Stock Market Turmoil – Don’t Sit There Awaiting a Rebound

The virus epidemic is causing major disruption to businesses and our personal lives. Thank god that we have the internet so we can conduct business and do our shopping without leaving home. But the UK is seen as one of the victims in the world so the pound is falling to parity with the dollar for the first time for many, many years. Meanwhile the Governor of the Bank of England is saying that he will print as much money as needed – unlimited “helicopter” money to lend to businesses to keep them afloat. Will that stop a recession? I doubt it. But to look on the bright side, it may be a short one.

China seems to have stopped the virus from spreading with no new domestic cases and movement restrictions being lifted. There are also some technical developments that might assist particularly in testing for the virus. But the UK is gearing up for a major epidemic and major stress on the NHS.

I am in isolation trying to avoid catching the disease as I certainly don’t wish to have another spell in intensive care as I had a few years ago. I ended up with “intensive care neuropathy” where all your nerves weaken. Had to learn to walk again, rather like Kenneth More playing Douglas Bader in Reach for the Sky. I recovered but it can be a very dangerous syndrome.

The news from my stock market portfolio is mixed based on the latest announcements which every company is now issuing. LoopUp (LOOP) who provide tele-conferencing is up over 40% today after a very long decline, and there are few other rises today, but overall my portfolio is still slightly down. It was not helped by 4Imprint (FOUR) reporting today that sales have declined by 40% over the last 3 days as against the prior year. They sell promotional merchandise and this an example surely of companies cutting back on non-essential marketing spend and events.

The commercial property market is interesting in that yet again a number of open-funded property funds have suspended redemptions. It is interesting to look back at the share price of TR Property Investment Trust (TRY) which I have held for many years. Such trusts have been badly affected by the gloom in the property sector even if the property companies they invest in may hold long leases and not much exposure to retail or other virus sensitive areas. But the share price of TRY is now back to the level it was in 2013. That’s down over 50% from its peak in February. If the recession is short, that will surely be seen as an anomaly.

It’s also worth remembering that valuing companies on short-term results or trading statements gives you a very poor estimate of what a company is really worth. What matters is the discounted future profits over many years. One bad year has relatively little impact. But when investors are panicking and simply reducing their exposure to the market by moving into cash, then valuations can become both unrealistic and extreme.

The Government’s response is probably a sound one. They are betting that the recession will be short and that keeping companies afloat by short-term loans is better than letting them go bust which would create a snowball effect on suppliers and staff employment.

But some sectors are clearly going to be dire in the short-term. Hospitality is one. Accesso (ACSO) who provide technology to visitor attractions published results yesterday. They might benefit from a low pound but their sales relate directly to visitor numbers to their customers’ sites. I cannot imagine US theme parks being very busy this year and solving queuing problems might be seen as irrelevant. They also declared a write off of $53.6 million on past capitalised software costs. With a new CEO this was hardly surprising to me given the shape of the business and the failure to find a buyer for it recently. Investors will need to be in for the long-haul if they wish to stay on board, but many clearly do not given the share price performance of late. The risk is that some buyer will come along and pick up the useful technology and customer contracts at a bargain price.

One aspect of the virus epidemic I am particularly unhappy with is that the market turmoil and declines have generated a lot more work on my portfolio than usual. Unlike some people, I do not simply sit there expecting shares to bounce back up in due course. Some may but others will not. Some companies may go bust or become a shadow of their former selves while other new opportunities arise. The trend to internet shopping and services will be accelerated. For example one of my eighty-year old neighbours has just opened a supermarket web shopping account for the first time. Ocado (OCDO) has had difficulty keeping up with demand and even had to close their App service temporarily. But once people get into the habit of shopping on-line they won’t revert to old ways. The future for the High Street looks ever bleaker.

There is one other aspect to consider. Will a short, sharp recession be quickly forgotten about or will it prompt the definite end of the bull market? Will share investment go out of fashion after many investors realise they have lost a pile of money from this incident? The general economy may quickly recover but the stock market might not. I don’t know the answer to that question but as always I won’t be guessing at it – just following the trend.

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

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Market Crash and Abcam Impact from Coronavirus

This morning my stock market portfolio was a sea of red – down 5.6% at the time of writing at 9.30 am.  Not only have most shares fallen, but spreads have widened so it’s not even easy to pick up those shares that are now undervalued at a fair price. I think the answer here is to wait until the immediate panic is over before making any more decisions to buy or sell.

The major impacts on shares have been the threat of the coronavirus Covid-19, where the reality of the possible economic impact is finally sinking in, and the other has been the oil share price decline. It might be only short term but the impact of Covid-19 on China and northern Italy is clearly going to be substantial.

I don’t actually hold any oil company shares and it was just propitious that I said on February 14th when discussing electric vehicles that one should “sell BP and Shell perhaps”. The price of oil is down over 25% since Friday and the share prices of BP and Shell are down 16% and 18% respectively today at the time of writing. These declines have a major impact on the FTSE-100. Does that make them a bargain? Perhaps to dividend seeking investors but these are companies whose share prices are driven by oil/gas prices so they are not the kinds of companies I like to own.

One company I do own is Abcam (ABC) who published their interim results this morning. Revenue up 11% but adjusted profits down 20% with the share price down 7% after a sharper initial drop this morning. They report a £3 million revenue reduction from the Covid-19 virus from its early spread in China. But the broader China activity is now returning although still below pre-outbreak levels. The supply chain has been largely unaffected to date.

Cash generated from operations increased but free cash flow is down slightly mainly because of high levels of expenditure still being applied to “new ERP systems and processes” which is capitalised and which I have commented negatively on in the past. Well at least that expenditure is down from last year.

Notwithstanding the short-term impact of the virus, they give a positive outlook statement – “pleased with progress, strong fundamentals, confident in our future prospects, attractive long-term dynamics” are some of the phrases used. I think we might see a lot of similar statements from companies over the next few months. But adjusted earnings per share forecasts for this year are surely going to be downgraded somewhat at Abcam.

I am also not optimistic that the UK, USA or other western economies are going to avoid a widespread outbreak of the disease which will disrupt our lives and economy even if it is a relatively short-term impact.

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

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Sirius Meeting Result, Intu Announcement and Share Plc Results

Yesterday shareholders in Sirius Minerals (SXX) voted for the proposed scheme of arrangement. Whether the votes actually represented the considered views of shareholders as regards the Court vote is questionable as most were not on the register and hence would not have been counted as individual members. However, this was a typical example of what happens when a company runs out of money and there is the immediate threat of administration – the winner is likely to be any other company that is willing to put up the cash to mount a rescue which in this case was Anglo American. Shareholders will not lose everything in this case as is what often happens but the many private shareholders who invested after optimistic promotions of the venture will still feel disgruntled no doubt.

I did not attend the meeting as I was never a shareholder in the company, but there are good reports in the Guardian and Daily Telegraph this morning. ShareSoc who have been running a supportive campaign for Sirius investors will no doubt be publishing a report on the meeting soon.

I never invest in mining companies that are still building a mine rather than actually in production because they always tend to run out of cash and require more investment to finish the development. The folks who make money are those that step in at that point because there are often few bidders to take it forward. In the case of Sirius billions of pounds are required and the project is high risk and always has been, even if the eventual outcome could be very profitable. So you can see exactly why current investors did not have much choice and may have been wise to vote for the takeover. The only possible alternative was some support from the Government such as loan guarantees but they chose not to do so. Why should they though when the Anglo deal will protect jobs and ensure the mine is developed? At least they will be taking the risk, not the Government.

In a previous blog post I suggested that investing in property companies might prove a good defensive strategy against the coronavirus epidemic. That was on the basis that they have reasonably secure long-term leases. But property companies that are exposed to the retail sector are probably not a good bet, I should have said. This morning Intu Properties (INTU) gave an “Update on strategy to fix the balance sheet” which is a direct way of stating what needs to be done.

The share price is down 28% today at the time of writing, and that is after a long decline since 2006. It’s actually fallen by 99% since then!  The company has concluded that an equity share raise is not viable.

The business reports some positive news but in essence the company has too high debts with a debt to asset ratio of 68% after the latest property revaluations downwards. It has £190 million of borrowings due for repayment in the next year and other liabilities of £93 million also due. The company is to “broaden its conversations with stakeholders” but it looks to be a grim outlook for ordinary shareholders. A debt for equity swap is one possibility which often dilutes previous shareholders out of sight.

Share Plc (SHRE) who run The Share Centre announced their preliminary results this morning. You can see why the company recently agreed a takeover bid. Revenue was up 7% but losses rose to £133,000. Not that this is a great amount but it shows how competitive the stockbroking sector is currently with new entrants now offering free share trading. Consolidation is clearly the name of the game so as to increase scale and therefore it’s not surprising that an offer was accepted.

Stockbrokers now have high fixed costs due to the costs of developing and maintaining their IT systems and increased regulations and compliance have also added more costs. With few barriers to entry and not much market differentiation the future for smaller players does not look good.

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

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Jack Welch Obituary and Coronavirus Impact

Jack Welch, the former CEO of General Electric (GE) has died at the age of 84. He turned the company around from a slumbering US corporate giant into a much more profitable business that awarded shareholders handsomely. His management style was of the “slash and burn” variety with jobs being reduced and anyone rated as underperforming being fired. This was similar to the management style of Fred Goodwin at Royal Bank of Scotland and with what they might consider tough but required decisions being made. In both cases their legacies proved to be toxic with successors facing difficulties.

Both had a large media presence and big egos. But is that what you want in a CEO? And do the ends always justify the means? Certainly Jack Welch showed that the ability of management is probably the key factor in the success of a business but the cult of personality that surrounds such leaders and the decisions they make often makes for difficulties in management succession. For investors, such managers tend to make good short-term returns but you need to know when to bail out while humble and more sensitive managers can be better long-term bets.

As I write this stock markets are zooming up after large falls in the last week. Your portfolio is probably down substantially like mine, but is this recovery a “dead cat bounce” or a realisation that the Covid-19 virus impact might be lower than anticipated?  I have no more great wisdom to impart than others on the future impact nationally or worldwide but it does seem to me that we might well see a major pandemic. Some industries such as travel and entertainment venues might see much reduced revenue for a short period of time and supply chains will be disrupted in many markets. I don’t think it will really hit home in the UK as it has done in China until people you know start dying. The fact that it may be mostly fatal to the elderly or those with poor immune systems (like me incidentally) may be little comfort. As with the 1918 flu pandemic, the long-term economic impact may be small but there may be short term disruption.

It was interesting reading the announcement this morning from 4Imprint (FOUR) whose shares I hold. Their final results were very good and the share price is up 20% at the time of writing. But this is a company that sells promotional products and most of the manufacturing takes place in China. This is what the company had to say: “Impact on the business has so far been minimal, reflecting the timing of the inventory cycle of our domestic suppliers. However, the situation is very fluid and if production restrictions in China persist, the potential for disruption of our supply chain increases”. They go into a lot more detail in their operational review which is quite helpful. But they have not estimated the possible impact on reduce sales volumes if there is a general impact on the economy of the USA which is their major sales market.

In essence I think it is way too soon to judge the likely impact so having sold some shares (not those of 4Imprint though) in the face of the declining markets I don’t plan to rush back into the markets in a big way and particularly I will be avoiding shares that may be vulnerable. Companies with longer term or recurring revenues are a better bet as usual because they should be able to survive short-term economic disruption. Property companies may be a good bet as they mostly have long-term leases spanning multiple years when the virus impact may only last a few months before everyone has survived it or died even if there is a global pandemic.

On that positive note, I think it’s best to close before I get seduced into giving share tips.

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

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Avoiding Another NMC Debacle

Yesterday the shares in NMC Health (NMC) were suspended and a formal investigation by the FCA was announced. The suspension announcement said that the company has requested the suspension of its shares and that the company is focused on providing additional clarity to the market as to its financial position.

The events at NMC are hardly the kind of thing one expects from a FTSE-100 company with reported revenue of $2.5 billion and profits of $320 million. The company operates hospitals and other healthcare facilities in the Middle East – hardly a sector that should be particularly volatile. The company has of course been the subject of an attack by Muddy Waters and the share price was already down by 80% from their peak in 2018, before they were suspended.

There now seems to be considerable doubts about the accounts (the finance director is on long-term sick leave which is never a good sign), there are doubts about who holds the shares, and questions about related party transactions and debt. The founder and CEO have departed from the board leaving the COO as interim CEO.

I recall NMC being tipped in numerous publications before all this bad news came out and it certainly looked a good proposition at a glance. Both revenue and profits were rising at 30% per year driven by rising wealth in the Arab states. So why did I avoid it?

The key point I would make is that “financial numbers are not important when picking shares” which is the subtitle of my book “Business Perspective Investing”. The numbers alone cannot be trusted even if they have been audited by a big firm such as Ernst & Young.

The company is registered in London and listed in the UK but the company had a peculiar governance structure with two joint Chairman and an Executive Vice-Chairman. They had a large number of directors otherwise and at the last AGM actually approved a resolution to increase the maximum number to 14. That is way too large for any company and results in board meetings being dysfunctional. The Muddy Waters financial analysis clearly raised some concerns and it is well worth reading. It also raised issues about the level of remuneration of the board and share sales. These might be considered warning signs and there is the key issue that it might be very difficult for UK based investors to monitor the operations of the company.

These are the kind of issues that I suggested investors need to look at in my book.

What do investors do if they find they have been suckered into a company with dubious accounts and when other negative facts have come to light? The simple answer is to study the evidence carefully and if in doubt sell the shares. It is never too late to sell is phrase to remember. You only have to look at the share price graph of NMC to see that investors with a trailing stop-loss of 20% would have exited long ago and hence avoided the worse outcome.

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

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Warren Buffett’s Shareholder Letter and Market Comments

Warren Buffett has issued his annual letter to shareholders in Berkshire Hathaway. It is usually worth reading for his market insights.  Last year was not a great one performance wise – annual percentage change in per share market value up only 11%. If you look back over the last 50 years of the company, and he publishes the whole track record, it is obvious that he has not been achieving the large outperformance against the market in recent years as he was up until the year 2000. That’s probably simply a reflection of the size of the company now and his inability to acquire controlling interests in good companies of late with the stock market being so buoyant.

The letter covers how the company uses insurance company floats to finance the business and the future as both Buffett and his partner Charlie Munger are now both very old.

Buffett has some interesting comments about how boards of directors have changed over the years. But he says: “The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO – possessing integrity, for sure – who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up,……”

He also says this about remuneration committees: “Compensation committees now rely much more heavily on consultants than they used to. Consequently, compensation arrangements have become more complicated – what committee member wants to explain paying large fees year after year for a simple plan? – and the reading of proxy material has become a mind-numbing experience”.

Obviously he is referring to US companies primarily but the same applies to UK companies. He also has some negative comments about boardroom pay (which is even more gross in the USA than UK) and how the independence of non-executive directors is undermined by their pay, while he was happy to accept $100 per year for one directorship in the early 1960s. How times have changed!

You can read the full shareholder letter here: https://www.berkshirehathaway.com/letters/2019ltr.pdf

As I write this the markets are still falling sharply for the second day. Having been through several market downturns, I am not too fazed by the biggest ever one-day drop in my portfolio value. There will probably be some momentum in the downward trajectory as recent stock market investors will realise it’s not a one-way bet investing in shares. Shares likely to be affected by a worldwide pandemic are also particularly sharply down while there is general feeling that the long-running bull market must come to an end sometime.

But I am a dedicated follower of fashion as nobody knows how long the impact of negative news will last, what steps Governments might take to keep the economy afloat and stock markets bouyant, or what will be the emotional reaction of investors. So in general I will be selling shares as the market declines until the outlook appears more positive and when the bargains appear.

Having loads of cash is always a good thing to have so as to take advantage of opportunities as they arise.

Needless to say, this is not investment advice. You may choose to take a different path and you need to make up your own mind based on your investment strategy, long term objectives, what proportion of your holdings are in ISA or SIPPs and your tax position.

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

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Moneysupermarket News and Market Exuberance

Moneysupermarket.com (MONY) issued their preliminary results this morning. It was headlined “Return to profit growth and good progress on reinvent”. The results were much as forecast so far as I could see, although the outlook suggests some second half weighting for the current year. But the share price has jumped 18% today to 365p which is where I started buying some last June. But I got somewhat nervous when the share price subsequently consistently fell after an initial spurt upwards despite forecasts being positive.

The other significant news was that CEO Mark Lewis indicated he wished to step down yesterday “and pursue his career in a new direction” so the board has started a search for a replacement. This is rather surprising as he has not been there very long. More explanation as to why he is departing would have been helpful.

Price comparison businesses like Moneysupermarket still seem to be growing but clearly they are maturing somewhat. However on a prospective p/e of 17 (before today’s jump) and a dividend yield of 4.6% according to Stockopedia they surely looked good value.

The company does generate considerable cash with a good return on capital but most of the profits are paid out in dividends rather than used to generate growth or acquire complementary businesses. Is that the strategic issue that caused the CEO to depart I wonder? We may no doubt learn more in due course.

Otherwise the stock market seems to be ignoring the global trade threats such as the coronavirus outbreak in China and the US/China trade war, plus the possible risk of a failure of UK free trade talks with the EU. It’s one of those markets where almost everything is rising and investor are just buying everything that looks reasonable. I may have to go on a share buying strike until the market calms down as it seems somewhat irrational at present. Too much investor exuberance in summary.

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

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