Saturday, February 21, 2004
Long time no blog. Since last writing, the portfolio has been buoyed with the rise in my house-building share, Ben Bailey. Now at 480p, this has been an astonishing success since my purchase at 178p of January 2003. The game could soon be up for Mr Bailey however, the shares being at the closest to being fully valued that they ever have. Full year results will be announced on March 2nd and I'll be selling at six times earnings if I can get it. Ben Bailey was forced to update the market back in December that earnings for the year would be ahead of expectations, which at the time were running at around 80p per share. Assuming the results will be fifteen percent ahead of that figure, it is not too difficult to see Ben Bailey trading at in excess of five pounds in March.
The next two months are going to be a crucial time for the portfolio, with all holdings reporting results for the full year. Chaucer reports on April 4th and Dana Petroleum at some point between the two. This could leave me with a real problem, if the price of my holdings adjusts to what I consider a fair valuation against the results, I could be shareless. It's vital then, that I find some new targets. I have already run the rule over Tate and Lyle and Shell. A third company of interest is SVB, another Lloyd's insurer trading at an even larger discount to net assets than Chaucer. I'm holding fire on that one for the moment however - I wouldn't like to be doubly exposed to insurance underwriters, as an extraordinary blow could be dealt at any time. Another consideration is a short-selling of Berkeley, the south east based house-builder.
So, keep watching this space.
The Artful Dodger
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The next two months are going to be a crucial time for the portfolio, with all holdings reporting results for the full year. Chaucer reports on April 4th and Dana Petroleum at some point between the two. This could leave me with a real problem, if the price of my holdings adjusts to what I consider a fair valuation against the results, I could be shareless. It's vital then, that I find some new targets. I have already run the rule over Tate and Lyle and Shell. A third company of interest is SVB, another Lloyd's insurer trading at an even larger discount to net assets than Chaucer. I'm holding fire on that one for the moment however - I wouldn't like to be doubly exposed to insurance underwriters, as an extraordinary blow could be dealt at any time. Another consideration is a short-selling of Berkeley, the south east based house-builder.
So, keep watching this space.
The Artful Dodger
Sunday, February 15, 2004
I've been much heartened in the last three weeks or so with the progress of the stock market in the large. It's gone nowhere. That's a positive, as most shares short-term fortunes are tied to people's attitudes to the risks involved in equity investing (traditionally economic outlook such as crude oil prices, exchange and interest rates), any significant advances in the indices are naturally accompanied by price rises amongst individual shares. If shares aren't rising it is likely some will be approaching attractive, undemanding valuations, leaving buying opportunities. The FTSE100 index has barely progressed in 2004 and there have been some significant declines amongst the larger stocks, most notably Shell, the oil co.
Shell is a massive business that again, is going nowhere. As long as there is oil to be dug up on earth Shell will be doing so and profitably too. The share price took quite a substantial hit recently as the company was forced to reclassify almost 20% of it's reserves from `proven' to `probable'.
More jargon. Essentially, Shell had been claiming they own all this oil, ready to be dug up and bottled and taken to market but they have recently fallen foul of an accounting technicality enforced by the US standards authorities. Shell remains an incredibly strong company. Those in the know are confident that these degraded reserves will indeed go on to produce revenues for the company. It looks like a classic case of an over-reaction, the shares are down something like 15% since the news and are now surrounded with much negative sentiment, most of it concerning the institutions perceptions of the management. When the bears attempts at justifying a lower price centre around something a nebulous as the City's attitudes to people they have never worked with, alarm bells should start ringing: the stock is approaching it's nadir.
So, Shell is cheap at Friday's close of 350p and so is Tate and Lyle at 275p. My oil holding, Dana is cheap too but I've got enough of those already (at an even cheaper price than today's). I'd be a buyer of Shell at ten times earnings, that's 330p. We'll see in the coming weeks if I'll be getting my chance.
The Artful Dodger
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Shell is a massive business that again, is going nowhere. As long as there is oil to be dug up on earth Shell will be doing so and profitably too. The share price took quite a substantial hit recently as the company was forced to reclassify almost 20% of it's reserves from `proven' to `probable'.
More jargon. Essentially, Shell had been claiming they own all this oil, ready to be dug up and bottled and taken to market but they have recently fallen foul of an accounting technicality enforced by the US standards authorities. Shell remains an incredibly strong company. Those in the know are confident that these degraded reserves will indeed go on to produce revenues for the company. It looks like a classic case of an over-reaction, the shares are down something like 15% since the news and are now surrounded with much negative sentiment, most of it concerning the institutions perceptions of the management. When the bears attempts at justifying a lower price centre around something a nebulous as the City's attitudes to people they have never worked with, alarm bells should start ringing: the stock is approaching it's nadir.
So, Shell is cheap at Friday's close of 350p and so is Tate and Lyle at 275p. My oil holding, Dana is cheap too but I've got enough of those already (at an even cheaper price than today's). I'd be a buyer of Shell at ten times earnings, that's 330p. We'll see in the coming weeks if I'll be getting my chance.
The Artful Dodger
Wednesday, February 11, 2004
In a previous blog I claimed that in valuing Tate and Lyle, I would rather use the previous years' profits than broker predictions for next years' figures. This isn't a prejudice I apply blindly. This is a useful metric for certain types of stock, particularly companies with a large market capitalisation operating in a mature industry, such as Tate, the sugars manufacturer valued at £1b by the market.
Tate operates in an industry that is essentially going nowhere. That is true for most of the players in the foods sector, even more so utilities but I wouldn't apply this rationale to technology outfits or pharmaceuticals. If a company or an industry is indeed 'going nowhere' that needn't necessarily be a negative, the absence of exciting growth is often accompanied by a solid and dependable revenue stream - allowing chunky dividend payments. A company that is indeed going nowhere is highly desirable for the investor, if he can get in at a bargain price. It naturally follows that these steady, dependable companies will not report wildly fluctuating profits from year to year - without significant news one can expect profits to be pretty much the same one year as they were in the previous. This logic is so simple the brokers would regard it as amateurish, they prefer to use their models, spreadsheets and expert contacts in the industry to divine future profits and as the year progresses, they often so wrong a company is forced to issue a trading statement to guide the market. Unswerving faith in a broker prediction is sheer folly, as however, would blind faith in my `previous years figures' heuristic, examine the results statement, there may be significant exceptionals contained within.
"Why brokers just aren't capable", a future blog perhaps.
At nine times earnings Tate & Lyle would be sufficiently undervalued by my reckoning to remove a lot of the risks inherent in equity investment and allow plenty of room for appreciation. Don't get me wrong, at 277p Tate is undervalued but to leave me some room for error in my appraisals, I'm lowering the bar to 250p, with fair value at 324p.
The Artful Dodger
(0) comments
Tate operates in an industry that is essentially going nowhere. That is true for most of the players in the foods sector, even more so utilities but I wouldn't apply this rationale to technology outfits or pharmaceuticals. If a company or an industry is indeed 'going nowhere' that needn't necessarily be a negative, the absence of exciting growth is often accompanied by a solid and dependable revenue stream - allowing chunky dividend payments. A company that is indeed going nowhere is highly desirable for the investor, if he can get in at a bargain price. It naturally follows that these steady, dependable companies will not report wildly fluctuating profits from year to year - without significant news one can expect profits to be pretty much the same one year as they were in the previous. This logic is so simple the brokers would regard it as amateurish, they prefer to use their models, spreadsheets and expert contacts in the industry to divine future profits and as the year progresses, they often so wrong a company is forced to issue a trading statement to guide the market. Unswerving faith in a broker prediction is sheer folly, as however, would blind faith in my `previous years figures' heuristic, examine the results statement, there may be significant exceptionals contained within.
"Why brokers just aren't capable", a future blog perhaps.
At nine times earnings Tate & Lyle would be sufficiently undervalued by my reckoning to remove a lot of the risks inherent in equity investment and allow plenty of room for appreciation. Don't get me wrong, at 277p Tate is undervalued but to leave me some room for error in my appraisals, I'm lowering the bar to 250p, with fair value at 324p.
The Artful Dodger
Tuesday, February 03, 2004
Last week's profit warning from Tate forced me to rethink my hypothetical entry price for the stock. After some to and fro, I have plumped for nine times previous years' earnings. This should be making you think:
"Why nine times?"
and
"Why previous years earnings?"
second things first. Without the illegal benefit of inside information we cannot know what next years full earnings from Tate might be. The directors should at least have a very good idea as to what earnings might be and indeed recently informed the market in their trading statement they expect something similar to market expectations. There's some more directorese at play here, wrapped up in the term 'market expectations'. This be first translated to 'City expectations', meaning the expectations of professionals (actually, 'tradesmen' might be better) in London's financial services industry. This mob are the stockbrokers, fund managers and analysts at the myriad institutions in the EC2 area of our capital. Note that amongst that list there were no clairvoyants, shaman or soothsayers. Analysts don't know the intimate details of Tate's accounts or the sector Tate operate in so well they can predict full year earnings. They don't read the runes or goats entrails for information on future weather conditions the progress of carbohydrate price negotiations in the US. How do the market pros arrive at an approximate figure? The directors tell them, usually one at their (private) meetings. So 'market expectations' can really be read as 'the conclusions of City analysts since we last spoke'.
I digress but I'll continue.
Without access to these City expectations claims such as 'we will meet market expectations' are of no use to the private investor without access to the equivalent of the stable lad. What is the shareholder or prospective investor to divine from such elliptical communication? In the spirit of fair play the trading statements are broadcast to all market players via the stock exchange's news service but 'market expectations' are not. That's not a level playing field. The brokers and their cohorts don't disseminate their 'expectations' to all market participants. Brokers' earnings estimates and associated tittle-tattle are compiled into broker reports which are kept on file for clients perusal, and used as the basis for buy/sell recommendations. I'm not against this. Any information analysts may have been able to piece together should naturally be used for maximum commercial gain. What I am opposed to is directors' use of the term 'market expectations' in an address to all those playing the market. This statement requires qualifying with just what those market expectations are. The wordplay undermines the very purpose of the trading statement, which should update shareholders on the health of their investment and also inform the market. Instead, directors choose to keep individual shareholders and market watchers in the dark, pandering to brokers' commercial interests by withholding this vital information. A simple and fair resolution would require companies divulge just what earnings per share 'market expectations' are in precise figures. This could be an average of broker forecasts from those that have been briefed that year, or the range of expectations. If a broker refuses to report his earnings forecast, they could simply have the privilege of direct access to management removed. On further consideration I don't see why a company should not be able to do just this. If a company you own shares in refuses to divulge just what 'market expectations' are I suggest a call to your broker and investor services at the company and if that fails, follow it up with stern letter to a non-executive director, whose responsibility is to represent shareholder's interests at board level.
My new price target for Tate is around 250p. I'm delaying my justification of my Tate price target for another day. With Tate shares currently trading at 280p and a trading statement having already been produced, short of thermonuclear war, that gap won't be narrowing in the time before you hear from me again.
The Artful Dodger
(0) comments
"Why nine times?"
and
"Why previous years earnings?"
second things first. Without the illegal benefit of inside information we cannot know what next years full earnings from Tate might be. The directors should at least have a very good idea as to what earnings might be and indeed recently informed the market in their trading statement they expect something similar to market expectations. There's some more directorese at play here, wrapped up in the term 'market expectations'. This be first translated to 'City expectations', meaning the expectations of professionals (actually, 'tradesmen' might be better) in London's financial services industry. This mob are the stockbrokers, fund managers and analysts at the myriad institutions in the EC2 area of our capital. Note that amongst that list there were no clairvoyants, shaman or soothsayers. Analysts don't know the intimate details of Tate's accounts or the sector Tate operate in so well they can predict full year earnings. They don't read the runes or goats entrails for information on future weather conditions the progress of carbohydrate price negotiations in the US. How do the market pros arrive at an approximate figure? The directors tell them, usually one at their (private) meetings. So 'market expectations' can really be read as 'the conclusions of City analysts since we last spoke'.
I digress but I'll continue.
Without access to these City expectations claims such as 'we will meet market expectations' are of no use to the private investor without access to the equivalent of the stable lad. What is the shareholder or prospective investor to divine from such elliptical communication? In the spirit of fair play the trading statements are broadcast to all market players via the stock exchange's news service but 'market expectations' are not. That's not a level playing field. The brokers and their cohorts don't disseminate their 'expectations' to all market participants. Brokers' earnings estimates and associated tittle-tattle are compiled into broker reports which are kept on file for clients perusal, and used as the basis for buy/sell recommendations. I'm not against this. Any information analysts may have been able to piece together should naturally be used for maximum commercial gain. What I am opposed to is directors' use of the term 'market expectations' in an address to all those playing the market. This statement requires qualifying with just what those market expectations are. The wordplay undermines the very purpose of the trading statement, which should update shareholders on the health of their investment and also inform the market. Instead, directors choose to keep individual shareholders and market watchers in the dark, pandering to brokers' commercial interests by withholding this vital information. A simple and fair resolution would require companies divulge just what earnings per share 'market expectations' are in precise figures. This could be an average of broker forecasts from those that have been briefed that year, or the range of expectations. If a broker refuses to report his earnings forecast, they could simply have the privilege of direct access to management removed. On further consideration I don't see why a company should not be able to do just this. If a company you own shares in refuses to divulge just what 'market expectations' are I suggest a call to your broker and investor services at the company and if that fails, follow it up with stern letter to a non-executive director, whose responsibility is to represent shareholder's interests at board level.
My new price target for Tate is around 250p. I'm delaying my justification of my Tate price target for another day. With Tate shares currently trading at 280p and a trading statement having already been produced, short of thermonuclear war, that gap won't be narrowing in the time before you hear from me again.
The Artful Dodger
