It’s Impossible to Value Companies at Present!

The stock markets rose sharply yesterday and this morning, allegedly on the news of the $2 trillion economic support package announced in the USA. But the company news is consistently bad where it is available.

In the company announcements I have read, they seem to fall into two kinds: 1) We are shutting down all or part of our operations and managing the cash but our balance sheet strength is such that we can survive this for weeks and won’t go out of business (Greggs, Dunelm, Next and Victoria for example); or 2) Only minor impacts so far but it is too early to judge the wider impact of a possible economic recession on the business (Diploma for example).

Nobody is giving forecasts and it’s impossible to work them out for oneself. The result is that individual stock prices are bouncing up and down, and the whole market is also gyrating. I have no confidence that the recent market bounce is an indication that we have passed the bottom. It’s simply impossible to value companies at present with any accuracy.

One could perhaps say one can value them because the coronavirus crisis may only last a few weeks while company valuations should be based on years into the future, but there is no certainty on the duration of the epidemic, how many people will die and when the economy will be back to normal.

Here’s a useful quotation from the Victoria (VCP) announcement today: “….the Group goes into the uncertainty of the next few months from a position of considerable strength. However, as Darwin stated, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.’ Therefore, our managers have been willing to think the unthinkable and act decisively and promptly to protect their business – particularly its cash position – as the impact will, in the short term, be significant”.

Some of the companies mentioned above have seen an immediate impact on their businesses while others are less affected. Those who run “non-essential” businesses such as General Retailers and Hospitality operators are the worst hit, but I suspect others will see the impact in due course as the economy slows. It’s OK for Governments to pump money into the economy to try and keep it afloat but the future profits of many companies will surely be wiped out this year.

The impact might be wider than we expect. For example, one of the on-line retailers I use has closed down its web site today presumably because of the difficulty of packing and shipping orders. On the other hand, office productivity might suddenly improve if everyone is working from home – less time will be spent gossiping or flirting with others or wasted on commuting.

As an investor does one simply sit on one’s hands in the expectation that the crisis will pass in due course and the markets will rebound?  There was an interesting article by Chris Dillow in last week’s Investors’ Chronicle. He pointed out that research tells us that when there is bad news, investors tend to look at their portfolios less often. It’s the equivalent of not going to the doctor because their diagnosis might be bad news. Not reviewing your portfolio regularly is surely a habit to be avoided. I do it every evening as a matter of routine.

I know exactly the value of all my portfolios and the movements of individual holdings over the day. It’s made for gloomy reading of late. I also get alerts during the day of share prices that have moved significantly from previous levels and review them at the end of the day also. I use software products such as ShareScope and Stockopedia to provide this information. As a man of action, I do react to what I see happening in the market and to individual shares. I manage my portfolio to reduce exposure to the market when it is falling. And I make changes to my individual holdings dependent on the latest news and current prospects.

But it’s easy to waste a lot of money by over-trading, and waste a lot of your personal time, so I try not to make changes unless trends are very clear. My habits have developed over many years of investing in the stock market and have worked out reasonably well. But others might take a different approach. There is no one “best solution” but hiding behind ignorance of what is happening in the market is surely a recipe for poor portfolio performance.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

 

 

Market Bounces, But It’s Not on Good News

The FTSE-100 is up 2.5% today at the time of writing, and my portfolio is up 5.5%. There are several stocks in there that are up more than 20% but the bad news keeps coming so this seems to be more a case of folks picking up stocks that have fallen to very low levels and moving into defensive ones than on any really good news. The impact of the virus in the UK is still growing and business is grinding to a halt.

The bad news today was 1) From Rightmove (RMV) who said “Notably the number of property transactions failing to complete in recent days and likely changes in tenant behaviour following the announcement of the renters’ protections by the government may put further pressure on estate and lettings agents”. They are knocking 75% off their customer invoices for the next few months which will mean a hit of up to £75 million to revenue! Better to have some revenue than have agents cancel seems to be the logic. The share price is down 4%. 2) From Tracsis (TRCS) a provider of services to the rail industry who say: “Given that the situation is changing rapidly, at this point in time it is not possible to accurately quantify the impact on H2 trading and therefore full year expectation”. A lot of their revenue is recurring in nature but they will be impacted by the cancellation of events. The share price is up over 2%, presumably on some relief that it is not as bad a prognostication as many companies are issuing.

I do hold those stocks but one I do not is Next (NXT) the retailer. They have received compliments in the national media about their recent announcement which gave some very detailed forecasts of how they would cope “in extremis”. I still doubt this is a sector to get back into because wages in many sectors of the economy will be depressed which will surely hit retail sales even if they are able to venture back into the shops or shop on-line. When the economic outlook is uncertain, people stop spending money also.

For Sirius Minerals (SRX) shareholders, ShareSoc has issued a very well judged blog post on possible legal claims – see https://www.sharesoc.org/sharesoc-news/sirius-update-9-14-march-2020/ . Regrettably there have been some hotheads who wanted more action and sooner, which was not practical, and some who think ShareSoc is raising false hopes. Neither is the case. As someone who has in the past run shareholder action groups, I have learned that quick actions are neither sensible nor practical. But legal cases for redress are sometimes possible – for example in the case of the Royal Bank of Scotland rights issue in 2008 and the false prospectus. But it can take years to raise funding and reach a conclusion. Persistence is everything in such circumstances. But rushing into legal action, however willing lawyers are to run up fees on a case, is not sensible.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Equals Trading, Bango Results, Finablr Suspension, Baronsmead VCT and Closing the Stock Market

As share prices of almost every share on the market collapses, should all trading be suspended? The argument for this is that as the impact of the coronavirus on the economy is not certain, although it looks more dire every day, shares cannot be valued with any certainty. Indeed there seems to be no hiding place as there never is in a bear market – almost all share prices have fallen. The editor of the FT thinks the market should not be closed and I agree with her. Closing the market is very prejudicial to private shareholders, particularly those who absolutely need to move into cash even if it means some sell into an unrealistic market – but that is their choice. If the market closes you have no choice. If there was to be a closure, it should only be for a few days as at the start of World War II.

I have been trend following in the market as I have mentioned before but it has proved difficult to keep up in the last few days. At least brokers’ systems seem to be robust this time around.

The major sectors affected by the virus, or soon will be, are hospitality businesses, hotels, pubs, entertainment venues and airlines. One symptom is that I just cancelled our holiday in June as I am supposed to be hibernating for 12 weeks according to the Prime Minister and I doubt the epidemic will have passed by June. But you can see that there will be many staff lay-offs in such businesses and airlines are already asking to be bailed out by the Government because if airplanes don’t fly they cannot cover their aircraft lease costs.

Meanwhile the virus is causing businesses to get their staff to work from home, including one of my brokers. Payment company Equals Group (EQLS) issued a statement this morning giving their response to the virus and a trading update. They say they have 50% of their staff working remotely in shifts and can move to 100% when required. As regards trading, group revenues to the end of February were up 33% but there has been a marked slowdown in travel cash and retail card revenues in the last week due to the adverse impact on travel. But corporate revenues are still robust so far and account for the majority of revenues. Clearly the business will be impacted to some extent so they are cutting costs to conserve cash. The share price had anticipated this and had already fallen a long way in previous days and weeks – it fell again today.

Another company in the payments sector is Finablr (FIN) which announced yesterday that the shares were suspended. The company suggests that problems with liquidity are making it difficult to manage the business. They have also discovered some cheques dating back to before their IPO which have been used as security for the benefit of third parties – a small matter of $100 million is involved! The CEO has resigned and the board is looking for a new one. This company was founded by B.R.Shetty who also founded NMC Health and whose accounting and financing arrangements are also under scrutiny. It looks like Finablr is yet another financial disaster I have managed to avoid to look on the bright side. I would not bet on shareholders recovering anything. Temporary suspensions very frequently turn into permanent ones.

Another company that operates in the mobile commerce and payment sector is Bango (BGO) who issued their final results today. Group revenue was up 41% and they say “Adjusted EBITDA” for the year was a positive £0.45 million. However cash declined because of the large expenditure on intangible assets and there was still an overall financial loss. They expect the “payments business to continue to grow exponentially” and they forecast the coronavirus to have a positive impact on End User Spend as from experience they see consumer spending rise during “stay-at-home” periods such as Ramadan and Christmas. The share price rose slightly today by the time of writing this note, but investors are still unsure about the future of the company it seems. Investors are either taking their money off the table altogether or moving out of businesses likely to be impacted by self-isolation and quarantining and this is having a very wide impact.

My portfolio is now over 25% in cash which is very unusual but I am picking up the odd few shares in companies where the panic seems overdone – in none of the sectors likely to be affected that are mentioned above though.

One of the few companies I hold whose share price rose in the last 2 days has been Ocado (OCDO) as the popularity of on-line ordering and delivery rises. Getting delivery slots with them is now difficult for customers and other supermarkets are having similar problems and when you do get a delivery a lot of items are missing. There is clearly some panic buying going on for certain items which may subside if logistics turns out not to be a major problem after all. But surely all the workers who pack and delivery from supermarkets are going to be affected if the virus becomes rampant, even if they are in the younger and healthier group.

I mentioned some issues at the Baronsmead Venture Trust (BVT) AGM in a previous blog post (see https://roliscon.blog/2020/02/27/venture-capital-trusts-the-baronsmead-vct-agm-and-political-turmoil/). I wrote to the Chairman of the company, Peter Lawrence, after the meeting and have received a response. He confirms that the chart of returns in the last ten years in the Annual Report on page 3 was wrong. It showed a decline in NAV Total Return in 2018 when there was in fact an increase and the 2019 point was also wrong– a corrected graphic is below.

Baronsmead Venture Trust Corrected Chart 2020--03-17

It always surprises me that there are so many errors in Annual Reports that shareholders find easy to spot when the directors have not. This seems to be a particular problem in VCTs – perhaps too many jobs and not enough time allocated to each role with some VCT board directors considering their directorship a sinecure that requires little thought or effort. I suspect those are the problems. Perhaps they need reminding to read the Annual Report in detail before approving it!

Mr Lawrence rejected my complaint about the lack of time allocated to public questions at the AGM Meeting (only 15 minutes) and also rejected my complaint about the length of time he has been on the board which is contrary to the UK Corporate Governance Code. I will send him a stiff reply. To my mind this looks like one of those VCTs where a revolution is long overdue. It needs a fresh board and a good examination of the investment policy, the fund manager and the fees paid to the manager.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added. 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

It’s Not the End of the World, But It Is a Bear Market

After the Chancellor’s statement yesterday in which he did a good job of scaring everyone about the economic impact of the coronavirus epidemic, and news coverage of the spread of the virus overnight, the UK stock market was in freefall this morning. That was not helped by sharp falls in the US and Far East markets overnight.

A bear market is when folks dump shares irrespective of a company’s prospects or earnings and is driven by herd following in index funds and others. When does a bear market end?  After many months and when shares start to look very, very cheap on fundamental ratios such as earnings or dividend yields. That is clearly some way off yet.

To have that happen the public do also need to have confidence that the virus epidemic is over and that only a few old folks like me have died or are likely to die as a result. That is at least a few weeks away. But the market recovery may start to take place as soon as there is the first sign that the world is not going to end after all, which it will certainly not.

Moving into cash is one possible short-term reaction but the Bank of England have undermined that strategy by reducing interest rates to record lows. AJ Bell Youinvest have just announced that they will not be paying interest on cash in clients’ accounts any more. Other brokers (not many anyway) and banks will no doubt follow to cut their interest rates on deposits. But if there is an economic recession then holding cash, or simply spending it, is not a bad idea until the economy revives. Now is the time to cash in your shares and buy a new car or a house extension! Or for the altruists, now is the time to donate money to charity, particularly as the tax-year end is coming up.

Meanwhile the national media seem to have decided the Chancellor’s budget is an inflationary one of the spend-spend-spend variety. Why should the Government not borrow money for some required investment in infrastructure when it can borrow money at such low interest rates?

But how much influence do the Chancellor or the Governor of the Bank of England have over the real-world economy? Not a lot in essence when it is mainly driven by external factors and public sentiment.

While this plays out, I will not be dumping shares indiscriminately but I will be exiting those companies that may be particularly badly hit by the virus, if I have not already. That includes travel and holiday companies, airlines, entertainment venues, pubs and hotels, high street retail operations where footfall will decline, etc. But I may buy those companies where the share price has fallen because of the general rout when their income is not obviously threatened – for example because they have long-term contracts or guaranteed repeat business.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Market Crash and Abcam Impact from Coronavirus

This morning my stock market portfolio was a sea of red – down 5.6% at the time of writing at 9.30 am.  Not only have most shares fallen, but spreads have widened so it’s not even easy to pick up those shares that are now undervalued at a fair price. I think the answer here is to wait until the immediate panic is over before making any more decisions to buy or sell.

The major impacts on shares have been the threat of the coronavirus Covid-19, where the reality of the possible economic impact is finally sinking in, and the other has been the oil share price decline. It might be only short term but the impact of Covid-19 on China and northern Italy is clearly going to be substantial.

I don’t actually hold any oil company shares and it was just propitious that I said on February 14th when discussing electric vehicles that one should “sell BP and Shell perhaps”. The price of oil is down over 25% since Friday and the share prices of BP and Shell are down 16% and 18% respectively today at the time of writing. These declines have a major impact on the FTSE-100. Does that make them a bargain? Perhaps to dividend seeking investors but these are companies whose share prices are driven by oil/gas prices so they are not the kinds of companies I like to own.

One company I do own is Abcam (ABC) who published their interim results this morning. Revenue up 11% but adjusted profits down 20% with the share price down 7% after a sharper initial drop this morning. They report a £3 million revenue reduction from the Covid-19 virus from its early spread in China. But the broader China activity is now returning although still below pre-outbreak levels. The supply chain has been largely unaffected to date.

Cash generated from operations increased but free cash flow is down slightly mainly because of high levels of expenditure still being applied to “new ERP systems and processes” which is capitalised and which I have commented negatively on in the past. Well at least that expenditure is down from last year.

Notwithstanding the short-term impact of the virus, they give a positive outlook statement – “pleased with progress, strong fundamentals, confident in our future prospects, attractive long-term dynamics” are some of the phrases used. I think we might see a lot of similar statements from companies over the next few months. But adjusted earnings per share forecasts for this year are surely going to be downgraded somewhat at Abcam.

I am also not optimistic that the UK, USA or other western economies are going to avoid a widespread outbreak of the disease which will disrupt our lives and economy even if it is a relatively short-term impact.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

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 )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.