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

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.