Rathbone Income

Rathbone Income

Carl Stick at Rathbones certainly thinks so. His £1bn income fund has just bought a huge stake in Cineworld, the UK's second biggest motion picture chain, making it one of his chunkiest bets. In total, the funds he manages have bought around 7% of Cineworld's entire stock, and he confesses it's a "gutsy" decision.

But in truth, it's not because he's expecting to see queues round the block as hard-pressed consumers substitute expensive going out (ie restaurants) for cheaper nights out (ie going to the pictures). It's more because he sees Cineworld as an undervalued stock that meets his bottom-up, stock-picking criteria. It's cheap: trading at around 135p compared with its peak of 227p as recently as last September; it's on an attractive yield of 7.8%; it's got £30m in free cash flow; and it's misunderstood.

Cinema receipts aren't looking too great at the moment, with fourth-quarter 2007 takings down on fourth-quarter 2006. That's partly because of the blockbuster cycle; expect to see an upturn this year with the launch of the latest Harry Potter and a new James Bond.

Shares in Cineworld were hurt last year amid renegotiations of a contract with Carlton Screen Advertising, but the company scored a big hit when it converted one of its West End cinemas into a theatre for the launch.....continued below

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Carl Stick is himself in need of better reviews from the critics. A one-time wunderkind of the investment world, his Rathbone Income fund had a poor year in 2007.

It didn't help that around 2% of the fund was in Northern Rock. Stick isn't the sort of person to make excuses; he's brave enough to fess up when he's made mistakes. He admits that at times he strayed away from his core-value philosophy, and has learned lessons from that. At least with Northern Rock he limited his losses. "After the BBC broke the story about Northern Rock, we took the decision to sell immediately. We sold at around £5 a share, and by the end of the day it had already fallen towards £3."

The fund's exposure to financials looks worryingly large at around 25%. "Like most people, we didn't predict the extent of the credit crunch in summer 2007. But we're happy with our exposure to HSBC, which is a well-capitalised bank with a balance sheet that may allow it to take advantage of the current situation. Our holdings in Standard Chartered have also performed well. Barclays and RBS have been more problematic.

Where he does see deep value is in house builders, which he says are reaching prices where they will start to become attractive. "Bovis is interesting. It is getting close to the level where we will start picking some up. The short-term outlook is of course deeply negative. But it's already trading at a 50% discount to the value of the land on its balance sheet. Yes, it's true that if property prices fall by 5%, that could result in a much bigger knock-on effect on land values. So we want a deep discount before we buy."