Brexit Bounce, Green Accreditation, Security Issues and Hargreaves Lansdown AGM

The FTSE and my portfolio jumped up this morning on the hope of a Brexit Agreement after all. RBS is up 16% which seems to be a function of euphoria. I think I’ll wait and see the progress of discussions in the next few days before plunging in to buy some more stocks. But if an Agreement is reached then the market is likely to power ahead so keep that cash handy.

The London Stock Exchange (LSE) announced today a new “Green Accreditation” scheme which will recognize companies and funds that derive 50% or more of their revenues from products or services that contribute to the global green economy. One company that has promptly announced accreditation is Blancco Technology (BLTG) in which I hold a very few shares after a disappointing track record. How do they qualify for this award? They do so because they provided data erasure services thereby helping people to recycle and reuse hardware rather than scrap it. No doubt there will be other “virtue signalers” claiming this award but I doubt it will make a lot of difference to my investment choices.

The takeover of Cobham (COB) has run into a lot of criticism about the threat to national security. The founding family have raised concerns and the Government has decided to intervene. On a personal note should I be worried that our new home security system based on Hikvision technology leaves us open to being hacked? Not only that but I also have a Huawei smartwatch. Both companies have been banned by the US due to their links to the Chinese Government. Hikvision have 1.3 million cameras installed in the UK, often in NHS facilities. This is surely an issue where the Government should be providing some advice. Why do we now have cameras all around our house? Not because of worries that my views on Brexit might stimulate some demonstrators but because the home of two Asian families in our street were recently burgled. Apparently such families are particularly at threat of such attacks because they often keep gold at home. Readers can be assured that there are no gold bars in our house. The burglaries that did take place were to houses with non-functioning alarm systems but my wife was somewhat concerned.

There was an interesting report in the Financial Times on the Hargreaves Lansdown (HL.) Annual General Meeting (I do not hold the shares). It sounds like it was a lively affair. Apparently some shareholders were not happy with the reaction of HL to the Woodford Equity Income Fund suspension after HL had promoted the fund. One shareholder said the reopening of the fund “has been postponed more often than Brexit” and suggested that HL should push for Woodford to liquidate the fund immediately. Comment: liquidating the fund abruptly would be easier said than done due to the nature of its holdings, but I agree that more vigorous action could have been taken. The fact that Neil Woodford is still running the fund when it will clearly be every unlikely to recover rapidly if at all is far from ideal.

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

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Dunelm Trading, Abrupt Share Price Moves and Volatility

It’s a good job I am not an emotional person. This morning Dunelm (DNLM) issued what I considered a very positive trading statement for the last quarter. The share price promptly dropped 6% after the market opened.

Total group sales were up 5.8%, with like-for-like sales up 6.4%. In addition this is a company that is clearly making a successful transition from being a retail store business to a hybrid on-line/store model. On-line business was up 34.7% while store business was still up 2.9%. On a prospective p/e of less than 15 and a yield of over 4% this is starting to look attractive. The company says year-end expectations remain unchanged as it continues to win market share. The only slight negative was that “September trading was mixed in part reflecting a softer homewares market”. But should a retailer be judged on one month’s trading alone?

This is the third of my holdings to suffer abrupt falls in the last couple of days. The others were 4Imprint (FOUR) and Telecom Plus (TEP), neither for any very obvious reason although there were some large trades put through on the former. But the UK market has been falling driven by the nervousness over resolution of the Brexit situation no doubt. That looks even more problematic at present with it being clear that the EU thinks they can force Brexit to be cancelled by sitting on their hands and dictating another referendum or general election before they will negotiate a withdrawal agreement. Conspiring with Speaker John Bercow is the latest attack on the democratic constitution of the UK by the EU in furtherance of this objective. What’s the motivation for the position of the EU Commission on all of this? I would suggest as usual it’s about money which always drives politics and the actions of individuals. The departure of the UK from the EU will leave a massive hole in the EU budget which they have not even attempted to solve as yet.

These events mean of course that foreign investors, who hold the majority of UK listed companies, are spooked and the risk of a future Labour Government rises as the leavers vote is split between Conservatives and Brexit party supporters. The only positive aspect is that the falling pound, driven by the same emotions, is improving the potential profits of many of my holdings which have large overseas revenues. 4Imprint comes into that category of course so the recent falls are difficult to explain except on the basis of recent past irrational exuberance. Smaller cap stocks are particularly vulnerable because just a few trades can move the share price substantially.

When markets and investors get nervous, volatility does increase and sharp share price falls can happen for no great reason. This is the time to pick up some bargains perhaps?

Postscript: Commentators on the Dunelm results after the share price fell further focused on the threat to margins from a falling pound, but the company announcement indicated that they expect gross margin for the full year to be consistent with last year despite currency headwinds towards the end of the year.

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

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Book Review: 100 Baggers

100 Baggers is a book by Christopher Mayer on those companies that have returned more than 100 times the original investment cost to shareholders. Having got some 10-baggers in my portfolio, and with the summer lull in business and the markets, I was interested in reading how to spot the ones that could generate an even bigger return.

The author credits a book by Thomas Phelps called “100 to 1 in the Stock Market” first published in 1972 as the inspiration for his own title and quotes extensively from it. Mr Phelps died in 1992 and his book was out of print for a long time but is now available as a reprint at some considerable cost. It’s also rather archaic in references to companies. Mr Mayer’s volume is therefore a useful update on the subject and also covers many areas of investment practice from his own experience.

One interesting quote from Phelp’s book he supplies is this: “There is a Wall Street saying that a situation is better than a statistic” and also says that “Relying only on published growth trends, profit margins and price-earnings ratios is not as important as understanding how a company could create value in the years ahead”. That accords very much with my thinking as espoused in my own recent book.

Christopher Mayer is obviously a widely read investor as he includes numerous pithy and apposite quotations from other authors. But this tends to make his book rather episodic and unstructured in nature. It’s full of parables and apocryphal or true stories to reinforce the points he is making.

What are some of the key points he makes? Firstly to have a 100-bagger means you need to a) invest in companies at a reasonable price; b) start with a relatively small company; c) have them grow at 20% or more per year; and d) hold them for a long time. Diving in and out of companies, or reacting to overall trends in the economy or the markets should be avoided, i.e. you need to “buy and hold”.

Who are some of the 100-baggers in the US market on which the author concentrates as at 2014 when this book was published? Amazon, Microsoft, Electronic Arts, Amgen, Nike, Union Pacific, Pepsi, Equifax, Walgreens Boots, Hershey, Intel, State Street, Southwest Airlines, Wal-Mart and Sunoco are just a few of the 365 and many of them you will not have heard of before. The key point is that they come from a wide variety of industries and sectors but the book does cover what are the defining characteristics of these companies. That includes high and consistent growth in revenue and high return on invested capital.

Longevity is important. Many of the 100-baggers in 2014 took more than 30 years to get there, although some such as EMC and Charles Schwab took less than 10. But the author tends to skip over the problem that even if you pick a company with the right profile in its early days, the chances are that you will be taken out by a takeover bid, by changes to the market for its products/services, by changes in technology or other vicissitudes. Companies have shorter and shorter lives in the modern era so the chance of a company reaching the age of 30 as a listed vehicle is quite low. It may be mostly chance that enables them to reach 100-bagger status. But that does not undermine the basic thesis that it is best to aim for those companies that have the potential to do so.

There is much to be learned from this book. But it does conclude with the statement that “there is no magic formula” so bear that in mind when reading it.

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

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Burford Capital, Goals Soccer Centres, Carillion, and Why Numbers Are Not Important

To follow on from my previous comments this morning on Burford Capital (BUR), this is a typical “shorting” attack where the shorter (Muddy Waters) and their supporters make a lot of allegations which investors are unable to verify in any useful time frame. I certainly questioned the accounting approach used by Burford and other litigation finance firms as I commented on it back in June, but disentangling the factual accusations in the Muddy Waters dossier from innuendo and comment is not easy.

It is surely wrong for anyone to make such allegations and publicize them with the objective of making money from shorting the stock without first asking the company concerned to verify that what they are alleging is true – at least as far as the facts they report are concerned rather than just their opinions.

The company may threaten legal action for libel where misleading or inaccurate information is published but in practice such law suits take so long to conclude, with major practical problems of pursuing those who are resident overseas while actually worsening the reputational damage rather than improve it that few companies take that route.

This is an area of financial regulation that does need reform. In the meantime the damage to Burford is probably likely to persist for many months if it ever recovers.

What is the real moral of this story so far as investors are concerned? Simply that trusting the financial accounts of companies when picking investments is a very poor approach. This was reinforced by more news about the accounting problems at Goals Soccer Centres (GOAL) which I also commented on previously. Apparently a report to the board by forensic accountants suggests that the former CEO corroborated with the former CFO to create fictitious documents including invoices (see FT report on 3/8/2019). Clearly the audits over some years failed to pick up the problems. In addition it looks like the demise of Carillion is going to be the subject of a legal action against their former auditors (KPMG) by the official receivers. Financial accounts, even of large companies such as Carillion, simply cannot be trusted it seems.

This is not just about poor audits though. The flexibility in IFRS as regards recognition of future revenues is one of the major issues that is the cause of concerns about the accounts of Burford, as it was with Quindell – another case where some investors lost a lot of money because they believed the profit statements.

This seems an opportune moment to mention a new book which is in the process of being published. It’s called “Business Perspective Investing” with a subtitle of “Why Financial Numbers Are Not Important When Picking Shares”. It’s written by me and it argues that financial ratios are not the most important aspects to look at when selecting shares for investment. Heresy you may say, but I hope to convince you otherwise. More information on the book is available here: https://www.roliscon.com/business-perspective-investing.html

There are some principles explained in that book that helped me to avoid investing in Burford, in Quindell, in Carillion, in Silverdell and many of the other businesses with dubious accounts or ones that were simple frauds. These are often companies that appear to be very profitable and hence generate high investor enthusiasm among the inexperienced or gullible. It may not be a totally foolproof system but it does mean you can avoid most of the dogs.

With so many public companies available for investment why take risks where the accounts may be suspect or the management untrustworthy? One criticism of Neil Woodford is that his second biggest investment in his Equity Income Fund was in Burford. If you look at his other investments in that and his Patient Capital Trust fund they look to be big bets on risky propositions. He might argue that investment returns are gained by taking on risk which is the conventional mantra of investment professionals. But that is way too simplistic. Risks of some kinds such as dubious accounts are to be avoided. It’s the management of risk that is important and size positioning. The news on Burford is going to make it very difficult for Woodford’s reputation as a fund manager to survive this latest news.

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

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Market Crashes and Burford Capital

Investors might have been panicked by the recent market falls driven by the US/China trade wars, Brexit and gloomy economic forecasts. As usual, the UK market is led by the US markets. The S&P 500 is down 5% since the 26th July even though there was a slight bounce upwards yesterday. There can be few readers portfolios which have not suffered some impact because there were few stocks that did not fall.

Now I am an inveterate trend follower so how did I react to the falls? I did nothing because a few days is too short a period to determine whether it is a short-term panic or a real change in the trend. I am not convinced that we have moved from optimism about shares, to a real bear market. I’ll wait and see whether a trend develops because responding to short term share price fluctuations can be an expensive mistake.

One big faller this morning was Burford Capital (BUR) – down 60% at the time of writing. This is a litigation funding business that has come under attack for alleged dubious accounting by Muddy Waters in a report published this morning. I do not hold the stock and made some somewhat negative comments on their revenue recognition on June 12th – see https://tinyurl.com/y3ljqqvr . You can see Carson Block of Muddy Waters describing some of the issues in a video here: https://tinyurl.com/yxcq24ol or you can read the full report here: https://tinyurl.com/y6arozr9 .

I have read the report and I think it makes some valid points. The company issued a statement this morning calling it a “shorting attack” which it undoubtedly is, i.e. Muddy Waters have taken a position that might motivate them to exaggerate as shorters invariably do. For example they say Burford is a fund that “invests in an illiquid and esoteric asset class” and suggests they are using a “mark to market” accounting model of “Enron fame”. But they highlight the fact that the CFO is the wife of the founder/CEO which I find somewhat surprising, and the long service of all the directors which is not good corporate governance.

I remain skeptical of the accounting treatment of litigation funding by this company and others. Burford is of course one of the big investments made by Neil Woodford which will not enhance his reputation for prudence.

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

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Goals Soccer Centres, Renishaw, Economic Forecasts, Politics and Portfolio Transfers

It’s Friday in August, the markets and the pound are falling, the Conservative Party have lost a bye-election meaning their majority in Parliament is vanishing, and the Governor of the Bank of England has forecast a shrinking economy as a result of Brexit. It’s gloom all around which explains the falling UK stock market today. But Mark Carney is only forecasting a 33% chance of a contraction in the UK economy in the first quarter of 2020, which means that there is a 67% chance it won’t and even then for only a short period of time. That’s assuming you have any confidence in Bank of England forecasts which are notoriously unreliable. The media are not exactly reporting matters in an unbiased way. Those who support Brexit are unlikely to be worried by such forecasts and they would probably accept a temporary disruption to the economy. Remaining or leaving the EU was never a primarily economic decision so far as Brexiteers were concerned – it’s about democracy and who makes our laws.

But there is certainly bad news for investors in Goals Soccer Centres (GOAL) who have reported that the defects in their accounting go back to at least 2010. The 2018 audit has had to be suspended, there is no time frame for producing the accounts and therefore the company is going to be delisted from AIM. This looks to be another example of defective audits – the past auditors were KPMG and BDO.

I have complained about the length of time it takes to switch portfolios between investment platforms in the past. The good news today is that I finally completed one. This latest one I have done has taken from the 23rd May to the 31st July, i.e. 70 days. And that’s one where it was a transfer of holdings in a personal crest account with Charles Stanley, after they raised their charges on such accounts, to another personal crest account with another provider which was already in existance. That should have been very simple as there were no fund holdings in the account – just all direct holdings on the register.

It is really quite unreasonable that account transfers should take so long and require so much effort, including numerous emails and letters to get it completed. It’s anti-competitive to allow such delays to continue.

Well at least that’s one simplification of my portfolios. I also sold out from Renishaw (RSW) yesterday after disappointing final results – revenue down 7% and below forecasts mainly as a result of alleged economic conditions in the Asia Pacific region. The share price is down another 5% this morning at the time of writing. This may be a fundamentally sound business with good products in essence but clearly investors like me are losing confidence that the company can justify its high p/e rating when growth is going into reverse.

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

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Slack IPO, Web Privacy and Sell on Monday

The IPO of Slack in the USA has received a lot of media coverage. This is one of those technology stocks that is on what at first glance is a sky-high valuation. Slack provides workplace collaboration software and last year had revenues of $400 million, and lost $140 million. The market cap is now around $20 billion which means it is valued at about 50 times revenue. Those are the negative numbers. The positive aspect is that it roughly doubled revenue in each of the last two years. With such growth are profits or losses important? But it’s surely a case of investors piling into a hot story, i.e. following the herd.

There’s an interesting article by Megan Boxall in this week’s Investor’s Chronicle comparing the current mania for technology stocks with the dot.com bubble of the 1990s. She reports that 2018 saw the highest proportion of loss-making company IPOs since 2000 and the market is awash with private equity money being ploughed into early stage loss-making companies.

Well I lived through the dot.com era and managed to sell a software business and retire before the boom became a bust. The current mania for technology stocks certainly reminds me of that era. Growth certainly adds to value, but growth in profits not revenue is what matters. Many early stage companies can grow revenue given enough investment but often they never make a profit. And when the realisation comes, investors drop the company like a hot potato. The key question is to look at when a company will stop consuming cash and at least look like it will breakeven. Before that point, it’s simply a speculation. Investors in the dot.com boom realised later on that they were going to lose money on most of their punts and the whole sector became untouchable for some years.

The other question to ask about Slack is whether it has some unique technology that cannot be easily copied. I am not sure it does on a quick review.

ICO and Adtech

I mentioned in a blog post om April 10th my concerns about privacy after I was bombarded with advertising for SuperxxDry products after mentioning the company in my blog. The Information Commissioner’s Office (ICO) has now published a report which says the Adtech industry must mend its ways. Basically personal data is being shared without the users’ consent, possibly to hundreds of advertising firms.

The ICO has effectively warned the industry that they must reform themselves as the use of personal data has been unlawful. See https://tinyurl.com/yxk7d494 for more information and to read their report. This will clearly affect any company operating in this sector including such giants as Google. But it is surely a move that is to be welcomed by anyone concerned about privacy and those not wanting to be bombarded by irrelevant advertising.

Buy on Friday, Sell on Monday

I have noticed over the last few months that my portfolio tends to rise on Mondays and fall on Fridays. It certainly did this week again. It appears that investors pile in to small cap stocks and investment trusts on Monday morning, but lassitude sets in on Fridays.

Researching the internet seems to suggest that this is a known pattern. So clearly it is best to be contrarian and buy when prices are temporarily down on Friday and avoid buying on Monday. So that’s my tip for today.

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

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