The FTSE 100 has had a weird year this year, with some constituents performing gyrations that are normally only seen on smaller cap indexes. Such volatility gives us some great opportunities, but it adds a lot more risk to the mix.
Take Vodafone (LSE: VOD), for example, whose shares are up 39% in three years, to 216p. That sounds good, but it hides a white-knuckle ride that’s had the price bouncing up and down between the 160p and 250p levels.
On forecasts for the year to March 2016, we’re looking at a P/E multiple of over 45, which is the kind of valuation usually only afforded to almost-guaranteed growth or to small blue-sky hopes. But Vodafone has seen earnings falling heavily for two years in a row, with a further 14% fall on the cards this year. There’s a modest 20% rise penciled in for 2017, but that would drop the P/E only as far as 38.
With no obvious joined-up strategy I can see, and ludicrous dividend yields of 5% on offer that aren’t even half covered by earnings, Vodafone’s fundamentals seen out of kilter to me. I could see a rationalization hurting the share price.
Soaring on sentiment
Hargreaves Lansdown (LSE: HL) has been performing very well in the past few years, as investor sentiment has been improving and its coffers have been swelling — at Q1 time this year, the firm reported £54.7bn in assets under administration, and an 11% rise in net revenue to £78.5m.
But at the same time, the share price has been soaring — over the past 12 months alone, it’s up 50% to 1,478p. And that’s put the shares on a forward P/E of 38. Although there’s an 18% rise in EPS forecast for the current year, it comes after a 4% drop in the year ended June 2015, and the dividend should only yield around 2.5% — and would be only barely covered.
Great company, but the share price is surely overheated.
Shiny stuff
Shares in silver miner Fresnillo (LSE: FRES) have had a torrid time, losing around 64% since late 2012, to 709p today — with the main culprit being the falling price of silver. But with the precious metal firming up a bit, Fresnillo’s shares have ticked up since the start of October.
The company does have a 158% rise in earnings per share forecast for this year, but that’s from a crunching low in 2014 and would still be quite some way behind its earlier glories. Still, there’s a further rise of more than 80% on the cards in 2016, so why do I feel uneasy about the shares?
It’s simply because they’re on a prospective P/E this year of 56, which only drops to 30 on 2016 expectations. To me, that seems to factor in at least a couple more years of decent earnings growth. And to be fair, it might well be there — but it hangs almost entirely on the fickle pricing of precious metals, and that’s too risky for me.