Tag: Business Perspective Investing

Speedy Hire and Burford Capital

There are a couple of interesting articles in this week’s Investors Chronicle. One of their share tips for 2020 is Speedy Hire (SDY) which I own some shares in after attending a presentation by the company at a ShareSoc meeting in October. I was somewhat impressed by the apparent turnaround in the business that the management has achieved. You can read a write-up of the presentation here: https://roliscon.blog/2019/10/04/speedy-hire-presentation-burford-analysis-and-treatt-trading-statement/

Another very good article in Investors Chronicle was on the subject of fair-value accounting. It should be essential reading for all Burford Capital (BUR) investors. It explains how Enron used mark-to-market accounting to value long-term contracts. Their reported profits surged as they recognised future profits but the cash did not appear so the management then went from creative accounting to downright fraud by the use of off-balance sheet vehicles.

In reality it was using “mark-to-estimate” accounting as there were no public markets for the assets that could provide a sound valuation. How is this relevant to Burford? That company is in the same position in that the majority of its profits come from fair value gains on the value of the legal cases it is pursuing. As in Enron, the cash flows are very different to the reported profits. In 2018 the reported operating profit was $344 million but the cash outflow was $198 million.

As I said in my blog article mentioned above, I have always been doubtful about the merits of the company and one reason is the answer to the question “Do profits turn into cash?” The answer is “Not in the short term at Burford”. They are effectively recognising what they consider to be the likely chance of success in current profits. But winning legal claims is always in essence uncertain. I have been involved in several big cases and your lawyer always tells you that you have a very good chance of winning as they wish to collect their fees, but even if you win collecting any award can be uncertain”. In essence the accounts of Burford rely to a large extent on management’s estimates of the chance of winning cases and hence the future profits.

Incidentally a few respondents to my mention of my portfolio performance last year in a previous blog post and tweet requested details of my portfolio holdings and investment strategy. My response was that I don’t like disclosing the details mainly because listing all my holdings and providing reasons for them would be tedious but clearly one reason for success is avoiding companies such as Burford where profits do not turn into cash. As regards my investment strategy this is well covered in my book Business Perspective Investing https://www.roliscon.com/business-perspective-investing.html.

As I point out in the book, attending presentations by management or attending Annual General Meetings can give you useful information and the ShareSoc events are very relevant to that objective so I recommend them.

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

A Question Answered on Winners and Losers

When I tweeted a mention of my forthcoming presentation on Business Perspective Investing, Andrew responded that he would be interested in a list of my winners and losers over the years and lessons learnt. So here’s some of them.

Health warning: this is not a recommendation to buy, sell or otherwise speculate in these companies. Some of the companies have been sold, or been delisted due to takeovers or other reasons. The notes are only a very trivial analysis of the reasons I purchased them. I will not be advising of future changes to my shareholdings and I have not included relatively new purchases for the same reason.

I give the company name, the year first purchased and the compound annual return (including dividends) reported by Sharescope up to the current date, or when sold. Note that I rarely purchase large holdings at once, but tend to buy more over time if the performance is good. If the performance is poor they are sold so the losses are minimised.

Most of the winning companies show consistent growth in revenue, operate in growing markets, have a high return on capital, positive cash flow, some intellectual property (IP) and competent management. Many of the companies have exploited the internet to provider a quicker or lower cost service.

Some of the Winners:

4Imprint (2016: 31.0%). A simple business distributing promotional merchandise, sold over the internet.

AB Dynamics (2015: 74.6%). Automotive technology gaining from the need for improved testing requirements and automated vehicle needs.

Abcam (2006: 31.1%). Distributor and producer of antibodies and proteins used in medical research, sold over the internet.

Accesso (2012: 32.0%). Visitor attraction software and services. Consolidator in a diverse sector.

Bioventix (2014: 39.3%). Producer of antibodies for medical diagnostics.

Boohoo (2014: 108.8%). On-line clothes retailer. Benefiting from changing shopping habits.

Delcam (2003: 26.3%). Computer aided design software for manufacturing.

Diploma (2015: 28.6%). Specialised technical products in life sciences, seals and controls.

DotDigital (2011: 33.2%). Email and other business marketing services.

Fevertree (2017: 89.4%). Producer/distributor of drinks and mixers. Great marketing and strong branding with outsourced manufacturing.

GB Group (2003: 31.6%). Identity checking internet services, benefiting from the need for quicker ID checks.

Ideagen (2012: 36.0%). Software for GRC applications. Driven by both organic growth and acquisitions, higher regulatory demands and strong sales management.

Judges Scientific (2010: 25.6%). Producer of scientific instruments. Organic and acquisition growth and emphasis on buying small companies that are cheap that can deliver a high return on capital.

Moneysupermarket (2011: 19.6%). Internet price comparison services.

Rightmove (2012: 21.2%). On-line estate agency portal. Benefiting from network effects and being the market leader.

Safestore (2018: 29.5%). Self-storage property company. Growing need to store personal and business items.

Segro (2016: 26.1%). Property company specialising in warehousing. A growing sector from internet distribution need.

Tracsis (2013: 17.1%). Software for rail operators.

Victoria (2012: 74.8%). Floor covering manufacturer led by charismatic manager.

Some of the Losers:

Blancco Technology (2016: -34.1%). IT product erasure and diagnostics. Dubious and inaccurate accounts.

Patisserie Holdings (2017: -100%). Totally fraudulent accounts led by Executive Chairman who failed to watch the detail I suggest.

As you can see, the industries in which the successful companies operate are quite varied but there is a strong focus on “newer technology” companies providing internet services or software. Although technology has been a hot sector in recent years, that has been so for most of my investing life and I expect it to continue. Note how my prejudices against certain sectors are reflected in the above list. Although I have invested in a few mining and oil producers over the years, they were generally not successful investments. Likewise financial businesses with minor exceptions.

The per annum returns may not appear spectacular but it is the high returns over many years that makes them an outstanding investment (or “ten baggers” as some are – for example Abcam has compounded at over 30% per annum for thirteen years). It may be unable to continue to do so but the company still has ambitious growth plans.

The high performing companies listed tend to be smaller ones but my portfolio does hold some larger FTSE-100 and FTSE-250 companies. The more successful ones of those don’t achieve such high returns as the companies listed above but typically more in the 10% to 20% per annum range. I also hold a number of investment trusts and funds which have similar returns. But the lower returns on those are compensated for by the lower risks associated with them.

Some of the companies have changing performance over time. For example Accesso was a strong performer until recently. I tend to top-slice companies when they become over-rated by the market or there are significant changes in the business, and try to buy when they are still cheap.

Andrew also asked “if people didn’t put as much time into it as you, do you think they can make it work?” Effort in any game is rewarded. Likewise the more experience you have the better you get. That usually means some time commitment is required. But whether you spend a lot of time or little, the key is to use the time effectively and not try to research everything in absolute detail. There is more information available than you can hope to handle in the modern world. Experience tells you what is important of course and what can be ignored. My book “Business Perspective Investing” just suggests what is important to look at, and what is not.

Note that I will be giving some overall portfolio performance information at my presentation next Tuesday (the 12th November at the Mello London event).

Incidentally ShareSoc/UKSA have published their joint submission to the consultation on “Intermediated Investments” from the Law Commission. It is very similar in content to my own but even more detailed on the problems of nominee accounts and how they should be fixed. It’s well worth reading. See here:

https://www.sharesoc.org/sharesoc-news/sharesoc-uksa-response-law-commission-review-of-intermediated-securities-call-for-evidence/

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

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RNS Announcement Emails, Mello Presentation and NHS Politics

Many private investors like me have been using a service from Investegate to deliver new RNS announcements via email. But recently, and not for the first time, delivery of such announcements has been delayed, or they have not been delivered at all. This can be positively dangerous – for example I only realised that I had missed seeing one after the share price of a company I held rose sharply. Missing bad news can be even more traumatic.

After complaining to Investegate and getting no response I decided to change to another service. The London Stock Exchange offer a similar free service (see https://www.londonstockexchange.com under Email Alerts). It appears to work reliably so I recommend it.

Many readers will be aware of the Mello events that attract many private investors to company presentations and for networking. Mello London is a 2-day event in Chiswick on the 12th and 13th of November (see: https://melloevents.com/event/ ). I will be giving a talk on Business Perspective Investing based on my recently published book on the Tuesday at 12.55pm. So please come along and learn more about why financial analysis is not the most important aspect of selecting companies in which to invest.

I note that the NHS is likely to be a political football in the coming General Election. As a heavy user of the NHS for the last 30 years during which it has kept me alive, I consider this is a grave mistake. The NHS is not a perfect service and could do with some more money as the UK spends relatively less on healthcare in comparison with other countries. But the service has improved enormously over the last 30 years regardless of the political party or parties that were in power. One of the most damaging aspects has been constant change and reorganisation driven by political dictates and concerns to improve efficiency. It’s also been slow to adopt new technology such as IT software because it is so monolithic and bureaucratic a body. When it did commit to a major IT project for patient records and associated systems it wasted £10 billion or more on an ultimately abandoned project. More diversity and local decision making are needed in the NHS. But I see no chance of it being threatened by any trade deal with the USA or by our exit from the EU.

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

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Eddie Stobart Logistics and Reasons to be Fearful

No sooner had I published a book that says investors cannot trust the accounts of companies when making investment decisions (“Business Perspective Investing”) than we have yet another case of dubious financial reporting. The latest example is that of Eddie Stobart Logistics (ESL) which has announced that “the Board is applying a more prudent approach to revenue recognition, re-assessing the recoverability of certain receivables, as well as considering the appropriateness of certain provisions”. CEO Alex Laffey is leaving with immediate effect, profits seem to now be uncertain, the dividend is being reviewed and the shares have been suspended. In other words, it’s one of those shock announcements that undermines investor confidence in company accounts and in the stock market in general.

That follows on from the case of Burford Capital where revenue recognition has also come into question and I personally doubt the accounts are prudent. We seem to be getting about one case per week recently of accounts that are called into question or where significant restatements are required. I may need to revise my book sooner than expected because it contains a list of examples of dubious and fraudulent accounts in companies which is rapidly becoming out of date!

ESL is of course one of Neil Woodford’s largest investment holdings – he holds 22% of the company. Mr Woodford has also suffered from a write down in the value of his holding via Woodford Patient Capital Trust in Industrial Heat due to slow business progress. This is a company focused on “cold fusion” technology. Mr Woodford seems to be adept at picking risky investments of late which is not how he built his former reputation. Even the Sunday Times is now attacking Neil Woodford with an article today headlined “Neil Woodford’s worthless tech bets” which covers his investments in Precision Biopsy and SciFluor Life Sciences and which are now alleged to be almost worthless. I feel it’s going to be a very long time before his reputation recovers.

As regards more wider issues, there was a very good article by Merryn Somerset Webb in Saturday’s Financial Times under the headline “So many reasons to be fearful”. She points out that due to low interest rates making it seem irrelevant how long it might be before exciting companies actually produce returns, value stocks are trading lower relative to growth stocks than they have for 44 years. The pound is also at a 35-year low against the dollar and US stock prices at a 50-year high relative to US GDP.

Bond yields are so low that even in nominal terms they are negative in many parts of Europe. What should investors do? She comes up with some suggestions such as investing in commodities such as gold or silver, or even oil because there is a risk that with Governments running out of options to stimulate their economies, they may start printing money which will drive up inflation.

She also comments on a likely new “cold war” to be fought by the USA and China over trade which will may profoundly affect many of our investments. She argues that the next 30 years may be very different to the last 30.

Altogether an interesting article well worth reading if just to remind ourselves that the world is rapidly changing and that we live in very unusual times.

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

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

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

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

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

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

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

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

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

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

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

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

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