Why’s JD Sports Fashion’s share price rising?

I think the share price increase is directly linked to the 11% decline seen last week. In other words, investors most likely saw it as a good opportunity to buy the share on a dip. Despite this being an awful year for retailers, JD’s share price has shown a robust increase through much of 2020. 

This, of course, is related to its performance. It’s last set of results did show a dent to performance driven by the Covid-19 lockdowns. But, it was still profitable and the company also maintained its full-year guidance. 

What’s next for it?

I’d brace for a downward revision when it updates investors on its financials next. This is because of the unprecedented impact of Covid-19 lockdowns. Non-essential retailers are closed in the current second lockdown. With restrictions on our public lives set to continue even after it comes to an end, bricks-and-mortar retailers will continue to feel the heat too.

But still, JD is likely to be in a good place, going by the fact that it’s in the running for buying up beleaguered retailer Debenhams. There are contradictory reports doing the rounds about whether it’s still in the race or not. We will know for sure after the lockdown ends later this week. 

In the meantime, it has won the appeal against the decision of the Competition and Markets Authority (CMA) to prohibit its acquisition of Footasylum. The CMA had expressed concern on the negative impact on shoppers because of this. But the Competition Appeal Tribunal, not persuaded by CMA’s reasoning, overturned this decision.

Acquisitions can come with their own challenges, as the acquirer takes on not just market share but also the weakness of the acquired company. But as I see it, that’s tomorrow’s problem. For now, the fact that it has got a go-ahead, coupled with its interest in Debenhams, suggests that JD Sports has the means to buy them. 

How’s the long term looking?

Even otherwise, I think JD Sports’s future is bright. We may still be in lockdown, but at least we can see the light at the end of the tunnel. Forecasts for economic growth in 2021 were looking up even earlier. I reckon they’ll be better still now that a vaccine is around the corner. Retailers should benefit from this. 

The verdict

Further, JD Sports is a financially healthy company that’s part of a growing industry. It’s little wonder that investors are positive on the stock — evident from the fact that its price is rising despite an earnings ratio of over 40 times. I’ve long been bullish on the stock, and don’t see any reason that should change. 

The post JD Sports Fashion is the fastest FTSE 100 riser today. Would I buy now? appeared first on The Twelfth Magpie.

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Manika Premsingh owns shares of JD Sports Fashion. The Motley Fool UK has recommended Experian. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Despite all this, those buying the stock back when markets crashed in March will have done very well. Indeed, easyJet’s share price was flying a little over 60% higher yesterday than where it was in mid-March.

Are the shares are still worth buying? Not in my view.

Reasons to steer clear of easyJet

The arguments against buying now are both plentiful and powerful.

First, investor expectations may be unreasonably high. Even if the company manages to get more planes in the air, you’d need to be a real optimist to think that things will return to how they used to be anytime soon.

Ask your nearest and dearest whether they’d be happy to fly tomorrow. I’ll bet the majority won’t, even if middle seats were kept free. Also consider the increased costs associated with keeping planes clean and the need to offer big discounts to attract flyers in an already highly competitive industry.

All this surely has implications for profits and, ultimately, the share price. Will those who’ve recently made a packet be willing to stick around? I’m not so sure, especially as we become more aware of the full economic impact of the pandemic. Even Warren Buffett, arguably the greatest proponent of buy-and-hold investing, dumped all his airline stocks not that long ago.

Another thing worth considering is that a not-insignificant portion of easyJet’s shares are being shorted. In other words, a fair number of market participants are now betting the share will fall. These highly researched shorters don’t always get their calls right but it takes guts to go against them.

So, what would I buy instead?

As an alternative, I would suggest investing in quality, market-leading companies that, crucially, tend to be resilient in good times or bad. I wrote about one such firm earlier this month. 

Of course, if you really want some exposure to easyJet, you could push equal amounts of cash into all of the UK’s listed airlines and cross your fingers. This is less dangerous than backing the Luton-based business on its own but it does feel more akin to gambling than investing to me. It’s still a poor way of diversifying your capital as well. 

A less risky, albeit potentially less lucrative alternative would be buy a cheap FTSE 100 exchange-traded fund. This ensures at least some of your money is invested in easyJet. The remainder is spread around the rest of the UK’s biggest companies.

Another consideration, particularly in light of easyJet’s recent woes, is getting some exposure to cybersecurity stocks. The growing need for companies of all sizes to protect themselves from sophisticated hackers makes this a great option for long term defensive investors, in my opinion.

If you’d rather not sort the wheat from the chaff, then the iShares Digital Security UCITS ETF could be ideal. It tracks a basket of 113 stocks, roughly half of which are based in the US. The ongoing charge is 0.4%, making this a relatively cheap way of getting on board this mega-trend. 

The post Forget easyJet shares! Here’s what I’d buy instead appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Back in June, shares in mid-cap upholstery retailer DFS (LSE: DFS) suffered their worst day since listing. Over 20% was wiped from the company’s valuation after it issued a profit warning, blaming a weakening trading environment. 

The stock may have recovered a little since then but it’s still nowhere near the 350p mark it achieved last November. Indeed, based on today’s final results (and the market’s reaction to them), I suspect the situation’s only going to get worse for the Doncaster-based business.

Challenging conditions

In the year to 29 July, DFS saw gross sales rise 1.1% to just under £991m. Thanks to “very challenging” market conditions in H2 and the weakness of Sterling, revenue climbed just 0.9% to £762.7m with pre-tax profit tumbling 22.3% to £50.1m. Worryingly, free cash flow also fell almost 25% to £57m, raising questions as to whether the special dividend of 9.5p paid earlier in the year (in addition to the total ordinary dividend of 11.2p) was entirely appropriate.

It wasn’t all doom and gloom. As well as the recent proposed acquisition of Sofology and a licencing partnership with Joules, the company reflected on progress made in expanding its UK store network with three new 10,000-15,000 sq ft stores opened over the reporting period. Trading in the Netherlands remained “in line with expectations” and the company opened its second store in Spain.  

Nevertheless, while I don’t doubt the belief of management that DFS has “excellent prospects for the long term,” I struggle to see why investors would want to stick around for a reversal in the company’s fortunes, even if — trading on 11 times earnings — its shares might look a bargain buy in terms of valuation. The big-ticket nature of the products the company sells and the fact that consumers are likely to refrain from splashing out if inflation continues to rise both lead me to believe that there are far better opportunities elsewhere on the market.

Speaking of which…

While hardly immune to the tightening of purse strings, I think easyJet (LSE: EZY) could be a far better purchase for investors who suspect that the prevailing political and economic uncertainty won’t be enough to stop people from wanting to travel abroad.

As well as it being far more more likely that people will take a flight than purchase a replacement sofa, recent fiascos surrounding industry peers Ryanair and Monarch should do the company no harm at all. True, the former will be soon forgotten both by the market and passengers (just like the IT system failure at British Airways had no lasting impact on IAG‘s shares) but the latter could be beneficial in terms of reducing competition and increasing capacity.

Even if the £5bn cap, Luton-based airline will be saying ‘bon voyage’ to its highly regarded CEO Carolyn McCall in a few months time and a forecast 23.5% drop in earnings per share is predicted for the current financial year, things look set to turn around in 2018/19.

At 16 times forecast 2017 earnings, easyJet isn’t the cheapest airline stock to buy, but a price-to-earnings growth (PEG) ratio of just 0.9 suggests investors would still be getting a good deal for their money. While dividends are expected to be 26% less this year than they were back in 2015, a 3.1% yield is still adequate compensation for any concerns arising from Brexit.

The post Why I’d buy easyJet plc over this beaten-up mid-cap appeared first on The Twelfth Magpie.

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Paul Summers own shares in easyJet. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My main concern is the highly cyclical nature of the hotel industry. The sector’s health in recent years has improved alongside the global economic recovery following the financial crisis, but it is unclear how long this growth can continue.

The IMF may have recently upped its global GDP growth estimates for 2017, but it also issued stern warnings on the risk of rising protectionism, a lack of structural reforms in key markets and a dearth of international economic cooperation. This matters hugely for IHG as its ability to fill new hotels and jack up rates is directly tied to global economic health and the spending power of tourists and business travellers alike.

An added wrinkle is one investors in airlines will be all too familiar with: companies’ tendency to add capacity at breakneck speeds that inevitably results in too many empty rooms when demand growth inevitably falls.

Indeed, the speed at which global hotel groups are adding capacity is already negatively impacting IHG’s ability to increase rates. Growth in revenue per available room (revpar), the industry’s key metric, has fallen for two consecutive years at IHG. In FY 2014 year-on-year revpar grew at 6.1%, which fell to 4.4% in 2015 and then 1.8% in 2016.

This hasn’t been a critical problem as the company’s move to a franchisee business model has seen it increase margins and cash flow, which all investors love. But with the company’s shares priced at a relatively expensive 21.8 times forward earnings and an industry fixated on expanding rapidly, IHG is one cyclical stock I’d steer clear of right now.

Flying into turbulence 

It’s almost the exact same story for BA, Iberia and Aer Lingus owner International Airlines Group (LSE: IAG). Unlike American carriers, that have kept capacity growth artificially low through what some argue is collusion, European carriers have been adding capacity at a rapid clip in recent years.

In 2016, IAG increased capacity by 3.9% year-on-year excluding its Aer Lingus acquisition. This is even more dramatic for smaller rivals such as easyJet, which upped capacity by 8.6% y/y in the previous quarter, and Ryanair, which is forecasting a 12% increase in passenger numbers for this year.

All of this is driving fares down across the industry. In 2016, IAG’s revenue per available seat kilometre, a key industry metric, fell 4.3% year-on-year and this effect was even more extreme for budget carriers.

With the age old cyclical nature of the airline industry once again returning to full force I’ll be avoiding legacy carriers such as IAG due to high debt, high staffing costs and far less flexibility than nimbler budget rivals. Although the airline’s shares may look cheap at 7.5 times forward earnings I wouldn’t be buying shares of IAG at this point.

The post Two high-flying FTSE 100 stocks I’d sell right now appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But I reckon Lloyds’ lamb-like appearance disguises an erratic wolf with sharp teeth ready to bite investors risking money on the shares.

Why Lloyds is not cheap

Today’s share price around 67p looks cheap at first glance and throws up a forward price-to-earnings (P/E) ratio just over 10 for 2018, which compares to a median forecast P/E of all stocks on the London Stock market with earnings estimates of just over 14.

Then there’s the forward dividend yield running around 6%, above the median forecast of all dividend payers of 3.2% or so. We can even look at Lloyds’ price-to-book ratio of around one and argue it indicates reasonable value for the banking group.

However, to compare its valuation figures with any kind of average for the whole market gives a false impression. Averages combine the lowest rated firms with the most highly valued outfits and all enterprises in between. Averages are nonsense because each company faces its own ‘issues’ and Lloyds has plenty of those.

A useful mind model

To me, banks are not proper trading businesses. Instead, they facilitate other businesses and people’s personal finances. In some ways, despite their best intentions and the hard work of their employees, banks are like leeches dining on the blood of other animals. If the host is in good health, the leech prospers, if not, the leech withers. I think that colourful analogy suggests a useful mind model for investors considering Lloyds.

With the ‘leech’ idea in mind, you can see why banks are among the most cyclical of stock market enterprises. If macro-economies wobble — suggesting businesses and individuals may struggle financially — the shares of out-and-out cyclical firms like Lloyds will plummet, often at the first whiff of economic trouble.

But ‘normal’ cyclicality is the least of your worries if you are invested in banks. Well-known past Fidelity fund manager Peter Lynch reckons that cyclical firms can fall too hard on a cyclical down-leg and never recover to previous glories. Anyone investing in Lloyds prior to the 2008/9 financial crisis and holding until now can verify the wisdom of that.

Why crises are normal for banks

Bank crises are nothing new. The Guardian reported during 2007 that according to Lehman Brothers (which itself filed for chapter 11 bankruptcy protection in 2008) the 18th century saw 11 banking and financial crashes. In the 19th century, another 18 occurred. There were 33 traumatic happenings in the 20th century, including the Wall Street Crash of 1929 and the Japanese financial turmoil of the 1990s. 

So far, in the 21st century, we’ve seen the sub-prime-induced financial crisis followed by the so-called Great Recession. I reckon, judging by past evidence, we’re due more catastrophic financial events before the century is over, each potential occurrence likely to decimate the total return outlook for those holding bank shares. 

With such potential for volatility in the business model, Lloyds deserves its low-looking valuation — how else can the market attempt to discount for such forward risk? City analysts don’t see much growth in earnings on the horizon for Lloyds, so the only thing going for the stock right now is fragile share-price momentum and a fat, but in my view precarious, dividend.

The post The uncomfortable truth about Lloyds Banking Group plc appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Is 2017 finally the year that the good value we think we see in stocks such as Lloyds (LSE: LLOY), Royal Bank of Scotland (LSE: RBS) and Barclays (LSE: BARC) will ‘out’ to drive these firms’ share prices substantially higher?

Going up, but…

Since October, Lloyds’ share price is up 20%, RBS is up 30% and Barclays has put on around 34%. Yet forward prospects differ for these firms, which makes me suspect the current rally is driven by investor sentiment and speculation rather than sound underlying fundamentals.

For what it’s worth, which isn’t much, City analysts expect Barclay’s to increase its earnings per share by 51% during 2017, RBS by 30% and they expect Lloyds to post a 4% decline in earnings next year.

Yet earnings have been volatile in recent years. If you look at trading results for the last five years and projections for the next two years, you’ll see big declines in yearly earnings per share as often as you see rises.

The share chart tells the story for longer-term investors: Lloyds is down around 23% since early 2014, RBS is down 41% and Barclays down 25%. Big cyclical beasts like the major London-listed banks don’t make decent buy-and-forget investments, especially now after a long period of relatively large profits.

The third way

As investors, we all seem drawn to search for bargains in sectors beaten down by bad news, setbacks and poor investor sentiment. What better place to look than the banking sector then? After all, it has been beaten and thrashed by regulators, scandals and economic circumstances for years.

Valuations look attractive at first glance. Lloyds trades on a price-to-book value around 0.96, RBS is 0.49 and Barclays is around 0.6. So, are we seeing the banking industry poised to recover and shoot the lights out during 2017, or is an investment now a high-risk proposition with potential to plunge?

I reckon neither  option is likely in the medium term. Maybe the big banks will take a third way and remain bogged down delivering a flat total return for investors over the coming years. That has certainly been the case since around the end of 2013 and I see no reason why the situation shouldn’t continue. We don’t know what regulatory requirements will hit the banks in the future, or how much fines will escalate for their misdemeanours, how competition will erode their trading position in the UK, or how many more high-risk but previously profitable operational strategies they will abandon.

Wading through porridge

Cyclicality means bank stocks will likely perform as if they’re wading through porridge from here anyway, even without all the firms’ other challenges being taken into account.

I reckon the market will keep nibbling away at the banks’ valuations as the wider macroeconomic cycle matures in an attempt to discount for the next cyclical down-leg, which will see profits and share prices plummet. So that’s why I’m wary of the banks now. I wouldn’t want to be holding their shares when the music stops again.

The post Be wary of this bank stock rally appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Cheap on the numbers

Compared to many other firms in the Footsie, all three firms are cheap based on the numbers as this chart shows:

Borrowings seem to be under control in each case, although it’s worth noting that Pearson and Travis Perkins have a lot of intangible assets. Therefore, the gross gearing figures and the price-to-book (P/E) values would be less impressive if we stripped those intangibles out.

Nevertheless, all three firms sport a low-looking P/E ratio and a substantial dividend yield. Overall, their value credentials measure up to scrutiny and each firm deserves further research and attention.

I know nothing

One of the guiding principles for many value investors is an acknowledgment that we really don’t know anything at all about a firm’s business, its prospects or the wider economy. We really are clueless as investors, and knowing that we don’t know anything puts us into a position of strength.

If we know we don’t know anything we can’t trip ourselves up by getting forecasts and predictions wrong. We don’t know which firms will go on to trade well or grow and we know it’s hopeless to try to guess. Therefore, we look for cheap shares. Firms with share prices beaten down by negative investor sentiment or simple lack of interest. 

After all, a share price trading close to the firm’s underlying net asset value probably can’t fall much further, right? A low P/E rating and a high yield is a copper-bottomed indication of cracking value, right? Low gearing means manageable debts, right?

You know plenty

Not so fast. A lot can still go wrong. It’s possible for shares to value firms at a small fraction of their underlying asset value and that could happen if earnings fall off a cliff. With earnings gone, the attractions of a low P/E, high yield and low-looking debts could also be blown out of the water. 

The trouble with the theory that we as investors know nothing is that we do actually know plenty. One of the things that I know is that all three of these businesses have a high degree of cyclicality in their operations, and cyclicality could conspire at some point down the line to create the impoverished-earnings scenario that I describe above. 

If that happens, the shares will plummet — perhaps by as much as 80% or so. For example, look at Travis Perkins, trading around 1,398p today, but as low as 229p back in 2009. The shares could easily go there again.

But if you believe economies are about to turn up, right now could be a good time to take the plunge with Pearson, Royal Mail and Travis Perkins. Just remember what you’re getting yourself into and remain vigilant.

The post 3 of the FTSE 100’s best ‘value’ shares appeared first on The Twelfth Magpie.

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How long will it take Lloyds to recover from here? Well, I’d argue that Lloyds’ business has already recovered from the lossmaking depths it plunged to in the aftermath of last decade’s credit-crunch.

Robust profits

Back in 2007, pre-tax profit came in at around £4bn for the year. Then we saw gargantuan losses from the firm for a few years, but City analysts following Lloyds expect a pre-tax profit around £6.3 bn for 2016.

That looks like the business has recovered, but the share price is unlikely to ever return to the heady heights it occupied before the financial crisis. In 2007, the firm’s profit delivered earnings per share of 58p. In 2016, with profit up almost 60% since 2007, the earnings-per-share figure looks set to come in at just 14p or so. Such are the effects of dilution where the profits must be distributed among a much larger share count.

Share prices don’t tend to move according to absolute levels of profit, but they do move if the earnings-per-share figures rise. If a firm keeps diluting its investor base, as Lloyds has done in recent years, the shares will struggle to rise even though the underlying business might be doing well.

Barriers to shareholder gains

Yet dilution isn’t the only worry for shareholders. Lloyds is busy shrinking its asset base and refocusing operations on the competitive UK market. Further business growth from here is likely to be hard to achieve, and I reckon the combined effects of further dilution and lacklustre profit growth could conspire to hold the shares back in the coming years. City analysts predict a 1.6% uplift in pre-tax profit for 2017 but a decline in earning-per-share of 16% this year and 8% during 2017.

But Lloyds’ biggest disadvantage is its cyclicality. Some firms provide goods and services that are so stripped-back and of such a commodity nature that they’re super-sensitive to macroeconomic events and cycles. Banks are like that. They provide a service that facilitates business and personal finance activity. If that activity declines, such as during a recession, so does the turnover of banks. That can lead to a dramatic and sudden plunge in earnings for the banks, and where earnings go the share price is bound to follow. 

I think Lloyds’ cyclicality is a big problem for those hoping for a valuation rerating now. The bank might look cheap on conventional valuation measures — such as the level of the dividend yield and the price-to-earnings ratio — but Lloyds deserves its low rating at this mature stage in the macroeconomic cycle, as viewed back to the credit-crunch. Profits have recovered and now look peaky to me. The cycle will turn at some point and the market knows it, that’s why the valuation is low, in anticipation of the next business collapse.

The post How long will it take Lloyds Banking Group plc’s shares to recover? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Kantar reckons Tesco grew ahead of the overall market where sales increased just 0.8%. It looks like Britain’s largest grocer is making real turnaround progress under chief executive Dave Lewis.

Squeezing out profits

Meanwhile, BP (LSE: BP) reported third-quarter results this week with underlying replacement cost profit up almost 30% compared to the previous quarter but down nearly 50% on last year’s third quarter. The firm is working hard to squeeze out profits by controlling costs and announced a further decrease in its capital expenditure plans to $16bn down from earlier guidance of $17-19bn.

The lower price of oil forced the firm to ‘reset’ its cost base. The firm’s chief financial officer reckons it can “rebalance organic cash flows next year at $50 to $55 a barrel,” which suggests Brent Crude at today’s $47 or so could be a problem for the company.

Share prices riding high

It’s possible to glean something cheerful from the news in both cases. Maybe that’s why these firms’ share prices are riding high. At today’s 211p, Tesco is up almost 52% since January, and at 454p, BP is up just over 46% over the same period.

I ‘get’ the case for investing in these two. Even Tesco’s projected annual pre-tax profit of just over £1bn for the year to February 2018 is still around just a quarter of what the company made during the year to February 2012 — this turnaround has potential to go much further. And the price of oil languishes around 66% below the peak it touched during 2008 — just think what a recovery in the price could do for BP’s cash flows.

My problem is that both firms look overvalued, and I’d argue that neither is suitable as a long-term investment. I certainly wouldn’t trust my retirement funds on the pair today.

Wider challenges

Today, Tesco’s forward price-to-earnings (P/E) ratio runs at just over 21 for the year to February 2018. To me, that’s too high and already anticipates a return to higher profits for Tesco way down the road, beyond 2018. 

Investors are too optimistic, I reckon. Tesco ‘should’ be trading at no more than a P/E ratio of 15, tops. The firm is making a little headway now with its business, but a wider threat continues to gather in the supermarket sector as rapidly growing challengers Aldi and Lidl make market share gains that walk all over Tesco’s. I reckon a return to peak profits for Tesco seems unlikely in inflation-adjusted terms — ever.

BP’s forward P/E rating around 14 for 2017 seems to build in a return to higher profits that may never arrive. Recent events show me that BP’s cyclical business is even more dependent on high oil prices to really thrive than I suspected. Cyclicals like BP deserve a lower rating and even then the risk to the downside for investors remains large.

If I had gains with Tesco and BP I’d cash in right now and reinvest in firms with higher quality businesses.

The post Why I’d drop Tesco plc and BP plc right now appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Television companies may not be the first example to spring to mind when cyclical stocks are mentioned but their high dependency on advertiser spending means the health of the broader economy is of paramount concern for TV executives.

Judging by the 37% fall in share prices since the beginning of the year investors were beginning to lose confidence in ITV even before the EU Referendum vote in June. Why the negativity? It’s not down to ITV’s core business as interim results showed an 11% rise in revenue year-on-year and 10% jump in EBIT.

The main culprit is fear that economic growth is stagnating, which ITV’s interim results did nothing to dispel as TV advertising didn’t grow at all year-on-year. Many analysts see adspend as a bellwether for economic health, which is something ITV shareholders should bear in mind.

The good news is that ITV management is working hard to lessen the effects of cyclical adspend on the business by spending heavily on in-house productions. Revenue from internal studio productions is becoming a bigger chunk of business and was worth roughly a quarter of EBIT over the past six months.

Unfortunately, this still illustrates just how dependent ITV remains on advertisers and the overall health of the economy. It’s been a hell of a run for shares since the financial crisis but with the possibility of a Brexit-related economic slowdown looking more and more likely I’d be wary if I were an ITV shareholder.

Watch and wait?

It’s little surprise that shares of Persimmon are off 13% since the start of 2016. Like ITV, the housebuilder is a solid company with strong competitive advantages it can’t escape the headwinds many see coming for the domestic housing market.

While Persimmon hasn’t released financial results that cover the period after the EU Referendum, there are a few points that would make me nervous if I owned shares. Foremost among these is the reliance on government policies such as Help-to-Buy to stoke demand for the lower-cost homes Persimmon builds.

And, while sales of new builds appear relatively resilient in the months following the Brexit vote, estate agents have begun ringing warning bells that all is not well in the overall market.

Still, the company’s last interim results showed just how strong the underlying business has been with gross margins hitting 26.9%, net cash reaching £462m and dividends once again increasing as bumper profits continued. Until there’s further hard data released on home demand it could be too early to cut loose a quality company such as Persimmon.

The post Is it time to sell these cyclical shares? appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.