Coronavirus Impact on Supply Chains

There was an interesting review by Paul Scott in his Stockopedia Small Cap Report of the impact of the Coronavirus on Chinese supply chains yesterday. As readers are probably aware, many companies have shifted the production of electrical and mechanical products to the Far East in the last 30 years. Paul covered announcements from three companies who may be affected by problems of production or transport in China – namely Up Global Sourcing Holdings (UPGS), Tandem (TND) and Volex (VLX). All three companies made announcements yesterday that gave some coverage of the issue.

Up Global, producer of branded household products. said that the majority of its manufacturing was in China. The extension of the Chinese New Year holiday is expected to cause production delays but it gave positive noises about having experience of similar disruptions in the past.

Tandem, a distributor of leisure and mobility equipment (e.g. cycles), said the virus outbreak was restricting the movement of raw materials and labour throughout China and had been delaying orders. They said they had no ability to forecast how big or how long the problem will last.

Tandem was already on a lowly valuation before this and had even been tipped by some investors as due for a re-rating, but has now slipped back to a historic p/e of about 6. Amusingly the departing Chairman who is leaving after ten years at the helm had some negative things to say about internet posters and suggested that the change in the share price during his tenure from 110p to 205p should not be disparaged. But is that good enough? It actually equates to a growth in the share price of about 5% per annum which is not what I like to see in any small cap company with growth ambitions. Sure investors have also received generous dividends but the share price went nowhere for a long time in that period.

Volex said it had four manufacturing plants in China and although they are not in Wuhan only one of the four sites has resumed operations at a reduced capacity. The Volex share price has also been on a roll of late after the company was rerated by analysts and tipped by various sources, but has now fallen back recently. As with the other companies, details provided are sparse, but that may simply be because the companies do not know the impact in detail or have any good view of the future. But Paul Scott criticised all of them for just providing “bare, disjointed facts, with zero interpretation”. It certainly makes it difficult for investors to decide whether to hold on or bale out.

It definitely appears that the vigorous steps taken by Chinese authorities to halt the spread of the disease is disrupting supply chains and my guess is that they are likely to do so for some time. Investors in companies that rely on such supply chains from China, particularly of the “just-in-time” variety need to consider what the impact might be. But it also seems likely to me that the virus will spread outside China and have some impact worldwide. But the actual impact on commercial operations might be small. The likely deaths might be tragic but it seems no worse than any other flu epidemic and we might simply learn to live with it. The best hope is probably the development of a vaccine before the disease becomes very widespread.

In the meantime, I won’t be buying shares in the aforementioned companies until the picture is clearer (and I don’t hold them already).

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

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Bernard Baruch – Speculating in the Twentieth Century

Someone on Twitter recently mentioned Barnard Baruch as a legendary investor. I have just read his autobiography which is entitled “Baruch – My Own Story” and it is indeed interesting for several reasons.

Firstly he had a long life and the book covers the period from the American civil war until the 1960s. So it covers more than one period of financial crisis such as the 1929 Wall Street crash and two World Wars. Baruch’s father was a doctor and surgeon in the Confederate Army. For those interested in American history, as I am, it’s a revealing account of why the USA became so dominant in the world financial scene.

Baruch became a stock market speculator and a millionaire by his thirties when a million dollars was worth a great deal. He later became an advisor to Presidents and was involved in US responses to both major wars. But he also was almost wiped out at times in his early career. One thing he learned to do was to always reflect on and try to learn from his mistakes so as not to repeat them – sound advice for all investors.

He is scathing about share tips. So he says about his losses in American Spirits that “Nothing but my own bad judgement was responsible. My course violated every rule of speculation. I acted on unverified information after superficial investigation and, like thousands of other before and since, got just what my conduct deserved”.

It covers an age before the second world war when stock market manipulation was very common and there is an interesting mention of “bucket shops” and how they operated to wipe out their patrons (I mentioned the resurgence of bucket shops in a previous blog post).

Baruch is particularly good on the manias that sweep stock markets. He was adept it seems at knowing when the market was too high and when it was time to get out. He has a chapter on his investment philosophy that includes this advice:

  1. Don’t speculate unless you can make it a full-time job.
  2. Beware of barbers, beauticians, waiters – or anyone – bringing gifts of “inside information” or “tips”.
  3. Before buying a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
  4. Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars.
  5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
  6. Don’t buy too many different securities. Better only a few investments which can be watched.
  7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects…
  8. Study your tax position to know when you can sell to greatest advantage.
  9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
  10. Don’t try to be a jack of all investments. Stick to the field you know best.

These are all wise words indeed.

In summary, the book is an interesting read as Baruch is a good communicator as well as it being a slice of America’s financial history when it was dominated by J.P. Morgan, the Rockefellers and other giants of the age.

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

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China Coronovirus Impact on Your Portfolio

With the news that the coronovirus outbreak in China is spreading and may be difficult to contain, stock markets are reacting negatively around the world. Is this the event that will halt the multi-year bull run or will it all be a flash in the pan as the Sars outbreak turned out to be? I don’t have the answer to that question so my response is to wait and see and simply follow the market. But it’s impacting some stocks more than others.

Just looking at a few I hold, and some I don’t, it seems that any stocks that have large amounts of business in China are down significantly – for example BHP and Rio Tinto are down 8% in the last few days because they ship a lot of ore to China. Even Polar Capital Technology Trust is down 4% today presumably because they have large stakes in Alibaba and Tencent, whereas most technology stocks have not yet been impacted.

If the virus does spread to the UK, then public venues might be closed so shares such as those in bowling operators (Hollywood Bowl and Ten Entertainment) have fallen and football clubs and cinema chains may be threatened. Cineworld has fallen but that’s just a continuation of a long trend at the company. Pubs, restaurants and hotel chains might also be shares to avoid if the country goes into “lock-down” as people avoid public venues. And don’t forget airlines and holiday package companies who may be impacted by travel restrictions.

Who might benefit from the virus outbreak? The two largest producers of anti-viral medicines in the world are Gilead and GlaxoSmithKline (GSK) but the share price of the latter has fallen 2% today so you can see how the panic is spreading somewhat irrationally. GSK might actually benefit from the spread of the disease.

Even given the worst scenario for the spread of the disease, it seems only those with poor immune systems or other health problems are likely to be fatally impacted unless the virus mutates which is always a possibility. The overall impact on the population may be relatively small particularly if treatments are rapidly developed.

In conclusion, I think it’s something to keep an eye on rather than dumping everything but it may be time to review those shares which may be particularly affected. With the market having had such a good upwards run in the last few weeks, perhaps top slicing a few holdings and introducing trailing stop-losses might be worth considering.

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

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Bucket Shops are Back

I recently saw an advertisement on Twitter for a company, who shall remain nameless, offering to trade “fractional shares”. That means instead of buying a whole one share of expensive stocks such as Google (Alphabet) and Amazon which cost more than a thousand dollars, you can buy a fraction of a share. They offer an App which provides this with zero commission trading and CFD trading on 20% margin or less (i.e. you don’t need to put down the whole amount). What immediately sprang to mind when I read the advertisement was the provision of trading by “bucket shops” in the USA in the early 1900s.

I can do no better than to quote a Wikipedia description: “As defined by the U.S. Supreme Court, a bucket shop is an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in”. See https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) for more background.  They were outlawed in many US states, but if you wish to get some understanding of how they operated it’s worth reading a book called Reminisces of a Stock Operator by Edwin Lefèvre, which was possibly a pseudonym for stock market speculator Jesse Livermore. It was published in 1923 and is still readily available as it’s a book worth reading by any stock market investor.

The company advertising this new trading facility claims to be authorised by the Financial Conduct Authority (FCA) and be based in London although they also have operations and authorisation elsewhere. Their web site makes it clear that 76% of retail investors lose money when trading CFDs with them. It takes a very smart operator, as Jesse Livermore was, to make money in bucket shop operations and he soon moved on to bigger things. When stock markets are buoyant, as they have been of late, inexperienced punters get suckered into share speculation which is really gambling and most are likely to lose money.

The FCA really needs to monitor and regulate such operations a lot more closely.

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

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New Year Share Tips – Are They Worth Following?

It’s that time of year when financial magazines and newsletters analyse their past share tip performance and give their New Year tips. Are the tips worth picking up or even reviewing?

One approach you might think would be effective would be to simply back those publications who had the best historic performance. One review I picked up on Twitter (I am not sure of the original source) gives the Investors Chronicle (IC) as the winner in 2019 with a 37% return with The Independent bottom of the table. However, the performance varies from year to year – for example the IC had a negative year in both 2017 and 2018, while the Guardian had negative returns in all three of the previous years. Perhaps not many investors read the Guardian but that may be to the good.

One problem of course is that the tip writers may vary even within a publication from year to year and few put their names to the articles. In essence backing the share tips based on the “form” of the publications or the writers is not going to work. Even if the writers stay the same, and their “styles” of investment such as a focus on growth or value, what works one year might not work in another.

Another failing is that some writers rely on advice from well known fund managers who tend to “talk their own book”. So the Questor column in the Daily Telegraph, written by Richard Evans, tipped Bioventix (BVXP) as “AIM stock of the year” on Friday (10/1/2020). That was after talking to Keith Ashworth-Lord of Sanford DeLand Asset Management who has a big holding in the company. The share price rose 9% on the day this tip was published which as a holder of the stock I am quite pleased with, but I would not previously have rated it as other than a “hold” personally.

Many share tips in the national media and reputable investment newsletters will rise in price on the day the tip is issued – indeed even before you have got up for breakfast. Investors then pile in further over the next few days and if you follow that herd you are going to lose money. After a few weeks, when the company’s performance does not instantly shoot up or there is little news, the speculators lose interest and the share price falls back again.

It’s worth pointing out that it does of course depend on whether you are a long-term investor or a short-term speculator. Such share price movements may be great for speculators , most of whom I suspect lose money, but for long-term holders like me share tips can be positively dangerous. My approach is therefore as follows:

I use share tips as ideas for research. Only one in ten is worth more analysis and if I consider it worthy after that I would buy a few shares and see how the company and its share price develops. Most companies fail on the “due diligence” phase. I am not a “plunger” who bets a lot on any new holding. I am looking to find companies that I can hold for the long term and in which I wish to take an opening position. Apart from anything else, moving a lot of cash out of existing holdings to invest in new ones is often a mistake, I have learned from past experience. It’s the syndrome of looking for the pot of gold at the end of the rainbow, i.e. picking new investments you don’t know much about but which someone else thinks are a great proposition, and abandoning ones that you do know.

What are the kinds of tips that I avoid?

Firstly I hate the “recovery story” kind. These are where a company with a pretty dismal historic performance has improved analyst forecasts (which is what most tipsters focus on). For example, Investors Chronicle has Burberry (BRBY) as one of their 2020 tips. The supporting article has lots of positive comments about the changes taking place in the company and its “transformation”, but a quick look at the financials gives me doubts. Revenue in the last 3 years, which is a key metric for any retailer, was static or falling and the forecasts for the next two years are only slightly higher. Earnings per share follow a similar pattern. Even under new management, is this a growth business or a just another rather mature company in a crowded sector (revenue about £3bn) flogging expensive clothes to suckers? Is there any real innovation or growth above inflation taking place is the key question?

Another example of a recovery story is Momentum Investor tipping Marks & Spencer (MKS) based on their move into on-line groceries via the joint venture with Ocado. But the wisdom of this tip was soon disproved after the company issued a trading statement on the 9th of January with dismal figures for clothing sales. The share price is down 12% since then. Too many “skinny” fit men’s trousers was one problem as the company tried to be more fashionable so that’s just another management failure partly arising from the sclerotic supply chain at the company. Tipping shares can be a quick lesson in humility of course which is one reason why this writer does not do it. Let those who get paid for their alleged wisdom continue to do so though so we can have the occasional laugh at their folly.

Window supplier Safestyle (SFE) was tipped as a recovery story by ShareWatch but is likely to still make a small loss in 2019. Are profits really going to come back in 2020 and will investors regain confidence in the business and its management? I do not know the answer to those questions so I am unlikely to invest in it.

Secondly, I ignore sudden enthusiasm for boring companies. Another of IC’s tips was Johnson Service (JSG) which provides textile rental and cleaning services – hardly a new business and one that I doubt has barriers to entry. The company is growing, but on a forward p/e of 19 and relatively high debt, I cannot get enthusiastic.

Apart from drain-pipe trousers, something else I used to favour in the 1960s that is back in fashion is ten pin bowling. Two companies that were tipped by Momentum Investor and mentioned in Investors Chronicle – Ten Entertainment (TEG) and Hollywood Bowl (BOWL) may be worth looking at. TEG (which I hold) was also tipped by ShareWatch. These companies are changing from not just being bowling alleys but indoor family entertainment centres with other games available and good food/drink offerings. Some also stay open long after the pubs have shut. You can see why they are experiencing a revival in demand with more centres opening. The key with share tips is to follow the new trends, not the old ones.

Thirdly I ignore tips that back racy stocks already on high valuations. For example Shares Magazine tipped Hotel Chocolat (HOTC). This is a chocolate retailer that seems to have a good marketing operation and decent revenue and profits growth but on a prospective p/e of 45 it seems too expensive to me. The slightest hiccup would likely cause a sharp drop in the share price so there looks to be as much downside risk as upside possibility to me.

Lastly, I ignore tips in sectors I don’t like or businesses I do not understand – the former includes oil/gas and mine exploration, airlines and banks. Shares magazine tipped Wizz Air (WIZZ) and Lloyds Banking (LLOY) for example but they are not for me. Businesses I do not understand might include some high tech companies with good stories of future potential but no current profits.

To reiterate, share tips are useful for providing ideas for research but blindly following them is not the way to achieve superior investment performance.

Preferably share tips should confirm your views on shares you already hold – such as Bioventix, Ten Entertainment and several others I hold which have been tipped in the last couple of weeks. That may be a reason to buy more, but not in any rush.

As regards other tips like the best countries, or the best sectors, or whether to invest at all based on economic forecasts or Brexit prognostications here’s a good quotation from John Redwood in the FT this week: “The safest thing to forecast at the beginning of the 2020s is more of the same”. An economist with real wisdom for a change.

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

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Year End Review and Future Forecasts

Following folks on Twitter suggests that there was an enormously wide variation in the overall portfolio performance of private investors in the last year. But without people saying what they invest in and how big and diversified their portfolio is, I am not sure the information provided helps much. I also worry about how they calculate their performance figures and whether it includes dividends reinvested because I never find it a simple thing to do as none of the software products I use give me a correct figure so I still have to do the calculations manually.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio performance.  Total return for the year (including dividends) was almost exactly 30% return on my capital invested at the start of the year. As my target is simply to consistently beat the FTSE-AllShare which was up in capital terms by 14.3% last year and dividends would have added another 4%, I am happy with that outcome.

My portfolio is very varied with a slight emphasis on UK small and mid-cap shares but it does include a very few FTSE-100 shares and several large investment trusts and funds including some overseas focused ones. One of the reasons for outperformance was probably betting on a successful resolution of the Brexit impasse before the General Election, which has clearly had a very positive impact on markets, particularly in UK small cap stocks.

It was partly a good year because I had few bad failures – Patisserie was the worst, but when you have a large number of holdings, as I do, then there are always one or two disappointments. Others I managed to get out of without much damage but Patisserie had trading suspended at the initial announcement of possible fraud and never returned.

Well at least I beat Warren Buffett’s Berkshire Hathaway last year. He only managed an 11% gain last year while the US market gained 31.5% last year, including dividends. No doubt some clever sod will suggest that I could have saved a lot of effort and just invested in an S&P 500 tracker but that would have been a risky strategy because the US markets can be very volatile. Incidentally Berkshire now has cash of $128 billion. Buffett is clearly finding it difficult to invest the money. Perhaps he is slowing down at aged 89 and if he has another bad year like the last one folks might be encouraging him and his partner to retire. But few investors achieve outperformance every year – one needs to consider performance over 5 or more years.

My portfolio also includes some Venture Capital Trusts (VCTs) which would have generated a less good overall return because they tend to be vehicles for turning capital into tax free dividends. As usual they mainly showed small capital losses although two VCTs focused on AIM stocks did relatively well for a change.

What of the future and where should we be investing? I am still keen on technology stocks and here’s a useful quotation from Alan Turing who is soon to appear on new £50 notes: “This is only a foretaste of what is to come and only the shadow of what is going to be”. He wrote that in 1949 about the future use of computers, but it still applies as many new and innovative businesses based on software and the internet are still being founded. However, I think the valuations of early-stage unprofitable companies are getting overblown (e.g. in fintech and biotech) so I suggest one needs to be careful.

One slight negative in my portfolio performance last year was that total dividends received fell slightly. That’s probably because I sold a few high yield shares – with a buoyant economy it hardly seemed the best place to be. I hold no builders, no banks or other financial institutions and no oil companies at present and generally do not as I am prejudiced against them.

The slight cloud on the horizon is that Boris Johnson has to conclude a free trade deal with the EU in the coming year, or face a difficult decision. That might cause some business uncertainty in the meantime. But I doubt if it will affect those companies with quality businesses. As I have been saying for the last 6 months, it is business perspective investing that enables you to generate good returns, and that is very much the basis of my good performance last year. Plus avoiding too many investment disasters as I said in a previous blog post.

If you were hoping for details of my holdings, or share tips for the future, you will by now be disappointed. What made money for me last year, may not do so this year, and giving tips for the coming year is a very risky proposition. Such tips tend to encourage churning of portfolios and increase the readership of publications giving them but it is not necessarily a productive exercise. I prefer a strategy of buying good companies and holding them for as long as it makes sense to do so.

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

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Should Companies, their Investors and Bankers Adopt Some New Year Resolutions?

Environmental concerns are all the rage at present. Indeed it’s become a new religion verging on paranoia. Some people believe that the world is going to become impossible to live in after a few more years, or that seas will rise enough to submerge many major cities. They ascribe the cause to global warming caused by rising CO2 emissions from the activities of mankind. Even if we are not all wiped out, the impact on the economy could be devastating due to mass migration and the costs imposed by decarbonising all energy production, food production and transport.

This article is not going to attempt to analyse whether global warming is a major threat, or what its causes might be, but simply what the reaction of companies, their investors and their bankers should be. Should company directors adopt a New Year’s resolution to divest themselves of all activities that might result in CO2 generation? Should investors who hold shares in such companies sell them and invest in something else, and should bankers stop lending money for projects such as creating new oil production facilities.

Even outgoing Bank of England Governor Mark Carney gave some dire warnings in a BBC interview a couple of days ago.  He suggested that the world will face irreversible heating unless firms shift their priorities soon and that although the financial sector had begun to curb investment in fossil fuels the pace was far too slow.

What do oil companies or coal miners do if faced with such rhetoric?  There is clearly a demand for their products and if one company closes down its activities then other companies will simply move in to take advantage of the gap. There will be a large profit incentive to meet the demand as prices will likely rise if some producers exit the market.

Companies also have the problem that they cannot close down existing facilities, or move into new markets such as wind or tidal energy in the short term without incurring major costs.

Famous investor Warren Buffett does not think they should do much at all. He has suggested that even if Berkshire’s management did know what was right for the world, it would be wrong to invest on that basis because they were just the agents for the company’s shareholders. He said “this is the shareholders money” (see FT article on 30/12/2019).

So long as the law of the land says it is OK to exploit natural resources even if they generate CO2, and the shareholders support a company’s activities then company directors should not be holding back he suggests.

But I suggest shareholders have other things to consider whether they believe in global warming or not. Investors clearly face a risk that even if they are happy to invest in coal mines, the Government might legislate directly or indirectly to put them out of business. As a result of Government policies in the UK, the amount of coal produced and consumed in the country, particularly for power generation has been going down. It’s now only about 5% of electricity generation, largely replaced by natural gas usage (with lower CO2 emissions) and renewables such as wind-power and hydroelectricity. Forget trying to get planning permission for any new coal-fired power stations even if very cheap coal can be imported.

As an investor, clearly divestment from coal mining and coal consumption is a worldwide trend in most countries with a few exceptions such as China. So any wise investor might simply look a few years ahead and take into account this trend. Investing in declining industries is always a bad thing to do. However well managed they are, companies operating in such sectors ultimately decline in profitability as revenue falls and competitors do not exit as the management has only expertise in that sector and won’t quit.

Investment is also not about what you believe but about other people believe because other people set the share prices of companies, not you. You might think that global warming is simply not true, but if the majority of investors believe it then they will sell the shares in companies that are involved in CO2 generation and drive down the share price. This is surely already happening to some extent with major oil companies. Shell and BP are on low p/e ratios no doubt because they are seen as having little future growth potential. You can of course become a contrarian investor if they become cheap enough but that is a risky approach because clearly these companies are facing strategic challenges.

Investment managers are divesting themselves of holdings in oil companies so as to please their investors. Both the managers and the investors have been subject to propaganda that has told them for the last few years that oil is bad and consumption needs to be reduced. They are unlikely to take a contrary stance. Once a religion becomes widespread, you have to follow the believers or be branded a heretic, whether the religion has any basis in reality or not.

There are not trivial sums involved. The Daily Telegraph suggests that UK shareholders are some of the most vulnerable in the world with about £95 billion invested in fossil fuel producers. If you consider that CO2 needs to be reduced, and choose your investments accordingly, then you need to exclude not just coal, oil and gas producers but a very large segment of the economy. All miners and metal producers are big energy consumers mainly from fossil fuels, and engineering companies likewise. And then one has to consider the transport sector and the producers of trains, planes and automobiles. Even producers of electric vehicles actually use large amounts of energy to build them although much of that is consumed in other countries such as China. Food production and distribution also consume large amounts of energy, and building does also. For example cement production uses enormous amounts of fossil fuel and actually generates about 8% of global CO2 production for which there is no viable alternative.

There are actually very few things in the modern world that don’t consume energy to produce them. That production can be made more efficient but decarbonising the economy altogether is simply not viable.

For investors, it’s a minefield if they wish to be holier than thou and claim moral superiority. There may be some simple choices to be made – for example why support tobacco companies where their products clearly kill people? But as an ex-smoker, I am more concerned about future Government regulation that will kill off or substantially reduce their business which is why I am not invested in tobacco companies.

Company directors, investors and bankers do not need to make moral choices. New year resolutions are not required. They just need to look to the future and the evolving regulatory environment and the court of public opinion.

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

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