Hargreaves a ‘definite buy’ on share weakness as profits soar

UK managers including Lindsell Train founder Nick Train have labelled Hargreaves Lansdown a “definite buy” with enormous growth potential, after the group beat analysts’ expectations last week.

The asset manager announced funds under management had risen 41% to £24.6bn in the last year, with revenue up 31% to £207.9m, and underlying profit before tax rising 42% to £129m.

The results were better than brokers had predicted, leading Numis Securities to upgrade the stock from ‘hold’ to ‘add’, after AUM beat its forecast by £300m.

Investors ploughed into the stock after digesting the results, with Hargreaves’ share price notching a double-digit gain that pushed the shares back up towards the 500p mark.

UK managers said the rebound was justified, arguing the stock had been oversold recently on fears over the impact of the Retail Distribution Review (RDR), and during the market correction.

Train has about 5% in the stock within his £300m Lindsell Train UK Equity fund, having upped his stake after the “unfair” sell-off, which saw Hargreaves’ share price drop almost 40%.

“We have been adding to the stock in response to the weak share price, and feel justified by the rebound as the hammering the stock took over the suggested impact of RDR has been overdone,” said Train.

“If we had never owned the shares before, we would have snapped them up last week following the results as it clear the company is going to grow enormously over the next decade.”

Train noted Hargreaves currently has a share of 0.5% of the growing UK pension market, and he expects this to jump to 5% by 2020.

Royal London Asset Management’s Martin Cholwill has also profited from the spike, topping up his position before the release of the results. He said  the FSA’s proposed changes to rules on platforms will not derail the firm’s growth. 

Cholwill, running the £230m Royal London UK Equity Income fund, built a 1.5% position in the stock after the price fell through the 500p barrier.

“We bought back in when the share price fell bellow 500p because we felt the market was set to bounce. Hargreaves is due a re-rating as it is pricing in a double-dip recession, when in reality we are going through an economic soft patch.”

Both managers, along with Eden Financial’s Leigh Himsworth, are favouring asset managers as opposed to banks for their financials exposure.

Himsworth, who has just launched Eden’s UK Select Opportunities fund, said asset managers are a safer investment than banks due to their higher levels of transparency.

“We have put 8% into asset managers as I feel the dynamics have changed and now the general public is increasingly using them to store their wealth, as opposed to banks, which they do not trust,” said Himsworth.

“Growth in the sector is evident by the M&A activity going on, with the likes of F&C last year making positive moves to organically grow the business.”

Train added: “Investors are putting their cash in asset managers due to a lack of trust in banks, and low interest rates, and this will see companies like Hargreaves grow substantially over the next decade.”