Mid-Cap Mullering

Two trading days into December and lots of damage. Here is a message from an English investor/broker whose views I greatly respect (full message here):

The mid cap stocks have been thoroughly mullered in the past two or three weeks.

Companies with excellent track records, strong finances and trading down 35% - 50% from their highs of the year.

The ones Im watching and starting to pick up include KIE

For god's sake, what has a company to do? Cash of c£4 per share puts them on a historic PE of 7 ex cash and 6 if you believe the forecasts. Remember that the company announced results in late Sept (excellent) and positive), has had an IMS in late Oct (excellent) and an AGM statement the other day (excellent). Yet the stock continues to bomb.

Someone somewhere is offloading a lot of the mid cap names and with volumes at rock bottom the price just tanks. Mind you, try buying at the shown price in anything like "sensible" volumes and you see it instantly correct.

Others that are mystifying me (okay so they are partly construction related but are top quality companies nevertheless) and trade on daft multiples:

KLR - world leader in ground works. Strong trading figures.
SHI - leader in insulation materials and oft talked of as a target for St Gobain
CHTR - world leader in welding and compressors (seeing strong demand from O&G/Mining capex in particular)

Even WOS looks a good long term buy, if it ever gets back to the 620p or so it reached last week.

Sometimes it makes no sense. I'm not rushing in, just picking up some quality quality with proven track records, highly regarded in their sectors with solid financials at what look like daft prices.

I couldn't agree more.

Notes:
KIE = Kier
KLR = Keller
SHI = SIG
CHTR = Charter
WOS = Wolseley

A successful prediction ..

.. of mine has been a series of very small bets against there being a UK General Election in 2007. There were a number of senior politicians who thought there would be an election. Let me list them:

Prime Minister, Gordon Brown
Education Secretary, Ed Balls
Ed Milliband
Douglas Alexander

Well, it's only £200, but the frustration to these socialists is worth so much more to me.

Gloomy November

It's been a rotten month for my portfolio. Financials and smaller companies, where I'm overweight, have been badly hit. The figures for 2007 as at end-November:

Me -4.4%
FTSEAllShare +4.7%
FTSESmallCos -9.8%

This looks likely to be my first year of relative underperformance since 1998. No whingeing, it's my fault. The credit crisis has intensified and the Governor of the Bank of England has warned recently of the dangers of a sharp correction in share prices (but he was probably looking at the general level of the UK market, as measured by the FTSE100 and hadn't noticed that there has already been a sharp correction suffered by smaller companies).

My recent strategy, due to scepticism about the strength of the UK economy after 10 years of tax-and-spend socialism under NuLabour, has been to reduce UK exposure, especially to the shares of retailers, and to increase overseas holdings. However, some sectors, such as real estate and and non-residential construction and quite a few smaller companies appear to me to have become oversold. This has led me to purchase: more Kier, Land Securities, and T.Clarke. There are quite a few smaller companies with yields above 5% and P/E ratios below 10 where I'll be looking for bargains as funds become available.

Two steps forward, three steps back

This title might summarise a horribly difficult late-summer and autumn period for me, where I have made some bad mistakes. Worst has been following quite heavy share purchases by directors of Northern Rock. This alone has lost me more than £10k - my largest ever losses on a single share. My purchases of financials has also proved too early and cost me dearly. My outperformance of the (pathetic) FTSE has disappeared making this my worst year since 2001. As at 2nd Nov:

Me - 5.6%
FTSEAllShare - 6.4%
FTSESmallCos - -1.5%

The reduced market values of UK banks now seem to far exceed even a worst-case scenario of sub-prime infection - see here. So I have continued buying. In the short-run this has been painful.

I should add that I am more pessimistic about the UK economy than hitherto. It is being emasculated by the creeping (creepy) socialism and rampant (and intolerant) political correctness of the Labour government. I was happy to see Gordon Brown and Ed Balls exhibit their idiocy over the election-that-never-was. At least I made some money on betting against there being an autumn election. I have also bet on the UK election being postponed until 2010.

Unfortunately, this all imples two-and-a-half years more damage being inflicted by these high-spending clowns. Against this background, I have recently invested more in overseas markets and reduced holdings in shares dependent on the domestic UK market.

Otherwise engaged

Off to hospital this morning for what should be a minor operation. If there are no more entries, you'll now know why. It'll be a shame, as I've enjoyed beating the FTSE indices these last 10 years.

Those Magic Words Again

On 20th August Keller announced its interim results for the period ending June 30th 2007. They were very impressive (see here) :

• Revenue of £465.2m up 3% (9% on a constant currency basis)

• Record first-half operating margin of 9.0% (2006: 7.9%)

• Profit before tax of £40.1m up 20% (28% on a constant currency basis)

• Basic earnings per share up 23% to 37.2p (2006: 30.3p)

• Recent major contract wins contribute to a record order book

• Interim dividend per share increased to 6.0p (2006: 4.2p)

This, from a company where Brokers' consensus was for 72p earnings for the year - that is, DOWN from 77p in 2006. These interim results blasted that fiction away. These were the magic words from the Chief Executive:

'In these favourable conditions, and with an all-time high order book, the Board
now expects that the full-year results  of the Group's continuing operations
will significantly exceed last year's outstanding results.'

The above had, in fact, been presaged by an optimistic trading statement on the 21st June 2007 (nine days before the end of the first half). But in the July/August turmoils Keller had been badly buffetted. From a peak of 1135p on 10 July, it got as low as 770p on 10 August. At the Friday close on 17 August it was 918p.

How did the market react to these results? By marking Keller down to 899p (it got as low as 873p that day). Here is how the market has reacted since to the magic words:

29-Aug-07

1,060.00

28-Aug-07						1,029.00
24-Aug-07						1,001.00
23-Aug-07						1,020.00
22-Aug-07						987.00
21-Aug-07						923.50

The point I have attempted to demonstrate here is (1) the potent effect of results exceeding market expectations, and, more important, (2) the opportunities available to the private investor to make money, given that the market often reacts rather slowly to the change in expectations. I have seen this happen so many times. Of course, there were great opportunities also in the market panics of late July and August.

Keller is now one of my largest holdings.

My subprime crisis

Oh, dear! Already badly wounded in July, this private investor repeatedly had chunks bitten off him in the first half of August. His geared play on the FTSE100 has, thus far, been a loser. He is now barely above water for the year. And all because of the difficulties of credit markets in anticipation of spreading contagion from the subprime crisis in the US. There are some bad packages of loans out there and nobody's sure of the degree of the toxicity of the packages and who's holding them. The resulting uncertainty set off a lurch for liquidity and this has resulted in some strong selling of the most liquid larger stocks, at least until late last week. I fancy this was reinforced by selling by leveraged hedge funds and investors on the long side as margin calls hit.

But are many FTSE100 companies short of liquidity? Are they near distress? No, no, no! Many of them are awash with cash and every day for months have been buying back substantial quantities of their own shares. Unlike in the late 1990s, they are lowly rated and with high earnings yields. So, I have spent the first two weeks of August repositioning my portfolio towards the FTSE100 (AstraZeneca, Barclays, Hays, HBOS, iSharesUKHighDividend, Kazakhmys, more Northern Rock, more Royal Bank of Scotland) and some FTSE250 companies whose prices seemed stupidly battered (Inchcape, Keller, Paragon). I had to say goodbye to some old friends to finance this (Inveresk, more Soco Intnl., Premier Farnell, SmallerCosDividendTrust, WHIreland). It's been an extraordinary quantity of transactions for me ... I hope that it's unltimately as profitable as my shift to SmallCap value shares in 1998-2001. The FTSE100 is down for the year. I still expect it will end the year quite a bit higher.

July: Even Wetter and More Turbulent

Lucky enough to be out of Birmingham most of July and, thus, missed most of the biblical rain experienced here and in the West of England. But the market turbulence got me, and I'm £30,000+ lighter at the end of the month. Nevertheless who wouldn't be pleased with this end-of-the-month summary of relative performance so far in 2007:

Me: +8.0%
FTSE100: +3.7%
FTSESmallCap: +2.3%

Luckily I had some cash when I got back and on 29 July I bought £50k+ of shares. I reckon at this level there are bargains around. My buys were: FTSE100Index (£37k), Northern Rock (Mortgage Bank), more Bellway (housebuilder), Glaxo (Pharmaceuticals). During the month I took some profits on Miners, Antofagasta and BHP Billiton. I hope to update on my portfolio's top holdings shortly.

A Turbulent Month

June 2007, never to be forgotten for its wet and stormy weather here in Birmingham. Rather a lot of stock market volatility, but because of a decision to do quite a bit of decorating - for the first time in 20 years - I've been too busy to clock up my ups and downs. But 30 June marked the half-way stage of the year and, although my June performance was lack-lustre, the half-year outcome is OK: up 10.4% whilst FTSE100 up 7.2% and FTSESmall up 4.2%.

Lately, I've been buying into mortgage bank, Northern Rock, builder, Bellway, and property agents/consultancy, DTZ as property-related stocks have fallen sharply. Also picked up fallers, Tate&Lyle and AstraZeneca. Have sold off quite a lot of oil explorers, Soco, some Dana, and some BP. Oils and mining stocks, where I'm over-represented have been doing well.

Transactions, week ending 1 June 2007

Up 0.82% this week. Happy with it? No, not when the FTSEAllShare was up 1.55% and the FTSESmallCos, 1.68%. Still, I'm comfortably beating both indices thus far in 2007.

Purchase:
Glaxo*

*After being hit by "bad news" on one of its drugs, and also downgraded by our good friends Merrill-Lynch.

Transactions, week ending 25 May 2007

A good week - up slightly (0.07%) whilst FTSEAllShare down 1.05%.

Purchases:

Character Group, top-up*
Paragon
Widney

Sales:

Highway Insurance (part)
Henderson Far East Income (part)
MS International (part)

* Purchased at "no-brainer" price of 163p on Monday.

Transactions, week ending 18 May 2007

A poorish week for me - up 0.36% when the FTSEAllShare was up 1.17%. Mostly this was due to the large price falls in furniture retailer, SCS Upholstery, after terrible results (what an idiot to not have completely sold my holdings) and in Character Group, which has this weekend led to some dispute on the investment discussion boards.

Purchases: Braemar Seascope (BMS), more Character Group (CCT), Plasmon (PLM)

Sales: Britvic (BVIC) (partial), GlaxoSmithKline (GSK)

Bad day at the office: show some character, lad

Wednesday 16 May was a veritable stinker for me. On a more or less level day on the market, a slight majority of my portfolio holdings slipped and, most significantly, my largest holding, Character Group fell by nearly 10% to 179.5p. This fall seemed to have no logic as two weeks ago the company - awash with cash - was buying back shares at 200p.

My response? Simple, to buy more Character Group both for myself and my mother and my daughter.

Transactions: week ending 11 May, 2007

My only transaction this week was the purchase of more Northern Recruitment Group (NRG), a share offering a yield of more than 7%.

Merrill Lynch and Goldman Sachs on Hanson. Oh, dear!

Monday, 30 April was proving a sickly day for Hanson (I had about 1% of my portfolio in Hanson, bought on the strength of their reserves of building aggregates). Its share price was down about 3% that morning at £8.30. Merrill Lynch had released a broker note and downgraded Hanson to sell from hold. The note stated that fair value is 614p and 842p on the basis of a takeover. The broker saw little prospect of M and A:

‘High recent takeover multiples and a weakening US housing market should lead to a much calmer period of US takeover activity in our view. ............
Hanson’s share price includes significant takeover premium despite no signs of a takeover. We do not expect a bid in the short term.’

614p? Gosh, I'd bought mine at 830p in late March. Your not-too-boastful-I-hope blogger did not bat an eyelid. Three days later guess what happened: news that a large European company, Heidelberg Cement, was considering making an offer. Whooooooooooooooooooosh. Price by end of trading on Friday: 1070.5p.

End of story? Not quite. Goldman Sachs had had Hanson on its Conviction Sell list! Now after the approach from it changed its recommendation to neutral. It admitted that the shares had gone up by more than a quarter since it formed its bearish opinion.

And to think somebody pays big bucks to these pillocks for this stuff. Ughh.

Twenty Largest Holdings, 30 April 2007

Here are my twenty largest holdings at the end of April (note that IT=Investment Trust and that figures represent percentage of portfolio). Cash stood at about 4%. Additions were made to Coffee Republic (through a share placing), Character Group, and Clarkson. BP was reduced. Gains so far this year - 10.3% compared to FTSE100 at 4.7% and FTSESmallerCos at 5.4%.

Coffee Republic 6.1
Character Group 5.9
Highway Insurance 4.0
Soco 3.1
Renold 3.1
Fayrewood 2.5
RC Group 2.3
Smaller Companies Dividend IT 2.1
Jupiter Dividend and Growth IT 2.0
BP 1.9
Burren Energy 1.8
British Insurance 1.8
Northern Recruitment 1.7
Keller 1.6
Clarkson 1.6
Dana Petroleum 1.5
Henderson Far East IT 1.4
Geong 1.4
Asset Management IT 1.4
Aminex 1.4

Trading statements

It's been quite a week for trading statements on the London stock market - many of them, and quite a number signalling profits exceeding market expectations: Colefax (wallpapers), Fletcher King (real estate, surveying), and Tribal spring to mind. Difficult to jump on board all three, but I got on the Tribal bus, despite it rising by over 10% as soon as the news hit the market. Also interesting to see that directors increased their holdings in Victoria (VCP) ... may have to buy more of those.

A down week for the FTSE100 (minus 0.84%), and one of those weeks when I beat the market by best part of 2%. Royal Bank of Scotland (RBS) has been marked down on possibility of hostile bid for ABN Amro (silly, surely, to offer shares when PE of RBS is much lower than target company).

.. exceeding market expectations

One feature I have found to be an excellent precursor to substantial rises in the price of a stock is a stock market announcement that profits are likely to exceed market expectations. The stock usually rises immediatedly, sometimes then falling back, sometimes not, before, over a longer period, rising considerably. The effect seems to be stronger when the "exceed" is preceded by words such as significantly or comfortably. It is also helped if the company is on a lowish rating, taking the debt/cash position into account. This morning Victoria Carpets (VCP) made such an announcement (see here) and I have bought some shares, despite having to pay more than 10% above yesterday's closing price.

Brown: A Fool with the UK's Gold

Gordon Brown isn't just an average fat bloke. No, he's been Chancellor of the Exchequer (that is, the UK's Finance Minister) for 10 years. Unfortunately, he's useless at finance and economics. As Mark Twain would have said: ".. it's not that he doesn't know any economics, it's just that everything he does know is wrong". Faced with the problem of managing the nation's gold reserves, he and his advisers (bad at economics) ignored the Bank of England's (they're good at economics). See here:

GORDON BROWN is to face questions in parliament after revelations that he disregarded advice from the Bank of England before he sold off more than half the country’s gold reserves at the bottom of the market.

Insiders involved in the decision have broken ranks after an 18-month battle in which the Treasury has blocked attempts by The Sunday Times to make public the official advice received by Brown before he sold the gold.

They have revealed that Bank of England officials had serious misgivings over the chancellor’s determination to sell 400 tons of bullion in a series of auctions between 1999 and 2002, when the price was at a 20-year low. Since then the price has almost trebled, meaning the decision cost the taxpayer an estimated £2 billion.

Anticipating trouble: dangerous phrases

An interesting post here on dangerous phrases in directors' announcements, which are often a warning sign that problems are being hidden from the stock market. The phrases include "international", "well positioned", and "firm/solid platform/foundation":

A firm/solid platform/foundation:
This roughly translates as rock bottom - what could be a more solid platform? Usually, by the time they resort to this phrase, you can take it as a hope expressed in sheer desperation, along the lines of "It surely can't get any worse than this.. can it? Either way, we're ****ed if we know what to do next and are resorting to prayer.

When directors contact you - wanting to buy your shares!

Shareholders rarely get letters from directors containing a general offer to buy their shares at the current market price. What should they do, upon receiving such a letter? I add this item to the pool of shareholders' experiences.

In late 2004 the directors of E Wood (then known as Torday & Carlisle) sent me a letter offering to buy my shares direcrtly off me, thereby saving me any market dealing costs. The price was around 90p. My thoughts at the time? Now, why were the directors taking this unusual step with a share which had been through years of trouble and stagnation? Well, it's rarely true that directors (and just about never true in the case of anyone cold calling you) are offering you 'something for nothing'. But it's far more common that they're willing to go 100 to 0 (or even 150 to -50) on sharing potential gains. So, my reaction was to buy more: I more than doubled my holdings from 2115 to 5035 in January 2005. Result: on 22 March a recommended cash offer of 323p a share was announced.

Top Ten Holdings, 23 March 2007

Figures show percentage of portfolio. Top ten holdings accounted for just over 38% of portfolio.

Coffee Republic 6.05
Character Group 4.83
Highway Insurance 4.00
Renold 3.32
E Wood 3.22
Soco International 3.12
RC Group 2.89
BP 2.52
Fayrewood 2.47
Smaller Cos Dividend Trust 2.14

2007: a difficult, but good, first quarter

Quite a lot of profit disappointments and negative trading statements, and I spent the first few weeks underperforming the FTSEAllShare. And yet, I've had a good quarter: at 30 March my portfolio had made 7.0% capital gain compared to the FTSEAllShare's 1.96% and the FTSESmallCo's 2.76%. That's over £32,000 (nearly $60,000) ....* Quite a chunk of the gains are due to strong gains in Character Toys and Coffee Republic ... plus a takeover for E.Wood, one of my top-ten holdings, effectively brought me nearly an extra £5,000 before breakfast one March morning.

* There's none for that greedy bloated socialist Gordon Brown (and I've gifted quite a lot of it to relatives and some friends) ... and, given our stupid inheritance/death tax rate of 40%, I've got nearly half a £million to spend at 40% off!

2006, Goodbye and Thank You

I've almost finished calculating my 2006 gains. They seem to be about £102,800 net*, that is, 28.3% against the FTSE All Share 15.?% for 2006. This is more than satisfactory. The year ended rather slowly with several company results being unhelpful (SCS Upholstery - where has the double-digit growth gone? - I've halved my holding; MSI International). My largest holdings going in to 2007 are:

Highway Insurance (HWY - Nonlife Insurance)
Coffee Republic (CFE - Coffee Bars)
Soco International (SIA - Oil Exploration)
Character (CCT - Toys)

I have also increased holding of Asian investment trusts in the second half of 2006 .... to nearly 5% of my portfolio. I may increase that shortly. Also, if I can overcome my inertia, I will purchase a put-option on the FTSE to serve as insurance against a fall in the markets.


* In Gordon Brown's high(and getting higher)-tax Britain that's the approximate equivalent of a £160,000 gross salary. And I feel better for not giving that greedy so-and-so £50,000+ to waste on hopeless socialist and harmful politically correct causes. There seems to be very little to show, apart from rather-well-off doctors and lots more fatter kids and young people, for all the extra public expenditure.