Second, less debt means less risk and less risk means investors are usually willing to pay a higher multiple to access the company’s profits and cash flow. The combination of higher rating and higher earnings is a powerful one, since p/e times e equals share price.
If oil starts sliding and windfall taxes start flying, that calculation could run into reverse, as the multiple (the p/e) contracts, the earnings (the e) fall and then the share price tumbles. But a single-digit forecast p/e and a near-4pc yield price in at least some of the dangers and little of the upside from sustained oil and gas price strength or further debt reduction.
Patient holders should ride out any near-term volatility. Hold.
Questor says: hold
Ticker: SHEL
Share price at close: £20.05p
Update: Keystone Law
This column may have slipped up with one or two of the growth-oriented names in the portfolio as both GB Group and Strix trade a good way down from their highs (even if there are still fat paper profits on the table), so it would be a shame to repeat the blunder with Keystone Law, where our entry price in December 2018 was 384p.
The “challenger” law firm’s business still seems to be humming, thanks to its flexible platform model, which looks placed to drive strong growth as more lawyers and clients join the network. However, a forecast price-to-earnings ratio of some 40 times for 2022 prices in a lot of good news. Upgrades to forecasts could make that price tag deceptive, but it leaves little room in the event of any disappointment.
Moreover, if we do get an inflationary upturn, investors may prove reluctant to pay this sort of premium valuation for secular growth if they can find plentiful cyclical growth (at least in nominal terms) that is trading at much lower multiples.
Time to (reluctantly) take profits. Sell.
Questor says: sell
Ticker: KEYS
Share price at close: 800p
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