Category: Stock market

Market Conditions, Fonix Mobile Webinar and Aston Martin

The stock market seems to have calmed down now that we have some political stability in the country, it seems we might not run out of gas this winter after all and may be able to keep the lights on. But small cap companies are still very depressed with stock market investors preferring to put any spare cash into big or mid-sized oil/gas companies. Big miners are still holding up reasonably well because of the high dividends they are paying despite the gloom over the prospects for consumption in China.

I am not trying to buck the trend and have even bought some BP, Shell and Rio Tinto shares recently. I feel that all those new speculators in small cap company shares that joined in during the boom times have departed the market and are not likely to return soon. Once bitten, twice shy may be their motto.

I reduced my holdings in smaller companies as their share prices declined but I still hold some of them. One such is Fonix Mobile (FNX) who gave a presentation of their annual results on the Investor Meet Company platform today. I’ll briefly summarise what they do:

The company specialises in carrier billing systems, i.e. charging fees to your mobile phone as an alternative to credit card payments (75% of revenue), and in text messaging services (22% of revenue). They are experts in core verticals such as media, charity donations and online gaming but any transactions of less than £40 qualify so can be used also for such things as car parking payments.

What do I like about this company? The positives are:

  • Steady growth in revenues and profits in the last 4 years (they listed on AIM in October 2020).
  • High return on capital.
  • Pay a decent dividend.
  • High recurring revenue and high customer retention.
  • Focus on internally generated growth not acquisitions.
  • Limited foreign adventures.

They do have an international development strategy but that’s mainly focused on Ireland at present with some activity via partners in Germany and Austria. They are also evaluating other markets but they suggest they have room to grow in their existing markets. They are mainly investing in product development and sales/marketing. They only have 40 staff at present with about 15 in product development.

The management presented well and a recording is available of course.  Note though that the shares are tightly held and there is limited trading in the shares with a bid/offer spread of over 2.5%.

There are other companies in the carrier billing market, e.g. Bango and Boku, but the focus on certain verticals in the UK clearly has enabled them to build a solid niche.

I see Aston Martin (AML) published another poor set of results this morning – a year to date loss of £511 million and debt rising to £833 million although claimed revenue was up. The company blamed “supply chain challenges and logistics disruptions”. It still looks a complete basket case to me and I suggest only car aficionados should consider investing in it. When the anticipated recession really bites will folks be buying “ultra-luxury” cars as they call them? My only slight interest is that after holding it for 9 years my Jaguar XF will soon need replacing – a big bill today for some maintenance work on it. Let me have your suggestions for new petrol or hybrid luxury vehicles, or perhaps I will be able to pick up a low-cost Aston Martin when they near bankruptcy?

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

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Retail Investor Trading and Their Bad Habits

There is a very good article by Michael Taylor that has been published by Sharescope on the subject of the behaviour of retail investors, and their bad habits. It is based on an academic article.

I quote from some of it:

“1. Retail investors tend to trade as contrarians after large earnings surprises, both positive and negative”. Retail investors typically love to buy stocks with profit warnings – the old catching a falling knife trade. They are also quick to book profits on stocks with earnings surprises to the upside. This is why “cut your losses and run your winners” is an oft-used phrase. It’s the exact opposite of what the study in the article found retail investors do.

2. Contrarian trading behaviour did not appear to be information-driven on average. The study found that most retail investors were doing their trading post announcement. Rather than taking a view on the stock before the announcement, they were reacting to the surprise (and often as a contrarian).

3. Contrarian behaviour appeared to be attention related. Retail investors were more likely to trade as contrarians more intensely on stocks they held. I believe this is because many retail investors are risk-averse. Rather than cutting their losses, they preferred to take on more risk rather than admit they were wrong. I think this because many of these portfolios that were looked at had significant negative returns compared to the market by going against momentum.”

You can read the full academic article here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3544949

I don’t think I suffer from most of the bad habits mentioned above although I certainly tend to trade post announcements. I cannot see the point of trying to trade on imaginary news and trading before announcements is positively dangerous as there tends to be little trading then so prices can fall for no reason.

But I have seen the above errors many times in the numerous retail investors I have talked to over the years, particularly in the inexperienced ones.

With the gyrations in the market at the moment I am probably trading too often. Should one buy back a stock after it has fallen and you sold it? I certainly do so if the fundamentals suggest it is good value or that the market has temporarily over-reacted to negative news. At present the stock market is being swept by emotions so a couple of rules I would suggest: 1) Wait a few hours before reacting to news and trading unless the news is very clear (and by the time you can react the price will have moved anyway); 2) Make sure you are sober before trading and not distracted by other events – you need a clear head and need to avoid emotional reactions.

You need to accept your mistakes, ditch the losing stocks and run your winners. That means accepting your mistakes on selling as well as buying.  

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

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Why Property Companies Are Falling

A couple of articles in the FT today explain why commercial property company share prices have been falling of late, causing some damage to my portfolio.

First there is an article headlined “Goldman Sachs sounds alarm on UK commercial property”. They predict that with a sharp rise in borrowing costs billions of pounds will be wiped off their value. Prices could fall by 15 to 20 per cent by the end of 2024 they say. See https://www.ft.com/content/f4f96cf7-29a2-4416-a1cd-83ea362cfcaa

The article also points out that the “mini” budget which caused a disruption in the gilt market has caused pension funds to sell their property holdings. Several property funds have suspended redemptions so no doubt they are ditching holding in property investment trusts instead which I hold rather than open-ended funds. This means that a company such as Schroder REIT (SREI) has fallen to a 47% discount to NAV which seems excessive.

But gilts have rallied today which might relieve the pressure on pension funds. Another FT article said this: “Investors had previously been unnerved by confirmation from [Andrew] Bailey on Tuesday that the BoE’s bond-buying programme would not be extended beyond Friday, with the Bank warning troubled pension schemes that they had just three days left to sell whatever assets they needed to in order to restore their cash buffers. However, after the central bank purchased £4.4bn of bonds on Wednesday — easily the biggest daily volume so far in the BoE’s programme — markets were reassured by signs that pension funds were taking advantage of the facility to offload gilts and raise cash”.

Comment: I am getting really annoyed by these gyrations. When commercial property should be one of the less volatile of shares they are being driven into bouncing around by speculation on what the chancellor and governor of the Bank of England will do.

Even the negative prognostications on borrowing rates from Goldman are misconceived. Property companies rarely need to refinance their loans in the short-term and their loan to book values are generally not high (28% in the case of SREI in March this year for example). If loans need to refinanced in a few years time, what will be the loan interest rates achievable then? They are likely to be somewhat higher as the rates have been unrealistically low for many years but nobody really knows.

In summary these gyrations might soon be making property trusts more attractive but the general malaise in the stock market is not going to encourage anyone to buy unless the outlook seems brighter and the gilt market stablises.  

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

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Preparing for Power Cuts

The Government seems to think we will be able to muddle through in the same old British fashion but I am getting prepared by thinking ahead. It’s not going to be as easy as it was 50 years ago when miners were striking in the 1970s as so much now depends on electricity.

National Grid have warned that power cuts may have to be imposed this winter for periods of hours because of a shortage of gas which is the largest source of electricity generation. If there is a very cold spell, supplies of gas are cut off from Russia which is already happening, and a combination of other negative factors occurs then we will be facing a bleak mid-winter.

You might have gas central heating but your boiler won’t operate without an electricity supply. Are you working from home? Forget it because your PC or laptop will shut down along with your wifi router. Even your 4G phone signal may fail as phone masts only have a few hours back-up battery supply.

I have checked out our two old oil lamps (photo of one above which I have polished) to see if they still worked and they do, with some oil remaining in them. Can be lit with a few matches.

We also have a gas fire in our living room that can be lit manually with a match which will suffice – it’s rare for a domestic gas supply to be cut off because, so far as I recall, to do so creates problems when the supply is reconnected requiring a visit to every household in case a pilot light needs lighting. Industrial users would no doubt be cut off first.

But I probably should not have thrown out a paraffin room heater a few years ago – however they are still available and cheap.

As regards electronic communication, my broadband supplier (BT) provides auto switchover to a 4G connection if the broadband goes down but I don’t think that will help if the router loses power. I had a quick look at UPS systems but these are mainly of help in providing a gentle power-down. They typically only provide a few minutes battery time unless you spend a large amount of money. If you want hours of back-up you need a diesel generator. I doubt the expense of that is worthwhile.

A mobile phone like my iPhone 13PRO will operate for two days without a recharge so that should cope with lengthy power cuts. But if your phone has a shorter life then you need a “powerbank” which can give you many hours of power. They are readily available and not expensive. It could also support notepads as well as phones but laptops and PCs are another matter.

In extremis I could power my laptop in my car because I have a converter that plugs into the car auxiliary socket and supplies a 230-volt normal 3 pin socket. I can then probably tether my laptop to a 4G signal via my phone.

This might enable me to continue trading my stock market portfolio one way or another but will the stockbroking platforms and the LSE continue to function? I have no idea. I hope they are thinking ahead at the moment on how they can operate if power cuts are widespread.

A diesel or petrol car can supply many days of power but those folks who have bought plug-in electric vehicles might have difficulties if there are lengthy power cuts.

The above covers my personal “resilience” on power supply but nationally we seem to be in a really dangerous position. The Nord Stream gas pipeline was apparently easily damaged by some malicious act – probably Russian, but electricity interconnectors which we rely on for power from the continent are vulnerable. Similarly internet/phone cables could be easily damaged (as happened in January to a link from Norway to Svalbard).  In the modern world we are extremely open to all kinds of malicious acts from foreign powers and Russia now seems intent on using its capabilities to cause mischief on a global scale. All off-shore installations are vulnerable in essence so we need to crack-on with fracking.

It’s a far cry from when my father ran a coal-fired power station in the 2nd world war – he never ran out of coal. The Government has clearly got to take a good look at energy security in the UK. Even if the hot war in Ukraine cools down we might have an energy cold war for some years. It’s going to be long time before anyone trusts Russia again and certainly not while Putin is in power.

I have also been adapting my stock market portfolio to the new world of energy insecurity in the last few weeks by buying shares in oil//gas companies such as BP, Shell, Serica Energy and Woodside Energy. The dividend yields on such companies are now sufficient to offset the capital risks. I am normally prejudiced against commodity stocks but when times change I decided it was time to reconsider. But I still will not be looking at small exploration oil companies.

I have also been buying alternative energy suppliers such as Gore St Energy Storage, Greencoat UK Wind, Gresham House Energy Storage, Octopus Renewables Infrastructure and The Renewables Infrastructure Group although even those have dipped recently after a good run up since the start of the year. Whether this is due to the general stock market malaise or doubts about the new regulatory regime for electricity is not clear. As in any bear market, there is nowhere to hide as everything falls.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added

Currency Impact on the Stock Market

I have been wondering why certain stock market sectors have been falling for no very obvious reason of late. For example UK property companies and alternative energy funds. I suspect one reason is that the majority of UK listed shares are now held overseas – 56.3% at the last reported figures in May 2020 which was a record high.

The pound against the US Dollar has fallen by 14% in the last 3 months. So if you are an investor sitting in the US you will have seen your UK shares fall in price in your local currency by that amount. When shares are falling for no obvious reason, people tend to sell them – at least I know I do. So it’s quite likely that the UK market is being affected by US shareholders dumping their holdings as a defensive reaction to falling prices.

Some people have suggested that UK companies are being affected by the high inflation rate, by labour shortages, by higher interest rates, by logistic issues or a looming recession but in reality the reported results have been OK of late.  Yes some companies might be directly affected by a falling pound – exporters positively and importers negatively. But there is no simple correlation with a company’s share price.

In reaction to the falling pound the Bank of England is buying UK bonds to calm the market. But they surely need to raise interest rates further and soon.

The rising proportion of UK listed companies held by overseas investors is exacerbating the bear market. Exchange rates can be very volatile and this makes for a very unhealthy stock market.

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

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Treatt Profit Warning

It has been suggested by articles in Investors Chronicle that now might be the time to venture back into the small cap market after a big fall in the share prices of such companies in the last year (the FTSE-AIM index is down by 27%). But investors in Treatt (TET) might not agree. After a profit warning this morning the share price is down by 31% at the time of writing.

Treatt is a supplier of natural flavouring and fragrances and has been highly rated in the last few years because of its apparent strong market position in the sector (a forecast p/e of over 27 before this warning).

What is the reason for the profit warning? Well there are a whole rag-bag of excuses including lack of anticipated performance in Tea blamed on poor US consumer confidence, volatility in FX movements, significant input cost inflation and Covid-19 restrictions in China.

Has poor US consumer confidence really impacted the consumption of that horrible beverage iced tea or was the company just being over-optimistic in sales forecasts? I suspect the latter.

Note I do not currently hold Treatt although I have done in the past. I eventually came to the conclusion that the share was too optimistically priced as I was not convinced it had as strong a market position as suggested and was vulnerable to competition.

Another small-cap company reporting today was Up Global Sourcing (UPGS) which I do hold. They issued a pre-close trading update in which they: “Unaudited Group revenues increased 13% to a record £154.2m (FY21: £136.4m), driven by the earnings enhancing acquisition of Salter, and a resilient performance of the core business, with underlying organic growth of 1.0% to £137.9m (FY21: £136.3m). Growth has been particularly strong with our supermarket customers, which now represent our largest sales channel”.

But with organic growth only 1.0% and a looming recession that will no doubt impact consumer goods purchasing, the share price has only risen slightly today. On a prospective p/e of 9 that is certainly looking cheap in comparison to what it was a year ago but I am not yet convinced it’s time to pile into such small cap stocks. The future needs to be clearer, particularly re supply chain costs ex China and consumer confidence in the UK.

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

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Am I Living in an Alternative Universe?

My share portfolio jumped up by 1.3% yesterday. But the national media news was full of gloom on energy prices and the drought. The NHS is collapsing and the war in Ukraine continues. Bad news has always sold newspapers and the same goes for clicks on social media channels. I have the feeling I am living in some alternative universe where economics and the stock market are completely uncoupled.

The same thing happened after the gloomy prognostications of the Governor of the Bank of England. It’s rather like the “Backwards” episode of Red Dwarf where everything was in reverse and time ran backwards.

All this bad news is surely going to have an impact sooner or later. Come winter many people won’t be able to heat their homes and the coming recession will mean many people will become unemployed. This might put a damper on inflation but the stock market cannot stay immune from these economic trends for ever.

It reminds me of the infamous comment by Chuck Prince just before the financial crash of 2008 – “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance”.

I may be sceptical about future prospects for shares, particularly those in certain sectors, but I won’t be selling shares just yet. I will continue to follow market trends as always until I think valuations are completely irrational on individual stocks.

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

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Austin Review of Capital Raising and Dematerialisation

It’s the mid-summer doldrums in the stock market and with investors having more time on their hands, what better time to issue a 265 page document entitled “UK Secondary Capital Raising Review” (see link below). This document covers a number of very important issues to investors after a review by Mark Austin as Chair of a committee that has looked at the way the UK stock market operates in certain areas. I will only cover some of the key points below because it is a long and complex technical document but Mr Austin has done a fine job in bringing out the key issues in his report to the Chancellor:

  • He spells it out early on in these sentences: “…….we as a market need to be bold and brave in our thinking. We need to look at our existing rules and practices with a fresh set of eyes and a blank sheet of paper, and ask ourselves with a bottom-up rather than top-down approach – what is the right regime for us as a market for the next decade and beyond? …….That requires bold thinking and potentially addressing vested interests that have organically (and understandably) grown up in the past couple of decades due to how the system currently operates – and that may have made our capital markets fit for purpose in the past couple of decades but will not necessarily make it fit for purpose in the coming two decades”.
  • Secondary capital raising is one area he looks at in detail. He says: “There are many – sometimes competing and overlapping – structures, views and guidelines that create a complex architecture. Practice has built up over many years. It is, for want of a better phrase, an area that is very ‘whack-a-mole’ in nature, in that when one issue is addressed, it often causes another that needs to be addressed to pop out elsewhere – usually for a different set of stakeholders”. Retail investors are ill-served by existing practices and have been missing out on placings for example. Mr Ausin says, and quite rightly, that “As much of a company’s existing shareholder register as possible – including, importantly, retail investors – should be able to participate in any capital raising in a timely way, whatever its structure. Again, technology and digitisation have a key role to play here”.
  • Pre-emption rights are important to shareholders to avoid dilution but the rules on what is allowable are not defined in law but are promoted by a “Pre-emption Group” – in essence a club of city grandees. The Austin Review suggests it should be put on a more formal basis which is surely sound policy. The Review also covers the use of “Cash Box” transactions to get around the current legal limits on share issuance which should surely be outlawed and is one option suggested in the Review.
  • One matter discussed is the complexity and delays that occur when a rights issue or open offer is chosen as the fund-raising method. This discourages their use and the reliance instead on placings to expedite matters and reduce costs which prejudice private shareholders and smaller institutions. The key problem is the lack of a complete digital register of shareholders (including beneficial owners who hold shares in nominee accounts). That frustrates rapid communication with investors. Where a general meeting to vote on a proposal is required this currently requires 14 or 21 days notice to shareholders but the proposal is to reduce that to 7 days – an impractical objective unless electronic communication is possible. That will certainly assist rapid fund raisings which are sometimes required but it might also obstruct the ability of shareholders to communicate their concerns to other shareholders in time to oppose a vote. I suggest this requires more consideration.
  • The Review spells out the key priority in this sentence: “Raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure, which is actioned by a Digitisation Task Force with an independent chair and a clear set of principles to be followed”.
  • That will include “the eradication of paper share certificates and that “– it should seek to ensure that rights attaching to shares flow to end investors quickly and clearly and that investors are able to exercise those rights efficiently”. That is currently obstructed by the prevalent nominee system and the obstruction of some nominee operators (stockbrokers and platforms).
  • I have of course written extensively on the issue of dematerialisation and the use of nominees extensively in the past – in fact for more than 15 years with little action on the issue being decided. It is well overdue! ShareSoc has run a campaign on this issue where you can see the issues explained – see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ . There needs to be a “bottom-up” reform of the ways share are held and transactions recorded as the Review suggests. The current system is way too complicated and needs reform to improve shareholder democracy and market efficiency. Dematerialisation of all shares in public companies is a given requirement and all shareholders should be on the share register so that issuers (public companies) know who their investors are and can communicate with them quickly and easily. That is also a requirement for improved shareholder democracy.  

In conclusion, the Austin Review is a well-researched report and is essential reading to anyone who invests in the stock market. It includes detail reviews of how other international markets such as Australia operate. Let us hope that its recommendations are followed through with some urgency.  For retail investors the proposals should be welcomed not feared.

Austin Review: https://www.gov.uk/government/publications/uk-secondary-capital-raising-review

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

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Techinvest Comments on Technology Stocks

The latest edition of the Techinvest newsletter has just been issued. This is a newsletter that comments on smaller cap UK technology stocks and is always worth reading for those who hold such shares as I do. The latest editorial is particularly worth reading in my opinion. I quote from some of it below.

“Between 1994 and 2000. the gain on the Nasdaq index was circa 590%. It subsequently lost around 76% of its peak value in the tech stock crash that played out over the next three years.

As we have commented before, however, we doubt that the bear market this time will follow the path taken during the unwinding of the dot.com bubble. For one thing, current tech stock valuations are not as stretched as they were back then. Also, tech is a much more established part of the economy today, benefiting from developments such as digitisation, automation, and cloud services upon which modern enterprises are increasingly reliant. The dot.com crash was driven primarily by realisation among investors that a speculative bubble had formed in tech stock prices. By comparison, tech stocks are selling off today in response to concerns about events in the real world, chiefly supply chain shortages and rising inflation. Fears of a looming recession in particular has dented risk appetite and made investors cautious about backing growth stocks at a time when the outlook for the economy is turning down. Investors are also showing preference for safe haven blue-chip stocks at the expense of the smaller cap sector. Unfortunately, most tech companies with a London-listing are small cap and have suffered accordingly due to their perceived lack of defensive qualities relative to larger cap brethren in old economy sectors.

Given that most tech operators continue to report strong results and appear to be absorbing the impact of supply shortages and rising operating costs reasonably well, the current sell-off may seem irrational. But markets look ahead and try to discount events that appear likely to occur in the medium term. A worsening economic situation later this year and into 2023 does seem likely and therefore needs to be discounted in current stock prices. Whether this justifies the heavy falls seen in tech stock prices, however, is questionable. After all, tech would seem to have the wherewithal to come through a downturn in better shape than many other parts of the economy. Balance sheets are generally strong in the tech sector and many operators have good cash generation and high levels of reliable recurring revenue. Secular growth trends, such as automation and digitisation, also provide a strong underpinning for tech demand even if IT budgets become more constrained in a downturn. While we recognise some justification on economic grounds for the sharp de-rating of tech stocks since last year, we also feel there is an element of overreaction driven by fear and short- termism. Good stocks have been pulled down alongside ones that have weaker fundamentals, creating some attractive buying opportunities”.

Comment: As the editor points out private equity investors are pouncing on good opportunities in the UK – EMIS and Ideagen are examples of recent bids at very substantial premiums. If a recession does come, those technology businesses with high recurring revenue and good balance sheets may not suffer much. Once a customer has become reliant on technology they will rarely ditch it or change suppliers. So they can be very defensive stocks to own. The ones to avoid are those with no profits, poor cash flow and reliance on future fund raisings which may not be forthcoming in a recession.

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

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After IDEAGEN and EMIS, What to Buy? VIP Perhaps?

With bids for Ideagen (IDEA) and EMIS (EMIS), two of my larger and longer-standing holdings, I need to look for new small/mid cap technology stocks in which to invest. I may be willing to hold the realised cash for a short while but with inflation at 10% it’s going to be costly to hold much cash for very long.

I note AB Dynamics (ABDP) has been tipped in both Techinvest and Small Company ShareWatch last week but I already hold that and it does not look particularly cheap to me as yet.

Techinvest reported on their New Year Tips last week. With 12 stocks recommended the average fall is 17.7% to date which just shows how out of favour small tech stocks have been of late. Only one of the 12, Ingenta, rose with all the rest falling. I won’t mention the rest because none look greatly attractive to me.

What I am looking for is companies with good intellectual property, which can provide barriers to competition, in growing market sectors, with good returns on capital, high levels of recurring revenue, positive cash flow and with rising revenue (Ingenta has a poor track record in that regard and has low return on capital).

Readers should add your suggestions for companies to look at by leaving a comment (see left hand column of this blog).

One alternative to investing in tech stocks is property companies and I read the Annual Report of Value and Indexed Property Income Trust (VIP) over the weekend. Property companies are a good hedge against inflation, particularly as VIP has a focus on holdings with index linked rent reviews. Their comments on future prospects make for interesting reading.  To quote:

“Total returns will be lower but still satisfactory over 2022 as a whole. They may be around 12% overall with returns for industrials, retail and the alternative sectors all in the early teens but offices only around 5% with capital values flat, rents under pressure and voids through the roof. Property’s real returns will be far lower, with the RPI already up 9% year on year. It will stay higher for far longer than the Bank or England or the market expects. Stagflation is here to stay for at least as long as the war in Ukraine drags on”.

That’s a good summary of my own view and investors might be happy with a 3% real return this year as world economies go into recession.

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

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