The stock market seems to be returning to normal with a positive trend over the last month despite the economy being in a complete shambles as a result of the “lock-down”. The Government is incurring massive costs to bail-out companies, support the NHS and pay workers to do nothing. We have yet to see the real economic impact of those measures on the Government’s finances. But investors seem to be euphoric because they now realise we are not all going to die from the Covid-19 epidemic and there are signs we will be able to get back to work soon.
There are also indications that vaccines to prevent the disease, or treatments for it, may be available in the next few months. One of the best commentators on the epidemic because of his scientific background is Matt Ridley who I met many years ago in circumstances he probably prefers to forget. He publishes a blog which is here: http://www.rationaloptimist.com/blog/ plus he has several good books published which I can recommend. His latest blog article is entitled “The contenders – and challenges – in the race to cure Covid” and is a good review of the field.
One interesting suggestion is the possible use of monoclonal antibodies to replicate antibodies from those infected with the disease and use them to treat other people. This might be very expensive from my knowledge of other such treatments but if the treatment is effective it might only require an injection every few months. It might be affordable for developed countries.
The diversion of NHS resources to treat Covid-19 patients is creating many problems though. Minor operations and non-urgent consultations are being cancelled. You can see the impact of this in the results reported by Medica Group (MGP) earlier this month. The company provides teleradiology services to the NHS and others. This is what it said: “In terms of Routine activity, the Company is experiencing a decline of around 90% in activity with many NHS hospitals having already suspended non-urgent elective procedures”. Reduced A&E admissions are also having an impact. But the company remains positive and can reduce its cost base substantially. ShareSoc has organised a webinar with this company this evening which may be interesting as I do not hold it.
Another company I do not hold is Burford Capital (BUR) which announced results this morning. This company has been in the news a lot because of a shorting attack. This is what the Chairman had to say: “2019 was a year of contrasts, marked by the continued expansion of our business yet also by the disruption of a meritless short attack. Though our business fundamentals remained strong, investor confidence was dented, causing shareholders to urge changes to our governance”. The announcement contains many positive comments about the progress on litigation, the future prospects, and balance sheet strength.
The accounts are not easy to understand and the Annual Report consists of 163 pages so I have not read it all. No doubt other people will comment on it in detail. But one simple thing I did do was look at the income and cash flow statements.
This is a company where the profits do not turn into cash. Comprehensive income was down from $342 million to $194 million but after changes in “capital provisions” the net cash outflow was $8.3 million. There are also doubts as to whether the legal awards which are recognised in the accounts can actually be collected. The share price is up over 25% today at the time of writing.
Another company worth mentioning as I like to cover cases of defective accounts is that of motor dealer Lookers Group (LOOK) – I have never held it. A few days ago the company gave a “Trading and Operational Update”. It included coverage of the fraud investigation which is now expected to result in a non-cash charge of £4 million in the 2019 financial accounts. Those have now been delayed until June. The investigation has also been extended across all divisions and more charges are expected.
The share price of Lookers was 185p in early 2016. It’s now about 21p. Such events totally undermine investor confidence in the accounts of public companies and suggest much tougher action is required to ensure accounts reported by companies are accurate and not subject to fraud or misrepresentation. Auditors surely are one group who need to take a lead on this as frequently when frauds are identified they have been running for several years.
As I said in my book Business Perspective Investing, “financial accounts don’t matter because they cannot be relied upon”. That’s certainly the case at present and it’s better to look at other measures of the quality of a business. That is particularly the case at present when the Covid-19 epidemic is distorting the results of companies and making it very difficult to forecast future financial numbers.
Better to look at other factors such as your trust in the management, the market position of the company and its future prospects.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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