PayPal (NASDAQ: PYPL) stock is up over 30% in the last month. After posting excellent Q2 results, it takes the spotlight as my stock of the week. With that in mind, I think PayPal could rebound in the current stock market recovery.

Investment pays off

After the fintech firm reported its Q2 numbers, PayPal saw its stock rise by more than 10%. This was because it beat a number of analysts’ estimates on both its top and bottom lines. In fact, the company managed to surpass its own guidance on the majority of metrics!

Nevertheless, the firm’s EPS saw a substantial decline. However, this was because of lower transaction margins from eBay, and the last year’s numbers getting a boost from the release of unneeded allowances for bad loans. Taking those factors into consideration, EPS stayed flat on a year-over-year (Y/Y) basis.

Pals bring quality

Since PayPal revised its goal of bringing more quality than quantity, it’s seen user growth decline, but PTPAA has gone up steadily. This was evident in this quarter’s numbers, with minuscule NNA, but robust PTPAA growth.

The growth can be attributed to two reasons. The first is the rise in core daily active users, which has seen a rise of more than 40% since 2019. This is crucial for PayPal because 80% of its transactions come from 30% of its most active users. The second is the continued growth of Venmo, which ended up driving more than 50% of PayPal’s revenue growth in Q2.

As such, management provided a decent outlook for the rest of the year. The Nasdaq-listed firm now expects Q3 revenue of $6.8bn, with an upwardly revised non-GAAP EPS of approximately $0.95. For the full year, it expects 10% revenue growth, with a non-GAAP EPS of approximately $3.92. The board also forecasts to grow TPV by 12%, add 10m more accounts, and have a free cash flow of at least $5bn.

Long way to grow

So, is PayPal stock worth a buy? Well, all signs seem to point towards yes. Aside from the excellent numbers and guidance provided, the impact on its cost savings are yet to be realised. Interim CFO Gabrielle Rabinovitch mentioned that PayPal expects $900m worth of cost savings in FY22, and a further $1.3bn next year. She also reiterated that the payments processor expects operating margin expansion of at least 0.5% starting in Q4. And with core markets yet to be fully penetrated, PayPal still has a long way to grow as it expands its digital wallet features to more regions worldwide.

Nonetheless, it’s worth noting that PayPal sits on $10.6bn worth of debt. But with no maturities for the rest of the year and margin expansions on the horizon, I’ve no doubt that incoming CFO Blake Jorgensen will be able to navigate through its debt pile without too much hassle.

Finally, the company saw its take rate remain flat at 2% (yoy), which is great news as PayPal continues to maintain its transactional margins while seeing TPV increase and growing its market share. Therefore, I think PayPal has a position on my portfolio with an average price target of $119.29.

The post Stock of the week: PayPal outperforms in Q2! appeared first on The Twelfth Magpie.

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John Choong owns shares of PayPal. The Motley Fool UK has recommended PayPal Holdings. 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.

Tempting-looking value indicators may instead just lead us to buy ‘cheap’, which can sometimes work out to be a mistake. 

Growth in the FTSE 100

Right now, I reckon pharmaceutical firm Shire (LSE: SHP) and insurance company Prudential (LSE: PRU) from the FTSE 100 both have decent forward growth prospects backed by impressive trading records. Today, I’m taking a closer look to see if these firms offer investors good value too.

I can’t argue with their recent trading records. Over the past four years to December 2015 Shire has driven up its annual revenue by 50%, operating profit by 28%, and net cash from operations by 117%. Over the same four-year period Prudential advanced its revenue by 43%, operating profit by 62%, and net cash from operations by 46%. 

Those figures demonstrate impressive business growth. In response, Shire’s share price is up 130% since the beginning of 2012 and Prudential has risen 120%. That strikes me as decent returns for investors holding through the period, and I think it shows how important a firm’s growth prospects can be to an investor’s initial assessment of value. The big question is, can these two firms continue to grow their businesses from here?

Positive outlooks

City analysts following these two firms are optimistic. They see Shire increasing earnings per share by 87% this year and 19% during 2017. They think Prudential’s journey will be a little more bumpy with earnings per share dipping by 9% this year before rebounding by 13% in 2017.

Shire’s ongoing progress comes from organic growth and acquisition activity. During 2016 the company completed a deal taking over US biotechnology company Baxalta. Shire’s chief executive said with the recent second-quarter results statement: “While closing this transformative deal and making significant progress on integration, we have delivered strong double-digit revenue growth from our legacy Shire franchises, and for the first time our results reflect a significant contribution from the legacy Baxalta franchises.” 

The Baxalta deal and an earlier acquisition of Dyax at the beginning of the year look set to make big contributions to forward growth.  I reckon shire’s cash-generating business will go on to enable more earnings enhancing deals in the future.

Meanwhile, Prudential’s chief executive said in August: “The group’s performance is led by double-digit growth in Asia … In the US and the UK, we continue to successfully manage the effects of market turbulence. The quality of our earnings, geographic diversity and strong balance sheet position us well to grow over the long term.” 

At today’s share price of 5,118p Shire trades on a forward price-to-earnings (P/E) ratio of just over 13 for 2017, and at 1,382p Prudential’s forward P/E rating is 10.6. With both firms making positive noises, it suggests growth could have further to run. 

The post 2 growing FTSE 100 firms to consider 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 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.

It’s tempting to go for a FTSE 100 tracker fund to try to capture upside potential in the index while at the same time achieving diversification. However, a basic FTSE 100 tracker fund allocates around 70% of our invested funds to the largest 30 firms because of allocation by weighting — the biggest firms end up with more of our money than the smaller ones do.

In effect, a weighted FTSE 100 tracker keeps most of our investment out of the companies with the greatest potential. The solution, to me, is individual stock-picking, and I think smaller firms such as Schroders (LSE: SDR) can outpace giants like HSBC Holdings (LSE: HSBA).

Big problems

The big banks have many well-documented on-going problems. In the case of HSBC, regulatory headwinds combine with lacklustre growth in the firm’s international markets to produce flat business progress. Is there a big bank around today that isn’t involved in major restructuring and navel-gazing as once profitable lines of business dry up and directors rethink operational business models?

Right now, I see the big banks as risky. Profits are high, having recovered from cyclical lows following the financial crisis. Low price-to-earnings ratings and high dividend yields look like more of a warning than an attraction. When valuations are low after a period of strong profits, the banks are dangerous reckons legendary one-time Fidelity fund manager Peter Lynch.

The big banks are among the most cyclical beasts on the stock market and when profits are up, as now, I reckon the path of least resistance is down — for profits and for the share price. In the meantime, valuation-compression seems set to keep investor total returns in check as the market tries to discount rising profits in an effort to anticipate the next collapse.

A focused business model

Rather than risk an investment in HSBC, I think family-controlled fund manager Schroders looks like a better bet in the financial sector. The firm’s over-200-year heritage inspires confidence and the constant arrival of fee income has driven a good performance on total returns in recent years. It’s interesting to compare how investors have fared with Schroders and HSBC.

It’s true that past performance of an investment is no reliable guide to its performance in the future because investments can go down as well as up, but a good track record tells us something about a company’s form, in my opinion.

At today’s 2,422p share price Schroders trades on a forward P/E rating of just over 13 for 2017 and pays a dividend yielding around 3.9%. That’s a comfortable valuation for a firm that has proved its growth credentials.

An economic slowdown will likely weaken Schroder’s shares if it comes, but the firm’s focused business model — fund management — should leave the company less vulnerable than an out-and-out cyclical firm with a complex and geared business model such as HSBC.

The post Why Schroders plc looks set to beat HSBC Holdings plc appeared first on The Twelfth Magpie.

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Embrace your freedom

Fund managers may have access to vast amounts of research and highly informed analysts but they’re also constrained by investment objectives. If a share gets too big, small, volatile or cuts its dividend, it may be jettisoned. Index trackers suffer from the same problem. Private investors are at an advantage because they have the freedom to buy pretty much whatever they want, whenever they want and even go where others fear to tread. This doesn’t guarantee success but it doesn’t prevent it either.

Focus on company prospects

Just because a leading index is tumbling doesn’t mean the prospects for a company you’ve invested in have changed for the worse. A vote to leave the EU could see the FTSE 100 drop significantly on account of financials and housebuilders making up a significant percentage of its constituents. But many decent, resilient companies might also be dragged down for no reason. If the investment case hasn’t changed, ignore the bigger picture and stay the course.

Have a war chest

It’s essential that investors are able to take advantage of shares going cheap. As such, I recommend always having a portion of your portfolio in cash, ready to be employed when an opportunity presents itself. There are few things more frustrating in investing than being unable to do so.

Write a watchlist

There’s no point being in cash if you haven’t identified shares you’d be keen to buy if their prices dipped. Otherwise, you run the risk of impulsively jumping into investments without conducting the necessary research/due diligence. If, as the philosopher, Sun Tzu postulated, “every battle is won or lost before it is fought,” having at least an idea of likely destinations for your capital should markets go into panic mode is beneficial. My own watchlist is dominated by expensive, high quality companies that I would only purchase if prices dropped significantly.

Focus on the long term

Private investors have time for their shares to grow or recover. Fund managers are judged on their performance over a relatively short period of time, hence the herd mentality and index-hugging antics (in which funds mirror the main indexes and refrain from trying to outperform the latter as they’re paid to do). As long as you believe in the companies you own and don’t need immediate access to your capital (if the latter, I’d argue that you shouldn’t be investing in the first place), panic-selling can be avoided.

Be diversified

Investing in a group of companies in just one sector is strongly discouraged. Although all share prices tend to be affected during market panics, some (such as utilities and pharmaceuticals) cope better than others. Buying shares in a group of UK housebuilders before the EU referendum, for example, is a risky strategy. Investing in one (alongside other, less cyclical, multinational stocks) isn’t because your other shares should compensate for the housebuilder in the event of a Brexit.

Drip-feed capital

Ultimately, nobody knows where share prices will go next. As such, it can sometimes be best to drip-feed your capital into new or existing investments and benefit from pound-to-cost averaging (where more shares are purchased at lower prices and fewer at higher prices) rather than invest a lump sum in one go.

The post Learn to love volatility: A private investor’s cheat sheet appeared first on The Twelfth Magpie.

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It seems to me that those with lots of disposable income have a tendency to spend a fair bit on luxurious items for their homes. The rich could also benefit from a degree of insulation from the fiercest effects of economic downturns, perhaps so much that they will splash out on keeping their homes well decorated and furnished whatever the economic weather.

With that theory in mind, I am glad to have stumbled across Walker Greenback (LSE: WGB), a firm that specialises in luxurious interiors for the mid to upper end of the premium market.

Must-have brands       

The firm designs, manufacturers and markets wallpapers, fabrics and a range of ancillary interior products, all under the brand names Sanderson, Morris & Co, Harlequin, Zoffany, Scion and Anthology. These brands, the firm says, offer solutions for customers, designers and contract interiors by covering a wide range of tastes from traditional to ultra contemporary.

Walker Greenback trumpets its ‘made in Britain’ heritage, which in itself strikes me as a good selling point. On top of that, the company’s show rooms are in all the ‘right’ places for hooking the rich, including London, New York, Paris and Dubai, and the firm also runs partnership arrangements in Moscow and Shenzhen. On the face of it, Walker Greenback ticks all the right boxes, but how well has the firm been trading?

Strong growth

Despite targeting the well healed, there is bound to be a good deal of cyclicality in Walker Greenback’s business. However, growth since 2010 has been strong and the shares responded well by multi-bagging over the period. Here is the company’s financial record:

That looks like well-balanced progress with cash flow broadly supporting the expansion in revenue and profits.

At today’s 214p share price, Walker Greenback trades on a forward price-to-earnings (P/E) ratio of just under 18 for year to January 2017. City analysts following the firm expect earnings to grow 6% that year and to cover the dividend payout almost four times. That’s encouraging — a high level of dividend cover suggests the directors see more opportunity for growth ahead, otherwise they might hand more back to investors in the dividend. Right now, the forward dividend yield runs at around 1.5%.

One to watch

So Walker Greenback isn’t cheap, but the firm has potential. In an interesting recent development, one of the firm’s factories suffered extensive flooding, which will have an adverse impact on machinery, stock and profits.

The company has a comprehensive insurance policy, it says, which covers flood damage and business interruption, and has already logged a claim. However, maybe this or some other temporary setback could end up knocking the share price. If it does, we could see an opportunity to dig into further research with a view to buying some of the firm’s shares.

Or should I go for Aviva?

FTSE 100 constituent Aviva’s (LSE: AV) valuation certainly looks lower than Walker Greenback’s. At today’s 498p share price, Aviva’s P/E ratio comes in at just over 10 for 2016. However, I’m not keen on insurance firms because they fall into the wider category of ‘financials’.

The ‘trouble’ with financials is that they tend to be very responsive to macro-economic cycles. A good lurch down in the economy can really pull the rug from full-on cyclicals such as Aviva. On the other hand, maybe Walker Greenback’s brand strength and its affluent market could provide some watering down of the most onerous effects of cyclicality.

The post Can Walker Greenback plc Beat Aviva plc In 2016? 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.

Are these firms cheap?

If we look at a few valuation indicators, we might conclude that these three firms are reasonably priced — we *might*. However, I’m cautious about Prudential, Aviva and Chesnara, but more about that later.

Compared to the FTSE 100‘s price-to-earnings rating (PER) of around 17.5 and its dividend yield of 3.8% or so, the valuation indicators for these three firms ostensibly stack up pretty well:

Those yields look tempting and the cost in PER terms seems reasonable, but I’m still not rushing to buy any of these firms’ shares.

City analysts following these three reckon earnings will grow in 2016 by around 9% for Prudential, 11% for Aviva, and they will decline by 14% for Chesnara. So two of the three offers forward growth, too. Surely, that’s attractive. Not to me.

Trading well, but…

All three firms offer positive-sounding recent trading updates and outlook statements. However, the ‘problem’ with insurance-based operators is that their activities have a high level of cyclicality. As well as underwriting profits and fund management profits, which are cyclical in themselves, Prudential, Aviva and Chesnara also earn high proportions of their returns from investments. When the economy tanks, the profits and share prices of firms in the insurance sector can behave with even greater extremes than other financials, such as the banks.

My pick of the bunch

That said, Prudential’s growth since the financial crisis has excelled its peers here, and the shares delivered the firm’s investors a gain of around 430% since early 2009. However, the share price displayed some aggressive volatility recently, which underlines my point about cyclicality in the sector. Speculation that macro-economic growth could soon hit the skids is what probably drove the summer market wobbles. True to form, the cyclicals led the charge south.

We currently have what we could describe as a maturing economic cycle, and that’s not the best time to be in cyclical firms such as Prudential, Aviva and Chesnara, I’d argue. There could be further investor total returns to come, but there’s also a lot of risk of profit and share-price reversal.

With the cyclicals, share prices can behave oddly, too. Perhaps staying flat or declining as profits rise, due to things such as valuation-compression and other speculative effects. The market as a whole is always trying to anticipate what will happen next in the economic environment, and nowhere is such agonising more apparent than in the performance of the cyclical firms’ share prices.

The post Is Now The Time To Invest In Prudential plc, Aviva plc And Chesnara 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.

Structural change

Results for the first half-year were not bad at HSBC Holdings. The recent interim report showed pre-tax profits up 10% on the year-ago figure.

However, the firm’s chairman points out that the environment for banking is challenging.  Economic conditions are uncertain in many parts of the world, particularly in the Euro zone and in China, he says. The company is working hard to embed structural change resulting from regulatory pressures. Meanwhile, advancing technology presents both opportunities and threats. New firms into the banking industry are using technology to disrupt established business models in the sector, and HSBC is finding opportunities through technology to improve efficiency and build better customer products and services.

There’s a lot on HSBC’s plate, but the directors see opportunity for growth too. For example, there is what the firm describes as

“observable mega-trends supportive of financial system growth, growing urbanisation across Asia, infrastructure development in both emerging and developed markets, investment in new technology to address environmental efficiency and the development of capital market solutions to add fresh financing capabilities and contribute to the financial needs of an ageing population“.

All these things, the chairman reckons, have “positive implications for the role and profitability of the financial system“, along with what seems like the determination of central banks to “maintain a policy environment aimed at the resumption of sustainable economic growth“.

HSBC’s shares are down in the market turmoil, but they have underperformed for years. So, despite tempting-looking valuation metrics, I wonder if it might be better to ride the firm’s growth vision with investments in other companies in other sectors rather than by buying HSBC shares.

A turnaround ‘opportunity’

Over at Standard Chartered, the shares have bombed by around 66% since late 2010. Hang on, that shouldn’t happen in a macro-economic cylical up-leg! If bank shares haven’t done well over the last few years since the credit-crunch, when will they?

In the recent interim results report the firm’s chairman said Standard Chartered made progress on strengthening the company’s capital ratio in the period. However, the actions taken affected return on equity, and combined with a disappointing earnings performance. The firm does most of its business in Asia, Africa and the Middle East and the near-term outlook is weak, so the directors cut the dividend by 50%.

That’s grim. No wonder the share price plummeted. The Chief Executive reckons the results show the firm experienced challenges, but they are fixable. So, Standard Chartered is something of a turnaround proposition as it stands. That’s why I’ll take my investing chances elsewhere. Iconic investor Warren Buffett once said, “Turnarounds seldom turn,” and I have no reason to argue with him.

A fast grower

Fast-growing Secure Trust Bank is one of those new banking upstarts biting the ankles of the old dinosaurs such as HSBC Holdings. The recent interims revealed uplift in pre-tax profit of 40%. The firm’s latest charge for growth is by lending to small and medium-sized enterprises (SMEs).

The chairman reckons the bank is well funded and diversification into SME activities is proving successful, with lending to UK businesses growing and now exceeding £25m per month. He says the improving macroeconomic environment and the election of a business-friendly government provides confidence for continued growth in the second half of the year. 

UK-focused Secure Trust Bank is much smaller than HSBC Holdings and Standard Chartered, with a £521 million market capitalisation. However, the firm’s business seems to be firing on all cylinders and its operations appear refreshingly unencumbered by the legacy issues plaguing the bigger outfits. Secure Trust is the clear growth option of the three firms featured and, as such, I find the firm attractive.

The post Is Now The Time To Invest In HSBC Holdings plc, Standard Chartered plc And Secure Trust Bank 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 recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.