Stockwatch: director puts big money into this AIM growth share

Its rating leaves little room for the narrative to deteriorate, but companies analyst Edmond Jackson thinks there’s enough to like to make this stock interesting on a short-term view.

A substantial share purchase by a YouGov (LSE:YOU) director underlines a current tactical question: have growth stocks retreated sufficiently in the market fall since last September, and might they even constitute a “buy”? 

A few analysts are making such a call selectively on US tech-stocks. Meanwhile, conservative macro-economists typically reckon excesses have yet to fully unwind, and profit downgrades are yet to feature.  

The CEO of YouGov’s Asia-Pacific operation must have deaf ears – or knows better – because on 7 July he spent £216,250 buying 25,000 shares at 865p. Clearly, he thinks mean-reversion from 1,600p at end-2021 to as low as 830p earlier this month has gone too far. There has been a particularly sharp drop from near 1,400p at the start of June, but now some recovery to over 900p.  

We have also seen housebuilder bosses buy material shares in recent months, only for prices to go lower. Might a flaw with insider buying in current circumstances be that directors are swayed by strong order books and do not appreciate the wider context?  

Technically, yes, a retreat broadly to trend-line 

A circa 45% drop this year is substantial on a five-year chart view, below an approximate trend-line, although an all-time view would imply YouGov has further to fall. 

This is where I depart from chart analysis that effectively joins dots in a 10 to 20-year view; under-appreciating how industry advances can re-rate a company. Here, growth in opinion polls, surveys and data analytics has been transformational and YouGov is fundamentally a more substantive business. 

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Yet this area is still broadly market research, which has cyclical elements, and we are yet to see a true recession. 

The chief dynamic affecting valuation has been macro: an ultra-low interest rate and inflation environment that benefited growth stocks, now jolted into rate-rises to battle soaring inflation. It has been a long, glorious run for growth stocks, given central banks failed to normalise interest rates once economies picked up after the 2008 crisis. 

At its stock high, YouGov traded at over 50x some pretty aggressive forecasts. 

There is also the company-specific question: how vulnerable is YouGov to economic downturn? It has not really been tested since 2009 when a profits drop related chiefly to having taken on more staff in 2007. Revenue did not fall. 

Market leader with a global reach 

YouGov derives just 26% of revenue from the UK versus 46% from the Americas and 20% from mainland Europe – the remainder, chiefly Asia-Pacific.  

Yet the bulk of the July 2021 year’s profit derived from the US, which emphasises how successful the Federal Reserve can be in curbing inflation from nearly 9% to its 2% target, without causing a recession.  

The six-year financial summary table shows a strong financial progression interrupted only modestly by Covid if benefiting arithmetically from a low base.  

After the operating margin tested 15% in 2019, it has eased back, and return on capital is in the mid-teen percentages. Both are good but could be better to warrant a high stock rating. 

In fairness to ambitious forecasts, the 22 March interims cited trading slightly ahead of board expectations for the full year.  

Consensus expects net profit to re-rate from £11.5 million to over £29 million, then achieve £38 million in the July 2023 year. This would be a considerable advance over past years and looks chiefly organic after management had cited “accelerated momentum across most divisions, benefiting from a strong sales pipeline and improved execution…” 

Mind how, and as a cyclical read-across, housebuilder Vistry Group (LSE:VTY), which I examined on Tuesday, is saying exactly the same – for now. 

In the last 12 months, three acquisitions have been made – in Australia, the UK and Switzerland, but only the latter appeared sizeable enough to disclose numbers. LINK was bought for £22 million as Switzerland’s leading agency for market and social research.  

I am therefore quite wary of a near-doubling in earnings per share (EPS) for this financial year, lest it represents top-cycle momentum after years of global stimulus. 

Can a premium PE multiple continue to apply?  

Around 920p a share currently, the forward price/earnings (PE) is 34x easing to 26x. While lower than it has been, such a rating does not really leave room for YouGov’s narrative to deteriorate. The yield on projected dividends of 7p to 8.5p in the next two years barely reaches 1%.  

By comparison, in April 2019, when I made a “buy” case at 450p, it was hard to see what could materially disrupt business. The stock soared to 577p that July, on 73x trailing EPS or 34x going forward.  

With hindsight, I should have updated when YouGov was dropping, although I did intone in various pieces about how growth stock ratings were exposed to a shift in monetary policy once inflation took off. 

A cautious view would be to await a full-year, pre-close update – my guess being, on Monday 1 August. Yet the director’s substantial buying – before any dealing restriction – says he wants “in” beforehand. 

In the short term, this appears to make YouGov interesting for alert traders, in the hope still of exacting a turn from 920p. 

On a longer-term view, however, it is interesting to compare how a marketing services giant such as WPP (LSE:WPP) trades on just 8x forward earnings with a dividend yield testing 5%.  

Some may say that WPP is a quite different company, but it is substantially exposed to market research and, in its heyday, also enjoyed a growth rating. That it is around 8x YouGov’s market cap, despite the relatively lower rating, shows how size eventually tempers growth. Nowadays, most investors regard WPP as a quality cyclical. 

This is relevant because if YouGov does get compromised by a downturn then a “status change” towards more cyclical awareness implies a lower stock price – to further moderate the PE and raise yield.  

How did YouGov fare in the last recession?   

The July 2009 annual results showed a profits slump despite turnover advancing 10%, with normalised EPS of 2.7p down from 9.1p. This was explained as due to expanding headcount during 2007/08 - i.e. letting the cost base get ahead of income. 

Nadhim Zahawi, MP and current Chancellor of the Exchequer who co-founded YouGov in 2000, was CEO and declared “a very challenging year for the research industry as a whole”. The chairman added: “We have grown very rapidly and the recessionary shock has caused us to pause and take stock.”  

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By August 2010, operating profit had significantly recovered and that October a near £4 million normalised operating profit was reported on flat turnover of £44 million. Amortisation and exceptional charges, however, meant a £10 million operating loss.  

Much therefore depends on how adeptly YouGov can pivot as necessary. Management has recently continued to invest as storm clouds gather, albeit less than during the six months to January 2021. 

That same 2022 period saw over £8 million invested, and last April a “global profiles” business was launched – offering brands, agencies and media planners the ability to better-understand their global audience. 

A possible trade around the pre-close update 

I find the longer-term investment case “pending” because the stock does not appear to price in recessionary risk. 

I respect, however, little if anything is likely to change as regards YouGov’s business when it next reports. For experienced short-term traders: Buy.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.