3 Picks & Shovels From The Investment Sector

Published in Company Comment on 17 November 2011

While stock markets are in turmoil, we look for likely bargains.

We all know the old story from the gold rush days, when only a small number of prospectors made it big, but those who sold them their picks and shovels made a profit no matter whether they found any of the shiny stuff or not.

Similarly, in tough economic times, investors often turn to companies selling the equivalent of picks and shovels that companies in various industries need. Of late, my attention has turned to companies that I think could be considered amongst the pick and shovel providers of the investment business itself.

The archetypal example is a stock exchange operator, and I've already had a look at the latest results from the London Stock Exchange (LSE: LSE). The thing with a company like this is that, whether investors want to buy shares or sell shares, they still need a bourse on which to do it, and so the providers of such services should still have business.

Admittedly, that business will be healthier in times when more companies are coming to market to seek funds, but the LSE has actually kept its profits going quite nicely during the downturn and, perhaps more importantly, has kept up its dividends and has maintained decent cover for them.

Venturing into other areas, like lending short term money in the overnight markets, also looks like a profitable "picks & shovels" move -- though Italian banks are deep in the zuppa, the LSE has made some nice money from them.

Investment bankers

I had further thoughts along these lines when I looked at the latest numbers from Investec (LSE: INVP), the Johannesburg-based investment bank and asset manager that provides banking and investing services to niche clients.

The results were, on the face of it, a little disappointing, as first half operating profit declined to £223m from £228m at the same stage last year. That was due to a poor performance in its banking division -- there were exposures to the Irish property market, which is, well, not flying high. And overall return on equity fell from 11.5% to 10.1%.

But although the market was clearly not impressed (the shares are down 3.5%, to 356p, as I write), the figures were actually not too far behind expectations -- there's a very slight profit rise pencilled in for the full year.

Could things turn round? That has to be possible, as Investec enjoyed strong performances from its asset and wealth management businesses, which both saw pre-tax profits boosted by 30% -- between them, they brought in £87.4m.

Investec did drop its dividend during the crisis, but this year it's forecast to be back close to pre-doom levels, with a 5% yield hopefully on for the full year -- at the interim stage, an 8p payout was declared, bang in line with last year.

Another favourite

Talking of companies like this reminds me of another similar company, Man Group (LSE: EMG), which has seen its share price hammered by poor figures that saw funds under management falling badly.

But look at what Man Group does. It's a hedge fund manager, and when stock markets around the world are crashing, we should expect its funds under management to fall in value.

And since the results were released, we've had several City updates still forecasting a strong dividend yield for the year, of around 9.7%. Of course, analysts' forecasts are salty finger material, and whether the dividend will actually be upheld is a harder question. But with a year-end P/E of 11 forecast, based on today's 142p price, and a nice rebound next year currently being predicted, we could well have a candidate here for the value investors and recovery specialists amongst us.

Briefly comparing the three...

CompanyPrice (p)Forward P/EForward
dividend yield
London Stock Exchange81210.13.8
Man Group14211.49.7

Do you see any of these as potential long term investments? I think there could be some bargains here -- please to tell us what you think, below.

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ANuvver 17 Nov 2011 , 11:24pm

re Man Group:

"It's a hedge fund manager, and when stock markets around the world are crashing, we should expect its funds under management to fall in value."

Only if it's a lousy hedge fund manager... I thought the whole point of hedgies was to make money fair weather or foul?

fedupwithbanks 18 Nov 2011 , 3:53pm

Exactly. Another example of where a blue chip investor investor would question management capabilities.

Brings to mind, once again, Clint Eastwoods immortal words: "A man's gotta know his limitations"

fedupwithbanks 18 Nov 2011 , 3:55pm

I remember this share having a 9%, or thereabouts, divi at double the current share price, and we all know what happened next.

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