This is no big deal, as long as the Black Support Line holds I should be ok - it is breaks, then the Price will probably drop lower. With Interim Results soon, this seems unlikely. As with any Technical Analysis, it is no guarantee of anything but it does give valuable clues about what outcomes are most likely.

It is quite possible that the Price moves in a Sideways Range up to around 1200p ish now for many months - hard to tell but that is the usual behaviour after a Major Downtrend breaks - at some point, I expect any such Range to break to the Upside and we could start moving up strongly again.

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In the Upper Window of the Chart below, you should see the Bollinger bands which are the wobbly Blue Lines which surround the Price Candles - above and below. My Green Arrow points to where the Price Candles have moved up off the Bottom Bollinger Band - this is a good sign that the Price wants to move up.

In the Bottom Window, my Blue Arrow is pointing to the Red MACD Hump (Moving Average Convergence Divergence). This picture was a bit ruined by the Friday data, but if you can imagine what I was looking at on Thursday Night, then it was looking like the ‘Hump’ was turning up. To get the significance of this, look to the Left and you should see where the Humps did this in the past and what happened to the Price.

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Summary
I am pretty sure TEP is a class act and exactly the kind of Quality Stock I want to own for the Long Term and I have a load in my Income Portfolio and I wanted to copy this with a larger Spreadbet Position as we go into Winter.

Robbie Burns, the Naked Trader, holds a huge amount of these although I did notice he trimmed his holding a bit lately - I don’t think you can read too much into this as his holding is utterly enormous. 

With regards to Targets, I think in time we could see the previous All Time High again around 1950p ish but we are a long way off. In maybe the next year or so perhaps we can see something around the 1500p area. TEP has a superb history of rising Dividends and it will be hard for Income Investors to ignore this.

I did a fairly detailed Blog on TEP back at the end of 2014 which should give a lot more detail on the Company, but of course time has moved on so the Numbers bit should be ignored really. You can read it here:

http://wheeliedealer.weebly.com/blog/telecom-plus-tep-buy-rationale

McCarthy & Stone MCS
Along with TEP, I picked up some MCS on Friday via a Spreadbet at 206p. This is a brand spanking new IPO and ‘Conditional Dealings’ started on Friday at a Price of 180p. By the Close on Friday it was up to 209p ish so I am off to a good start and I think it could rise quite well in coming months as people realise it is back on the Market. 

I have known this was going to list for a while but had really forgotten about it and thought it was a while yet - time flies doesn’t it ?!! I am really keen to get involved because I used to deal in McCarthy & Stone when it was under the Epic Code MCTY many years ago before it was bought out by Private Equity.

MCS is the UK’s leading Retirement Home Provider and they specialise in just this and seem to do it really well. In fact, a mate of mine was temping in one of their Sales Offices recently and she said it was hugely busy - they are pretty much selling everything they can build. This is no surprise with the demographics of the country meaning that there are more and more Old People who want to live in smaller properties which have warden facilities and stuff - downsizing is now very common as people get older.

I didn’t have any spare Cash in my ISA so I bought a small Starter Position via a Spreadbet in my igIndex account to get my foot in the door. Part of the problem is that I don’t really know what the Valuation is precisely like. On Friday morning, I read that the Float Value was about £950m or something and that last year they did £80m Profit Before Tax. These numbers look ok in Price/Earnings (P/E Ratio) terms and at my Buy Price of 206p the Market Cap is probably around £1.15Bn - so I guess the P/E ratio for last year is around 18 or 19 times - not cheap by any means but not really expensive for something of this quality. In the past, when listed as MCTY, the shares were always on a high P/E rating.

Whilst in ‘Conditional Dealings’, it might be hard to buy normal Shares, I don’t know, but of course Brokers should have this information.

I really am keen on MCS partly because Housebuilders in general have had a very good run and it is hard to tell if they are good value or not. My hunch is that there probably still is more value to come in Housebuilders but historically they have traded on much lower P/E ratios so I am really not sure. In such circumstances, I think MCS gives me a neat way to sort of get exposure to the UK’s Housing Crisis (let’s be honest, that is what it is, the Government has done a pathetic job at enabling Houses to be built) and because it is such a special niche, it might be a lot less risk. Empiric Student Property ESP, a recent buy I did also gives me a similar kind of niche exposure to housing. You can read my ESP Blog here:

http://wheeliedealer.weebly.com/blog/empiric-student-property-esp-buy-rationale

My plan here is to be patient and to see how things play out in coming Days/Weeks and once I get a better understanding of the Value here, I will be looking to topup in a big way if the Value Case stacks up for me. If it goes up and up and starts to look overvalued, I might just sell my small stake and bank the profit and move on.

Right, that’s enough for tonight, a WheelieDealer must eat you know !!

Cheers, WD