There’s an old investment saying “buy in gloom and sell in boom” and with the ASX 200 pushing 5,100, there is not much gloom around, at least outside the mining sector. However, as always, markets reward those showing patience and this month an outstanding opportunity came out of the blue.
Back on 15 July, 2013 investors in McMillan Shakespeare Limited (MMS) let out an aggregated, despairing scream – We have been Rudded…I mean Dudded – as the newly appointed Kevin Rudd announced a surprise change to FBT treatment in relation to car use for business. The fallout was a collapse in the MMS share price, due to it being a significant player in the novated lease industry.
A hiccup
Up until then, the stock had been one of the real market darlings, delivering consistent earnings growth and massive share price appreciation since the GFC lows four years ago. The stock rallied from under $2 to over $18, delivering a staggering compound annual growth rate of over 70%.
As we have seen in many growth stocks before, its consistent growth earned it a valuation premium to the market. It was trading on a PE of around 20 times, that reflected investors’ faith in its future growth. However in mid July, that all changed!
After the Rudd announcement, MMS shares fell like a stone to a low of $6.75 – a whopping knee jerk fall of 63%, before rallying back as sanity prevailed. Within a short period of time, Tony Abbott announced the coalition would not support the change and the market took a breath and realised that MMS had become a proxy for the election.
It is worth noting that the MMS share price fell more than 50% from around $4.10 to $1.90 back in 2008, when there was talk that the Henry Tax review would change the FBT landscape. This never eventuated and the company continued to grow and prosper.
The numbers game
At the current price of $12 some of the upside has already been seen, but it remains an interesting trade. If the Coalition wins, the upside may be $1 to $2 a share or more. We consider it unlikely that the stock will move back to its previous valuation…at least in the short term. A modest 12 to 14 times earnings is probably more reflective of the market’s current concerns of the potential risks for the stock suggesting a share price of between $13 and $14.
The downside on the other hand, in the event that Labor wins re-election, is probably for MMS to fall to $6 to $7 a share. Therefore, given the likely scenario that the coalition will win, the trade appears attractive to me.
Sportsbet, I note, is paying $1.09 (9%) for a Coalition win and you obviously lose all of your bet if Labor win. This MMS trade is likely to pay 8% to 16% upside if the Coalition wins, and you are likely to lose around 40% of your capital if Labor wins.
Given the expected outcome, it looks like an interesting trade to me and falls classically into what we often call an “event-driven trade”.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
