It’s Impossible to Value Companies at Present!

The stock markets rose sharply yesterday and this morning, allegedly on the news of the $2 trillion economic support package announced in the USA. But the company news is consistently bad where it is available.

In the company announcements I have read, they seem to fall into two kinds: 1) We are shutting down all or part of our operations and managing the cash but our balance sheet strength is such that we can survive this for weeks and won’t go out of business (Greggs, Dunelm, Next and Victoria for example); or 2) Only minor impacts so far but it is too early to judge the wider impact of a possible economic recession on the business (Diploma for example).

Nobody is giving forecasts and it’s impossible to work them out for oneself. The result is that individual stock prices are bouncing up and down, and the whole market is also gyrating. I have no confidence that the recent market bounce is an indication that we have passed the bottom. It’s simply impossible to value companies at present with any accuracy.

One could perhaps say one can value them because the coronavirus crisis may only last a few weeks while company valuations should be based on years into the future, but there is no certainty on the duration of the epidemic, how many people will die and when the economy will be back to normal.

Here’s a useful quotation from the Victoria (VCP) announcement today: “….the Group goes into the uncertainty of the next few months from a position of considerable strength. However, as Darwin stated, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.’ Therefore, our managers have been willing to think the unthinkable and act decisively and promptly to protect their business – particularly its cash position – as the impact will, in the short term, be significant”.

Some of the companies mentioned above have seen an immediate impact on their businesses while others are less affected. Those who run “non-essential” businesses such as General Retailers and Hospitality operators are the worst hit, but I suspect others will see the impact in due course as the economy slows. It’s OK for Governments to pump money into the economy to try and keep it afloat but the future profits of many companies will surely be wiped out this year.

The impact might be wider than we expect. For example, one of the on-line retailers I use has closed down its web site today presumably because of the difficulty of packing and shipping orders. On the other hand, office productivity might suddenly improve if everyone is working from home – less time will be spent gossiping or flirting with others or wasted on commuting.

As an investor does one simply sit on one’s hands in the expectation that the crisis will pass in due course and the markets will rebound?  There was an interesting article by Chris Dillow in last week’s Investors’ Chronicle. He pointed out that research tells us that when there is bad news, investors tend to look at their portfolios less often. It’s the equivalent of not going to the doctor because their diagnosis might be bad news. Not reviewing your portfolio regularly is surely a habit to be avoided. I do it every evening as a matter of routine.

I know exactly the value of all my portfolios and the movements of individual holdings over the day. It’s made for gloomy reading of late. I also get alerts during the day of share prices that have moved significantly from previous levels and review them at the end of the day also. I use software products such as ShareScope and Stockopedia to provide this information. As a man of action, I do react to what I see happening in the market and to individual shares. I manage my portfolio to reduce exposure to the market when it is falling. And I make changes to my individual holdings dependent on the latest news and current prospects.

But it’s easy to waste a lot of money by over-trading, and waste a lot of your personal time, so I try not to make changes unless trends are very clear. My habits have developed over many years of investing in the stock market and have worked out reasonably well. But others might take a different approach. There is no one “best solution” but hiding behind ignorance of what is happening in the market is surely a recipe for poor portfolio performance.

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

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