Big Miners, Moneysupermarket and Winning Against the Odds

Looks like we are back to a normal English summer – rain every other day and cool. But there are a few things to talk about.

Yesterday BHP Group (BHP) published their results to the end of June yesterday. Revenue and earnings were slightly below forecasts and the dividend was reduced by 10% as profits were down. But hey, when so many companies are cutting out their dividends altogether this is surely not going to worry many people. They still managed to achieve a return on capital of 17% and underlying eps was up. The shares fell only slightly as a result.

Today Rio Tinto (RIO) reported that production of refined copper in 2020 is now forecast to be lower by about 30% due to delays in restarting a smelter after planned maintenance. The share price is actually up today slightly at the time of writing, perhaps because copper is a relatively small part of their portfolio.

Both companies are very reliant on consumption of commodities such as iron ore in China, and China is still forecast to have economic growth this year despite the Covid-19 epidemic, unlike many other countries. Both companies are working hard to improve their ESG credentials after some recent mis-steps. Ignoring that, these companies still look good value to me (I hold both).

I used to be a holder of Moneysupermarket (MONY) shares but sold most of them in March when I was cutting my exposure to the stock market and weeding out the underperformers in the epidemic rout. Recently my house insurance came up for renewal and the broker I had used for many years gave a renewal quotation that was up 12% on last year. So I thought I would look for a cheaper quote on Moneysupermarket. They produced three quotations only one of which was cheaper and they insisted we replaced our newly installed alarm system for reasons I could not understand. So I then looked at other alternatives and got a quote from LV (Liverpool Victoria as was) that was less than 50% of all the other quotations. The moral is that it can be cheaper to go to direct providers. Is this why Moneysupermarket has not been growing earnings of late? Perhaps they are not producing competitive quotations?

Another good book for summer holiday reading is “Winning Against the Odds”, the recently published autobiography of Stuart Wheeler. He died in July and had a very interesting career.  He was a big gambler and founded IG Index which developed into a major spread-betting company from which he made many millions of pounds eventually.

One section of the book talks about his visits to Las Vegas where he made money by using a card counting technique on Blackjack. But he clearly liked to bet on almost anything.

I visited Las Vegas several times for computer software conferences. But I avoided the gaming tables and slot machines.  I did have some interest when a teenager in betting but not after the age of 18. To win at card games, betting on horses or sports results requires a great deal of hard work to be successful. I think there are easier ways to make money such as betting on stock market shares.

One of Stuart Wheeler’s friends was the late Jim Slater, financier and author of books on stock market investment. One of his sons is Mark Slater who runs a fund called the Slater Growth Fund, and others. I don’t hold them because I prefer investment trusts to open-ended funds but he is certainly a good “active” manager. They sent me the latest update on the Growth Fund today and it’s good to see that their fund asset chart over the last few months appears to match my portfolio. At least I am keeping up with the professionals.

The latter part of Wheeler’s book covers his involvement with politics although he seemed to have no great adherence to any political stance, apart from his belief in capitalism and his desire to depart from the EU. He did donate £5 million to the Conservative Party which was the biggest donation at the time to them. But they later expelled him from the party after he started to support UKIP.

Politically the last few years have been some of the most exciting in my lifetime. Politics used to be a very boring subject but now it has captured the imagination of the public with everyone forming opinions on the parties, their leaders and their policies. Rational analysis often gets lost in the fierce debates. Brexit alone was and is a very divisive subject. 

The leaders have been a very mixed bunch indeed and Wheeler sticks the knife into both Jeremy Corbyn and Theresa May. But he was careful not to say a lot about Boris Johnson. I think he might have preferred Michael Gove as Conservative Party leader but I do not see him as being very electable.

In summary, it’s an interesting book and an easy read.

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

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Exchange Market Size in Stockopedia and BHP plus RIO

I noticed that the share prices of BHP Group (BHP) and Rio Tinto (RIO) jumped this morning – at least for these behemoths of the FTSE-100 they moved substantially at 2.8% and 3.4% respectively. I only noticed because I recently purchased some of the shares in each company.

These are of course very large mining companies so they are dependent on the price of metals and metal ore, particularly iron ore. The last time I looked at these companies was two or three years ago when they were laden down with debt and had poor returns on capital. But they have certainly had a change of heart since then and seem to be more focused on generating real profits and cash flow rather than building ever bigger holes in the ground. Debt has been cut substantially in both companies.

With the profits mainly coming from overseas, they are a good hedge against any form of Brexit, and yields are high for those who like dividends. I am not a great fan of commodity-based businesses where predicting future prices of the products is not easy and they typically go through boom and bust cycles as such companies all invest in new production capacity at the same time as prices go up. Soon after when all the new capacity comes on stream there is a bust of course. But I made a small exception in this case.

But why the share price jump this morning? Are investors moving from growth to value as other commentators have suggested? Have value shares such as BHP and RIO suddenly started to look attractive, as they did to me? Or has Nigel Farage’s impossible demands for a deal with the Conservatives to ensure Brexit over the weekend suddenly encouraged investors to look for Brexit hedges?

Stockopedia have released an updated version of their “New” software. It now includes the Exchange Market Size (EMS) which is a useful parameter to look at when trading in company shares, particularly smaller ones. Note that Exchange Market Size was previously called Normal Market Size.  It is the maximum size in terms of share trade volume at which a market maker is obligated to adhere to their quoted share prices. It is a very good indicator of the liquidity in the shares and how easy they will be to trade. When trading electronically on most retail platforms, this is a useful number to know as it will affect whether you can trade automatically, have to set a limit order or get a dealer to trade for you. In addition, any trade bigger than the EMS might be done at prices higher or lower than you expect.

This number can be very small for some AIM stocks. For example on Bango (BGO) which I hold it is currently only 3,000 shares (less than £4,000 in value) when the EMS for BHP and RIO is more equivalent to £20,000 in value.

The new Stockopedia software version has other improvements although I still seem to be having problems with the Stock Alerts feature that I use every day. Perhaps there are still some issues that have yet to be fixed but you can still revert to the old version.

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

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