Tag: Tesla

Elon Musk Biography Book Review and Comments on Twitter Takeover

It’s summertime and with markets quiet it’s time to look for some holiday reading. One book I can recommend is “Elon Musk” by Ashlee Vance. Published in 2015 it covers the early life of Elon and his early business ventures at Zip2, X.com/Paypal, SpaceX and Tesla.

It reveals a lot about his personality and will to revolutionise the space exploration and banking sectors. Like Bill Gates and other successful entrepreneurs he clearly has a forceful manner and does not suffer fools gladly.

The subtitle of the book is “How the billionaire CEO of SpaceX and Tesla is shaping our future”. If you want to know how to become a billionaire and the richest person in the world (roughly $250 billion at the time of writing) then this is a book well worth reading.

Elon’s career was not without its problems and failures. SpaceX rockets blew up repeatedly and technical problems with the first Tesla car delayed its public launch (over-heating batteries and breaking transmissions). But despite consuming most of his fortune from the sale of Paypal he persisted and eventually they were successful products.

The book also provides some interesting background on the VC world in Silicon Valley in the 1990s and 2000s, which I was familiar with from running a software company in the period and having an office in Los Altos.

Why was Elon so successful? He was willing to take risks and focussed on revolutionising sectors such as space exploration with low-cost launches, the banking world with internet banking and the automobile industry with electric vehicles when other people just said the goal was impossible. But he was not a one-man band and made sure he hired the best people as employees.

He could clearly be persuasive in raising capital when needed helped by the availability of funding for new ventures at the time.

In summary one of the best books on Elon Musk and a New York Times bestseller.

The latest gamble by Elon is paying $44 billion in cash for Twitter. As a user of Twitter it has always seemed to me to be an essentially simple software product that should have been low cost to develop and maintain. Since Elon Musk took the reins at Twitter as its CEO in October 2022, its workforce has dropped by 80% and reportedly hovers at around 1,300 employees, according to CNBC.

There was certainly an opportunity there to massively reduce costs. But other people have seen that also with the launch of “me-too” products that have imitated Twitter functionality. Will they be successful? I doubt it.

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

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Allianz Technology Trust Webinar and Covid Impact

Yesterday (26/1/2022) I attended two interesting webinars. These overlapped in time and it’s rather tricky to watch two at the same time but I think I got most of the interesting parts covered.

The most important one was a presentation by Allianz Technology Trust (ATT) organised by ShareSoc. This has been badly hit by the fall out in the technology sector in the last few weeks which has affected my holding in the Trust and many other holdings in my portfolio – the rout continued this morning after some recovery yesterday. I commented on this situation a week ago when I said “My feeling is that maybe prices of some of the stocks favoured by these companies have become over-inflated but that I still feel that they are better long-term bets than the traditional “value” plays. The world has been changing and technology has responded to meet the new challenges. Those companies that will meet the new demands of world markets are the ones where profits will rise in future”. So it was interesting to hear what investment manager Mike Seidenberg had to say about it.

He quoted the CEO of Microsoft who reportedly said “we are part of the digital transformation of businesses”. Mike suggested companies need to become digitally transformed because of the impact of the Covid epidemic.

In response to a question about the higher valuations of businesses they hold he agreed they are on higher P/Es than the market but they are also higher growth. What are they excited about? He answered collaboration software and automation to reduce the cost of labour – there is a global labour shortage.

He was asked why they sold out of Tesla but bought it back so it’s now the second largest position. Mike suggested that Tesla was now taking cost out of the product by vertical integration giving them a strong competitive position and there was a “halo” effect as Tesla cars hold their resale value. With more EVs in the market, more people now see them as mainstream. This bullish view of Tesla was backed up on the same day by results from the company as it reported a record net profit of $2.3bn in the fourth quarter of 2021. Despite some supply chain issues Elon Musk expects sales volumes to grow by more than 50% this year.

Another question raised was on performance fees in the trust and why invest in an active manager rather than an equivalent index fund. Mike suggested you are investing in a team and a process – you need to look at the long-term performance.

He concluded by saying it was a distinct advantage being immersed in the technology in the Bay Area which I can well understand being familiar with the area. In fact they have an office in Francisco on Mission Street in downtown San Francisco.

This was very amusing as on the same day the Financial Times ran an article on how San Francisco was “scaring away the tech crowd” due to crime and homelessness. Housing is also very expensive and technology companies have been moving employees to other cities. The social problems in San Francisco have been known about for many years and the Mission District was never an area to be wandering about in late at night. The FT article was clearly written by someone with little knowledge of the area.

In summary Allianz Technology Trust still looks to be well managed to me and I did not perceive any concerns with their market stance but clearly as they are focussed on technology companies they won’t be avoiding the general trends in that sector.

The other webinar I attended was one organised by Kidney Research UK which covered the impact of the Covid epidemic. As all of my family, other than I and my wife, have recently caught the disease there was interesting data on vaccination impact. I actually had a fourth vaccination two days ago because it seems that 25% of those with poor immune systems have not been creating antibodies. This was data from the “Melody” study in which I participated. Whether a fourth dose of a vaccine might help has yet to be determined.

But the heart-warming session was a talk by a young lady named Andrea who had been on kidney dialysis since being a baby but had recently had a transplant from a relative. She said she now felt “invincible”. It was a great example of how kidney transplants transform the life of such patients.

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

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Boris Johnson Not Backing Down and the Technology Stocks Bubble

Today I received an email from the Conservative Party signed by Boris Johnson and entitled “I will not back down”. The first few sentences said:

“We are now entering the final phase of our negotiations with the EU. The EU have been very clear about the timetable. I am too. There needs to be an agreement with our European friends by the time of the European Council on 15 October. If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on. We’ll then have a trading arrangement with the EU like Australia’s. I want to be absolutely clear that, as we have said right from the start, that would be a good outcome for the UK”.

But he says the Government is still working on an agreement to conclude a trade agreement in September. However the Financial Times reported that there are problems appearing because the “UK government’s internal market bill — set to be published on Wednesday — will eliminate the legal force of parts of the politically sensitive protocol on Northern Ireland that was thrashed out by Mr Johnson and the EU in the closing stages of last year’s Brexit talks”. It is suggested that the EU is worried that the Withdrawal Agreement is being undermined. But reporting by the FT tends to be anti-Brexit so perhaps they cannot be relied upon to give a balanced commentary on the issues at present.  

Of course this could all just be grandstanding and posturing by both the UK Government and the EU to try and conclude a deal in their favour at the last minute. But we will have to wait and see what transpires.

Well at least it looks like Brexit news will dominate the media soon rather than the depressing epidemic stories.

Technology Stocks Bubble

Investors seem to have been spooked last week by the falls in the share prices of large technology stocks such as Apple and Tesla (the FAANGs as the group are called). This resulted in overall market falls as the contagion spread to many parts of the market, particularly as such stocks now represent a major part of the overall indices. I am glad to see my portfolio perked up this morning after substantial falls in my holdings of Polar Capital Technology Trust (PCT) and Scottish Mortgage Investment Trust (SMT) both of whom have big holdings in technology growth stocks although they are not index trackers.

I’ll give you my view on the outlook for the sector. Technology focused companies should be better bets in the long-term than traditional businesses such as oil companies, miners and manufacturing ones. There are strong market trends that support that as Ben Rogoff well explained in his AGM presentation for PCT which I mentioned in a previous blog post.

But in the short term, some of the valuations seem somewhat irrational. For example I consider Tesla to be overvalued because although it has some great technology it is still in essence a car manufacturer and others are catching up fast. Buying Tesla shares is basically a bet on whether it can conquer the world and I don’t like to take those kinds of bets because the answer is unpredictable with any certainty. I would neither buy the shares nor short them for that reason at this time. But Tesla is not the whole technology sector.

Some technology share valuations may be irrational at present, but shares and markets can stay irrational for a very long time as different investors take different views and have different risk acceptance. In summary I would simply wait to see if there is any certain trend before deciding to buy or sell such shares or the shares of investment trusts or funds focused on the sector.

Investment trusts are particularly tricky when markets are volatile as they often have relatively low liquidity and if stocks go out of favour, discounts can abruptly widen. Trading in and out of those kinds of shares can be very expensive and should be avoided in my view.

I don’t think we are in a technology stocks bubble like in the dot.com era and which I survived when anyone could sell any half-baked technology business for oodles of money to unsophisticated investors. But it is worth keeping an eye on the trends and the valuations of such businesses. Very high prospective/adjusted p/e ratios or very high price/sales ratios are still to be avoided. And companies that are not making any profits or not generating any free cash flow are ones of which to be particularly wary (Ocado is an example – a food delivery company aiming to revolutionize the market using technology). Even if the valuations are high, if a company is achieving high revenue growth, as Ocado is, then it might be able to grow into the valuation in due course but sometimes it just takes too long for them to do so. They risk being overtaken by even newer technologies or financially stronger competitors with better marketing.

Investors, particularly institutional ones, often feel they have to invest in the big growth companies because they cannot risk standing back from the action and need to hold those firms in the sector that are the big players. Index hugging also contributes to this dynamic as “herding” psychology prevails. But private investors can of course be more choosy.

This is where backing investment trust or fund managers who have demonstrable long-term record of backing the winners rather than you buying individual stocks can be wise. Keeping track of the factors that might affect the profits of Apple or Tesla for an individual investor can be very difficult. Industry insiders will know a lot more and professional analysts can spend a lot more time on researching them than can private investors. It is probably better for private investors to look at smaller companies if they want to buy individual stocks, i.e. ones that are less researched and are somewhat simpler businesses.

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

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Should I Buy Shares in Tesla, and ShareSoc Seminar Report

Should I buy shares in Tesla, or perhaps short the stock?  This thought was prompted by the recent large jump in the share price which has made the company worth more than Ford, General Motors and BMW put together. But there is still a considerable short interest in the company based on the fact that the financial ratios look far fetched and are discounting a lot of future growth. Plus of course the doubters worry about the leadership of Elon Musk.

The technology in Tesla cars is brilliant (I have had a test drive of a Model S) and is claimed to be way ahead of competitors. But other auto makers are fast catching up. Announcements by the UK Government that no diesel, petrol or hybrid vehicles can be sold after 2035, or even 2032 as the UK seems to be making decisions on the hoof on this matter, and by EU directives that promote the sale of zero emission vehicles has meant that everyone has realised the future is electric. That’s even if there are doubts about the grid capacity and how people will recharge them. As a result there are plenty of new electric vehicles from major car manufacturers being announced.

But I have decided not to purchase or short Tesla shares. There is one simple reason why. It’s basically a bet as to which car manufacturer will end up the most successful and make real money as a result. It’s not even a “binary bet” as there are many horses in the race. I simply have no clue as to which will be the winners or losers. So it’s not the kind of investment I like. It’s for speculators not investors.

There was a very relevant quotation repeated by Kate Burgess in the FT yesterday on this subject. Apparently Warren Buffett said “The wise bet in the early days of cars was to short pony traps rather than try to pick the winners”. So sell Shell and BP perhaps, although that might be a simplistic analysis as they are involved in gas and plastics production also. But you should disregard BP’s claim to be zero carbon by 2050 – it’s only window-dressing. Instead buy software companies and battery manufacturers or those helping to develop automated vehicles such as AB Dynamics (ABDP).

For more analysis of Tesla you could also read the latest edition of Shares magazine who have an article headlined “Why Tesla shares can’t continue to motor”. It covers the arguments for and against the company in some depth.

A second reason for not investing in the company is that this is clearly a stock that is very heavily researched by institutional investors, even if they have ended up with contrary opinions. How could I as a private investor without a big team of researchers behind me hope to come to better conclusions? I may find it better to simply rely on funds/trusts who are holding the company (Scottish Mortgage has a big stake in Tesla for example). They can also follow the company closely when I cannot.

I find it easier to make money as a direct investor in companies in smaller or mid-cap stocks. I often get wrong-footed by the changing views of big company analysts.

Which brings me onto the subject of the ShareSoc seminar I attended on Wednesday (12/2/2020). These events focus on smaller companies so they tend to be a very mixed bag. I will give some impressions of the companies presenting this week:

DX Group (DX.): This is a parcels and document delivery service. In 2015 it hit difficulties after a failed strategy and the next two years saw big losses. It’s been in turnaround mode since and is at least making profits now on an EBITDA basis. But bottom-line profits and positive cash flows are still in the future. They seem to be investing a lot in improving IT support and in other areas to improve quality of service which seems to be the only thing that might differentiate them from competitors.

My conclusion: insufficient differentiation from competitors and still weak financial fundamentals (e.g. low current ratio even excluding subscription liabilities) so the future may be bright but is it really “well-placed…..” as a FinnCap note on the company says. Document delivery is a declining market and I doubt they can fix that, and the freight market is fragmented with lots of competitors. The management who presented made a good pitch and they have experience of turning around a similar business so there are some positives while parcels will always need physically delivering but there are too many negatives at present I suggest. But some investors like recovery stories.

Diaceutics (DXRX): This company is a data analytics and implementation services company which services the global pharmaceutical industry. It provides diagnostic services which are very important for developing and applying personalised treatments, or “precision medicines” as they are sometimes called. It is primarily service based, with projects being sold to pharma companies but is it also now developing a “platform” which will contain patient data. This is effectively a “big data” model which is one of the hot buzzwords of late.

The presentation was short on financial information – like a lot of those from pharma companies the approach was to sell you on what they can do to cure the millions of cancer patients by developing better treatments. It’s the “gold at the end of the rainbow” syndrome. Looking at the financial profile they are making profits but the prospective p/e is sky high. Clearly punters (or should I say investors) in the shares think they will be a winner.

But I can’t say I was convinced by the presentation. There are also other companies that seem to be developing platforms to hold/analyse patient and drug data such as Open Orphan and Renalytix AI plus no doubt some US organisations. I would need to get a much better understanding of what they were developing and how it was differentiated from competitors, before investing in the company as it was certainly not clear from the presentation. There was also no indication of how they would make money from the new “platform” while I don’t generally like project based businesses.

SDI Group (SDI). Formerly called Scientific Digital Imaging, this is a company I hold but had not seen them present before. The company is a conglomerate of small technology businesses which it has acquired in the last 5 years (11 in all). All the acquired companies are profitable. Mike Creedy, the CEO, was the lead speaker and he is clearly an energetic person. He spoke rapidly.

The business model is similar to Judges Scientific – buying small companies in niche sectors cheaply and then letting them run independently with the management retained. Only treasury functions are centralised.

They like to buy businesses on 4 to 6 times EBIT and have done placings to finance the deals. Private shareholders can be left out as they don’t have time to do open offers although they have used Primary Bid to raise money in the placings.

They don’t do significant business in China where they operate through distributors which is a common question of late. The company has no significant patents or other IP.

The company has been widely promoted to private investors and hence has become highly rated. Only recently has the share price fallen back slightly, but it still reflects a lot of growth expectations. Perhaps the key question that comes to mind is “how many small companies can be acquired before the whole company becomes unmanageable”? There does not seem to be much synergy between the acquired businesses so the company is really a financial construct that needs to keep acquiring to grow profits. Using highly rated equity to buy more lowly rated companies is a good way to grow profits. But other than that I did not identify any concerns.

NVM (Northern VCTs). Charles Winward then spoke about the Northern VCTs who are currently raising more equity. The Northern VCTs are managed by NVM who were recently acquired by Mercia. I hold shares in the Northern VCTs and have written about their past performance previously.

Mr Winward covered his background in early stage development capital which is now important with the changed rules for VCT investment. He was also a director of Tracsis for a number of years which has been a very successful small cap technology company which I hold. Apparently it was not always a smooth ride there, which is news to me, but which reflects the typical problems of early stage businesses.

He suggested that the returns on development capital were improving – it is no longer an area in which to lose money. Comment: this probably simply reflects the valuations being put on early stage companies when they are still loss-making rather than some great improvement in profitability. Hope is being valued highly of late.

The valuations of Tesla (who have just raised another $2 billion via an equity placing) and Diaceutics are a reflection of the current market view of the future prospects of technology companies.

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

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AB Dynamics, Self-Driving Cars and Global Warming

AB Dynamics (ABDP) published some very positive interim results this morning. Revenue up 60%, pre-tax profit up 95% and it looks like it should easily meet analysts forecasts for the full year. The share price is up 9% so far today, at the time of writing. I hold the stock.

The company specialises in testing systems for major car manufacturers including a range of driving robots, soft vehicle and pedestrian targets and driving simulators. This is just what is needed to test the new Advanced Driver Assistance Systems (ADAS) and autonomous vehicles (“self-driving” vehicles) that all car manufacturers are now investing a large amount of money in developing.

For example Elon Musk of Tesla recently predicted that his cars will have self -driving capability by mid-2020 – they just need the software upgrading to achieve that he claims. He also promised a fleet of “robo-taxis” by the same date. These claims were greeted by a lot of skepticism and quite rightly. This is what ABDP had to say on the subject in today’s announcement: “There will be many phases to the development of fully autonomous vehicles and we foresee extended periods of time before they can satisfy a significant part of society’s mobility requirements.  There remain significant barriers to adoption including technical, ethical, legal, financial and infrastructure and these challenges will result in the incremental implementation of ADAS systems over many years to come. The ongoing regulatory environment and consumer demand for safety are also driving technological advancements in global mobility requirements and this provides a highly supportive market backdrop to the Group’s activities”.

As an active member of the Alliance of British Drivers, I can tell you that they are very wary of self-driving vehicles. None of the vehicles under test offer anything like the reliability needed for fully-automated operation and expecting human operators to take over occasionally (e.g. in emergencies where the vehicle software cannot cope), is totally unrealistic. In other words, even “level 3” operation for self-driving vehicles which requires drivers to take over when needed is fraught with difficulties and offers little advantage to the user because they have to remain awake and alert at all times, something not likely to happen in reality.

But even if that future is unrealistic, ABDP should still find a big market for testing of Autonomous Emergency Braking (“AEB”) and other ADAS systems.

Extinction Rebellion and their supporters who have been blocking London’s roads lately seem to want to remove all vehicles from our roads in the cause of reducing CO2 emissions which they claim is the cause of global warming (or “climate change”). I won’t even attempt to cover the latter claims although it’s worth stating that some dispute the connection and that climate change is driven by natural phenomena and cycles. But three things are certain:

  1. Reducing carbon emissions in the UK alone will have negligible impact on world CO2 emissions. China, the USA and other developing countries dominate the sources of such emissions and China’s are still growing strongly due to their heavy reliance on coal-fired power stations for electricity generation. China now produces more CO2 emissions than the USA and EU combined and is still building new coal-fired power stations. The UK now runs much of the time with no use of coal at all and rising energy contribution from wind-power and solar although gas still provides a major source.
  2. Environmental policies in the UK and Europe have actually caused many high energy consumption industries to move to China and other countries, thus enabling the UK to pretend we are whiter than white but not solving the world problem.
  3. A typical example of this approach is the promotion of electric vehicles. A recent article in the Brussels Times suggested that in Germany electric vehicles generate more CO2 over their lifespan than diesel vehicles. The reason is primarily the energy consumed in battery production – for example a Tesla Model 3 battery might require up to 15 tonnes of CO2 to manufacture. Electric car batteries are often manufactured in locations such as China although Tesla produces them in the USA.

In summary the UK and other western countries are being hypocrites and environmental campaigners are demonstrating in the wrong places and for the wrong reasons. The real problem is too many people in this world wanting to move to a high energy consumption lifestyle as we have long enjoyed in the western world. Population control is the only sure way to limit air pollution or CO2 emissions but nobody is willing to face up to that reality. In the meantime we get a lot of virtue signaling from politicians but a failure to tell the public the facts of energy consumption and production. Energy consumption is still growing world-wide and will continue to do so due to demographic changes and the desire for western lifestyles.

Finally just one comment on the Extinction Rebellion demand for a “people’s assembly” or “citizen’s assembly” as it is sometimes called. Is not the parliamentary democracy that we have at present such a system? Or is it simply a case that they want unelected people to decide on future policies? It has been suggested that such an assembly would be chosen at random from the population which hardly seems a very practical idea to me. This demand is a classic example of how muddled the thinking actually is of Extinction Rebellion supporters.

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

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Standard Life UK Smaller Companies AGM, WPP and Tesla

For those folks who invest in smaller companies, it’s always educational to attend the Annual General Meeting of Standard Life UK Smaller Companies (SLS) which I did today. This investment trust has been managed by Harry Nimmo and his team for many years and he has consistently beaten the company’s benchmark (currently Numis Smaller Companies Plus AIM index).

Harry’s presentation highlighted that smaller companies were a “great place to be until the last 4 weeks”. He said that we often see sharp setbacks toward the end of the economic cycle. One tends to see bursts of selling in the high performing stocks with profits being taken (one example being Fevertree he mentioned). There are some concerns in the market about the US prospects, rising interest rates, Brexit and other worries. But he suggested investors need to have a long-term perspective and hold the shares for 6 years or more.

The investment process followed is unchanged. They use a proprietary stock selection process focused on quality, growth and momentum. See pages 12/13 of the Annual Report for details. Valuation is secondary, i.e. they don’t buy “cheap” stocks. New purchases for the portfolio were Gooch & Housego, Alpha Financial Markets, Safestore, Blue Prism and Gym Group (note: I have bought a couple of those recently also). As an aside, Blue Prism still looks relatively expensive to me although it’s down 35% from its peak share price in the recent market crash.

There were a number of questions on the merger with Dunedin Smaller Companies Trust which was recently voted through. I voted against it because I could see the benefit for the Dunedin holders and for the manager but not for SLS shareholders. The benefits were argued to be “reduction in on-going charges” and “enhanced liquidity”, but when I asked what the actual reduction in charges might be, nobody seemed able to supply an answer. I also have doubts about the liquidity argument as Dunedin was substantially smaller than SLS, i.e., the extra assets acquired won’t add a great deal. The disadvantage of a larger trust, particularly in the small cap sector, is that it makes the manager less nimble, i.e. more difficult to get in and out of stocks. I remain to be convinced that this merger made sense for SLS holders but it may not be too damaging.

One somewhat irate shareholder berated the board for paying out too much in dividends (most of the “income” received) when the company is supposed to be focused on capital growth. I supported the board because in fact only a very small proportion of the overall profits are paid out in dividends. The current dividend yield according to the AIC is only 1.6% and many shareholders do like dividends. Trusts that don’t pay any or have very small dividends tend to have larger discounts to NAV.

Another interesting question was on the investment in AIM shares and the risk to AIM from changes to Inheritance Tax Relief (IHT). Harry said the AIM market had improved considerably in the last 6/7 years, from being full of rather “dodgy” companies to being a broad spectrum of growth stocks. He suggested this was important to the UK economy and it both creates wealth and jobs. The Chancellor would likely be careful on withdrawing tax benefits. Comment: I don’t judge that as a big risk and even if IHT relief was withdrawn any substantial decline in AIM share prices might simply draw in other investors to replace those only interested in IHT relief.

I asked Harry Nimmo a couple of questions after the formal meeting finished. How did he avoid investing in Patisserie shares? It seems they did not altogether and mentioned the company met their investment criteria, based on the false accounts. I also asked him about the changes to the Abcam remuneration scheme, a company they hold. It seems their corporate governance team had made representation on the subject to Abcam (see my previous blog post on that subject).

In summary, a useful AGM to attend, as many are. This is a very good trust to hold in my view if you don’t wish to speculate in individual small company shares. But smaller company shares can be more volatile in times of market panics, so SLS is down 18% since late September. That’s certainly not been helped by profit taking in such shares as Fevertree (their biggest holding at the year-end), First Derivatives, Dechra, etc, although the company had often reduced their holdings below their target maximum of 5% of their portfolio before the recent crash.

Bad news today in a trading statement from WPP the advertising agency business. This was brought to my attention by one of the attendees at the above AGM as I don’t hold it. I suggested the likely problem was the advertising world is becoming digital, bypassing the traditional agency model. In addition there were few barriers to entry in the advertising agency world. New businesses could be created by two men and a dog (or two women I should probably have said to be PC). The share price of WPP is down 14% today. This is what I later discovered the company had said: “As previously stated, our industry is facing structural change, not structural decline, but in the past we have been too slow to adapt, become too complicated and have under-invested in core parts of our business. There is much to do and we have taken a number of critical actions to address these legacy issues and improve our performance”. On a prospective p/e of 9 and yield of over 5%, I think following Harry Nimmo’s policy of not buying stocks just because they are cheap is probably good advice.

But let’s talk about good news for a change. Tesla have declared a profit in the third quarter. Cash flow also improved and is expected to be positive in the fourth quarter. So the doomsayers about this company might have to change their stance. There may still be risks associated with this business, particularly the management style of Elon Musk, but they are rapidly changing the auto industry through new technology. Traditional car makers are facing major disruption to their business, or as the FT put it in a headline to a long article yesterday: “German carmakers face their i-Phone moment”. Even Dyson is getting into the electric car business and opening a plant in Singapore to produce them. Technology is changing our world more rapidly than ever, and the pace of creative destruction in business continues to rise. Smaller companies tend to be leaders of such changes, in the advertising world, in car manufacturing (relatively) and in many other fields.

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

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Frying in Hell and Investing in Oil Companies

Last night and this morning, the national media were dominated by the news from the Intergovernmental Panel on Climate Change that we are all going to fry in a rapidly rising world temperature unless we change our ways. CO2 emissions continue to rise and even to limit temperature rises to 1.5 degrees Celsius requires unprecedented changes to many aspects of our lives.

The suggested solutions are changes to transport to cut emissions, e.g. electric cars, eating less meat, growing more trees, ceasing the use of gas for heating and other major revolutions in the way we live.

So one question for investors is should we divest ourselves of holdings in fossil fuel companies? Not many UK investors hold shares in coal mines – the best time to invest in coal was in the 18th and 19th century. That industry is undoubtedly in decline in many countries although some like China have seen increased coal production where it is still financially competitive. See https://ourworldindata.org/fossil-fuels for some data on trends.

But I thought I would take a look at a couple of the world’s largest oil companies – BP and Shell. How have they been doing of late? Looking at the last 5 years financial figures and taking an average of the Return on Assets reported by Stockopedia, the figures are 2.86% per annum for Shell and 0.06% per annum for BP – the latter being hit by the Gulf oil spill disaster of course. They bounce up and down over the years based on the price of oil, but are these figures ones that would encourage you to purchase shares in these businesses? The answer is surely no.

The figures are the result of oil exploration and production becoming more difficult, and in the case of BP, having to take more risks to exploit difficult to access reserves. It does not seem to me that those trends are likely to change.

Even if politicians ignore the call to cut CO2 emissions, which I suspect they will ultimately not do, for investors there are surely better propositions to look at. Even electric cars look more attractive as investments although buying shares in Tesla might be a tricky one, even if buying their cars might be justified. Personally, I prefer to invest in companies that generate a return on capital of more than 15% per annum, so I won’t be investing in oil companies anytime soon.

But one aspect that totally baffles me about the global warming scare is why the scientists and politicians ignore the underlying issue. Namely that there are too many people emitting too much air pollution. The level of CO2 and other atmospheric emissions are directly related to the number of people in this world. More people generate more demand for travel, consume more food, require more heating and lighting and require more infrastructure to house them (construction generates a lot of emissions alone). But there are no calls to cut population or even reduce its growth. Why does everyone shy away from this simple solution to the problem?

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

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Tesla, Unilever, EasyJet IT Write-Offs and Cash Holdings

The big news today is that the US Securities and Exchange Commission (SEC) have charged Tesla CEO Elon Musk with securities fraud. This charge relates to his comments on Twitter that he would likely be taking Tesla private. To quote from the SEC complaint: “Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source”. Mr Musk vigorously rejected the charges, as did the company.

The full SEC complaint is here: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

Comment: it is of course the oldest trick in the book if you are unhappy with the share price of your company to announce a potential bid from yourself or a third party. Making such an announcement via Twitter, if that was the motivation which has yet to be proven, would certainly be something new though. Making any announcements via Twitter is exceedingly risky and Tesla’s advisors must be tearing their hair out over this sequence of events. Who else if anyone reviewed the tweets before they were sent? Probably nobody I suspect. And anyone who uses Twitter will know it’s very easy to let typos, grammar errors and Spoonerisms creep in. Such important announcements should only be issued by the proper regulatory news channels. Elon Musk should have known better.

But if Elon Musk was forced to step down from Tesla, which might be the outcome, would it matter? I suspect not. The merit of Tesla as a company is in the technology in the cars which is still ahead of most potential electric car competitors. I have driven a Tesla Model S and it is a very good car indeed. But unfortunately my wife thinks I don’t need to buy expensive, flash cars to impress people any more so I’ll have to wait for the cheaper Model 3 to become available in the UK.

Unilever and Shareholder Voting

Unilever is planning to consolidate the two arms of the business in Holland, and drop the dual listing. UK shareholders would end up holding shares listed only in Holland, and as a result the dividends would be subject to Dutch withholding tax which is currently at the rate of 15%. Such taxes always cause problems although sometimes they can be refunded by submitting claims to do so. There is also the possibility that the withholding tax will be dropped. Another difficulty is that as Unilever is in the FTSE100, any funds running a FTSE-100 tracker would have to sell the shares. The Investors Chronicle ran a longish article on this subject and suggested it was a “no-brainer” for UK shareholders to vote against it.

But it seems that might be easier said than done. According to a report on Citywire, any shareholders in nominee accounts (i.e. in ISAs, SIPPs or other broker accounts – which means most UK shareholders now) will have to “rematerialize” their shares if they want to vote them, i.e. convert them to a paper share certificate. The company is not accepting votes submitted by nominee operators. Dematerialising shares is typically a costly and time-consuming process and is actually impossible to do if the shares are in an ISA or SIPP which have to be held in nominee form. This is truly outrageous news and any shareholders holding Unilever shares who wishes to oppose the move by the company should complain to the FCA, your Member of Parliament, the Company Chairman Marijn Dekkers, and anyone else you can think of.

[Postscript: the issue here seems to be the votes for the Court Hearing where the number of individual voters is taken into account. But for the shares held by a nominee operator, which may represent many thousands of underlying beneficial owners, only one vote would be counted even if it was submitted as there is only one holding on the register. ]

It has been reported that a number of institutions might oppose the unification of the company but it would certainly help to get retail shareholders voting.

Incidentally I attended a meeting today with Link Asset Services (one of the largest registrars) where the problem of retail shareholders not voting was discussed. I’ll write a separate blog post on that later.

EasyJet

If you recall, I mentioned previously the large expenditure on a “big-bang” IT project at Abcam which is clearly over-budget and over-time. That might have contributed to the 35% share price drop immediately after their recent preliminary results announcement. Now EasyJet have made a similar announcement today in their trading update. To quote: “…easyJet has now made the decision to change its approach to technology development through better utilisation and development of existing systems on a modular basis, rather than working towards a full replacement of our core commercial platform.  As a result of this change in approach, we are recognising a non-headline charge of around £65 million relating to IT investments and associated commitments we will no longer require. EasyJet will continue to invest in its digital and eCommerce layers that will enable it to continue to offer a leading innovative, revenue enhancing and customer friendly platform.”

That £65 million is no small sum and just shows you how IT is so critical to how businesses are managed in the modern world. Similar problems arose at TSB where they attempted to replace their old Lloyds systems with completely new software which was allegedly not adequately tested. But any IT professional will tell you that you cannot test and anticipate all the problems in a diverse customer environment ahead of going live with new technology. The NHS was another prime example of a “big-bang” approach to IT system development that ended up costing the Government, and us as taxpayers, at least £10 billion (that’s not a typo – it was ten billion and more). Evolution rather than revolution is the way to develop IT systems as EasyJet and Abcam seem to be learning, the hard way.

Cash Holdings

I suggested in a previous blog post that a newly available easy-access deposit account might be a suitable place to move cash from your stockbroking account to get a decent rate of interest rather than none. The problem of course is that most retail investors have most of their money in ISAs and SIPPs and taking cash out is problematic.

For ISAs, you may not realise that you can actually take cash out of a “flexible” ISA (which most ISAs are such as Stock & Share ISAs or Cash ISAs) and put it back in later. This was a recent change to the ISA regulations. However you can only do that within the same tax year without affecting your ISA allowance.

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

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