MIA Ratings: Top 3
The aim of the MIA ratings is to find high quality shares that are available at reasonable valuations, with wide margins of safety, and positive long term outlooks. This week I thought it would be interesting to take a look at the three shares that currently have the highest MIA Ratings scores.
The MIA Ratings are a work in progress and currently only stocks in the MIA investment universe of roughly 70 companies are rated. These companies are all UK listed from across the FTSE indexes, but there is a bias towards small cap growth stocks, so the list may not be representative of the wider market. The MIA Ratings are compiled daily so price movements and news flow can mean that a snapshot such as the one below may only remain relevant for a short period of time.
These are the three companies with highest MIA Ratings scores on November 4th 2021:
Before I take a look at these three in a little more detail, a gentle reminder that the MIA Ratings are being provided for general interest only and shouldn’t be relied upon to make any investment decisions.
Frontier Developments, led by founder David Braben, is establishing a strong track record of releasing successful big name games franchises, including titles like Planet Coaster and Planet Zoo for which it fully owns the IP.
The release in May this year of the latest instalment in the iconic Elite franchise (Elite Dangerous: Odyssey) was though less successful than we have come to expect from Frontier. The release suffered from technical issues that impaired gameplay and affected sentiment towards both the game and the shares.
The company has reported challenges in collaboration and in training of new employees due to remote working during lockdowns, but market expectations remain high with a trailing price to earnings of over 40 times. Recent negative sentiment means that while the valuation is high, it is now well below previous levels. The share price is down ~25% year to date.
Frontier’s earnings have a history of being uneven, primarily due to the timings of new game releases. Future earnings though should become smoother over time. New titles are being released with increased frequency, and Frontier’s ‘Launch and Nurture‘ strategy extends the lifespan of existing titles, enabling them to continue making a significant contribution to revenue. Frontier also releases titles through its 3rd part publishing label, Frontier Foundry.
There is a strong future roadmap with Jurassic World Evolution 2, the sequel to their biggest selling franchise, about to be released, and other big names including F1 Manager and Warhammer: Age Of Sigmar in the pipeline.
It may be slightly surprising to see a mining company in the top three rankings. It’s well known that the share prices of mining companies have a dependency on the prices of the underlying commodities that they mine. In the case of Rio Tinto that’s mostly iron ore, currently at a 52 week low and 45% below its July high.
Sentiment towards Rio Tinto has not been helped by slowing demand from China and negative press regarding the company’s failure to communicate the increasing costs of one of its copper projects to investors. The shares are down ~23% year to date, near 52 week lows, and trading at just over 5 times earnings. For income investors this makes for a very attractive dividend yield.
The positive long term outlook though remains intact. Population growth will continue to drive the need for more urbanisation, but it is the huge infrastructure spending required to fund the global transition towards more sustainable forms of energy and transportation that will be a major driver of demand for basic materials over the next couple of decades.
Rio itself though has a large carbon footprint, and will need to decarbonise its own operations. In a recent investor seminar, the company announced more aggressive targets to achieve this with investment of $7.5 billion in decarbonisation projects from 2022 to 2030.
It’s not just demand for iron ore that will benefit from global decarbonisation. Rio is also expecting to see increased demand for its other products. Copper for example is heavily used in electric vehicles, wind turbines, and solar power. Lithium is a key material used in the production of electric vehicle batteries and is already experiencing rapid demand growth. Based on current projections, both copper and lithium supplies will be unable to meet global demand.
Rio Tinto’s CEO, Jakob Stausholm, said in the seminar that Rio is investing for expected growth in all of these commodities:
…we will prioritise growth capital in commodities that are essential for the drive to net zero. We will look to grow further in copper, battery materials and high-quality iron ore.
There is very little one can say about Games Workshop’s outstanding quality metrics that hasn’t already been said.
The Games Workshop share price hit a new all time high in early September, but since then there has been a change in sentiment towards the shares. The price has slipped by over 25% from the high, and is now hovering near a 7 month low.
Rumours of disgruntled sections of the fan base, unhappy about stricter enforcement of IP relating to fan made animations, have been circulating for a while. These caught the attention of broker Jefferies last week which (slightly) trimmed it’s forecasts, highlighting some discontent among fans. The broker did however retain it’s ‘buy’ rating.
Freight costs and currency exchange rates, were also mentioned in the broker note although these had already been raised in Games Workshop’s September trading update so should not have come as a surprise.
Game’s Workshop’s longer term projects continue to have lots of potential. The company recently launched its new Warhammer+ digital content subscription service and will continue to look to exploit the significant value in its IP through licensing deals for video games and other media entertainment. There are also plans for further global expansion, as described by CEO Kevin Rountree in the 2021 Annual Report:
We aim to grow in every major country in the world, and via all of our three sales channels with all of our core IP. The only real obstacles are lack of ambition and focus- and these are not things I will allow us to be held back by.
This article is intended for informational purposes only. It is not a recommendation to buy or sell shares or other investments. Always do your own research before buying or selling any investment or seek professional financial advice.
Disclosure: At the time of writing the author owns shares in Frontier Developments, Rio Tinto, and Games Workshop.