Bad News for the Housing Market and On-Line Retailers

The news in the housing sector is all bad. Banks have stopped providing mortgages and builders have stopped building houses (Redrow announced it was closing all its sites this morning). Estate agents are also giving up as nobody wants to have strangers wandering around their house and there are few new buyers. Who would look to buy a house given the economic uncertainty and with everyone’s jobs under threat? Rightmove previously announced it was discounting all its bills to agents but they have now announced that the proposed final share dividend is being cancelled.

Did you think on-line retailers might be able to continue operating? Think again. Next has announced it is temporarily closing its on-line operations including warehousing and distribution. Apparently “colleagues” feel they need to be at home. This mirrors what I have seen from a couple of smaller on-line clothing suppliers I use. They both announced closure in the last few days. Will Boohoo, ASOS and Amazon be able to continue to operate? Only supermarkets seem reasonably sure to be able to stay in business over the next few weeks.

This gloom over the country’s business status was echoed in the comments of Paul Scott on Stockopedia. He said this morning: “Hundreds of £billions in economic activity is being killed off, with ruinously expensive compensation schemes being dreamed up. For what benefit? We’re likely to end up with millions of unemployed, many thousands of destroyed businesses, all of which might have slowed down the spread of the virus a little”. He has lost confidence in the recent stock market bounce and thinks losses will be ruinously high in many companies. I agree with his comments. Certainly in many sectors it’s a question of which companies will survive the year, not whether they will make any profits or pay any dividends.

The only positive glimmer is that Anthony Bolton, who ran Fidelity’s Special Situations fund until 2007 very successfully, is apparently moving back into the market to purchase selected stocks according to an article in the Financial Times. He says “at these prices there are really interesting opportunities”. Certainly the key is to be very selective even if you believe the crisis will be over by the end of the year.

Meanwhile I am sat in the bomb shelter otherwise known as isolating at home. These are such momentous times that I decided to start writing a diary just as my father did during the second world war. It may interest my offspring in due course as reading my father’s diary did after it came to light 37 years after he died. My diary may be a much shorter one though if I catch the virus.

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

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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 )

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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 )

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Next Results, Brexit Politics and Statpro Offer

Retailer Next (NXT) published their interim results on Thursday (19th Sept). This is a good example of a retailer making a successful transition from shops to internet sales. Earnings per share were up 8.8% with some impact from a change to adopt IFRS16 (lease accounting) and share buy-backs. Overall revenue was up 3.7% with online sales up 12.6% but retail sales down 5.5% and now less than the online figure. One has to ask, if Next can do this why could not M&S who recently got booted out of the FTSE-100? I suggest management is what makes the difference.

This what the CEO had to say in a detailed analysis of performance last year, under “Direction of Travel”: We are often asked: “What will the high street look like in 10 years’ time?”  The only honest answer to this question is that we do not know; we can see the general direction of travel but can predict neither the speed nor endpoint for the changes that lie ahead. Our approach is to build as much flexibility into our operations and cost base as is possible to minimise the negative effects of falling Retail sales and maximise opportunities for growth Online.  This means a constant process of reinvention and experimentation within our business, whilst preserving the integrity of our brand, the calibre of our people, quality of the operations and the profitability of the Group.  The task remains extremely challenging, but with more than half of our sales now coming from our Online and Finance businesses, it feels like we are moving in the right direction”.

CEO Lord Wolfson said that they would cut prices by 2% if the UK leaves with a Brexit deal. This is due to the government’s temporary tariff regime for a No Deal Brexit, which aims to minimise costs to businesses and consumers while protecting vulnerable industries. But he would prefer to see a deal done.

It was interesting watching Lord Pannick performing in the Supreme Court over the challenge to the prorogation of Parliament which is undoubtedly being motivated by opposition to Brexit (I simply don’t believe the motivation is otherwise – Parliament has had plenty of time to debate Brexit issues and will still have more time). As the Government’s lawyer said in court, if MPs don’t like what the Prime Minister is doing they can always call a “no confidence” vote.

Lord Pannick is a very clear speaker and a good advocate of any case. I recall him representing the Northern Rock shareholders over the nationalisation of that company without compensation and actually congratulated him on his performance at the end of the case. He lost that one though. I suspect he may lose this latest, or the result will be inconclusive but we will no doubt hear in a couple of days. It does seem to me though that it is time the UK adopted a written constitution to avoid such legal challenges and not have lawyers debating political issues. More clarity is required on what is permissible and what is not, and what the powers of the executive have versus Parliament. The role of the Prime Minister and other Ministers is being undermined by MPs trying to dictate day-to-day matters such as foreign relations with the EU which undermines their historic responsibilities.

Meanwhile the Financial Times ran with a headline today saying the Labour Party’s plans to expropriate 10% of shares would cost pension funds £31 billion. It might also cost readers of this blog who invest directly in shares or in funds a very large amount. Thankfully the chance of the Labour Party winning any general election seems low as not only is the Party in some disarray over their Brexit policy but they are dropping in the opinion polls. This is of course why Jeremy Corbyn refuses to support the call for a General Election. He is also rated the worse opposition leader in the last 45 years according to one opinion poll. Those who oppose Brexit are now choosing the LiberalDemocrats while those who support Brexit are supporting the Conservatives or the Brexit Party. Only if the Conservative vote is split would Labour have any chance of winning an election. But a General Election can be a very different battle ground to polls driven by single issue politics.

On Friday (20th Sept) AIM listed Statpro (SOG) announced a recommended takeover bid from US company Constellation Technologies. The share price promptly jumped over 50% to near the offer price. I held shares in this company for a number of years. Bought in 2005 originally and sold the last in 2015, suffering an overall loss. So that’s an example of lack of patience. The company always seemed to have potential but profits were patchy – it lost money in the last three years. Both companies operate in the investment analysis and reporting markets so this is a complementary acquisition. I see no reason to turn it down.

Bearing in mind my previous comments on technology stock valuations, it is on a forecast p/e of 8 but that is probably optimistic given that it reported a loss recently at the half-year and has a habit of disappointing. The bid values the company at 2.7 times historic revenue though which is probably reasonable assuming that Constellation can strip out a lot of the overheads. That always needs to be taken into account when looking at technology stocks. Often a trade buyer will pay more than market investors, particularly if they wish to acquire technology or customers.

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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