The fortunes of Ladbrokes seem to be of continued interest in gambling and City circles, almost like a barometer of the health of the wider sector. I suspect the interest in Ladbrokes has always been there since Cyril Stein ran the business in the 1960s when they had a high marketing and PR profile.
I was talking the other day to Paul Usher the knowledgeable and previous finance director of Ladbrokes. He said that when he joined the company Ladbrokes was the 28th biggest company in the UK they are now 180th in the FTSE 250 index.
Michael O’ Higgins, a well known investment analyst on Wall Street, invented a stock picking system that picked the 10 highest yielding stocks from the thirty stocks listed in the Dow Jones Industrial Index. It was nicknamed the dogs of the Dow.
The correct index to use for the UK to follow the system is the FT30. Why? Because with 100 stocks you will be overbuying on one bombed out sector.
Higgins has written two books on how the system works but in a nutshell this is it: stocks with high yields have been oversold and when the market realises this they will bounce back. In the meantime you are collecting a really good dividend. At the end of the year you look for the ten highest yielding stocks again and replace the ones that are not in that category.
Does it work? Yes, the returns have been stellar.
I have another theory. Investors in those high yield stocks have been burned and they force management into action and use every resource to get the company back to where it was.
The last time I wrote about Ladbrokes I said the shares were not for widows and orphans. At that time they were £1.90 and they duly dropped to £1.60. That led to the purchase by Teddy Saggi (Playtech) of 3% of the stock and since then we have seen the price move back to £1.90 only to fall as a plethora of poor results and profit warnings from gambling companies hit the press.
What will cause Ladbrokes to rise from the ashes and make the O’Higgins system work? Will it be a management restructure? Improved performance because of Playtech, or a takeover. I am betting on a takeover.