Hewlett Packard Confusion and Berkshire Hathaway Stake

The Investors Chronicle (IC) published an article last week entitled “What does Buffett see in HP?”. I read it with interest as I used to do a lot of business with HP and its customers before I retired from a proper job. But I think the article might have confused more people than it enlightened.

The article referred to the acquisition of a “large stake in printer manufacturer and software company Hewlett Packard (US:HPE)” by Berkshire Hathaway. But the latter actually acquired a stake in HP Inc (US:HPQ).

The Hewlett Packard company split into two companies in 2015 these being HP Inc (HPQ) focussed on printers and PCs, and HP Enterprise (HPE) focussed on software and services. The latter made the disastrous acquisition of Autonomy although they did win a legal case on the issue of misleading accounts in January this year.

The printer/PC business was seen as being slower growth and of course as being in a highly competitive sector and hence achieved a relatively low market rating. It’s now on a historic P/E of 7 but as the IC article indicated the free cash flow of HPQ has been improving greatly. Return on assets has improved to 17% as well so one can see why Buffett might be attracted to this business.

The IC article also talked about the management in-fighting at HP not prevented by weak management at the top of the company. In fact the company want through a series of top management changes after the founders departed and the worst of them was the appointment of Carly Fiorina as CEO. To quote from Wikipedia “Fiorina’s predecessor at HP had pushed for an outsider to replace him because he believed that the company had become complacent and that consensus-driven decision making was inhibiting the company’s growth. Fiorina instituted three major changes shortly after her arrival: replacing profit sharing with bonuses awarded if the company met financial expectations, a reduction in operating units from 83 to 12, and consolidating back-office functions. Fiorina faced a backlash among HP employees and the tech community for her leading role in the demise of HP’s egalitarian “The HP Way” work culture and guiding philosophy which she felt hindered innovation. Because of changes to HP’s culture, and requests for voluntary pay cuts to prevent layoffs (subsequently followed by the largest layoffs in HP’s history), employee satisfaction surveys at HP—previously among the highest in America—revealed widespread unhappiness and distrust, and Fiorina was sometimes booed at company meetings and attacked on HP’s electronic bulletin board.”

The company’s record of investing in software was also abysmal when hardware was becoming ever cheaper and generic. This cumulated in the disastrous acquisition of Autonomy.

But the fact that the company has survived (albeit it in two parts) is no doubt due to its strong historic reputation for well-engineered quality products and strong brand name.

But there are two key lessons to learn from the history of HP: 1) Changing the culture of an organisation is always exceedingly difficult and is likely to fail unless done very sensitively; and 2) Management incompetence can damage even the most admired businesses, as Hewlett Packard used to be.

To quote from my book Business Perspective Investing: “One of the key factors that affect the outcome of any investment is the competence of the management and how much they can be trusted to look after your interests rather than their own. Incompetent or inexperienced management can screw up a good business in no time at all, although the bigger the company, the less likely it is that one person will have an immediate impact. But Fred Goodwin allegedly managed to turn the Royal Bank of Scotland (RBS), at one time the largest bank in the world, into a basket case that required a major Government bail-out in just a few years”.

At Hewlett Packard it was not quite so disastrous and the company certainly faced challenges as the computer technology market changed but the damage done to a once great company was unhappy to see.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Hedge Funds Scale Back Big Bets

An interesting article published over the weekend was one in the Financial Times headlined “Hedge funds scale back big bets”. It said “         Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses”. It also reported that “Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3 per cent for the year up to and including Wednesday, according to Goldman Sachs estimates”.

The opaque and murky world of hedge funds is well described in a book I am currently reading entitled “Hedge Hogging”. This is by Barton Biggs a former hedge fund manager and contains lots of interesting stories about his experiences. For example, he covers going short on oil stocks based on fundamental analysis when the market started going in the other direction and he was in danger of clients taking their money out of the fund.

But it’s a book that any investor can learn from. Just looking at some of the chapter titles gives you some flavour of the content: The Odyssey of Starting a Hedge Fund: A Desperate Frantic Adventure; The Violence of Secular Market Cycles; Nature’s Mysticism and Groupthink Stinks; The Internet Bubble; Great Investment Managers are Intense, Disciplined Maniacs; Three Investment Religions – Growth, Value and Agnostic; Bubbles and the True Believer; Divine Intervention or Inside Information – a Tale That Will Make Your Blood Run Cold.

It makes it clear that the hedge funds world shows the natural survival of the fittest in the extreme. Those who make big bets and win are the survivors but those who make big bets and lose disappear and are soon forgotten as investors move their money elsewhere. Whether there is clear out performance in the long term by anyone is not clear but the high fees charged mean it can be very lucrative for the fund managers who can stay in business.

In summary it covers a wide range of topics including the dangers of shorting stocks if anyone has an urge to dabble in that as the market falls.

Ideal summer reading on your holidays.

FT article is here: https://www.ft.com/content/8495545c-74e1-4150-8207-4855c66c9750

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Stock Market Musings – Are You an Ostrich or a Trend Follower?

It’s Friday morning after another week of stock market volatility on top of a persistent trend downwards. In such an environment the investment community tends to fall into two camps – the value investors who hold on to stocks regardless (the ostriches of the market who allegedly bury their heads in the sand in the face of danger); and the momentum traders or trend followers.

The former say that if you have purchased a sound company based on good fundamentals you should stick with it, i.e. you should ignore the noise created by the frantic crowd. The latter say that that you need to sell to avoid worse losses or to retain what unrealised profits do exist in your portfolio.

I suggested in a previous blog post that this might be a good year to sell in May and go away. That was simply because I suspect this is not a short-term market correction from excessive exuberance but a realisation that the economic prospects are in fundamental decline. Higher inflation and higher interest rates to try and bring it under control are never good for the economy.

Technology stocks listed on Nasdaq have been particularly hard hit. The Nasdaq index is down by 17% in the last month with stocks such as Tesla, Amazon, Apple, Alphabet, Facebook and Netflix down substantially. This probably reflects the fact many new investors were pulled into the market in the last couple of years when it seemed impossible to lose money on such stocks. They are now pulling out and liquidating to protect their profits.

The short-term speculators are being hit hard and this is particularly obvious in the cryptocurrency markets which are down substantially as holders panic. It’s like a run on a bank where panic feeds on mania as holders choose to take their money and run. There was a good article in the Telegraph yesterday on that subject.

Should stock market investors choose to hold and ignore the panics or bail out? It is a dangerous approach in my view to take one extreme or the other – and particularly to switch from one to the other midway during a bust. If you choose to sell out completely on the premise that one can buy stocks back at the bottom you are likely to have two difficulties. One is that it’s impossible to identify where the bottom is and secondly the bounce back can be so rapid that one can miss out and incur high trading costs. That’s apart from the psychological difficulty of going back into a stock on which you have lost money.

But following the trend downwards does protect your portfolio from a massacre and will ensure you will never go totally bust. The trend does tell you what other investors think about the attractiveness of stocks in the stock market beauty parade, i.e. tells you the views of other investors who hold the stock.

It’s best to look at individual stocks when managing a portfolio and not to move in and out in a wholesale fashion. Sometimes the valuations put on individual stocks by Mr Market can appear irrational and in that case it can be better to hold them rather than sell. That particularly applies to small cap stocks where illiquidity can magnify panics. But it’s important to manage your overall exposure to the market and not to ignore major trends.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Ideagen Offer and Inspiration Healthcare Webinar

I mentioned a possible offer for Ideagen (IDEA) in a previous blog post (see https://roliscon.blog/2022/04/15/possible-offer-for-ideagen/ ). Today one was announced – a cash offer of 350p per share from HG which is a massive premium to the last listed price of 243p. The directors are recommending it so at such a premium I think it is likely to be a done deal. I will be accepting for my shares.

That should at least offset the losses today from the rest of my portfolio as the market heads south. We are surely in a bear market now. Perhaps folks read my previous blog post which suggested it was a good idea to sell in May and go away.

This morning I attended a preliminary results webinar by Inspiration Healthcare (IHC) in which I have a very small holding. The company sells neonatal products for premature babies. The share price has been drifting down like many technology companies. But revenue and EBITDA were up. Margins were also up as they concentrated more on their “own brand” products which is something I always like to hear. Distributing products from other companies is never very profitable in the long run.

The company has been investing in facilities, R&D and IT systems. But there have been logistic challenges as many other companies are facing. With purchased items increasing in cost also and they are changing suppliers in some cases.

Only 4% of revenues are from the Americas so there is big potential there if they can get regulatory approval and develop their marketing.

The company is cash generative and has no borrowing.

Project Wave is aimed a developing a new product and was delayed by the Covid pandemic but is now progressing – it’s now in clinical trial with possible commercialisation next year.

There was interesting discussion of ESG initiatives and staff support. Some 40% of staff are now working from home and one third of staff on a 4 day week (4 days at 8.00 to 6.00). They are using the Charities Aid Foundation (CAF) to distribute donations to charities – an organisation I seem to be coming across more frequently of late and worth knowing about if you make charitable donations.

There were a couple of questions from the audience. One on the increased costs of EU regulation for medical products. The second question was on a possible share buy-back. The answer was that it was not a benefit and “not on the cards”. It was suggested that it is important to maintain a strong balance sheet and to invest the capital. I cannot but agree as I almost always vote against them except in investment companies.

This webinar was on the Investor Meet Company platform and it was a helpful one. I recommend you watch the recording if you have an interest in small tech companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Sell In May and Go Away?

Rhododendron Odee Wright now in flower

An old saying in the stock market is “Sell in May and Go Away”. This is because historically the market tends to fall during the summer months for reasons that are not altogether clear. Bearing in mind the transaction and tax costs involved in selling shares and buying them back later in the year, and the fact that like all supposedly reliable investment rules, it tends to be traded away by the anticipation of knowledgeable investors, I do not normally take any notice of this theory.

But I feel this year it might be a good idea to follow. Inflation is forecast to rise to over 10% and GDP forecasts are falling so we might even enter a recession later his year. There is doom and gloom all around with the war in Ukraine not helping and commodity prices rapidly rising impacting both businesses and consumers.

A good example of the concerns of many companies was evident in the announcement by 4imprint Group (FOUR) this morning. Their trading statement said: “The Board is conscious that only four months of the year have elapsed and that current geo-political and broad economic factors may well affect the Group’s performance during the balance of the year. In particular, we are cognisant of potential issues relating to possible further COVID variants, supply chain disruption, inventory availability, increasing cost of product, availability and cost of labour, the effect of inflation on our customers’ budgets and the general threat of economic recession”. They are talking about the USA which is their major market but they could just as well have been discussing the UK.

Despite the fact that revenue so far this year has been up 27% over the last normal year of 2019, the company is clearly worried about the future. There have been similar statements from many other companies.

Another good example of the problems faced by many companies was a comment by Up Global Sourcing (UPGS) in a webinar yesterday. Everybody might be back in the office but the impact of higher shipping costs is having an adverse impact of 4% on their gross margin. They are looking for automation to reduce man hours and hence other costs.

We might currently have full employment but that is not going to last I suggest.

I think this might be one year to exit stock market holdings which will at least enable you to avoid monitoring your market holdings while you are on your summer holidays. Or at least move to holding shares that may be less volatile or less impacted by current economic trends.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Financial Ombudsman Is Useless

I have posted here before about the exorbitant time it took to make a transfer of one of my SIPPs from one provider to another. It took over 5 months for what should have been a simple transfer (see links below).

I did submit a complaint to the Financial Ombudsman service in May last year. Their response so far has been to consider a derisory financial offer from the platforms to be adequate and as the transfer is now complete they consider no further action is necessary. This is despite the fact that the delay to the transfer cost me not just a lot of my time in chasing up the transfer (many hours in fact) but as my holdings were frozen and partly in cash when the market was rising, the loss was significant.

So after a year I have appealed and the case has now joined a queue for a decision by an Ombudsman. Apparently it may be several months before a decision is given.

I think the moral of this story is that the Financial Ombudsman cannot be relied on to provide justice in any reasonable timeframe. This case was a prima facie example of incompetence by platforms in handling transfers expeditiously as they should do. Meanwhile the FCA continues to allow platforms to get away with the anti-competitive practice of deterring platform transfers by introducing long delays.

Platform Transfer Finally Completed: https://roliscon.blog/2021/06/22/platform-transfer-finally-completed-and-pointless-trust-changes/

Platform Transfers – Progress Pitiful: https://roliscon.blog/2021/03/21/platform-transfers-progress-has-been-pitiful/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Elon Musk Takes Over Twitter

The board of Twitter have accepted the bid from Elon Musk to acquire Twitter for $44 billion. How is he going to finance this? Apart from being the richest person in the world, probably by borrowing against his shareholdings in Tesla.

But users of Twitter will be concerned about his plans for the platform. This is what Elon said (in a tweet of course): “Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated. I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential -I look forward to working with the company and the community of users to unlock it.”

As an active twitter user I find these commitments to be positive. Authenticating all users should be done by all social media platforms to deter the abusive comments that are all too common. Twitter also needs to cease the political bias which is all too evident in its selection of who and what to suppress.

There are some simple changes to Twitter that might help. For example, allowing you to “dislike” tweets as well as “like” them, and allowing edits of tweets to enable one to correct the typos that creep in when using a mobile phone. There is also too much repetitive advertising on Twitter of late, often irrelevant to you.

Now would it not be good if we could get Elon Musk to take over the BBC and remove the left wing, woke bias from that also!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Gamma Communications AGM and FCA News

I have received the Annual Report and Notice of the Annual General Meeting for Gamma Communications (GAMA). Despite the fact that this company specialises in electronic communications and actually say in their Annual Report that “This year we have adopted a digital first approach reflecting how we operate as a business”, they expect me to physically attend the AGM in central London at 10.00 am on the 19th May. There is no electronic attendance via web cast or hybrid meeting supported. This is a waste of my time for what is likely to be a routine event. I have written to the Chairman to complain.

Their registrar Link Group also failed to include a proxy voting form with the AGM Notice so I had to use my own. This is a repeated failing recently by Link Group which undermines shareholder democracy. They seem to be trying to force everyone to register for their electronic voting system. I don’t mind voting electronically but that should be provided by a simpler system such as that used by Computershare.

The Financial Conduct Authority (FCA) have published a press release that says “The FCA has finalised rules requiring listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management, making it easier for investors to see the diversity of their senior leadership teams”. They have simply gone ahead and implemented new rules that were the focus of a public consultation which I severely criticised – see https://roliscon.blog/2021/08/06/diversity-but-at-what-cost/ . What feedback did they get to the public consultation? They have not said and no report has been published on it. I have asked for more information to see what support they got for these proposals which I consider to be political gestures which will have no benefit but add a lot of costs to listed companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Alliance Trust, Segro and NatWest AGMs

Yesterday I attended the Annual General Meeting of Alliance Trust (ATST) online. This at least enabled me to avoid travelling to Dundee and I am still avoiding physical meetings because of the Covid risk. From the experience of one tradesperson who visited us yesterday this is still very sensible I think – he caught it in London but had been very unwisely avoiding vaccination – as a result he spent several days in hospital with pneumonia despite being a young and fit person beforehand.

The Alliance Trust AGM was held as a “hybrid” meeting using the Lumi platform which enables on-line voting and was a very well managed event.

Alliance Trust is of course a generalist global trust and after a difficult few years in the past have now reverted to being one of those trusts suitable for widows and orphans, or anyone who desires a “simple, high-quality way to invest in global equities at a competitive cost” to quote from their Annual Report. They use WTW to select and manage a portfolio of independent fund managers.

The Chairman, Gregor Stewart, made the following comments. They outperformed their benchmark in the first half of the year but underperformed in the second half. This was due to the market being focussed on a few large US technology stocks in which they are underweight. But the dividend was increased last year with a total increase of 32.5%. NAV Total return was 18.6%. The discount to NAV has widened but that is true of most investment trusts as people lost confidence in the stock market and its prospects.

When it came to the Q&A session, one shareholder questioned the increase in the dividend which was done by paying out capital profits. The Chairman’s response was that there were differing views on this issue and they had consulted shareholders who generally thought the yield needed to come up a bit. Longer term their expectation is that dividends will be covered by income. Comment: Capital growth retained within the trust is tax free while if it is paid out as income you get taxed on the dividends. So I would personally prefer they not do this. But I can understand why some people would prefer increased dividends and companies in which they are invested are tending to pay lower dividends (the very high dividend payers are often mature businesses in sectors to be avoided). There is also the problem that Alliance may look less attractive to investors if they pay a headline lower yield than other similar trusts. In summary this is not a straightforward issue and will certainly not affect my decision to hold this trust.

Segro AGM

This was only held as a physical event yesterday although there was a recording made which I watched this morning (it’s available from their web site). There were only a few shareholders in physical attendance. Why could they not hold a hybrid meeting? They could surely afford to set one up using Lumi or other platforms.

The meeting was chaired by Gerald Corbett who is retiring this year. CEO David Sleath gave a presentation and I note here some of what he said: Adjusted eps was up 14.6%, adjusted NAV was up 39.7% and dividends were up 10%. The board believes there is a lot more growth to come due to favourable market dynamics. There is a record demand for space resulting in an unheard of vacancy rate of 3.5%.

They even reacquired some offices in Slough sold in 2016 to redevelop into industrial units. The board is confident in the outlook for the business and there is the potential to double rental income.

The Q&A was relatively brief and hampered by not everyone using a microphone so that was another organisational failure.

I commented previously on the voting for this event in March and in particular the remuneration Report and Policy (see  https://roliscon.blog/2022/03/20/its-the-agm-season-but-voting-not-easy/ ). But the actual voting as reported showed only 2.4% of shareholders voting against the Remuneration Report and 1.1% against the Remuneration Policy. This is exasperating. Irrespective of the fact that the company is doing very well and I have no complaints about the directors, the performance is due to market conditions and the remuneration is excessive.

NatWest Group AGM

The NatWest AGM is being held on the 28th April as a physical meeting in Edinburgh although there was a virtual event to enable shareholders (of which I am not one) to ask questions yesterday. Why cannot they hold a proper hybrid meeting?

Remuneration is an issue at this company also. ShareSoc have published some voting recommendations and other comments written by Cliff Weight – see here: https://www.sharesoc.org/vci/nwg-natwest-group-information-and-vote-guidance-2022/ although I understand you need to be a member to read them.

One thing Cliff said was this: “I question what was the need and rationale for the CEO to be given a 19% pay rise only 1 year into a new job – has she over delivered to such a degree that the Board think they were underpaying her?”. It’s clearly another case of excessive and unjustified remuneration which is all too common in the banking sector. NatWest is still recovering from its near collapse and effective nationalisation by the Government in the financial crisis of 2008 which it is no doubt trying to forget by changing its name from the Royal Bank of Scotland.

There is obviously still a generic problem of excessive pay for executive directors in public companies which changes to corporate governance and regulations in the last few years have failed to tackle. With votes on remuneration dominated by institutional investors who have no interest in controlling pay as they swim in the same pond, and private shareholders typically disenfranchised by obstructive platforms more substantial reforms to tackle this issue are clearly required.

In the case of NatWest, even the Government must have been consulted upon and voted to support the remuneration as they still hold 48% of the shares!

Mello Event

One physical event that investors may be interested in is the return of the three-day Mello meeting in Chiswick on the 24th to 26thof May run by David Stredder. See https://melloevents.com/ .

There is nothing like meeting companies and fellow investors in person to gain real understanding of what is going on. But regretfully David I won’t be joining you. Have just been advised to have a fifth covid vaccination!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Record Fund Raising for VCTs

The AIC have published a note that says that a record amount of money was raised by Venture Capital Trust (VCTs) in the last tax year. It passed the £1 billion mark for the first time.

This may not be surprising given that investors may have realised gains from stock market investment in last year and VCTs have been looking attractive because of good reported profits and the available tax benefits. But one issue that has yet to become clear is the impact on the long-term performance of VCTs under the new investment rules. The investment rules for VCTs changed so they now have to invest in early-stage companies rather than asset-backed companies or management buy-outs of mature businesses. This has meant that they are now investing mainly in immature technology businesses whose valuation is often problematic. And the valuations often depend on the last fund raising round rather than on the profits of the business.

The problem is that the valuations of juvenile technology businesses have been rising and you can see that from the comments of fund managers who have been finding the valuations of such businesses have been rising. They have been competing harder for new investments. If they are paying more for companies this might affect their long-term returns in due course.

More money piling into VCTs actually makes the situation worse as the cash has to be invested rapidly.

In the meantime, the reported profits of VCTs often depend on unrealised gains rather than realised ones based on fund raising rounds and comparable companies. They have been able to achieve a few good realisations which enables them to pay good dividends but that simply reflects the enthusiasm for technology businesses in the last couple of years.

I am not saying that VCTs are necessarily a bad investment at this point in time – I did purchase a few more VCT shares last year. They do provide some diversification in a portfolio and have good tax benefits even if there is a risk that the Government might reduce the latter in future. But investors do need to consider them as long-term investment vehicles and do need to be wary of the above issues.   

The AIC Press Release is here: https://www.theaic.co.uk/aic/news/press-releases/smes-to-benefit-from-record-funding-as-vcts-raise-over-a-billion-in-202122

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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