Excess Optimism and 4imprint Reality

The FTSE-100 is up 3% today at the time of writing and the FTSE-250 up over 6%. That follows a rise of 7% in the S&P 500 in the USA yesterday. This is driven by some expectation that the virus spread is declining in some countries, or has ceased altogether in China. But I suggest this is pure excess optimism as the lock-downs in many sectors have yet to hit the results of companies.

A good indication of how bad it could be was the announcement this morning from 4imprint (FOUR) a supplier of promotional products to companies, mainly in the USA. The share price of this company fell to a low of 1320p on the 19th March after it reported sales were had fallen to 40% of previous levels. It has since bounced back up to 1830p as of last night.

This morning they gave even more bad news. Sales are now running at 20% of last year’s figures and their main distribution centre in Oshkosh has been closed. The message is quite obvious to see. Companies are axing their promotional budgets and aggressively reducing their marketing expenditure. When times get tough, marketing expenditure is a discretionary item that can be easily chopped. You will see how this can ripple through the whole economy and affect any company in the marketing sector.

4imprint may survive but this year’s results are likely to look quite awful even if there is a rapid return to work. But there is no sign of that and it could be months before business returns to normal, or to anywhere near last year’s levels. The last widely published profit forecasts suggest a fall of 10% from previous forecasts made at the start of the year, but still more than last year’s actuals.

Hopelessly optimistic in my view, even if I am still holding some shares in the company.

This seems to be a common feature of the market at present with investors piling into or buying back shares they previously sold. Far be it for me to ignore the wisdom of crowds so I have been buying some shares but only on a selective basis. But excess enthusiasm for some shares such as 4imprint seems rather too common.

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

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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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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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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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Brexit Investment Strategies

Investors may have noticed that the pound is in free fall and heading towards US$1.20. That’s near the low after the initial Brexit vote. Pundits, not that they can be relied on for forex forecasts, suggest it could go lower now that we seem to be heading for a “no-deal” Brexit.

With the pound falling, and potential damage to the UK economy from a hard Brexit, investors should surely have been avoiding companies reliant on UK sales, or UK consumers, or those such as engineers and manufacturers that rely on just-in-time deliveries from Europe. The key has been to invest in those UK listed companies that make most of their sales overseas in areas other than the EU.

One such company that announced interim results today is 4Imprint (FOUR), a supplier of promotional merchandise. Most of its sales are in the USA and its accounts are in dollars. Revenue in dollar terms was up 16% at the half year and pre-tax profit up 22%. The share price rose 6.5% yesterday and more this morning but the former suggests the good news leaked out surely. With the added boost from currency movements, this is the kind of company in which to invest but there are many other companies with similar profiles. For example, many software companies have a very international spread of business, or specialist manufacturers such as Judges Scientific (JDG). Those are the kind of companies that have done well and are likely to continue to do so in my view if the US economy remains buoyant and the dollar exchange rate remains favourable.

The other alternative to investing in specific UK listed companies with large export revenues and profits is of course to invest directly in companies listed in the USA or other markets. But that can be tricky so the other option is to invest in funds such as investment trusts that have a global spread of investments with a big emphasis on the USA. Companies such as Alliance Trust (ATST), Scottish Mortgage (SMT) or Polar Capital Technology Trust (PCT) come to mind. Alliance Trust has a one-year share price total return of 11% according to the AIC and the share price discount is still about 5%. I received the Annual Report of PCT yesterday and it makes for interesting reading. Net asset total return up 24.7% last year and it again beat its benchmark index. The investment team there has been led by Ben Rogoff for many years and what he has to say about the technology sector is always worth reading. Apparently the new technology to watch is “software containerisation” which is compared to the containerisation of cargo shipments in its revolutionary impact.

Another interesting comment is from the Chairman complimenting Ben on having the skill of buying shares and holding those which go on to outperform, but also knowing when to sell at the right time which the Chairman suggests is not common in fund managers.

Another hedge against a hard Brexit is to invest in companies that own warehouses because a lot more stockpiling is already taking place as a protection around the Brexit date by importers, but also more will be required to hold buffer stocks for manufacturers in the future. Companies such as Segro (SGRO), Tritax Big Box (BBOX), and Urban Logistics (SHED) have been doing well for that reason. They have also been helped by the trend to internet shopping which requires more warehousing space and less retail space. These trends are likely to continue in my view and the retail sector is likely to remain difficult for those retailers reliant on physical shops. You can see that from the results from Next (NXT) this morning. Shop sales down while internet sales up with the overall outcome better than expected as on-line sales grew rapidly. Anyone who expects the high street or shopping malls to revive is surely to going to be disappointed in my view.

There are bound to be some problems for particular sectors if we have a hard Brexit. The plight of Welsh sheep farmers was well covered by the BBC as Boris Johnson visited Wales yesterday. Most of their production currently goes to Europe but they may face 40% tariffs in future. The Prime Minister has promised assistance to help them but they have been heavily reliant on subsidies in the past in any case. There will need to be some difficult decisions made about the viability of farming on marginal land in future.

The falling pound has other implications of course. It will help exporters but importers will face higher prices with the result that inflation may rise. However, there are few products from Europe that cannot be substituted by home grown or produced equivalents, or by lower cost products from the rest of the world. With import tariffs lowered on many imports the net effect may be very low in the long term. But it will take time for producers and consumers to adjust. Tim Martin of JD Wetherspoon is well advanced in that process so you can see just how easy it will be to adapt.

In summary, investors should be looking at their current portfolios and how they might be impacted by Brexit now, if they have not already done so. There will clearly be winners and losers from the break with Europe and investors should not rely on any last-minute deal with the EU even if Boris is expecting one. Any solution may only be a temporary fix and the policies suggested above of international diversification are surely wise regardless of the political outcome.

Note: the author holds some of the stocks mentioned.

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

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Trump Tariffs, 4Imprint AGM and Purplebricks Apologies

US President Donald Trump has created some havoc in world stock markets by threatening in a tweet to impose 25% tariffs on a wider range of Chinese goods from Friday. He is apparently getting impatient with the progress on trade talks between the USA and China, but is pursuing international diplomacy via tweets a good idea?

One company that might be affected by higher tariffs on Chinese products is 4Imprint (FOUR) whose AGM I attended this morning. 4Imprint is an AIM-listed retailer of promotional products (sold via catalogues and the internet). Most of its business arises in the USA with only a relatively smaller operation in the UK, and it imports a considerable proportion of the merchandise from China. I asked the Chairman after the AGM whether this was a concern. He said they discussed tariffs at every board meeting but as their competitors would be in the same position the impact might not be high.

There was a trading statement from the company this morning before the AGM. Revenue up 16% in the first four months and the board is confident that the Group will deliver full year results in line with market expectations.

This is the kind of company I like. Revenue growing, no debt, profits turn into cash and return on equity was 82% last year. Like a lot of retailers, they sell the products and collect the cash from customers before they have to pay the suppliers. In essence a simple business and the AGM in the City was a quite brief affair – duration about 15 minutes.

Only I asked any questions in the formal part of the meeting and one was: what is their market share in the USA? About 4% was the answer, and it’s still increasing. The competition is also fragmented so there is room for growth. You can see the kind of products they sell here: https://www.4imprint.co.uk/ . Having used the company in the past I can recommend them.

I also asked whether there were any substantial numbers of proxy votes against any of the resolutions (this is a question to ask when the Chairman says proxy votes will be disclosed at the end of the meeting as happened here!). Yes there was one. Remuneration Committee Chairman Charles Brady only got 93% support. I later asked him why. He said one institutional investor voted against him because the company does not have an LTIP.

I actually voted for the Remuneration Report because they have a simple remuneration scheme and pay of the executive directors is not unreasonable bearing in mind they are based in the USA. This is the kind of pay scheme that should be applauded, not voted against.

Another AIM company of a very different nature that made an announcement this morning is Purplebricks (PURP). A trading statement gave a financial update but included several very negative points. The Australian operation is being closed down, the US operations are now the subject of a “strategic review” with bad news being hinted at, and founder/CEO Michael Bruce is “stepping down with immediate effect”. That usually means the person named has been fired.

The board acknowledges that performance has been disappointing over the last 12 months and “we sincerely apologise to shareholders for that”. The company blames too rapid geographic expansion and poor operational execution.

The company is still losing money and the share price graph is one of those downward facing ski-slopes that investors hate. The share price is down another 7% today at the time of writing. Still an unproven business model in my view. I do not hold shares in the company for that reason.

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

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