Are equity investments like buses?

Wednesday, Nov 24 2010 by
30
Are equity investments like buses

It is often said that "there are plenty of opportunities" in the equity market or that "it doesn't matter when you miss an opportunity, because there'll be another one along in a minute". Indeed that is observably true because, in line with the old proverb that "it's an ill wind that blows nobody any good", there will always be some company somewhere benefitting from whatever turn of events has occurred.

Indeed, it is usually so often true that people get quite blasé about it - and they simply assume that the market is replete with good opportunities all the time. But is that true?

Some people will know that at one time I was a transport planner......but you probably won't know that 30 years ago I did some of the earliest pioneering work in trying to mathematically quantify the timekeeping qualities of London's buses. The big problem/joke at the time was that the buses frequently turned up in bunches (3 or 4 at a time), followed by a long gap.....and then followed by another bunch. There were a host of behavioural and mathematical reasons for this and, these days, the vast majority of such bunching has become a thing of the past. Indeed it has become true that "there will be another one along in 10 minutes", because considerable effort and technology is now applied to keeping bus headways as constant as possible and in line with the advertised timetable.  In fact we have become quite used to it, just as we have with the regular appearance of  opportunities for stock market investments.

But what if the stock market (or the bus network) were to lose the factors that keep fresh boarding opportunities appearing at regular intervals? What if the markets (or the bus network) suddenly became more random, unpredictable and uncertain? And what if we face an unexpected dearth of opportunities for jumping aboard and going "somewhere nice"?

I wonder whether we might be on the cusp of such changes for the markets.

It seems to me that low interest rates, limited lending, consumer squeezes and growth concerns are all beginning to take their toll on equity markets  - and the result is that we have more randomness, with hopes being raised and swiftly dashed for both individual stocks and the markets as a whole.......and share prices (broadly speaking) just wandering around and going nowhere in particular.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

Certainly I am finding it difficult to find outstanding investment opportunities that can be added to my portfolio, despite the availability of a large proportion of cash in recent months. And this is starting to become a concern for me as I can see the cash pile growing a great deal more in the near future (due to my expectations over my holding in SOCO International (LON:SIA) ). By "investment" I don't just mean a quick  trading punt - I mean the sort of stocks that can deliver long term outperformance over a decade.

Yes there will be no shortage of 10-20% gains to be had  from short-term anomalies.....but that is IMO "trading" rather than "investment" - and the private punter is at a disadvantage to the street. And then there is the problem of spotting them and sorting out the good from the bad. It isn't a game I want to play - there are other things to do with my time.

So, where are the solid LTBH opportunities? Sectorally I remain well-disposed towards the oil and gas sector....and I also have some banks on my list of possibles. But in general I would say that valuations aren't attractive, with many of the better-known stocks trading at levels that discount a great deal of future good news. And further down the food chain a number of minnows with strong and well-publicised stories also seem to have run ahead of events (or, in a few cases, completely lost touch with reality).

I'm not wholly averse to other sectors - and indeed have just "missed the bus" whilst away on holiday with one of my (US) watchlist stocks that has risen 50% in the last few weeks - but I'd be interested to know where people see the longer-term investment opportunities against a backdrop of global uncertainty and persistent constraints on growth and demand. Don't be shy  ;-)

emptyend


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
33 thumbs up
3 thumbs down
Share this post with friends




52 Comments on this Article show/hide all

djpreston 27th Nov '10 33 of 52
6

If people think that O&G is difficult, or small cap mining explo stories, then they are in for a rude awakening when it comes to Biotec.

Looking at the survivorship rate for compounds progressing through to even Phase III trials, let alone making it onto the market, you are going to haveto be incredibly lucky. Wildcat doesnt even come close to it. As fr trying to understand the biological/chemical interactions, effects etc, I wouldnt have a clue even if I started researching now and kept going for 10 years.

I know Im talking my own book but if you have to consider biotec or even something well outside your own field of comfort, most investors would be far better served looking at specialist closed end or open end funds - closed end funds when a sector is out of favour or overlooked give an even better entry via a biger NAV discount.

Fund Management: European Wealth
| Link | Share | 1 reply
ohinerau 27th Nov '10 34 of 52
5

Following the themes of biotech and shovels at the gold rush, I regard the equivalent of shovels in biotech as being diagnostics - the gold rush is the emerging market of personalised medecine. The regulators are increasingly requiring pharmas to accompany their drug development projects with the development of a diagnostic to identify those people for whom the drug is suited - until recently, drugs from a patient standpoint were more akin to shooting with a shotgun than a rifle, resulting in huge amounts of money being wasted on prescribing drugs which will never work and in some cases actually damaging the patient. The genome map provides the data to enable diagnostics to be developed which address these latter issues. The attraction then is that pharmas pay diagnostic companies to develop the diagnostic to accompany new drugs - investors in the diagnostic companies thus not only avoid the cost of lengthy clinical trials but are able to see their companies generating income and profit, whilst knowing that if the drug development proves successful there are likely to be substantial income in years to come from the supply of the accompanying diagnostic - this provides a revenue model akin to the early days of telcos.

I appreciate the problem referred to in earlier comments of how to navigate through this very complex piece of jungle. My experience has been to use the traditional compass of people ie find a person who i) knows his way around this piece of jungle extremely well from an operational standpoint, ii) has the genetic skills required to make money, and iii) is trustworthy - sounds a tall order, but an investor needs access to only a few such people to make life very enjoyable!

| Link | Share
siestainvestor 27th Nov '10 35 of 52

In reply to djpreston, post #33

I know Im talking my own book but if you have to consider biotec or even something well outside your own field of comfort, most investors would be far better served looking at specialist closed end or open end funds

Wouldn't Big Pharma, say Glaxosmithkline (LON:GSK) or Astrazeneca (LON:AZN), be the equivalent of a fund in that you get a portfolio of potential future products (and an historic cash flow to fund the research with a bit left over for dividends)?

| Link | Share | 1 reply
djpreston 27th Nov '10 36 of 52
1

In reply to siestainvestor, post #35

Wouldn't Big Parma, say GSK or AZN, be the equivalent of a fund in that you get a portfolio of potential future products (and an historic cash flow to fund the research with a bit left over for dividends)?

 

To an extent. Ive been a buyer of both AZN and GSK at their lows on a valuation basis - low PEs, patent expirylikely to be "in the price", phenomental cashflows and balance sheet strength, very atractive divi but also a very paridly growing Emerging Market business.

I was talking more from a pure biotech/theme perspective - to obtain a very wide spread of companies - some will fold and some will succeed. Something like LON:WWH is always a good place to start for a broad brushstroke approach.  NAV 750p shares 672p.

Fund Management: European Wealth
| Link | Share | 1 reply
sirlurkalot 27th Nov '10 37 of 52
2

"Wouldn't Big Pharma, say Glaxosmithkline (LON:GSK) or Astrazeneca (LON:AZN), be the equivalent of a fund in that you get a portfolio of potential future products (and an historic cash flow to fund the research with a bit left over for dividends)?"

Surely Big Pharma has limited growth prospects (patent expiries) though sort of attractive valuation metrics, and so is a quite different prospect from Small Biotech which has v attractive growth prospects (if you can choose the right one) but silly valuations in conventional terms?

| Link | Share
siestainvestor 27th Nov '10 38 of 52

In reply to djpreston, post #36

Something like LON:WWH is always a good place to start for a broad brushstroke approach.

 

djp

Thank you for the lead - I'd not come across WWH.  I like the discount.

Not so sure about the 16.5% performance fee when their principal holdings seem to be Big Pharma.  In particular, J&J, Roche and Novartis I hold already (for much the same reason as you hold GSK and AZN).

Siesta

 

| Link | Share
emptyend 29th Nov '10 39 of 52
4

Returning to the macro issues for a moment, I find it quite surprising that the markets are firm again this morning (up 50 FTSE points to nearly 5720. In the macro background at present we have:

None of this looks particularly bullish to me, either from a UK perspective or from a global one. Perhaps the markets are enjoying a relief rally now that Wagner has been booted out of X-Factor and England have saved the first test with some astonishing batting (517 for 1....I mean...when was the last time?? ;-))?

It all feels to me as if the markets are slowly getting undermined from a fundamental standpoint, even if perhaps year-end effects may encourage a "steady as she goes" feeling amongst institutions keen to keep mark-to-market valuations up as the books are closing.

ee

| Link | Share | 1 reply
marben100 29th Nov '10 40 of 52
7

In reply to emptyend, post #39

Didn't take long for that +50 pts to turn into -30. ;0)

Opening action on a Monday can often be transitory. Maybe a fair few London traders/fundies late getting to their desks, through snow & tube strikes?

However, I thought we're supposed to be looking at a multi-year view on this thread, rather than a multi-hour one? :0)

My experience through the volatility of the last couple of years has been that playing close attention to the "micro" and looking for anomalous prices in specific instruments is what's really paid off. So, rather than worrying too much about ephemeral "markets", looking at individual situations has proven more productive. However, one of my lessons from 2008 is that it's a big mistake to ignore the "macro" background altogether.

Cheers,

Mark

| Link | Share | 1 reply
emptyend 29th Nov '10 41 of 52

In reply to marben100, post #40

So, rather than worrying too much about ephemeral "markets", looking at individual situations has proven more productive. However, one of my lessons from 2008 is that it's a big mistake to ignore the "macro" background altogether

Yes - I go along with that completely. I think the macro background is very unpromising and, whilst I have a couple of particular situations that I think have things going for them in that context, it is tough to know where the winners might be from the political uncertainties in particular (Koreas, Wikileaks, Eurozone etc). Economic uncertainties are one thing - but major political events can be real game-changers.

French defence stocks? Has anyone had a look?

ee

| Link | Share
Fangorn 29th Nov '10 42 of 52

French Defence stocks? EADS. Thales?

I'd personally go for the largest European defence manufacturer myself (BAE systems) than the European offerings. Failing that a US one, such as General Dynamics, Lockheed.

Don't see much benefit to holding European defence companies given how wooly European countries are when it comes to paying their way in the defence arena.

| Link | Share
sirlurkalot 29th Nov '10 43 of 52
3

If you're after companies with long term defensible strategic advantages, I offer you Avanti Communications.

Legal right to up to about 12 more satellites (a legally-defensible "moat" to those who like such concepts), each of which would have a comfortable positive NPV and which can be funded by pre-sales to the ultimate users once Avanti has the credibility of last Friday's launch. Strategically, the only problem I suppose is that satellites will one day be made obsolete by ground fibre optic cable, but that day's a long way off. Nice positive broker notes and results on Wednesday.  http://www.avantiplc.com/news/press-coverage/avanti-communications-%E2%80%9C-countdown-lift-hylas-1-%E2%80%9C-strong-buy-base-case-target-pri

| Link | Share | 1 reply
emptyend 29th Nov '10 44 of 52
2

In reply to sirlurkalot, post #43

Yes - thanks for the Avanti Communications Group Plc (LON:AVN) suggestion. In fact I have had them on my watchlist since you first brought them up (in 2009 at c 180p IIRC). They've done extrordinarily well - and so have you for spotting them.

Sheer laziness on my part that I didn't buy any - plus a bit of "there'll be another along in a minute" thinking, coupled with getting the timeline wrong on other investments that would have generated the cash to invest. Every time I've looked at Avanti Communications Group Plc (LON:AVN), there has never been a compelling circumstance to pile in, because they've more or less gone up in a steady straight line. And now is no different, given the success of the launch.

It is interesting to see the heading on your link: "base case target price of 1,079p and potential upside to 2,194p".....very much like some E&P research that I was reading 2-3 years ago in terms of potential - though that has so far remained unfulfilled.

Incidentally, I chanced last year on the Avanti head office when visiting someone who has an office just over the road twixt Shoreditch and Hoxton. Not quite the sort of HQ location I associate with telecoms type companies.....though in retrospect I have to remind myself of the first time I visited the (old) Tesco head office in Cheshunt - which might have best been descibed as a shed on an industrial estate.
rgds
ee

| Link | Share
sirlurkalot 29th Nov '10 45 of 52
4

On the subject of Avanti Comms, the management have always struck me as being on the way to being wide boys who got lucky, particularly given their participation in the collapse of Avanti Screenmedia a few years ago. It wouldn't surprise me at all if their head office didn't appear exactly blue chip. IMO they aren't shy of marketing themselves, or their news or potential. I expect a blast of positive talk and media coverage with their results on Wednesday, which might well help the SP.

Only a small fraction of the capacity of Hylas-1, the first satellite now in orbit, has been sold. That fraction has been sold at rates some way below industry averages, because the main operators have redundant capacity on many other satellites, guaranteeing service, whilst Avanti didn't yet have even one satellite in orbit. It would be reasonable to expect the rest of Hylas-1 capacity to be sold (taking a couple of years??) at rates some way higher than the rates that have been achieved so far, and how much higher is IMO the issue that'll drive the SP in 2011. On Wednesday the key issue I'll be looking out for is extent of sales achieved so far, and indicators of the rates they'll achieve in future. Anyway, any more Avanti discussion should be on their separate thread, I just thought the initial idea had a place here.

| Link | Share
emptyend 29th Nov '10 46 of 52
1

It wouldn't surprise me at all if their head office didn't appear exactly blue chip

You can judge for yourself by looking at Google Maps streetview - it is near the east end of Rivington Street, on the south side just west of the railway bridge....attractive looking "window box" on the west wall ;-)  [better than I remembered it though.....]

Interesting comments on revenue rates etc. Thanks again for mentioning it (and apologies to SM whom I note probably found it even earlier - albeit perhaps a tad too early]

ee

| Link | Share
MaxCashflow 29th Nov '10 47 of 52
3

I'm currently looking for big investment trusts for my father who is looking for a set of buy-and-hold alternatives to an annuity. I was interested in a Fool article published today that covers several here:

http://www.fool.co.uk/news/investing/2010/11/29/invest-alongside-the-really-rich.aspx

The relevance to this thread is that apparently Hansa Trust has 45% of its money in Oceans Wilson, and trades at a 18% discount to NAV.

I wonder if we can find anything that holds Hansa Trust at a 20% discount :-)

| Link | Share | 1 reply
marben100 30th Nov '10 48 of 52
2

In reply to MaxCashflow, post #47

Hi "Max",

I wonder if we can find anything that holds Hansa Trust at a 20% discount :-)

Yes. Believe it or not, Ocean Wilson's... :0) Strictly speaking OCN's investment portfolio (i.e. that bit outside Wilson Sons) is run by Hanseatic Asset Management (also chaired by William Salomon)! So what I've said is not really true but there's clearly a rather incestuous relationship between OCN & Hansa

Thanks for highlighting the article, whilst I knew that Hanseatic managed OCN's portfolio, I didn't know that Hansa Trust was itself heavily invested in OCN. Nice way to get two lots of fees: first for managing OCN's portfolio & then for running a trust largely invested in OCN! I guess that kinda justifies the discount to assets OCN trades at.

RCP is a large holding of mine (bigger than any single company investment I hold).

Cheers,

Mark

| Link | Share
flyinghorse 30th Nov '10 49 of 52
4

To answer the thread literally:
I feel equity investments are more like traffic jams when you always want to be in the lane thats moving faster.(Micro environment).
In truth the whole area is grid locked and not actually moving very fast (macro enviroment)due to overall system constraints and cant go any faster.

The same feeling could be had by deciding you are on the wrong bus and not knowing when to jump off and ride another, will your bus speed up as soon as you step off?

I live in the country and love the fact that I avoid busses and traffic jams. The busses we do have here are infrequent (none existent in places) but they do move faster.

This thread and some of the other LTBH threads on here strike me as a desire to avoid the daily commute and aggravation that comes with it,but still make some money.
This particular bus is the "mental " one of the least painful and most reliable  route to individual security/financial independance.

Would people stop using Investment busses if they were financially independant-or could they just not resist staying out of the game?

Saying that theres 2ft of snow outside so there are no trains,busses,and very few private cars moving.

FH

| Link | Share | 1 reply
emptyend 1st Dec '10 50 of 52
4

In reply to flyinghorse, post #49

I feel equity investments are more like traffic jams when you always want to be in the lane thats moving faster.(Micro environment).
In truth the whole area is grid locked and not actually moving very fast (macro enviroment)due to overall system constraints and cant go any faster.......


This thread and some of the other LTBH threads on here strike me as a desire to avoid the daily commute and aggravation that comes with it,but still make some money.
This particular bus is the "mental " one of the least painful and most reliable  route to individual security/financial independance.

Would people stop using Investment busses if they were financially independant-or could they just not resist staying out of the game?

Good analogy re traffic jams etc - it does always seem to be "the other lane" that moves faster and there is a constant temptation to switch.

I've highlighted a relevant point, though. There is less compulsion to "play the game" when one has "enough" (however that is defined by the individual) - and one might also suppose that risk-aversion will be higher in that one doesn't want to convert a position of  "enough" into a position of "not enough". Those who can manage to convert "enough" into "more than enough" though are of course quite happy to continue to take risks and play the game - but even there a string of losses can cause a reappraisal.

ee

 

| Link | Share
Robert Newgrosh 6th Dec '10 51 of 52

"The bull market is built on sand"  emptyend 18 March 2010

Sandcastles in the sky?

Financial Training: New Skills Financial Markets Training
| Link | Share | 1 reply
emptyend 7th Dec '10 52 of 52
8

In reply to Robert Newgrosh, post #51

"The bull market is built on sand"  emptyend 18 March 2010

In March the FTSE was 5625. In the meantime it has been to 4800 before clawing its way back up again to about the level it was in March. Not what I would call a "bull market".

ee

| Link | Share

What's your view on this article? to Comment Now

 
 
You are feeling neutral

Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

You can track all @StockoChat comments via Twitter


About emptyend

I spent 20 years working in and around the City, before becoming fully-focused on investment on my own account. I've always paid most attention to "big picture" issues and LTBH investments rather than trading - which is why I am heavily focused on the oil sector (especially stocks which have positions that are attractive for strategically-driven M&A) more »


Stock Picking Tutorial Centre


Related Content


Incidental stuff
Incidental stuff
SOCO International 21st May '09

DRC  Congo K
DRC - Congo (K)
SOCO International 26th May '09



Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.