Report on Q1 2014

Report on Q1 2014

22 Apr 2014

The FTSE 100 fell by 2.2% in the quarter. The FTSE 250 (that’s companies from 101 to 350) rose by 2.1%. I wrote in the Q4 report that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is worth noting that in the first three weeks of April, FTSE 250 shares have become more jittery, falling by 2.2% compared to a modest 0.4% recovery in FTSE 100 stocks. It looks as if there has been plenty of profit taking in the best performing shares of the past year, many of which are those of FTSE 250 companies.

These were relatively trivial ups and downs in UK equities. Of more consequence for relative valuations is the continued strength of major government bonds. Yields on US, German and UK 10 year bonds have continued to fall, despite much talk of stronger economic data and falling unemployment. More impressive still has been the rebirth of demand for the bonds of Greece (yield on 31 December 2013, 8.41%; today, 6.12%), Portugal (5.9%; 3.73%), Ireland (3.43%; 2.83%) and even France (2.46%; 1.99%). Cash continues to chase yield and is becoming less fussy.

At a time when the price of assets regarded as safe continues to rise, it would seem irrational to turn negative on the shares of established and financially sound companies. On that basis, this year’s flat equity market is probably resting rather than expiring.

Turning to shares that I have recommended, in December I highlighted four companies with long-term strategies.

UBM, whose share price is nearly unchanged since then, has just acquired a new CEO. I must admit that I had missed the declared intention of the CEO David Levin to retire in 2014. He has now been replaced by Tim Cobbold, ex-CEO of De La Rue. There is no reason to think that this will change the company’s long-term strategy. UBM raised its dividend slightly in 2013 and, with its low capex requirements, is confident of maintaining its “progressive” dividend policy. But, there is inevitably a risk that a new CEO will surprise investors (new managers are usually keen to spring-clean for any signs of lurking bad news that can be firmly blamed on their predecessor) so I can understand that the share price reflects some caution; but the 4.1% yield continues to look like good value to me.

Home Retail Group’s shares are up by another 10% since December. In the first two months of 2014, Argos like-for-like sales rose by 5.2% and Homebase by 9.3%, both strong numbers in today’s low inflation environment. As it happens, HRG also has a new CEO but he is an internal appointment and it is reasonable to assume that there will be no change in strategy.

The shares of Halfords have drifted by 4% since I wrote about them, despite a decent trading statement in January. Predictably, the cycling division was a strong beneficiary of the dry summer. It is probable that investors are nervous about the end of the financial year (1 April) following the heavy rain and widespread flooding in January and February. This is not likely to be helped revenues from cyclists or drivers. But the strategy is intact, the cash flow is good and the balance sheet is sound.

Drax* shares are also nearly unchanged since December, having risen 10% in January and then subsided again. In February, the company’s results produced another weather detail, this time disadvantageous. A mild but windy winter across Europe caused downward price pressure, even though wind from politicians implies that energy prices do nothing but rise. The long term story of substantial capex as Drax switches towards biomass is intact. This should play out to 2016.

In February I poured scorn on RBS as an investment. The shares have fallen by another 6%.

In March I recommended Morrison and warned against Tesco. It is too soon to judge these views though Tesco results last week did nothing to help the shares.  Total balance sheet debt grew by £2.6 billion last year. We do not yet the new operating lease numbers. The CFO resigned at the beginning of April for no reason obvious to me.


A few hours after I posted this, Drax shares fell by 10% after the UK government changed its mind about a subsidy for one of the company’s units. This appears to be baffling decision because regulatory uncertainty is an investment killer. Drax is taking legal action. I now find myself to have invested in something that I didn’t fully understand (though I didn’t know that I didn’t understand it). I am still inclined to think that the momentum towards biomass will continue and that this is quite likely to be a buying opportunity.


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