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

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.