Collecting Your Personal Health Data – Should You Object?

There seems to be quite a furore developing over the plans by the NHS to make your personal medical data available for research to a wide range of organisations, including commercial companies. It is no doubt true that the NHS has an enormous amount of medical data on the UK population which is unrivalled anywhere else in the world except possibly in China.

That data which might be as simple as weight and blood pressure, through to blood tests and even DNA samples, could be exceedingly useful by using “big data” analysis techniques to identify possible causes of disease. It would of course include past diagnoses and treatments including medication.

But there have been a number of protests raised about the risk of loss of confidentiality and the fact that it might not be completely depersonalised (i.e. the data released might enable people to be identified). Even some of my neighbours on the App Nextdoor have been advising people to opt-out.

This is a complex area and I remember discussing it with my GP some years ago when it was first contemplated. He had concerns but I do not while I think such data could be enormously useful in diagnosis and the development of new treatments. The Investors Chronicle ran an informative article on the subject last week and covered some of the companies active in this area.

For example it mentioned Alphabet (parent of Google) partnering with hospital chain HCA Healthcare to develop algorithms using patient records. As I have recently been treated in an HCA facility (they own London Bridge Hospital) that might include me. The article pointed out that even your Apple Smartwatch will be recording some medical data such as heart rate exercise data.

A number of companies are developing partnerships with hospital groups to collect and analyse the data they have on patients. For example, AIM listed Sensyne Health (SENS) is doing so. They recently announced an agreement with the Colorado Center for Personalized Medicine which will extend their database by 7.3 million patients to over 18 million. They obviously plan to “monetise” that data by supplying it to other companies for research purposes. I do hold a few shares in Sensyne.

What are the concerns? Insurance companies would certainly like to know who might be bad risks by looking at patient data. They are unlikely to be able to do that, particularly as any data released will be depersonalised. But will it be impossible to identify people as some might enable linkages to be made? Perhaps not totally impossible but the risks seem low to me and personally I could not care less who knows my medical history. Others might disagree on that point but the benefits of having a good database of medical data to help with research, much of which is done by commercial companies, is surely invaluable.

There are opt-out provisions for those who have any concerns.

See https://digital.nhs.uk/data-and-information/data-collections-and-data-sets/data-collections/general-practice-data-for-planning-and-research for more information.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Scottish Investment Trust Reviewing Management Arrangements

I wrote about the Scottish Investment Trust (SCIN) back in February and commented negatively on its underperformance in recent years. Their investment style has been based on a contrarian approach, i.e. picking cheap stocks that look undervalued but which might recover. The article included this comment: “It would appear that they adopted the new investment style five years ago which might be identified as when under-performance took off. If an investment strategy does not work, how long should you persist with it? Not many years in my experience. It’s too easy to hold the dogs longer than you should”.

Since I wrote the article the company has been running advertisements on an “ugly duckling” theme suggesting that the undervalued investments it holds will turn into beautiful swans given some patience. I found these advertisements quite amusing.

But it seems the directors have finally lost patience because they have announced a “Review of Investment Management Arrangements”. They are inviting proposals from fund management groups who might take over managing the fund.

The board is to be congratulated on finally taking action. Better late than never.

Note: The company should not be confused with the Scottish Mortgage Investment Trust which is an unrelated company.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Scottish Mortgage Trust Report and Shell Climate Change Votes

The Scottish Mortgage Investment Trust (SMT) recently published their Annual Report and it’s well worth reading bearing in mind the exceptional performance they achieved last year. NAV total return was up 111% and that was way ahead of the global sector average. It was the best ever performance of the trust since it was founded in 1909 and it’s now one of the largest investment trusts.

How did they achieve such a remarkable result? You might think it was because of a strong focus on technology stocks – but that is only 23% of their portfolio. Perhaps you think it was because they made big bets on a few well-known names such as Tencent, Illumina, Amazon and Tesla? But that is not the case.

It is true that Amazon represented 9.3% of the portfolio at the start of the year and Tesla 8.6% but the 30 largest holdings only represented 80% of the portfolio. In other words, it was in essence a large and diversified portfolio. But a few stocks made a large contribution to overall performance with Tesla contributing 36% despite the trust selling 80% of their holding during the year so as to maintain diversification.

In his closing words, fund manager James Anderson suggests that he should have been more adventurous. He says “we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings….”. He discounts the value of near-term price/earnings ratios – understanding how the world is changing seems to be his main focus.

Another share that many private investors hold is oil company Shell (RDSB) who recently held their Annual General Meeting. If you don’t hold it directly you might hold it indirectly as it’s usually a big holding in global generalist funds and trusts.

There were two resolutions on the agenda related to climate change one by the company asking for support for their “Energy transition strategy” and one requisition from campaign group Follow This. The latter demanded more specific targets to achieve reduction in long-term greenhouse gas emissions. The company’s resolution received 89% votes FOR, but the latter achieved 30% FOR. Even so that was higher than previous votes, or similar resolutions at other oil companies with support from proxy advisory services and big institutions.

Even the company’s resolution, supported by a 36-page document and which was only “advisory” includes reference to Scope 3 emissions (i.e. those emitted by their customers using their products). They say “That means offering them the low-carbon products and services they need such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets”.

Are these proposals likely to be effective or substantially contribute to climate change? I think not when China and other countries continue to build coal-fired power stations and many people question whether it’s possible to change the climate by restricting CO2 emissions. These resolutions look like virtue signalling by major investors and may be financially damaging to Shell. It is particularly unreasonable to expect Shell’s customers to swap to other energy sources – they may simply switch to other suppliers if they can’t buy them from Shell. As the Shell report says: “If we moved too far ahead of society, it is likely that we would be making products that our customers are unable or unwilling to buy”.

Shell says that “Eventually, low-carbon products will replace the higher carbon products that we sell today”, but their report is remarkably short on the financial impact. In fact their report reads more like a PR document than a business plan and it also makes clear that projecting 30 years ahead is downright impossible with any accuracy.

Note: I hold Scottish Mortgage but not Shell. I do not hold any oil companies partly because they are exploiting a limited resource making exploration and production costs more expensive as time passes and partly because I see a witch-hunt by the environmental lobbyists against such businesses. I also dislike companies dependent on the price of commodities and vulnerable to Government regulation which Shell certainly is on both counts.

One interesting question is who owns and runs the Follow This campaign and how is it financed? Their web site is remarkably opaque on those questions. Even if they have been remarkably effective in getting media coverage for their activities, I would want a lot more information on them before supporting the resolutions they advocate.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

EKF Diagnostics AGM, Verici DX, Eleco Issues and Boku AGM

I attended the Annual General Meeting of EKF Diagnostics (EKF) today via Zoom. This was one of the better organised electronic format AGMs I have attended. To quote from the company’s web site: “EKF Diagnostics is a global medical manufacturer of point-of-care and central lab devices and chemistry reagents including hemoglobin tests, HbA1c tests, glucose and lactate tests. EKF also manufactures and distributes products associated with COVID-19 pandemic”.  The latter has enabled the company to generate very high revenue growth recently and the AGM statement said this also: “Strong trading continues into the second quarter 2021 and the Board is now confident that trading for the full year will be comfortably ahead of already upgraded management expectations”.

There were a few questions posed by the approximately 50 attendees to the AGM and as they gave the proxy vote figures I asked why they got 11% of votes against the approval of the accounts. Such a level of opposition is unusually high. The answer given was that this was because of a recommendation from a major proxy advisor with the added comment “It’s just stupidity”. This is not a very helpful kind of answer. Why exactly was there a recommendation to vote against? And why was it stupid?

Note that EKF holds interests in companies RenalytixAI (RENX) and Verici DX (VRCI) who are focused on renal disease, the latter on diagnosis of kidney transplant rejection. Both companies listed on AIM last year and have zero or minimal revenue. I recently read the prospectus (admission document) for VRCI. As a transplant patient myself, I have a strong interest in this subject but the company seems to be some way from developing a saleable product or service, i.e. fund raising seems to be for financing research. I won’t be investing in either company until the prospects are clearer. It is very clear that it is possible to list new companies on AIM at present that are not just early-stage ones but pure speculations, but that has probably always been the case. These companies might meet a strong demand for new diagnostic and treatment options for renal patients if they are successful but success is far from assured and large amounts of capital have been raised and expenditure incurred with no certainty of profitable revenue resulting. At least that’s my opinion but anyone who thinks otherwise is welcome to try and convince me.  

Another unhelpful response to a question I received today was from Eleco (ELCO). I have been a shareholder for some time in this construction software company. The company announced on the 26th of April that it had received a requisition notice that covered resolutions to reappoint two directors, that all directors stand for re-election at future AGMs and that the remuneration committee report be approved.

It was certainly unusual that such resolutions were not on the AGM agenda on the 6th of May and the above requisition was ignored (probably too late anyway). It is of course standard practice now for all directors of listed companies to stand for re-election, and a remuneration resolution is also normal at most AIM companies even if not legally required. The AGM was held in a format that discouraged questions also so I did not attend.

On the 14th May the company announced that the requisition notice had been rejected as it did not comply with the Companies Act and the company’s Articles, but gave no further information.

So I sent a question addressed to the Chairman, asking what was the reason for the requisition and exactly why was it rejected. The answer I received from advisor SECNewgate (not from the Chairman) was: “Thank you for your email regarding Eleco. It has been discussed with the Company’s NOMAD and lawyers and we do not believe we need to add any further detail other than that the requisition notice does not comply with the requirements of the Companies Act 2006 and is also contrary to the provisions of the Company’s Articles of Association”.

Hardly a helpful response. Why should the company avoid answering such simple questions? Will they continue to evade answering, which legally could be difficult at the next AGM? If they have one or more disgruntled shareholders who chose to submit the requisition why should not other shareholders know about their concerns? This is just bad corporate governance.

I also attended the Boku (BOKU) Annual General Meeting today. This was another Zoom event with about 10 attendees. The CEO gave a short presentation and the Chairman covered the issue that proxy advisor ISS had recommended voting against the remuneration resolution (there were some votes against). The ISS complaint was apparently that the LTIP was not solely performance based. The Chairman said they needed to match the more normal US remuneration structure, i.e. options based on length of service.

Several questions were posed by attendees after the end of the formal meeting and the CEO gave his usual fluent responses. I questioned the new focus on e-wallets. Surely there were lots of companies offering such wallets? How were they to compete? The answer apparently is by focusing.

Both of the on-line AGMs I attended today were useful events if rather brief and not nearly as good as a physical meeting. It’s also difficult to put in follow-up questions after initial responses. Let us hope we can revert to physical or hybrid meetings soon (hybrid ones will at least make it easier for those with travel difficulties to attend so I hope the electronic attendance option is retained).

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Voting Against Directors at Greggs and MAV4

Greggs (GRG) held their Annual General Meeting today. This was a “closed” meeting but with no electronic access provided. Bearing in mind the size of the company, it seems unreasonable that they could not have provided shareholder access.

But I note that the votes reported show that several directors received substantial votes against. For example Ian Durant at 4.8% and Sandra Turner at 7.7%. I wonder why? There were also substantial numbers of votes withheld but no explanation has been given.

One advantage of a physical meeting is that if you see a lot of proxy votes being cast against resolutions you can ask why before the directors close the meeting and depart. Even electronic meetings do not give you that opportunity.

Another company where the directors received substantial votes against recently was Maven Income and Growth VCT 4 (MAV4). But I think I know why in this case. I complained in a previous blog post about the length of service of the directors and suggested shareholders vote against their re-election. At their AGM there were a large number of votes “withheld” on the reappointment of the directors – over 800,000 for all 4 which is usually a sign of disapproval. Perhaps my comments had some impact on shareholders’ votes. They also recorded over 1 million votes against reappointment of the auditors, against disapplication of pre-emption rights and against share purchases, even though voting against share buybacks is usually not a good idea in VCTs. That’s because if the company does not buy-back shares then nobody else may do, with the result there is no share trading in the company’s shares and the discount to NAV widens to a very high figure.

Clearly some shareholders in MAV4 are unhappy. Again there has been no published explanation by the company or commitment to do anything about it.

However you look at it, this is not good corporate governance and the Chairmen of these companies should comment I suggest.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Rampant Speculation, Cryptocurrencies, Buffett Meeting and Ridley Blog

With a long weekend for the May bank holiday, I took the opportunity to prepare the information required by my accountants to submit my and my wife’s tax returns (it’s many years since I completed my own Self Assessment tax returns – my financial affairs got too complicated).

After reading a good article in this weeks Investors Chronicle on Inheritance Tax (IHT), entitled “Eight things executors need to know”, I think I should have simplified my financial affairs long ago! My executors are going to have quite a job on their hands. But IHT is just ridiculously complicated. It looks like a “make work” scheme for accountants.

I have of course tried to simplify matters recently by consolidating two SIPPs on different platforms into one. The process was started on the12th January and is still not complete although most of the assets have now been transferred. As I have said before, the time and effort required to move platforms is disgraceful so I will be preparing a complaint to go to the Financial Ombudsman this week.

Having reviewed my income and expenditure figures for last year, it’s also a good time to review the state of the market. Should I “Sell in May and Go Away” as the old adage goes? Not that one can go far these days without a lot of inconvenience and expense.  

My portfolios contain a mix of individual shares and investment trusts, with a strong focus on technology stocks and small cap stocks. I certainly have some concerns about small cap technology stocks which seem to be fully priced at present, even if their futures look rosy. There are a large number of new IPOs of late where the valuations seem very optimistic. Meanwhile there is rampant speculation being pursued by inexperienced investors, particularly in cryptocurrencies and NFTs.

This is what Warren Buffett’s partner Charlie Munger said at the recent Berkshire Hathaway Meeting: “Of course, I hate the Bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists, and so forth…Nor do I like just shuffling out billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. So, I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization. And I’ll leave the criticism to others”. That’s very much my opinion also.

Government debt has been ramped up to meet the Covid epidemic and interest rates are at historic lows. The concern of many is that inflation will increase as a result requiring Governments to clamp down on the economy to stop it overheating. This was a useful comment recently from the editor of Small Company Sharewatch: “The solution to the problem of lower interest rates is self-evidently higher interest rates. But the US Federal Reserve is having none of it. In the 1970s. inflation of around 15% was the problem. This was cured by higher interest rates, which got inflation down, and allowed interest rates to fall – for the next 40 years! The problem has now flipped. Low interest rates are the problem. Debt is encouraged: complacency grows; savers take on more risk; and investor mania grows. These are all likely to persist until the Fed acts”.

The economy is certainly buoyant. I learned today from attending a webinar of Up Global Sourcing (UPGS) that even pallets are in short supply. Commodities are also increasing in price as a result. I have not lost faith in technology stocks but perhaps it is best to look for new investments in other sectors of the economy – and certainly UPGS is a very different business which I now hold.

For another topical quote, here’s one from Matt Ridley in an article in the Telegraph (he always has something intelligent to say):

“The whole aim of practical politics, said HL Mencken, ‘is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.’

It is hard to avoid the impression that officials are alarmed rather than pleased by the fading of the pandemic in Britain. They had a real hobgoblin to hand, and boy did they make the most of it, but it’s now turning into a pussy cat. So they are back to casting around for imaginary ones to justify their draconian – and deliciously popular – command and control over every detail of our lives. Look, variants!

And yes, the pandemic is fading fast. The vaccine is working ‘better than we could possibly have imagined’, according to Calum Semple, of the University of Liverpool, based on a study which found that it reduced hospitalisation by 98 per cent……”.

If the pandemic and the associated fear of the population is over, no doubt the Government will ramp up the concern about global warming despite the fact that we had the coldest April for almost 100 years. Government actions in this area are already having a significant effect on some sections of the economy and I have been putting a toe into that pool. No I am not buying electric car stocks but the power generation area is certainly of interest. How to avoid the speculations and just buy good businesses that are not totally reliant on Government funding is surely the key.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Madoff Dies, Parsley Box, Active Trading, Babcock and Covid Vaccinations

Bernie Madoff, arch fraudster, has died in prison. He ran the largest ponzi scheme in history which defrauded investors of over $60 billion. His funds showed unbelievable good performance because he invented share trades to support his fund valuations. This attracted new investors whose cash he used to pay out departing investors and to support dividends. It is unbelievable that such outrageous frauds can still take place in the modern world despite all the onerous regulations.

I mentioned a recently listed company called Parsley Box (MEAL) in a prior blog post. I have now sampled their products – prepacked dinners and have come to the conclusion that I question whether this is likely to become a great company. The meals are rather bland and you can buy cheaper equivalents from supermarkets. They do have the advantage of a long shelf life and do not require refrigeration, but so do other products such as canned goods so I am not convinced there is a big market for them. The company is spending money on national TV advertising, on channels focused on the elderly like me. You can always generate sales if you spend enough on marketing, but that does not necessarily mean that you have a profitable business.  

How actively should one trade? This is a matter of personal preference I have come to believe. Some people can hold stocks for ever in the belief that they will come good in the end whereas others panic at the first sign of trouble. It does of course depend to some extent on the type of stocks in which you invest. Dumping small cap stocks that are on wide spreads can be a very bad idea. The volatility of small cap stocks can bounce you out of a holding quite easily if you have a tight stop-loss.

But there was an amusing story in the latest edition of the Techinvest newsletter. To quote: “In that respect, we are often reminded of a well-publicised study by a large American brokerage a few years ago that aimed to identify which retail accounts generated the highest investment returns. Top of the list were: the accounts of customers who it turned out had been deceased for some time; next best was those accounts that customers had forgotten about and had not traded on for many years; the poorest of investment returns belonged to accounts that had clocked up the highest transaction costs through frequent stock rotation”. Techinvest runs a portfolio and certainly its returns have been very good over the years as they rarely sell stocks. They appear to just wait until some idiot comes along willing to pay a premium price for their holdings.

Personally I often hold stocks for years but I am also impatient when investments seem to be going wrong. I cannot sit there doing nothing. As a man of action, I pander to my impatience by selling a proportion of my holding but not all, i.e. I sell on the way down in stages. That cuts my possible losses. The only exception to this rule I make is if the news is catastrophic or I have lost all trust in the management when I dump the lot.

Babcock (BAB) is a good example of the danger of holding on regardless. It has looked fundamentally cheap for some time but the shares have actually lost 75% of their value in the last 5 years in a steady downward trend. There was more bad news on the 13th April. An announcement from the company said “The contract profitability and balance sheet review (“CPBS”) has identified impairments and charges totaling approximately £1.7 billion”. They now plan some disposals which they suggest may enable them to avoid an equity issue.

On a personal note, I had my second Covid-19 vaccination yesterday (the Pfizer version) so I am feeling slightly tired this morning, as I did after the first. The organisation was chaotic though this time. Originally planned to be done at Guys Hospital but then redirected to St. Thomas hospital and they lost my wife’s record altogether. My tiredness may partly relate to the miles I walked yesterday around and between hospitals. The person who administered the injection worked for British Airways as cabin staff. He was redeployed as there are few flights to service at present. He said a lot of people are extremely nervous about taking the vaccine. He had spent 45 minutes talking to one person before they eventually refused it.

Personally I have no qualms at all about any of the vaccines. They are much safer than the risk of catching the virus. But there are a lot of idiots in this world are there not! The latest bad news however is that the CEO of Pfizer has suggested that we may need a booster every 12 months in future. As I have been having annual flu vaccinations for 25 years that is of no great concern.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Parsley Box Webinar, Wey Education Offer, Crimson Tide Placing and Deliveroo

I have just watched a Mello presentation by Parsley Box (MEAL) which was most interesting. They have recently listed on AIM at a price of 200p valuing the company at £84 million. The business supplies “ready meals” direct to consumers and targets the “baby boomers” like I and my wife, i.e. the 70+ age group, or younger. To quote from their prospectus which is well worth reading: “Parsley Box is listening intently to its customers and aspires to champion the needs of the life-loving 60+ population, whose voice has gone too long unheard and untapped”.

The products are pre-cooked and do not need refrigerating so can be stored in any cupboard with a shelf life of 6 months. It is not a subscription model and orders can be placed by phone or over the internet with next working day delivery. Convenience is clearly the key in comparison with having to visit a local store or order a take-away – you just need to open a cupboard.

The business was founded in 2017 and revenue last year was £24 million with a pre-tax loss of £3.2 million. The reason for the loss seems to be the high expenditure on marketing to grow the customer base. The management team seems very experienced even if the CEO looks a lot younger than his age. When will it make a profit? Who knows?

On a quick read of the prospectus I could not see anything amiss but I have ordered a sample pack to personally check out the product before investing – it does seem to have good reviews on the net. My only possible concern is that there are no clear barriers to entry in the business so competitors could move into the space. That was one reason why I did not consider buying shares in Deliveroo which turned into the biggest IPO flop ever – that’s apart from the dual voting structure which also put off many institutional investors and several other concerns about the business.

One surprise today was an offer for Wey Education (WEY) which I have held since 2019. It’s a bid from Inspired Education via a scheme of arrangement – a cash offer at 47.5p which is a premium of 46% to the last closing price. They already have 53% of the shares committed to vote in favour and with the offer looking very generous I think it’s likely to be a done deal. I will certainly be voting in favour.

Another slight surprise today was a placing by another small AIM company I hold which is Crimson Tide (TIDE) who share a director with Wey. They are raising £6.0 million to fund more sales/marketing and product development. The annual results also announced today were positive with revenue up 21% and pre-tax profits up 51%. However, the historic rate of growth of this business has not been great so perhaps the intention is to fix that. The amount being raised will certainly substantially dilute the share base so it needs to help with revenue and profits growth or eps will be falling significantly.

It seems to make sense to raise funds to develop the business but I will not be rushing into buying the shares particularly until the picture is clearer.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

The Death of the High Street, and All Physical Retail Outlets

A couple of items of news today spelled out the dire situation of retailers with physical shops, whether they are on the High Streets, in shopping malls or out of town locations.

Firstly chocolate seller Thorntons are to close all their 61 shops and rely on internet orders and partner sales alone.  Thorntons has been a feature of the retail scene for many years but it had been losing money even before the pandemic hit. I did hold the shares for a time when it was a listed company but it is now owned by Ferrero. I even sold the company some software over 20 years ago and remember visiting their factory more than once. It was indicative of changing shopping habits with supermarket sales and local convenience stores taking over from specialist shops for much of their business and with internet sales being the final nail in the coffin. Some 600 jobs will disappear as a result. The vertically integrated structure (both making and selling their products) gave them some competitive advantage but not enough.

Another indication that shoppers have changed habits, and probably permanently, was the announcement from payments company Boku (BOKU) this morning. In their results for the last year the CEO said this: “Industries dependent on face-to-face contact have been decimated. Some – hospitality, for example – will bounce back when restrictions are released, but for others, the pandemic has accelerated pre-existing trends. It turns out that many people didn’t really like driving into town to go shopping and for many types of goods the switch to online will be permanent”.

I hold some Boku shares and although revenue shows another healthy increase, it still lost money last year mainly because of a big write down of goodwill in the Identity Division. One might consider that an exceptional item, although the division is still reporting a loss.

Another interesting announcement this morning was that by Smithson Investment Trust (SSON) which I also hold. In their final results, the fund manager said this: “In the Investment Manager’s view, a high-quality business is one which can sustain a high return on operating capital employed and which generates substantial cash flow, as opposed to only creating accounting earnings. If it also reinvests some of this cash back into the business at its high returns on capital, the Investment Manager believes the cash flow will then compound over time, along with the value of the Company’s investment…….the Investment Manager will look for companies that rely on intangible assets such as one or more of the following: brand names; patents; customer relationships; distribution networks; installed bases of equipment or software which provide a captive market for services, spares and upgrades; or dominant market shares. The Investment Manager will generally seek to avoid companies that rely on tangible assets such as buildings or manufacturing plants, as it believes well-financed competitors can easily replicate and compete with such businesses. The Investment Manager believes that intangible assets are much more difficult for competitors to replicate, and companies reliant on intangible assets require more equity and are less reliant on debt as banks are less willing to lend against such assets.

The Company will only invest in companies that earn a high return on their capital on an unleveraged basis and do not require borrowed money to function. The Investment Manager will avoid sectors such as banks and real estate which require significant levels of debt in order to generate a reasonable shareholder return given their returns on unlevered equity investment are low”.

This formula of ignoring physical assets is proving very successful and demonstrates how the world is changing. I am not quite so pessimistic about real estate companies but certainly those holding retailing assets are surely to be avoided.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Retail Investor Participation in IPOs – A Good Thing?

Shares magazine have reported that the CEOs of major platform operators AJ Bell, Hargreaves Lansdown and Interactive Investor have written to Government Minister Jon Glen asking him to consider the rights of retail investors in IPOs. Long gone are the days when new company listings were advertised in newspapers and retail investors could subscribe, and frequently “stag” the issue to make a quick profit. Nowadays institutional investors are typically offered shares in a placing and retail investors are excluded from participating.

The letter quotes recent examples of THG (Hut Group), Dr Martens (DOCS) and Moonpig (MOON) where retail investors could not participate and also says that between 2017 and 2020 they were excluded from 93% of share launches.

Bearing in mind that those companies now trade at a premium to their launch price, you might think that retail investors have been missing out, although there was nothing stopping investors from buying the shares in the market soon after they launched when you would have had to pay little more. Are these platform operators really acting in the best interests of retail investors in promoting the idea of wider retail participation though? I tend to take the contrary view.

Share prices after an IPO can be extremely volatile in the short term. That is particularly so now that so many companies launch an IPO with a short track record and no profits. In the long term, IPO stocks actually underperform the market. A paper by Jay Ritter noted this: “in the long‐run, initial public offerings appear to be overpriced. Using a sample of 1,526 IPOs that went public in the U.S. in the 1975–84 period, I find that in the 3 years after going public these firms significantly underperformed a set of comparable firms matched by size and industry”; and “There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity”.

In other words, companies take advantage of good market conditions and insiders know best when to sell. Recent market conditions have therefore been good for IPOs.

I did have a quick look at the prospectus for Doc Martens as a long-standing wearer of their boots and shoes which I can highly recommend. But I was not impressed enough to buy the shares. For example, the company does not even own the brand names it uses. The product is easy to copy also.

Moonpig also appears to me to be wildly optimistic about future prospects given that its business model (delivering cards via internet orders) is surely highly replicable once other businesses realise how much money there is to be made from such a simple business model. Moonpig has also benefited from the short-term impact of the Covid epidemic which has reduced conventional retail sales of greeting cards.

THG certainly have a very well designed and flashy web site, but its cosmetic and health brands hardly seem unique in a crowded market for such products. The company also has a patchy record of profits.  

In essence I can understand why platform operators would like to support the demand by retail investors to get into the next “hot” stocks when launched but the investors would be wiser to step back and wait for the initial enthusiasm to abate. Or at least take a very skeptical view of new IPOs and take a careful read of the prospectus which few retail investors do. Those companies that are IPOs of companies held by private equity investors which they have geared up with debt are ones to be particularly careful about as they know when is a good time to sell and often look to get out in the short term.

Of more concern to me is the discounted placings of shares in existing listed companies where private investors are definitely disadvantaged. That is a problem that does need tackling I suggest.  

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.