Report on Q3 2013

Report on Q3 2013

2 Oct 2013

The FTSE rose by 3.9% in the quarter (Q1 +8.7%, Q2 -3.0%) meaning that year-to-date it is +9.2%. I didn’t recommend a single new share in the quarter. This is partly because I was away in France, but is also because no compelling new ideas turned up. City analysts are expected to come up with recommendations (usually ‘Buy’s) regularly but real people don’t have to. To some extent, this reflects my current view of the stock market. The most likeable companies are generally priced accordingly.

As I mention repeatedly, value is always relative and shares must always be compared to other asset classes. On that basis, there is not so much to worry about. UK house prices are creeping higher from unaffordable levels, encouraged by the government’s reckless Help to Buy scheme. (I heard the PM complain that the average income is unable to buy the average house. You might think that the solution is to raise the average income or lower the average house price or preferably both, but the answer from our government is to play “let’s pretend” and to forward the problem into the future, as usual). With growing numbers of people hooked up to the life support of the 0.5% Bank Rate, the chance of regular savings accounts bidding for your money are also about 0.5%.

The only practical rival to equities in Q3 was, surprisingly, government bonds. On 10 September I recommended one. UNITED KINGDOM 1 3/4% TREASURY GILT 22 was trading at 92 then. This is an investment to tuck away for the long term but in the short term it has risen to 93.78, which, for a gilt, is pretty exciting.

Shortly before the end of Q2 (12 June), I suggested a yield portfolio of twelve shares. From that date, they have returned 6.1% (including dividends) against 2.3% for the FTSE. So my implied caution has worked out quite well. The only stinker was Ladbrokes, thanks to a profit warning derived from its concerning failure to manage its online business. That having been said, its cash flow remains good and it has pledged to maintain the dividend. Today (167p) it yields more than 5% so I am, on balance, sticking with it.

It has been an extremely good quarter for the shares that I recommended earlier this year. Home Retail Group is 168p, 30p above where it was when I wrote the Q2 report. I was cross then when I wrote: “Home Retail Group fell after its last trading update, apparently on the basis that the rain kept people away from Homebase. Such absurdities provide buying opportunities for investors and would-be barbecue chefs”. As the summer progressed, both those opportunities proved to be good. Argos is getting wider recognition as an internet retailer – remarkably it has just announced a partnership with eBay – and I remain an enthusiastic holder.

ICAP has been as volatile as ever, though with a distinctly upwards bias. Its Libor-fixing problem seems to be behind it though every week I read an opinion piece saying that its business model is immoral or doomed. A small item of good news is that the proposed EU financial transaction tax seems destined for the oblivion that it surely deserves.

Go-Ahead Group rose by 13% in the quarter and is at a 5 year high at 1680p. It still looks financially solid to me and still yields just shy of 5%.

The biggest surprise for me has been Enterprise Inns which rose 40% in the quarter. The balance sheet restructuring story continues to grind out, aided by a warm summer and some debt restructuring (a convertible issue) but this looks to me like business as usual. I own a few of its 6.5% 2018 bonds which trade at c.103. This implies a redemption yield of c.5.9% if the company can stay financially intact for five years. This looks generous compared to the 1.5% available from a five year gilt but bond investors are generally more sceptical than equity investors and one should bear in mind that the recovery of Enterprise Inns is not yet home and hosed.

Almost as big a surprise for me is that M&S trades at 500p. I have written that only takeover speculation could justify a price above 400p. I have read no takeover speculation. I have read that it is imposing less favourable payment terms on its suppliers, which implies that cash flow is a concern. I have also read that it could become an internet retailer due to its genius tactic of not being an internet retailer and that it could expand abroad (didn’t it already try and fail at that?). I retain a small personal shareholding against the remote possibility of a takeover.

I was too greedy in the case of First Group, spurning it at 97p. It is now 122p. A trading update is due imminently but there is no recent public information to make one feel positive or anything else. A director has just sold shares worth £550,000. A prudent man, perhaps.

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