FTSE 100 pattern is big profit generator

There's been a severe case of déjà vu doing the rounds this week. North Korean dictator blows raspberry at unpredictable American president, sound familiar? Well, smart investors who spotted the pattern would have made big profits in this shortened trading week.

UK traders switching on their screens after the Bank Holiday weekend quickly hit the 'sell' button, panicked by Kim Jong-un's latest sabre rattling.

Clearly, a conflict in the Far East with the US, China, Russia and Japan at its epicentre would be catastrophic. Nerves are understandable. But the outcome would be so devastating that few believe it will happen.

That’s why the 1.5% sell-off for the FTSE 100 Tuesday to 7,289, a near-four-month low, proved a great buying opportunity. Having only just overshot technical support at around 7,300, the index was up 164 points, or 2.2% in less than 72 hours to a three-week high.

As we said elsewhere this week, interest rates are low and will remain low by historical standards for years. That only reinforces the argument for equities over other asset classes currently.

Miners played a significant role in the recovery this week. Anglo American, BHP Billiton and Glencore added between 3% and 6%. Randgold Resources and Fresnillo – the safe haven investor's favourite bolt-holes in a crisis – did predictably well.

None were top of the pile, however. That accolade goes to Ashtead, the US-focused infrastructure play that could possibly benefit from the rebuild in the aftermath of Hurricane Harvey. One would expect a spike in demand for its rental equipment, although it's impossible to put a number on it.

AB Foods continues its impressive run, extending gains so far in 2017 to 21% after broker Jefferies gushed over the Primark owner. It thinks the value clothes chain's European stores will make a bigger contribution, as the strong euro beefs up margins. Getting more pounds for your euros is great news when you report results in sterling.

And there's support for pharmaceutical firm Shire. Until recently, its share price had fallen 20% since the beginning of the year, but sentiment has now swung the other way.

Shire shares are up 4% this week and over 8% in less than a fortnight. But even that's chicken feed, according to City analysts. Cantor Fitzgerald analyst Dr Brian White thinks they'll hit a new high at £63 in time, implying potential upside of 61%.

"We believe that the breadth of Shire's portfolio as well as its exposure to market segments with visible growth characteristics have been overshadowed," writes the doctor.

In a quick summary of the laggards, Provident Financial will be kicked out of the FTSE 100 later this month after last week's profits warning. And that's despite doubling in value since the post-crash low.

There's little respite at education giant Pearson following worse-than-expected first-quarter results from Barnes & Noble Education.

Store textbook sales at the North American college bookstore operator fell 8.5%, which does not bode well for Pearson's North American higher education business. Generating over a third of group operating profit in 2016, this division is a real worry for Ciarán Donnelly.

The Liberum analyst still thinks the shares are a 'sell' with a price target of 330p, implying potential downside of 45%.

Over at low-cost airline easyJet, a recovery from a de-rating in 2016 continues to unravel. The catalyst can be traced back to the announcement mid-July that respected chief executive Carolyn McCall is off to ITV at the end of the year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.