Investor Meet Company, Fevertree, Closet Trackers, Politics and the Environment

I recently came across a company called “Investor Meet Company” (see https://www.investormeetcompany.com/ ). They claim to enable individual investors to meet with company directors over the internet, i.e. via a digital web cast. The service is free to investors but there is a small charge to companies who take part.

The company was formed in 2018 by two founders, Marc Downes and Paul Brotherhood, who seem to have lengthy financial backgrounds and the web site looks professional. However, their contract terms are over complex and their privacy policy likewise so I am not rushing to sign up. They also invite you to provide details of companies you are interested in, which may be your holdings, which is not ideal. But if any readers have experience of this service, please let me know.

I mentioned Fevertree (FEVR) in my last blog post and Phil Oakley’s review of the business. Today the company issued a trading statement which was positive – it mentions “acceleration in key growth markets of the US and Europe in the second half”, but UK performance seems to be mixed. Growth in the USA is now expected to be c. 34% which is ahead of previous expectations. But the overall revenue forecast of £266 to £268 million is less than the previous consensus brokers’ forecast. The share price is up 7.8% today though. I may have to look at this business again because US growth is key to the share valuation.

The Financial Conduct Authority (FCA) have fined Janus Henderson £1.9 million for running two funds as “closet trackers”, i.e. actually closely tracking an index while charging high fees that are more normal for actively managed funds. This apparently was particularly obnoxious because they did not tell the investors in the funds that they were switched to a passive approach in 2011. The funds affected were Henderson Japan Enhanced Equity and Henderson North American Enhanced Equity. Investors have been paid compensation. Investors in funds need to be very wary that the fund managers of actively managed funds are actually putting in the effort and not sitting back and being a pseudo index tracker while charging high fees.

I watched some of the debate last night between Johnson and Corbyn but as it was so trivial in content I turned it off fairly quickly. I can imagine a lot of people did. The programme producer and compere can be mostly blamed for allowing such bland questions to which one could guess the responses and allowing evasions and irrelevant interruptions. The format of the US presidential debates is so much better.

Rather surprisingly I received a flyer in the post yesterday from an organisation called “Tactical Vote”. If I go to their web site it advises me that the best choice for me is to vote Labour in the Bromley and Chislehurst Constituency. The flyer makes it clear that their agenda is to keep the Conservatives out! But I suspect that they won’t get far in my constituency as Bob Neil had a 10,000 majority last time. If anyone was to switch it might be more likely be to the Brexit Party or the Liberal Democrats but there is not even a Brexit candidate standing so far as I can see. I am all in favour of “tactical voting” in some constituencies but we really need reform of the political system so that we have better representation. A transferable second vote system as we have for London Mayor is relatively simple. Tactical Vote seem to be pursuing a false agenda though; they should call themselves the “Labour Vote Promoters”.

One of the hot political issues, at least so far as the minority parties are concerned as the major parties are more focused on Brexit, the NHS and give-aways in the current General Election is the environment, i.e. how we become carbon neutral by 2050 or a date of your choice. Even the Conservatives wish us all to be driving electric cars, changing our home heating system and changing our way of life in other ways to avoid disastrous climate change. There was an interesting article in today’s Financial Times showing how this is quite pointless because China will soon be emitting more carbon from burning coal than the whole of the EU. They are expanding the number of coal power stations and the result will be to offset global progress in reducing emissions. In 2017 China produced 27% of world CO2 emissions, while the UK produced 1.2%. China’s emissions have been rising while the UK’s are falling so any extreme efforts by the UK are not likely to have much impact on the world scene.

However if you want to save the world and cut your heating bills (the latter is a more practical objective) I suggest looking at product called Radbot from Vestemi. The company was founded by a long-standing business contact of mine. It’s basically an intelligent radiator valve that monitors when a room is occupied and adapts to your usage.

Apart from that point, I consider there is so much misinformation being spread around about climate change and the impact of CO2 emissions that it is impossible to comment on the subject intelligently enough to refute much of the nonsense in a short blog article. But I do think it might be helpful to reduce the population of the UK which is just getting too damn crowded and leading to housing shortages, congestion on the roads and in public transport and other ills. That would be a better way of reducing emissions.

Part of the problem is that the NHS has become very good at keeping people alive despite what some politicians believe, while immigration has boosted numbers as well. You can see this in the latest forecasts for London’s population which is likely to grow by 18% to 10.4 million by 2041. See https://data.london.gov.uk/dataset/projections-documentation for more details.

Those are the issues politicians should be talking about.

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

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Fevertree Fall, Trading Times and More on HBOS/Lloyds

Last week when I spoke at the Mello event I talked about my investment winners over the past few years. One of them was Fevertree (FEVR) but I was asked why I no longer held the shares. I gave a brief explanation at the time but there is good exposition of the issues by Phil Oakley in this week’s Investors Chronicle.

Fevertree’s share price peaked at 3200p in May 2019 but it’s now about 1900p. It has declined so much in the last few months that I considered buying it back but it has also perked up in the last few days so it did not reach my target price. Phil’s article is headed “Fevertree may fall further”. This is what he has to say about the business: “The high selling price of its products make for high profit margins. Combine this with an asset-light balance sheet and you have a recipe for an outstanding business with high returns on investment and lots of free cash”. But he is wary of their reliance on sales of tonic and on the UK market.

Will they manage to continue to achieve high growth rates? One concern I have is that every luxury hotel or good restaurant I have visited in the last two years has served Fevertree in my gin and tonic. Growth in the UK must surely be becoming limited. So future growth surely depends on them making a success of the US market. In their interim results in July the company talked about “encouraging momentum in the US” but we have heard nothing more since. Phil Oakley also points out that their competitors have reacted to the success of Fevertree with their own “premium” mixer offerings. Future growth is still well discounted in the current share price in my view so I am not rushing to jump back in until the picture becomes clearer.

Fevertree is a great branding and marketing story but I fear that there are ultimately no barriers to entry in their market. Others can surely copy their business model relatively easily.

Another article in this week’s Investors Chronicle was on changing market trading times. Would shorter hours improve markets is the question they ask? The UK LSE has some of the longest trading hours in the world. It opens at 8.00 am and closes at 4.30 pm but there are opening and closing auctions before and after those times.

RNS announcements are issued starting at 7.00 am so anyone who wishes to be on top of the news has to get up early. Many older private investors like me would prefer a later market start time. Although I tend to make most of my trades in the early morning as I review investments in the evening and make decisions on what to do the next day, it seems much of the market trading volume takes place in the last hour of the trading day. A more concentrated trading day might actually improve liquidity and avoid the volatility one sees in small cap stocks. In summary I am all in favour of a shorter trading day – 10.00 to 4.00 pm would be fine and even a break for lunch as they have in Japan would not be amiss.

Lastly, as a follow up to my previous blog story on the failure of the HBOS/Lloyds legal claim, I would like to point out that the judge made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and hence they might be considered to be negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I have written to the Financial Conduct Authority (FCA) suggesting that it needs to investigate these matters as a breach of the Prospectus Rules surely is a matter that makes the transgressors liable to sanctions under the Rules and there is no statute of limitation in regard to these matters. I suggest other investors in Lloyds TSB should do likewise and I have suggested ShareSoc should also take up this issue.

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

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The Vultures are Circling – Woodford, Carpetright et al

With the demise of the Neil Woodford’s empire and the winding up of the Woodford Equity Income Fund, investors are looking for whom to blame – other than themselves of course for investing in his funds. One target is Hargreaves Lansdown (HL.) and other fund platforms who had it on their recommended or “best buy” lists, including long after the fund’s problems were apparent. Now lawyers are only too glad to help in such circumstances and at least two firms have suggested they can assist.

One is Slater & Gordon. They say they are investigating possible claims against HL. and that “We’re concerned to establish if there was any actionable wrongdoing or conflict of interest by Hargreaves Lansdown in continuing to include Woodford funds on their ‘Best Buy’ Lists if it had concerns as to their underlying investments. We’ll also be looking at the price achieved when buying and selling instruments, such as ordinary shares, on the Hargraves Lansdown platform and whether or not this represents Best Execution”. You can register your interest here: https://tinyurl.com/yyrhbfb3

Another legal firm looking at such a claim is Leigh Day who say they already have 500 investors interested in pursuing a case. See https://tinyurl.com/y6r2buav for more information.

Having been involved in a number of similar legal cases in the past, my advice is that there is no harm in registering an interest but do not pay money up front and certainly not until the basis of any legal claim is clear. In addition bear in mind that it would be very expensive to pursue such a claim and lawyers may be willing to do so simply in anticipation of high fees when there is no certainty of winning a case. How is the case to be financed is one question to ask? Funding such cases by private investors alone (the majority of HL. clients) is likely to be difficult so “litigation funding” is likely to be required which can be expensive and erode likely returns. Insurance to cover the risk of losing the case is also needed and expensive.

Yesterday saw news announcements from three companies I have held in the past but all sold some time ago. The most significant was from Carpetright (CPR) which I last sold in 2010 at about 800p. It’s been downhill ever since. The Daily Telegraph ran an article today suggesting that this was a zombie company and that it was a good time of year for zombie slaying. After the announcement of a trading update and possible bid yesterday the share price is now 5p.

The Board of Directors “believes that Carpetright is performing well….” and “the prolonged sales decline appears to be bottoming out….”, but the company has too much debt and needs refinancing. One of its major lenders and shareholders is Meditor who have proposed to make a cash offer of 5p per share for the company. The share price promptly halved to that level because it is likely that the offer will be accepted by enough shareholders to be approved. So it looks like we will have a company with revenues of £380 million (but no profits), sold for £15 million. Founder Lord Harris, who is long departed, must be crying over this turn of events. But it demonstrates that when a company is in hock to its bankers and dominant shareholders, minority investors should steer clear.

Another announcement was from Proactis Holdings (PHD) which I sold fortuitously in mid-2018. They announced Final Results yesterday. Revenues increased by 4% but a large loss of £26 million was reported due to a large impairment charge against its US operations. The business has undertaken an operational review and restructuring is in progress. It has also been put up for sale but there is little news on potential “expressions of interest”. Just too many uncertainties and debt way too high (now equal to market cap) in my opinion.

The third announcement was from Smartspace Software (SMRT) which I sold earlier this year at more than the current share price as progress seemed to be slow and I wanted to tidy up my over-large portfolio. It reported interim results where revenue was up 57% but there was a large loss reported (more than revenue). There were some positive noises from the CEO so the share price only fell 0.7%. The company has some interesting products for managing office space but it’s a typical “story” stock where the potential seems high but it has yet to prove it can run a profitable business.

I have also noticed lately that the fizz has gone out of the share price of Fevertree (FEVR). It’s been falling for some time. I sold it in 2018 at a much higher level. It still looks quite expensive on a prospective p/e basis. Overall revenue is still growing rapidly but the USA is still the big potential market yet to be proven. I like the business model and the management even if I don’t personally like the main product. But perhaps one to keep an eye on. But generally buying back into past investments can be a mistake.

Given my track record on the above, perhaps my next investment book should not be on choosing new investments but on choosing when to sell existing ones?

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

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John Murphy, Branding, Fevertree, Downsizing, McCarthy & Stone & the Motor Industry

In yesterday’s Financial Times there was an article on John Murphy, my ex-brother-in-law. It covers his “downsizing” which in his case means moving from three houses (Tuscany, Suffolk and Islington) to one in London. Although I rarely meet him nowadays as he divorced my sister many years ago, he has an interesting history. He developed the first large branding and trade mark consultancy (Interbrand) and I worked with him briefly in it. He taught me the importance of strong branding and protectable trade marks. He subsequently was involved in the re-establishment of Plymouth Gin and claims to have started the whole fashion for gin which was otherwise a declining market at the time. Charles Rolls, one of the founders of Fevertree (FEVR), worked with John at Plymouth and that company is another good example of how important strong branding is in consumer products. The FT article is here: https://www.ft.com/content/c48fcdec-3071-11e9-8744-e7016697f225

On the subject of downsizing, I visited the latest McCarthy & Stone (MCS) “retirement living” development in Chislehurst recently – Shepheards House. It’s recently been completed and is not far from where I and my wife currently live. And very nice it is too. A 2-bedroom apartment costs £552,000 but the big problem would be downsizing to fit all our offices (3 including two “work rooms” for my wife), books and art into the one apartment. They have limited storage space in them. My wife suggests we would need two of them. Don’t think we are yet old enough to justify doing this and the economics of two of them don’t work.

Just reviewing the latest share price of McCarthy & Stone, which I held briefly, it’s still only about half the price at which it did an IPO in 2016. With the housing market in London and the South-East declining that is not going to make life easier for the company, although they seem to have sold the apartments in Shepheards House very rapidly. Profits were down last year and build costs are increasing which combined means the shares are looking relatively cheap now. It’s a typical problem with IPOs – the sellers know when it’s a good time to sell.

There was a good article on the UK motor industry in the main section of the FT yesterday under the headline “forced into the slow lane”. Apart from the mention of the impact of Brexit, which the FT has been repeatedly promoting with negative articles and editorial in the last few months, much to my annoyance, it does explain why the motor industry is facing difficulties.

It’s not just Honda’s decision to close Swindon, which has nothing to do with Brexit, as a Honda executive spelled out, but there is a general malaise in the industry which is also affecting German car manufacturers. The abrupt policy change over diesel vehicles, which has made them unsaleable to many people, has tripped up many manufacturers such as JLR and the fact that the EU has now negotiated a tariff-free trade deal with the EU means that Japanese car manufacturers no longer need to bother with manufacturing in Europe. That is particularly so when their markets in the Far East are growing while Europe is shrinking (Honda’s production at Swindon has been declining).

Vehicle sales have been dropping in the UK in what is a notoriously cyclical industry. It’s one of those products that does wear out, but new purchases can always be put off for some months if not years if there is uncertainty about technological change. With vehicles lasting longer than they ever did, there is no reason for buyers to acquire new vehicles at present.

Perhaps the Government should ask Tesla or other new electric car manufacturers if they want a ready-made facility and reliable workforce that will become available soon? In a couple of years’ time, the market for vehicles may well pick up.

But John Murphy’s decision to stop owning a car as part of his downsizing is a sign of the times also. When I first knew him, he owned the revolutionary Citroen DS and subsequently owned Bentleys. It must be quite a change for him.

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

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A Bad Day in the Market, but Good News from Unilever and BEIS

It was a bad day in the market yesterday, with the FTSE All-Share falling over 1%. This seems to have been driven by a sell off in bonds. Equity prices are usually linked to bond prices simply because as bond yields rise from a fall in bond prices, it becomes more attractive to hold bonds relative to equities. That particularly applies to shares that are “bond proxies”, i.e. ones bought because of their high yields for income seeking investors.

These changes have been driven by the realisation that the US economy is booming. The Federal Reserve has already raised US interest rates and is therefore likely to do so again if the US economy continues to race ahead. But a booming US economy is of course good news for many companies. Higher interest rates may mean that some companies pay more on their debt but that it a longer-term impact and many “new economy” companies do not have any debt.

When markets are falling in general, there is no place to hide. My over-diversified portfolio, mainly in UK small cap stocks, fell about 1%. Not every share declined but the majority did. It affected particularly highly rated, go-go stocks such as Fevertree (FEVR) which was down 8% yesterday. I am glad I now only have a nominal holding in the company. But also affected were many investment trusts which I hold as their typical low liquidity compounded by a few private investors panicking drove down the prices. Some fell more than the underlying shares they hold.

Property companies have also been affected as interest rates have an impact on their business model, despite the fact many have locked in low rates on long-term debt. Safestore (SAFE) for example was down 3.9% yesterday (I hold it).

The share price declines spread like a contagion to many other stocks who should be positively affected by a booming US economy and not impacted by higher interest rates. The rise in interest rates is hardly a surprise though it has been well signaled in advance in both the US and UK. It was unrealistic to expect the historically exceptional low interest rates to continue forever.

My reaction when there is carnage in the stock market is to stand back and wait to see whether it develops into a trend or is simply a short-term blip. There can be buying opportunities if the reaction to economic news is too severe. But interest rates are nowhere near low enough yet to cause me to abandon the stock market and move into bonds. I feel there is more destruction to come in the latter. 

Unilever and Enfranchising Nominee Shareholders

Today we have some good news from Unilever. They have backed down on their proposal to merge their dual legal structure. The announcement said “We have had an extensive period of engagement with shareholders and have received widespread support for the principle behind simplification. However, we recognise that the proposal has not received support from a significant group of shareholders and therefore consider it appropriate to withdraw”.

There was opposition from both individual shareholders and institutions in the UK and there was a risk that they might fail on the Court hearing vote to gain enough support. It’s always good when shareholders make their voice heard, although it still leaves the issue that shareholders in nominee accounts were likely to be disenfranchised.

The good news in that regard is that I have received a letter today from the BEIS Department which says “BEIS is sponsoring a project by the Law Commission to examine the UK system of intermediated securities”. I will try and find out more, but don’t get too excited – it might not report before 2020!

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

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