Spread Betting Homeserve (HSV)
Talking of the unloved end of the spectrum, anyone looked at HSV recently? Very handy record of long term growth. It is not in a very sexy industry, but it’s not the first time their growth record has been avoided a premium by the market.
HSV operates on superior margins and return ratios than competitors, apparently because of their focus on the water market (broken pipes and whatnot, compared to costlier operations that British Gas oversee, where operating margins are only half as high). The stock attracted a multiple in the 20s with the prospect of greater returns in the USA market, which I feel is still as valid as a year ago.
Preamble
By the year 2000, HSV (at the time South Staffordshire Group) had delivered seven years of EPS and turnover growth, not to mention a very attractive increasing dividend policy for an emerging company. Around 10% compound earnings growth, very consistently, between 1993 and 2000. In two of those years, EPS grew by almost 20%. The stock price appreciated considerably, but the P/E never even hit 15.
(by comparison, Graham’s formula would suggest a “normal” price of 28.5 times earnings if that growth was to continue, a P/E of sub-15 was extremely sensible of the market).
Despite another year of earnings growth, the share price sat in the 60s for much of 2000, at one point on a P/E of under 10. Let’s say you took your chances, at any point between 60p and 80p, that you were buying that track record at a very sensible price.
EPS kept growing, compounding at 10-12% per year on average. The bull market caused sentiment to turn, in 2007 overvaluing future growth on a P/E of over 30 for the same company. The crisis drove the P/E back to 10, the recovery pushed it back to 23 again.
In 2011 the stock price hit the 530s, 700-800% higher than purchase price. The full cost of investment was returned in dividend payments.
And then the stock fell off a cliff, assuming once again, that growth is dead and buried for the company.
The market has in the last decade effectively said “this company has slim growth prospects, no actually this company has fantastic growth prospects, no this company has slim growth prospects after all, then again this company has very strong growth ahead, actually no this company is not going to grow from here”
Do you trust the market, or say with relative conservatism, that there’s a long term opportunity while that track record is intact? The stock is amazingly up 70% since May, after being down 70% from 2011, if we needed any more proof that the market is horribly inefficient at estimating value.