It’s a standing joke that any time a stock falls for no obvious reason the newspapers label it ‘profit taking’, but it’s hard to see today’s 3% fall in McMillan Shakespeare as anything else.
As we wrote in How to back Rudd and McMillan on 6 Aug, McMillan had much to lose under Labor and much to gain under the Coalition. But it has already put in the hard yards as the odds on Tony Abbott firmed over the past few weeks, gaining 43% to Friday’s close.
We closed off that article by warning that ‘we wouldn’t recommend being invested in McMillan Shakespeare for long’, so we’d be in full agreement with anyone bagging their profit and heading for the exits.
Of course, as part of that hedged strategy, we also suggested backing Labor at the then odds of 2.4-1, and you’d have lost on that. But all up you’d have turned the $1,000 investment in McMillan into $1,432, leaving a profit of about $230, or about 19%, before brokerage and taxes, after allowing for the $200 lost on the bet.
We expect McMillan to earn around 80 cents per share this year now the Fringe Benefits Tax will remain unchanged, putting the company on a forecast price-earnings ratio of 16. However, while McMillan has escaped unscathed this time, its vulnerability to policy change remains.