Although the share price of Direct Line Insurance Group (LSE: DLG) has eased back with the market in recent weeks, the longer-term trend seems to be up.
And why not? After all, the underlying business seems to be doing well.
Cyclical recovery?
Before emerging as a separately listed company during 2012, Direct Line made underwriting losses in the wake of the global financial crisis. The firm returned to underwriting profit during 2012, and built on that improvement in 2013. The current year seems to be going well too, but we’ll learn more with the third-quarter interim management statement due on Friday 31 October.
Fluctuating profits reveal the firm’s inherent cyclicality. The financial companies, such as insurers, can see wild share-price fluctuation as profits ebb and flow. That’s why the firm’s valuation bothers me a bit. The forward dividend yield is running at about 7.7% for 2015, and City analysts expect forward earnings to cover the payout just over 1.2 times.
That’s seems a too-good-to-be-true kind of yield, and the thin cover from earnings makes it look vulnerable if earnings start to slip. Is the market trying to tell us that it expects forward earnings to decline soon?
Property-linked investing
Where do you think UK property values are heading? It’s another highly cyclical investing game to play, but if you want to get involved, without all the inconvenience of rolling your sleeves up and actually buying bricks and mortar, you could invest in a property firm such as Mountview Estates (LSE: MTVW).
I love the simplicity of the way the firm describes its activities on its own website: “Mountview Estates P.L.C. is a Property Trading Company. The Company owns and acquires tenanted residential property throughout the UK and sells such property when it becomes vacant.”           Â
This is a what-you-see-is-what-you-get investment proposition, with potential hidden value on the balance sheet, and high insider ownership by the controlling family. The firm records properties at cost, implying the market value of assets is in excess the company’s 7740p share price. But I think we should be careful, because the share-price chart is peaking where it did in 2007 — just before the last financial crash.
Make no mistake, if property values fall, so does Mountview’s share price — potentially a long way. The firm is cyclical to the very core.
Pharmaceuticals
FTSE 100 drugs firm Shire (LSE: SHP) (NASDAQ: SHPG.US) stands out among its London-listed peers for its fast-growing credentials. The firm is best known for the attention deficit disorder treatments Adderall and Vyvanse, and is a young, high-energy upstart founded in 1986 and listed on the stock market as late as 1996.
City analysts following the firm expect earnings to grow by 28% this year and by a further 10% during 2015. Yet the shares took a steep dive during October when US operator AbbVie Inc (NYSE: ABBV.US) walked away from a takeover deal.
The shares’ valuation looks more attractive now than for a long time, with the forward P/E rating  running at about 18 for 2015.