Nick Train is in a position to buy stocks. In a week when Cambridge Water announced its first hosepipe ban in 30 years, Finsbury Growth & Income has the opposite issue – a flood of liquidity.
Takeovers of two long-standing holdings — Schroders and Intertek — have handed the trust a windfall worth tens of millions. The destination for much of that cash? Games Workshop (LSE: GAW).
Investing lessons
First things first. There’s a lesson in the takeovers themselves, which is that the stock market tends to sort itself out sooner or later.
Schroders and Intertek spent years looking unloved before buyers arrived paying big premiums. And Nick Train’s fund suffered some serious underperformance as a result.
Fortunately, however, cheap stocks rarely stay cheap forever. Most of the time, someone eventually notices and that’s been the case recently for a number of UK names.
That’s a powerful argument for patience over switching. It’s often tempting to sell an undervalued stock out of boredom, but the cost of doing so can be huge in terms of missed opportunities.
Managers who run active funds don’t always have a choice – redemptions from clients have to be financed. For the rest of us, however, the ability to do nothing is a huge advantage.
An odd choice
Nick Train has been waiting patiently to be proved right on relatively cheap UK stocks. But that makes the choice of Games Workshop surprising – nobody could accuse that company of being unloved.
The stock trades at a price-to-earnings (P/E) ratio of 33 and has a 2.4% dividend yield. I don’t usually focus on dividend yields as a valuation metric, but I think it makes sense in this case.
Games Workshop returns virtually all of its free cash flow to shareholders. That makes the yield an unusually accurate proxy for how much cash the company produces.
At 2.4% this means the shares are expensive. Meanwhile, Diageo – a stock Train recently apologised for – trades at a P/E ratio of 11 with a yield of around of 5%.
Growth prospects
To be fair, Games Workshop’s business is performing. May’s trading update guided to record revenue, with the US expansion and licensing income driving growth.
On top of this, the first FY27 dividend was increased to 90p per share from 85p. That’s a 6.88% increase – well above inflation.
Then there’s the long-awaited Amazon film project with Henry Cavill. That’s still in development, but it could be a big boost when it arrives.
Getting that right is going to be key to the firm’s future US growth. But doing the right thing by its loyal customers is something the FTSE 100 company has done extremely well.
Is now the time to buy?
Games Workshop’s next update is due on 28 July. It’s a wonderful business, with high margins, strong franchises, and potential growth ahead.
In a market full of discount stocks, however, the high multiples are striking. I’m a Games Workshop shareholder, but I struggle to see a screaming bargain at today’s prices.
It makes me wonder whether this is a sign of a shift in Nick Train’s approach. The takeovers proved patience pays – the irony is what’s being bought with the proceeds.
Should you invest £5,000 in Games Workshop Group Plc right now?
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Stephen Wright owns shares in Diageo and Games Workshop.
