18 Jan 2023

For the first time in five quarters The FTSE 250 outperformed the FTSE 100 (+9.8% vs +8.1% compared to Q3). This does not change the fact that the big-cap index with international exposure trounced its smaller more domestically exposed rival over the year as a whole (+1% vs -20%). But some recovery by FTSE 250 shares would be very welcome in the face of much public negativity about the UK economy. In my Q3 report I wrote that half a dozen shares must be long term buys. I invest in line with what I perceive as probability and necessarily one is sometimes correct. While I take a brief lap of honour I shall recite as follows – Sainsbury +40%, Tesco +20%, Halfords +39%, Kingfisher +23%, Pets At Home +27%, M&S +52%. I own all those shares but the only one that I actually bought at the end of Q3 was M&S. The government bond markets have been interesting, as I wrote here on 23 December. Over the quarter UK 10 year gilts fell from 4.23% (a peak induced by the Bank of England, not Liz Truss) to 3.67%, a normalisation from an excellent buying opportunity. US 10 year Treasuries were flat at 3.88%, summing up the unresolved debate between inflation mongers and recession peddlers. German yields rose from 2.1% to 2.5%. CHINA AND NUMBERS Finally, a geopolitical strategist named Peter Zeihan mentioned something that I have seen before – namely that China, in addition to reporting dodgy population and Covid numbers, has long overstated its GDP growth. While this might seem just the grandiose bull of an authoritarian government, it has huge mathematical implications once you take into effect the compounding effects over time. An overstatement by 3% of a number that is itself already overstated will, in twenty five years, produce a GDP number that is distorted by 100%. It could be that the reason why the world has withstood the repeated closure of the Chinese economy is that China is not as important as its official GDP numbers...

8 Oct 2022

The FTSE 250 fell by 8.0% in Q2 and is down by 25.5% year to date. The FTSE100 is down by just 2.7% year to date, a massive and, in my experience, unprecedented outperformance. On average FTSE 100 companies are larger and more international meaning that they are typically earning dollar revenues, a very good cushion in recent months. UK ten year government bond yields began the quarter at 2.06% and ended it at 4.1%, a rout that was ludicrously attributed to a trivial mini budget. As I wrote recently, this has been coming for a long time and the cause is a combination of relentless excessive borrowing, to which the nation appears to be addicted, and blundering behaviour by the Bank of England which naturally fails to accept responsibility. The overdue correction in government bond yields was certainly not confined to the UK. Ten year German Bund yields soared from 1.2% to 2.1% and US Treasuries more modestly from 3.02% to 3.8%. As those yield movements imply, Europe has a bigger inflation threat because most commodities are priced in dollars. Stock investors in the US have seen most commodity prices well off their highs and are disappointed that the Fed appears to be set on continuing to dampen an economy that appears to be slowing down quite nicely. It is worth mentioning that most US commentators see a bad recession across Europe as a given. I have been buying two year Gilts yielding above 4% in the knowledge that these represent a very viable alternative to stocks, at this difficult time, as they say when flags are flying at half mast. There is no doubt that many share prices are very low and some of them may even be cheap. I have been looking at retailers. Sainsbury, Tesco, Halfords, Kingfisher and Pets at Home all have solid balance sheets and yield between 4.5% (Pets) and 7.5% (Sainsbury).Marks & Spencer, which must be selling hair shirts, pays no dividend for some reason but its historic free cash flow yield is 33%. Barring serious management blunders, which are of course quite possible, these companies are long term buys. I am tempted to write that there...

2 Sep 2022

Fifteen months ago I pointed out that ESG (Environmental, Social and Governance) investing would make a few people rich (via the vast public subsidies directed their way) and many people poorer. I tried to appear even handed without disguising my characteristic scepticism. Subsequent events have proved to me that I was much too restrained. ESG is not only rubbish but it is toxic rubbish. It fills up companies’ financial reports with box ticking nonsense that replaces facts that investors need to make decisions based on, you know, the financial outlook. Tom Kerridge is a “celebrity” chef who owns three successful gastropubs. He says that his energy bill is about to rise from £60,000 to £420,000 a year. The UK hospitality sector, having spent the best part of two years in imposed lockdown, is now staggering out of control towards a new disaster. All UK businesses that need significant retail outlets have seen their share prices dive because investors fear that rising energy costs will push them into loss or worse.  On 16 June Halfords released upbeat results for the year to April 2022. The dividend was 9p a share and the dividend policy is described as “progressive”. Today the shares are at 130p, down 60% this year, offering a theoretical yield of 7%. So I turned to Halford’s annual report and accounts to seek some clue about the company’s sensitivity to energy costs.    It seems that for Halfords risk management is based around a Task Force on Climate-related Financial Disclosures (“TCFD”). As the lights are about to go out Halfords’ ESG committee is meeting monthly to discuss the effect of climate change on the business between 2030 and 2050. The significant risk to Halfords retail sites is said to be extreme weather that results in flooding across the UK.  This might be the stuff of satire were it not for the fact that it replaces rather than supplements useful analysis.  Sainsbury’s shares are down 30% this year and the dividend yield appears to be 6.5%. As with Halfords, investors probably have visions of winter shopping in mittens by candlelight. Sainsbury’s annual report has seventeen pages of risk assessment. The company is watching out for...

20 Jun 2022

I am struck by the knowledge that the stock market hit its Covid panic low on 23 March 2020 (FTSE at 4994). That was the very day that the first UK lockdown was announced. This is a splendid example of how desperately keen share prices are to discount bad news. Because the actual news got much worse for much longer than anyone could have believed – but the low was already in for the stock market. Today, it is hard to see how much worse the news could get for UK consumer shares or government gilts. So here are some deservedly unpopular ideas that might just pay off. THREE SHARES VULNERABLE TO CONSUMER SPENDING National Express (buses and coaches) 217p Since the beginning of March it is an amazing fact that three of the four UK listed bus (& train) companies have received takeover bids Stagecoach – bid 105p (now unconditional) vs March low 76p (38% premium) FirstGroup – indicative bid of 163.6p vs 89p in March (84% premium) Go-Ahead – bid of 1500p vs 550p in March (173% premium) That leaves only National Express which is now just a bus company (plus a few trains in Germany). It is huge (£2.7 bn in revenues this year)  and supposedly in the sweet spot for new transport habits (out of those wicked cars, people, and get on board with the monarchs of the road). It raised £235million from shareholders in May 2020 at 230p per share and the price has gone nowhere (now 217p). It plans to restore a dividend in 2022. It has hedged its fuel costs 100% for this year, 64% of 2023 and 25% for 2024. It has guided to a 7% operating margin in 2022 (10% in 2019).  I do not love this company but it has the potential to benefit from a certain scarcity value. Halfords (auto centres and bikes) 157p Another theoretical sweet spot – second hand car servicing and cycling. This statement of the bleeding obvious last week sent the shares down by 20%. While rising inflation and declining consumer confidence will naturally present short-term challenges for any customer-facing business like ours, we remain confident in Halfords’ long-term...

28 Aug 2019

Anyone who cares to investigate can discover that the equities that you probably own directly or through your pension scheme are equitable only with each other. Benjamin Graham, the so-called father of modern investing, called them “common shares” which is a better clue. When a company is wound up this typically means that it has run out of money and run out of people who will lend or give it more cash. Equities represent any surplus assets that are left when all other creditors have been paid off. Every other creditor ranks above the owners of the common shares. First are secured creditors like banks or bondholders who have lent money on fixed terms. If the company defaults on those terms it can be forced into formal insolvency, though sometimes the secured creditors will accept equity in return for a further cash injection, if they judge that their best chance of getting their money back in the end is to keep the business going. In those circumstances they will be issued shares on such favourable terms that existing equity investors are diluted to the point of worthlessness. This is happening now in the case of Thomas Cook. After secured creditors have been paid in full, anything left goes to so-called preferential creditors, including employees, and then to the luckless trade creditors and HMRC. You can infer that common shareholders will usually be completely wiped out. Unsurprisingly, people who invest in equities very rarely think about the risk of insolvency and losing all their money. We all dream of the day when the theoretical value of those surplus assets explodes upwards. Bond holders may get their money plus interest back but as Benjamin Graham pointed out many decades ago, common stocks have “a far better record than bonds over the long term past”. It has widely been accepted as a fact that equities are the answer for a long term investor. Cautious share owners look for sustainable dividends that can rise as the company grows; the more optimistic hope for rising share prices as well. Those are the two elements that drive the long-term performance of common stocks observed by Graham. But stock market investors...

12 Jun 2013

Investment is betting on probabilities, not on outcomes. How can we judge if the probability of an event is over-priced or under-priced? Do not try to guess the probability of an outcome with a view to pricing it. Do ask when the price is telling you about the probability – then ask yourself if this is reasonable. For obvious reasons, investors are now very interested in dividend yield but they also have reasons to be worried about the stock market. Commentators seem to be evenly split between those who are looking down and suffering vertigo and those who say that equities continue to offer attractive value compared to what else is on offer. According to my own investment rules, you will find me in the second camp for as long as that proposition continues to be true. Dividend yields are as reliable a measure as any for judging what the market thinks of a company. Then, as the quotation from my fourth investment rule (Probability) says, we can ask ourselves whether this is reasonable. Below is a table of current dividend yields from shares that I follow. There is a wide range which, if the market is efficient, should tell us that we can choose between relatively safe companies with relatively low yields and relatively risky with commensurately high returns. Before I discuss any individual stocks, I will characterise what these various yields imply.     Price Yield BG 1165 1.4% Fuller Smith & Turner 925 1.5% Domino’s Pizza 670 1.5% Travis Perkins 1520 1.6% Experian 1175 1.9% Regus 165.00 1.9% Home Retail Group 152 2.0% Diageo 19.15 2.2% Interconti Hotels 1835 2.2% Smith & Nephew 755 2.3% Rentokil 88 2.4% Millennium 549 2.5% Cranswick 1120 2.7% Stage Coach 287 2.7% Kingfisher 344 2.8% Hays 90 2.8% BT 312 2.8% Synthomer 194 2.8% Sage 348 3.0% Rexam 505 3.0% Micro Focus 659 3.1% Unilever (€) 31.4 3.1% Reed 736.0 3.1% Tate & Lyle 811 3.2% Greencore 130.00 3.3% St Ives 160 3.3% Greene King 750 3.4% Debenhams 92 3.6% Morgan Crucible 277 3.6% M&S 448 3.8% Pearson 1173.0 3.8% UBM 690.00 3.9% Mitie 253 4.1% Costain 254 4.2% Tesco 343 4.3% Marstons 142 4.4%...