Small Cap Value Report (Thu 12 March 2020)- MOSB, CINE, CARR
Good morning. Here is the usual placeholder article.
You don't need me to tell you that markets are absolutely in freefall at the moment. as they re-price shares to allow for a coronavirus pandemic.
I'm not really seeing any particular bargains at the moment, given that 2020 earnings for many companies could be dire. That could change today, as I expect we'll see panic selling today. Online businesses are looking particularly attractive at the moment, as a lot of people look set to be self-isolating at home, with nothing to do. Therefore online shopping, gambling, etc, are likely to be winners from the current upheaval.
When looking at things to buy, it's essential look closely at balance sheets and cashflow. Can companies survive with considerably curtailed sales, for the next few months perhaps? I avoid highly geared companies at the best of times, but this is a particularly crucial point right now. Also, I think forward PERs have gone out of the window now, as 2020 earnings forecasts are likely to be way too high for many, maybe even most, companies.
Estimated timings today - I hardly got any sleep again, as all this market chaos is certainly taking its toll. Therefore please bear with me today, I may not be able to meet the 1pm deadline. Let's work on the basis that it will be done by 4pm, to give me time to crash out intermittently. Sorry about that.
Update at 12:54 - today's report is now finished.
Moss Bros (LON:MOSB)
Takeover bid, cash, at 22p (a 60% premium).
I have to say, I think the bidder is crazy, and would be tempted to sell in the market at close to 22p, if possible, in case they change their mind!
This is a very lucky escape for MOSB shareholders.
Cineworld (LON:CINE)
Outside my normal remit, due to its size, although that could be about to change.
Management has undertaken a reckless, debt-fuelled acquisition spree, and they're even talking about pressing ahead with another big acquisition.
It has net debt of $3.4bn (excluding an additional $4.2bn of lease liabilities).
The balance sheet is absolutely horrendous. Once goodwill and other intangibles are removed, NTAV is negative $-3.1bn!
Of course, with coronavirus now turning into a pandemic, cinemas are likely to be largely empty for a while. Let's hope the bank is accommodating.
I definitely wouldn't want to be long of this share right now. Shareholders should be very worried. Not as worried as the bank though.
If it can survive the next few months without the bank foreclosing, then it should be OK. There's a Going Concern note, which contains this stark warning;
In the downside scenario analysis performed, the Board has considered the potential impact of the COVID-19 outbreak on the Group's results. In preparing this analysis the following key assumptions were used: the impact of a total loss of revenue across the enlarged estate for between one and three months, no fixed costs reductions should sites be closed, run-rate combination benefits of c.$133m expected to be achieved as part of the Cineplex acquisition, forecast capital expenditure reduced in 2020 by 90%, and cessation of dividend payments from 1 July 2020. This analysis does not take account of the fact that in the case of widespread site closures the films scheduled to be released during this period of closure could be moved to later in 2020. These downside scenarios are currently considered unlikely, however it is difficult to predict the overall outcome and impact of COVID-19 at this stage. Under the specific downside scenario, however, of the Group losing the equivalent of between two and three months' total revenue across the entire estate there is a risk of breaching the Group's financial covenants, unless a waiver agreement is reached with the required majority of lenders within the going concern period.
Only the specific downside scenario detailed above would indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. The Consolidated Financial Statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
The downside scenario set out looks the most likely outcome I would say, Therefore, there's a very real risk this ridiculously over-indebted group could go bust in the next few months. Who knows whether the banks will support it or not? If they put it into administration, then the banks own the company, and shares go to zero.
If it can get through this period, then the business would recover, and it is highly cash generative. However, coronavirus is the ultimate nightmare for cinema operators. But once people recover, I imagine cinema audiences would be bursting at the seams, because when people are denied something they enjoy, the urge to return becomes quite strong.
Carr's (LON:CARR)
Share price: 90p (down c.35% today, at 11:02)
No. shares: 92.4m
Market cap: £83.2m
Trading update (profit warning)
Carr's (CARR.L), the Agriculture and Engineering Group, today announces the following trading update ahead of announcing its Interim Results for the 26-week period ended 29 February 2020.
Agriculture division - it blames tough market conditions, and mild weather, for volume & margins on animal feed being weak. Cost-cutting has only partly mitigated.
Engineering division - orders from China & Japan have been delayed.
Overall - not good, and they haven't given us any idea of what the profit shortfall is likely to be;
... the Board anticipates the Group's performance for the current financial year to be significantly below its expectations.
More cost-cutting is being done.
My opinion - in normal circumstances, I would find 90p an attractive entry point for this share. Its agricultural business shouldn't be affected by coronavirus, I imagine. However, the potential problem is the engineering division. Who knows what might happen to the order book, in current circumstances? Customers tend to cut costs, and pause capex in times of trouble. There's nothing new on Research Tree, so we can't take this one any further for now.
The balance sheet looks reasonable - with a strong surplus of working capital, although there is some long term debt, but not an excessive amount.
Overall, I can't get excited about this, because there's not any earnings visibility at the moment.
I'm going to leave it there for today.
Best wishes, Paul.
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79 comments
Capitulation, i really hope so, i’m sure all are looking with disbelief at some if the massive % falls across the board. For me i started to scale in a little yesterday & today, with resting orders at 10,12,15 percent below, and they are getting hit. Mostly dividend, but some small caps , but resting orders against dividend aristocrats etfs that fall 10-12 % in one day, this is really extreme.
VIX at 70+
FT100 down 10%. amazing. I've been scanning the BBs. Someone has suggested that the underlying problem is margin calls. Googling the news seems to confirm that gold is going down in order to raise cash to meet margin calls in the stock market (link). The depth of the plunge is reminiscent of the crash in 1987 caused by program trading.
It makes sense.
It seems that history has taught us nothing.
I wonder if we'll have any high-profile bankruptcies, together with a lot of busted retail investors. Time will tell.
As I had said before, this doesn't seem like a typical bull market top. A collapse due to margin calls would seem a better fit with the way the market is behaving. It also fits in with why I was puzzled as to why the market never rebounded. The market didn't bounce because it couldn't. It was a one-way ticket.
I'm no finanical market insider, I must stress. I'm just guessing all this as an untrained outsider.
Where and how this all ends I have no idea.
Gold always sells off with severe margin call pressure....its next pristine collateral....for variety of reasons I have high exposure to it but knew that under severe duress this (hopefully) short term pain needs to be accepted. So far during this sell off it has held up better than previous experience
I've been buying a few odds & sods that already sit in my portfolio, look reasonably cheap,and topping them up e.g. Property Franchise.
Obviously I won't be able to judge the bottom, but taking the pension related longer term view that dribbling some money into the market will be beneficial at some point in the mid term, and not being a trader, this seemed to me a reasonable approach in these turbulent times.
I will be using my full ISA quota on equities when we cross the allotted line in April.
Today is first day that parallels the stress of financial crisis IMO. Up until now we have had a growth/valuation crisis in US (which was coming) severely accentuated and accelerated by COVID19....that made for brutal toxic down. Now the stress is in financial system. I'd say that Blackrock telling all portfolio cos to draw down credit lines last night was the firing gun.
UK has responded best out of West at moment in terms of financial-economic stuff...and only time can tell with health.
Europe and US very poor. That has helped catalyse financial stress.
I expect the response function to now move to shock and awe and govt and other institutions will do what they had thought unimaginable.
Ultimately, the great shared fear (apart from the Germans so far - who had to be dragged kicking and screaming 2008-12 by the americans and Brits to action) is a debt deflation cycle. The fear will now be rising like a monster and policymakers know they must slay it.
What happens?...
Hi where did you see the news re Blackrock ? Thanks
£vod doesn't work.
What do you mean Vodafone (LON:VOD) does not work?
Hi All and Paul
I am relatively new to this site, and investing.
I am also unhappy with my current isa platform (ii) due to great difficulty getting money in, and moving between accounts. Can I please have recommendations as to which platform best to go to sign up for this years new isa.
Yes, its painful looking in but need to recognise that now .... we have blood on the streets!
Good luck all
These might help:
I have been investing in equities and property for the last 25 years. I liquidated most of my equities, funds and ITs a couple of weeks ago and am now 90% cash. I'm retired now and have learnt that, whilst good returns can be made in equities, you are only a profit warning or Black Swan event away from your investments cratering. It also takes up a lot of time trying to keep up with company developments etc. Property, by far is a much safer and less volatile investment for me. I have made good returns in the stock market over the years, but I will probably spend some of it now. I even sold most of my Fundsmith/Smithson which were very good performers.
Speaking as a medic who never quite understood why those that smoked didn't feel as anxious as I was about the health risk, who never understood why the lethal nature of annual influenza and other infectious diseases, such as measles was so played down, I am bemused by the apparent hysteria that surrounds Covid 19. Last year, we lost 1600 odd people from "normal" influenza in the UK and still only a fraction of those vulnerable feel the need to get a free jab to avoid it. It also seems to have been a novel idea to some people that washing your hands is a good idea and that coughing without putting a hand or a handkerchief over your mouth is better than letting the whole world catch what you have.
The most fascinating thing is attending a concert and hearing almost no coughing at all. One upon a time, you would cough to disguise the sound of a fart. Now you would fart to disguise the sound of a cough.
Never mind the way some of us who, only a few months ago were invoking Churchill and the blitz spirit to counter fears that Brexit might cause problems, now are afraid to run out of loo paper in a self-imposed hermit status. Thank goodness we aren't actually facing any wars!
I suppose that investing has never been much to do with reality and all to do with sentiment but some events beg a load of questions. Today, 25% has been wiped off the value of Go-ahead (LON:GOG) as the company, reasonably suggests its profits might be somewhat reduced. Do some investors seriously envisage London commuters walking to work or not showing up at all? Will those of us who survive now stop putting sugar in our tea, or eating sweets, for some reason, so we'd better forget owning a piece of Tate & Lyle (LON:TATE)? Given a likely death toll of 2%, mostly among those already in poor health, is it the virus we should fear, or fear itself? After all, if 98% of us survive and live on with lifelong immunity, to boot, do we believe the world's over-population crisis has now somehow been solved?
Hi TangoDoc
I love your point
The most fascinating thing is attending a concert and hearing almost no coughing at all. One upon a time, you would cough to disguise the sound of a fart. Now you would fart to disguise the sound of a cough.
"I suppose that investing has never been much to do with reality and all to do with sentiment but some events beg a load of questions."
Absolutely. Given the world has 7,800,000,000 people...
However, the market is pricing in a potential global recession and a credit event as over-leveraged US firms are not ready for the containment actions likely to be trigged. Also investors are addicted to Central Bank easing whenever there is a problem, but this time we have a virus that doesn't care what the interest rate is. Throw in oil price crash and a US president who gave a weird speech and here we are.
What's interesting is, in today's market, EFT index trackers are big. So investors are selling these off which means all stocks are sold indiscriminately by market cap weighting! This supports your point - good companies are getting cheaper.
I'm preparing a buy list. Can't pick the bottom, but need to get ready. Some decent companies at sale prices.
The analogy with a rubber band 'springs' to mind. Markets get over-stretched in both directions but at some point revert to the mean. There are buyers out there.
https://www.stockopedia.com/content/plans-for-an-eventual-bear-market-219508/comments?order=createdAt&sort=desc&mode=threaded
This is more like the steel spring that bends only so far then it either assumes the new attitude permanently or snaps.
Think we are half way there on the FTSE decline with PE at 11.6.
I feel stocks that have massive balance sheets or will be propped up by central banks will be winners. There is no logic in a crisis. Just have to slowly add on each big drop and average a price.
Just dont get burnt out interms of capital available or energy .
Best way to go that is monitor price alerts and say away from news / people flapping.
We have under 500 cases in a population of nr 60m. We are 3 weeks in and the world is flapping.
Just stay away from highly geared luxury low margin stocks.
Good luck all
The problem is that the PE of 11 is based on forward earnings. Analysts systematically overestimate growth prospects. It currently sits at 10.5%. In most circumstances I'd say that it's out by a factor of 10. Given the current circumstances I'd say that even a 1% growth is optimistic.
It's impossible to say how everything will pan out. We could get earnings collapse coupled with a PE contraction. That would be painful!
PE contractions are not necesarily inveitable, though. I seem to recall that there was a recession in early 90's. Earnings collapse. One famous market investor (I don't remember his name, but he was a famous value investor with a proven track record) said that the market was crazy being on such a high multiple.
Subsequently the stock market went on to perform well. He had made a bad call. The market was well aware that earnings had collapsed, and had factored that in. So you can never tell for sure.
My own thinking: I just use naive metrics. It places the FT100 on a PE of 13.8, which is a little cheaper than average, and therefore "safe". BWTFDIK. For all I know valuations could go down to 5, which would be absolute carnage.
My own hunch is that the markets will go lower but we won't go into financial Armageddon. I think we'll have a good ol' regular recession, if anything, not a complete dislocation.
Update: I just checked my portolio for the first time in a few days. What a farking mess. Needless to say I own Go-Ahead (LON:GOG), which is down 27% today. There's going to be some amazing bargains in the next year, and I might be tempted to break my rule about doubling down. But not yet. It's a dangerous game, those falling knives.
BBB Bonds
It's not just Aviva and the like, one of the largest retail ETF's £IS15 , and lots more are very exposed. They are forced sellers if their BBB bonds are downgraded, you have massive ownership of BBB in these ETF's they will all be selling at the same time if there are downgrades, which are inevitable. I sold out yesterday, if you hold bond funds you would be advised to look at the ratings of the debt the fund is allowed to hold.
Hi Paul,
I haven't been sleeping very well either. My lovely 95 year old grandma is in hospital, my boiler is broken and we have no heating until someone can come out to have a look NEXT MONDAY and I am loosing a lot of my hard earned savings in the markets. It's hard not to feel depressed! I haven't sold anything but am underwater on most holdings and some are very dire. I hold some gold mining companies Anglo Asian Mining (LON:AAZ) , Shanta Gold (LON:SHG) and Hummingbird Resources (LON:HUM) but even these are not performing as expected. I also have about 30% cash (growing by the day as my share portfolio value plummets), so my only hope is that I manage to put some money in at the right time and in the right businesses to make a difference when sentiment changes. I invested through 2000 and 2008 but the magnitude of the uncertainty around COVID19 and the impact on all economies throughout the world makes me think that this is worse.
Hope everyone is doing ok.
Ben
Lessons learned with my Nutmeg pension.
My pension distribution is 70% nutmeg and 30% SIPP. When it became clear that COVID-19 was going to be a big event I managed to derisk my SIPP in about 10 minutes.
On nutmeg one of their offerings is being able to move between risk levels from 1 - 10 for free as they match people moving up and down.
I jumped down to level 1 but to my surprise that de-risk cost about 10% of my portfolio as they explained nobody was adding risk!
It's now crystal clear that you have to manage your own portfolio and have full control.
Without Stockopedia I am not sure I would be able to manage this effectively.
Apologies if I am breaking the rules (1) by talking about an oil stock, and (2) one which has not announced today.
I have been looking at the EnQuest 7% 2022 bonds (ENQ1) trading (at the time of writing) in the mid 40’s, which suggests deep distress. Yet they have been paying down debt and their announcement in early February says
“EnQuest has hedged c.2.9 MMbbls of oil in the first quarter with an average floor price of c.$65/bbl. In accordance with the Oz Management Facility agreement, the Group has a further c.1.1 MMbbls hedged across 2020 with an average floor price of c$52/bbl.”
It also says that “unit opex of c.$21/Boe”
So this company appears not to need to be too worried unless (or should I say “until” in these markets) oil falls to the low to mid 20’s.
That would suggest that the bonds (presently yielding 15%+)are good value for income if you have risk tolerance. Or am I missing something ...?
Disclosure - I hold
Regards, Ricardo
Hi Ricardo,
Regarding the Inquest Bonds, I have the same observations on Premier Oil (LON:PMO) , the PMO1 retail bonds are trading at £49 with a 6.5 coupon & 2021 maturity. They trade pari-pari with the corporate bonds. To my mind these have a good margin of safety here. Oil recovers & these shoot up, company fails and you are buying at a 50% discount to face. As this is a retail market I am assuming there is no volume and the MM's have marked these right down. Premiers hedging is below, the biggest short position in premier was owned by the hedge fund that owns the main corp bonds. Hard to tell in the market but these look a good each way bet. I am no expert on credit however but I hold. If anyone has a view please comment.
Finance
Premier has hedged 37 per cent of its 2020 first half oil entitlement volumes at US$64/bbl, 40 per cent of its UK gas volumes at 56 pence/therm and 46 per cent of its Indonesian gas entitlement volumes at US$382/te. The Group’s complete hedging schedule is set out at the end of this release.
Full year 2019 field operating costs are estimated to be below full year guidance of US$20/boe at US$18/boe, of which US$11/boe relates to field opex and US$7/boe to FPSO lease costs across the Group. 2020 operating costs are forecast to be US$21/boe, of which US$15/boe relates to field opex and US$6/boe to FPSO lease costs. Development, exploration and abandonment expenditure for the full year 2019 is estimated at around US$300 million, below original guidance of US$340 million, due to the release of contingency spend related to the BIG-P drilling programme, the Tolmount project tracking below budget and some deferral of spend into 2020.
Total 2020 production and development capex is expected to be US$320 million, principally relating to drilling at Tolmount, Solan and Catcher. In addition, Premier expects to spend US$90 million on exploration and appraisal and US$30 million on abandonment (pre-tax relief).
Premier continues to benefit from its substantial UK corporation tax loss and allowance position with estimated losses and allowances of US$4.2 billion carried forward at 31 December 2019.
Premier reduced net debt by over US$330 million during the period from US$2.33 billion at the end of 2018 to US$1.99 billion as at the end of 2019. Estimated 2019 year-end leverage ratio (covenant net debt / EBITDA) is 2.3x against a covenant of 3.0x.
It will be interesting to see what happens to the already fragile Italian banking situation. I would guess that Lagarde has this in the forefront of her mind.
hardly got any sleep again, as all this market chaos is certainly taking its toll.
Paul, yes small caps are in dreadful losses, but as Purpleski alludes why not sit and wait for a rise to previous levels? Most investors are looking at red now.
Is your strategy that you need to sell every month to generate a capital gain???
Keep it up Paul.
Just wanted to say thanks for keeping up the writing during tough times in the market. I am also starting to feel the pressure. This morning I even thought about liquidating serious loss making positions just to get the cash out. I wont be doing this though, as I feel we are far too gone..
Interesting article and analysis on Covid here and what we're likely to see coming up based on the data and experience of China/Italy. Worth the 24min read. https://medium.com/@tomaspueyo/coronavirus-act-today-or-people-will-die-f4d3d9cd99ca
Yes, read it and share it. It was this article that led me to think about worst case scenarios.
If you are feeling that COVID-19 isn't that serious, and open to having your opinion changed, this provides some facts and evidence-based extrapolation that may change your views.
Something strange has happened to Spectra Systems (LON:SPSY) which has fallen below Spectra Systems (LON:SPSC) for the first time I can recall. SPSC is a small set of shares in Spectra that have trading restrictions and that historically have traded at a significant discount to SPSY. The discount has now reversed.
And why is Spectra Systems (LON:SPSY) falling anyway? It doesn't seem very exposed to COVID-19 or to government responses.
Potentially the drop could have something to do with the risk that there may be a move to accelerate the shift to a cashless society in view of the coronavirus and general hygiene concerns of the movement of cash?
Hi everyone,
Question not directly related to small caps: How can I go about purchasing a position in the FTSE 100 index or FTSE 250 index please? Is it through an ETF, any views on the best options?
Many thanks
Ishares have ftse100 tracker etf ticker ISF IS CORE FTSE100 UCITS GBP(DIST) ETF (LON:ISF) and FTSE250 tracker etf ticker MIDD IS FTSE 250 UCITS GBP (DIST) ETF (LON:MIDD)
Both low cost, very liquid and track accurately.
Not advice, but IF I was buying an index it'd probably be a vanguard FTSE ETF, although there's plenty other options out there. An ETF would probably be the way to go from a reliable provider that holds real assets, not synthetic.
Vanguard Index fund will be your best bet!
My strategy of being more or less fully invested in businesses that have robust balance sheets works for me. It's not nice seeing a sea of red and money disappearing but I try not to worry about it any more than fluctuations in the value of my house or family business. Sure it's more volatile but I view it as owning a part of a company not just an ethereal thing on a screen. Admittedly having a long time horizon and said family business helps, it must be infinitely worse if you rely on the stock market for an income / living.
I'm not saying this is the right way, everyone has to find their own way, but it does mean I'm not overly stressed right now.
Anyone know what's happened to A J Bell this morning? Seems to be particularly hard hit on no news?
OK so here's one for you - anyone care to take a stab at naming stocks that should be entirely unaffected by any of the following: (i) COVID-19 or any of its after-effects, (ii) people staying at home and not going out, not travelling, not socialising etc. (iii) oil price collapse and/or (iv) credit deterioration due to (i) to (iii) causing a crunch and potentially stricter lending standards leading to reduced credit availability and issues with debt.
It's not easy! Here's a starter - how about Moneysupermarket.com (LON:MONY) ?
I haven't come up with much else. Rightmove maybe (assuming that the credit crunch doesn't turn into a property slump ... which may be a big 'if'). Even your usual candidates of defensive shares like F&B producers start to unwind once nobody is buying drinks in bars and there may be supply chain issues from other countries where they source their ingredients, bottling factories etc.
BIACS
$TSTL - is my vote for not affected - if anything it benefits and is priced higher than when the crisis too hold. Not cheap mind.
crisis took hold
One of my holdings has been completely immune to the market turmoil... so far:
https://www.youinvest.co.uk/market-research/FUND:BJJPTR8
I have been buying more as I don't know what else to do with the cash. In the past I've seen gold get hit just as bad as equities when the market goes into a tailspin. As ever, this isn't advice, I could be wrong. In fact, don't buy it. :)
Growth Of 10,000 (GBP)
EssexPete and others ...
Please note that this fund is an open ended direct commercial property fund and that open ended direct commercial property funds are generally terrible investments in a downturn. They are about the worst things you can buy.
This is because as people start trying to sell, the open ended funds are forced to sell ... but the fund finds it can't . It's much more difficult to sell direct investments than property stocks. So the fund will try to sell assets at rock bottom prices, but wont be able to and so is ultimately forced to close beacuse it can't meet the demand for redemptions. When investors are finally allowed to sell (a long time later) they get a fraction of the value prior to the downturn.
Maybe you have found an exception to this rule, but it's a scenario that has played out many times before. Personally, I wouldn't touch an open ended direct property fund at any time, good or bad. Good luck with whatever you decide to do.
Hi cmpeckham,
Thanks for the 'heads up.' I just noticed it wasn't affected at the moment, but you are probably right.
Pete
Pondering the spread-betting firms:-
CMC Markets (LON:CMCX)
IG Group (LON:IGG)
Plus500 (LON:PLUS)
None have debt, they should be doing well in current markets, reasonable dividends .......
Regulation is an issue (Australia I believe will announce a system similar to our own).
Haven't looked at for a while - anyone any thoughts?
I also note that betting firms are being hammered - but I would have thought that a pure internet play like 888 Holdings (LON:888) would have some defensive characteristics. Again regulation to the downside.
Phil
I thought the same re. 888 but then realised a portion of their business is not retail/consumer facing - it's B2B supply to casinos (which I assume will be absolutely deserted around now...). I have not knowledge of what the terms or nature of their contracts with the casinos are, or how much of an effect (if any) it would have on 888 revenue, but it seems likely that is being discounted here to some extent? A more pure play consumer facing website gaming operator would be an interesting prospect though - I'm not familiar with this sector having never really explored it. Would be interested to hear from anyone who has though.
BIACS
Hello BIACS, look at Bluefield Solar Income Fund (LON:BSIF), boring I know, but hardly changing, because this is a solar energy infrastructure investment trust with mostly regulated price income, and the sunshine doesn't vary much. I have been in since the beginning, not shot the lights out, but bond-like performance, except it has higher yield! My regret here is selling some when it hit 140p, which I thought was overvalued cp NAV, to buy a higher income stock. But now it's a little lower with not much downside, and the price is pretty stable even now.
I hope I am not being complacent, but the reason I can still sleep is that our main portfolio is a bunch of pretty high-yield equities giving me more income than we need to live off.
I am so glad I only had 15% in non-income-bearing story stocks. They are, of course, rubbish. I think equities are safer if their capital growth comes as a by-product of decent and rising dividends.
I am trying not to look at the capital valuation of the portfolio, because we don't need to spend capital at the moment, so unless they go bust it doesn't really matter. (Well. that's how I got through 2009...) And I am struck that I have actually the best run of on-target results for months happen in the last couple of weeks, but heir prices have still been trashed: Legal & General (LON:LGEN), Aviva (LON:AV.), Duke Royalty (LON:DUKE), Phoenix Group (LON:PHNX), £SOM. I read your Aviva comment with respect, jwebster, but I do feel their solvency ratio is a decent buffer.
Possibly too large for SCVR but any thoughts on big fall in Aj Bell (LON:AJB) (c. 18% fall) following trading update comments on impact of BOE interest rate cut and market mayhem! Balance Sheet and Cashflow at September 2019 were very strong and Q1 trading update positive. Certainly meets Paul’s requirement for strong balance sheet and cashflow. Guess fall due to previous high rating in excess of 35 times forecast earnings and perceived impact of economic situation. Wouldn’t want a major investment platform for private investors to be in danger - that would only add to any impending financial crisis.!
VIX is currently 62. Interesting to note in the 2009 financial crisis its closing peak was 59.89, (intraday 89)……..I don't know about anyone else but the world markets seem to have lost the plot.
£Cine is certainly looking precarious and there have been some odd transactions with shareholders using shares as collateral.
While a complete shutdown of the estate for 2-3 months (deliberately worded in my opinion to make it sound like some outlandish assumption) suggests a revenue reduction of somewhere between 15-25%. Given Wh Smith (LON:SMWH) statement today, would suggest a 15-20% drop in revenue is certainly within the realms of possibility.
Management capability is in doubt too - first they took on debt such that they cannot take a bad half year and appear to be doubling down
Hi Paul
“I hardly got any sleep again, as all this market chaos is certainly taking its toll. Therefore please bear with me today, ...”
I am sorry to hear this. I have never been through this type of market and it is taking its toll on me but I go running once or twice a day and so that I sleep I take some night nurse (I think better to do this than have my immune response impaired by lack of sleep) and I am trying to stay of the booze but failed last night.
Please stay well and don’t worry about deadlines.
I am 30% cash/gold and keep asking myself is that enough? If I had more cash now would I have the ability to redeploy at the right time. I am not sure. If markets drop another 15%/20% (so 35%/40% from all time highs), which I think is likely would I then have balls to get back in, in time?
And if I don’t sell (and the companies don’t go bust) these are not real losses. However I am certainly not buying at this level.
I certainly have to learn from this current situation. Assuming it recovers to where we were a month a go in relatively short (less than a year) time, I have ask myself “How do I want to invest to achieve my goals?”.
When everything is going up overweight positions is Anglo Asian Mining (LON:AAZ) and Rockrose Energy (LON:RRE) seem ok and to some extent with the activity of the former (gold mining) and the cash of the latter, in way they still feel not completely unreasonable positions. We will see.
Thank you for the posts in what must very difficult times and stay well.
Michael.
I would welcome any views on the worst case scenario, just to get things in perspective. What would happen to Government Bonds if this was as bad as the Spanish Flu 100 years ago?
Suggest you read up about Spanish Flu before making such comments - this Virus hits the weak not the strong.
It was just a question Berksbee - Your response comes across a little disrespectful (in my humble opinion)
Fair enough guys - apology given. My point was Spanish Flu was a totally different kettle of fish. What killed was the strength of an individuals immune response - it was most brutal to those who were fittest. This virus is the opposite.
I'm not commenting, just asking for information. I find it easier to estimate the best case outcome but harder to estimate the worst case (however implausible the worst outcome might seem). Once I have a clearer view of both, I'll be better placed to plan my strategy and take action as things develop, taking into account my risk appetite and investment horizons.
I had a chat with a guy at the bank this week (he places trades etc..).
His view was that from the looks of it the private investors are holding and its the institutions that are selling and buying.
His view was to hold rather than crystallise losses and keep an eye on the vix it will indicate the time to start buying top quality stock with little debt at low prices.
His view on the UK was that most businesses were well placed to weather this storm due to cash balances being increased of the last few years in relation to Brexit planning.
His main advice was avoid stocks with high debt in an industry these will be first to go to the wall, the survivors will be well placed to thrive after all this is over.
This isn't the 1918 flu or anywhere like the 1968 flu, 80% of people who get it are fine, its the remaining that need additional care that are the concern. When you consider the amount of testing in South Korea the death rate is between 0.6-0.7% which is high compared to standard flu, but not the 1918 or 1968 stats where we lost 30,000 in the UK.
The economic light (which is a bit morbid to think of) is that COVID-19 kills mainly the old and people with morbidity, these people are less lightly to be economically active. (this doesn't make my 87 year old mum and dad feel good though, they are living in fear at the moment and self isolating). I did read an interesting but morbid opinion last week, that if we lost a far selection of the over 70's then their wealth will go to the next generation and this newly flush generation will spend some of this wealth in the economy, plus government wont have to pay pensions and disability benefits - so we may have bigger economic up tick after. very morbid to think that though.
A (there is more than one!) bad scenario is the following
1. USA virus spreads rapidly and govt enacts containment nationwide
2. firms cashflow hit in certain sectors for 2-3 months
3. the USA is loaded with high debt firms after years of share buy-backs, these firms miss payments and downgrades follow
4. much of the debt is BBB rated, which is investment grade, but only by one notch
5. derating of BBB leads to bond funds, pensions, insurers all mass selling as they don't have the mandate to hold non-IG bonds
6. thus... big credit event
For example, Aviva, well known UK firm, holds £7.7billion in BBB corp bonds. Compare with their market cap 12.2b. Interesting what would happen to them with a big write down or forced sale at a discount. Probably survive, but it will surprise us just who is holding this stuff, due to desperately chasing yield to meet commitments. And then on the other side they will have to tell shareholders their remaining assets yields no longer match their long term liabilities (pensions, annuities, etc). Yuck.
There's a huge structural mess there to unwind at some point.
Still, the virus will likely peak out in 2-3 months. There will be some great stock picking opportunities for us coming up. I'm somewhat ignoring the macro picture other than to avoid certain sectors e.g. financials which will get hammered somewhere down the line.
Thanks for the Aviva tip off, was pondering it in the next few weeks.
Aviva (LON:AV.) does sound high risk when you consider the bond situation. So does Legal & General (LON:LGEN) - they are in a similar position. However, I have reviewed the way that this money has been allocated for Legal & General (LON:LGEN) - they have put a lot of thought into minimising risk by spreading widely over countries and industries. (I would imagine that Aviva (LON:AV.) are similar). You can pick this info up from the latest results. For example, as at 31/12/2019 their biggest holdings are: Sovereigns, Supras and Sub-Sovereigns (18%), Utilities (14%), Non Cyclical Consumer Services and Goods (10%), Infrastructure - Social (8%), Infrastructure - Economic (7%)... Each category is split between several different continents. I found it reassuring - after all if these sectors start failing then our stock portfolios will be last things we'll be worrying about. I hold both Aviva (LON:AV.) and Legal & General (LON:LGEN) - so perhaps I am kidding myself!
Aviva (LON:AV.)
Yes, they do diversify well. The issue is macro yields in the long term.
Aviva on their balance sheet have 93.6 Billion of assets matched against liabilities. They make a spread on the two. Last year underlying cash flow was 1,745m of which 432m was spent on debt and centre costs and 1,222m on the dividend. Which pretty much maxes out their cash flow.
Their Solvency II position is strong with 206% ratio. I.e. they hold 24,548m in own funds of which 12,638m is surplus to the solvency capital requirement. So they could wear a melt-down in their corporate bonds.
But, any asset losses will need to be filled to continue meeting future liabilities. So that's the risk. Say they sold the BBB bonds at a 30% discount that's a 2.3B loss about two years of dividends. Although the real issue would be what would they buy to replace them? Yields on gilts are too low. They will have to go up the risk curve. The already have done this to some extent with 21.5b in mortgage loans of which 36% are commercial, albeit on safe low LTVs average 56% with 2.9x interest cover.
The market knows all this thus Aviva is priced with the dividend yield of 10.3% today, wow!
If you have a fairly benign view of the world economy and interest rates not dropping much further Aviva looks great. If you think we are in for negative interest rates and a credit event, not so good. I admit if it drops much further, much of the above is priced in and it might have a place in a balanced portfolio as an income earner.
Financials are a tough call at the moment.
Great extra info. I think with Legal & General (LON:LGEN) - that they have a policy of not selling their bond portfolio. They hold for the full term. So the issue of selling at a loss shouldn't be a major worry. Although when the bonds mature then you will need new bonds to replace. And of course there are issues if the bond defaults on interest payments or self destructs (but with the diversification - that should be limited).
As you say it is a balance of risk/reward. I wouldn't want to bet my house on it.
But looking at the China/Korea profile of reduced new cases it seems as though the time frame for a more positive outlook is not too far away (both are reporting low levels of new cases).
"that they have a policy of not selling their bond portfolio. They hold for the full term. So the issue of selling at a loss shouldn't be a major worry"
I don't know the policy at L&G but in general insurers and pensions don't have the mandate to hold non-investment grade bonds, so BBB down rated one grade drops out of investment grade, i.e. becomes 'junk' so they have to sell. That's part of the 'reflexive' risk sitting in credit markets.
Not saying it's going to happen, but it's a matter of awareness for investors.
One point about yields. A lot of pension plans are linked to things like government bonds/gilts. Now that rates are going even lower, expect pension deficits to balloon.
Back in 2014;/5, something like that, the government was trying to get everyone into private pensions, with automatic opt-in. I worked for a large firm, so that thing was doing the rounds. I vigorously opted out of it. The scheme was of a bond type.
The logic behind all this is that they can match liabilities, and bonds are "safe". My own logic was that yields were low at historic lows, and I would likely be able to do better investing by myself.
I honestly believe that insurance companies offer just about the worst financial products imaginable. They are subject to a high degree of group-think. Naturally, their rationales always sound plausible, but fundamentally flawed.
What we learn from Howard Marks is that there is there is no such thing as "safe at any price", nor does an asset class have outperformance as its birthright.
In the minds of the insurance companies, no risk is acceptable; missing out on the obvious fact that one needs to make a more circumspect view than that, and not just view things from one angle.
Those ballooning deficits are reduced by increased mortality, or shortening longevity too though. Some of the worst deficits are at companies with large numbers of old, and already retired, employees.
FREng you asked specifically what would happen to Govt bonds.
The answer depends entirely on the currency that the bonds are denominated in and whether or not the govt in question is the sovereign issuer of that currency. In brief, US and UK govt bonds are safe because there is no realistic probability of default even in a worst case scenario. In a worst case scenario, they would carry on increasing in value as interest rates fell below zero.
Eurozone bonds, for example, are a different matter because they are issued in a currency that is not controlled by that govt, so they MAY be forced to default. The US and UK can simply "print" whatever they need to repay bonds. The only limit is the inflation that would be generated as a result, but in a deflationary world they will be looking for ways to generate more inflation anyway.
Italy, as a counter example, can't do this. It has to either increase taxes, cut spending, or try to issue replacement bonds. None of these actions will have good outcomes in a recession. Yields on their bonds may start increasing (the bonds fall in value) as default probability increases.
Ultimately (personal view) it is unlikely that they would default because the ECB would intervene with "whatever it takes" as Draghi said before because the result would be catastrophic. But there is still a risk, because the Germans may prevent Lagarde from bailing out the weaker states, at least in a timely manner, and the eurozone may break up in the chaos. The last time a similar issue arose, the bonds of the weaker euro states diverged significantly from the stronger.
As at 8.30, all stocks in the FT100 have fallen, with the exception of NMC Health (LON:NMC), which is suspended.
"I hardly got any sleep again, as all this market chaos is certainly taking its toll"
Your doing a cracking job, and like the markets will recover the falls given time.
Panic selling? More like the market makers panicking! Next down 6% with 1.3 thousand shares sold and many more like that in early trading. Madness
The FTSE futures are down around 5% or so (on reasonable volume). If the individual constituents are not marked down at the open, there is an immediate arbitrage between the futures and the individual stocks. In these fast markets, pricing will be led by futures and indices.
Article by John Authers on Bloomberg today raises the possibility of a financial crisis arising from the consequences of high debt levels and weak balance sheets. The best hope is that the economic disruption is short-lived. It's behind a paywall but you can subscribe for free.
Jarvis Securities (LON:JIM)
FWIW - good results today from a solid company. Outlook good.
Phil
(I hold)
My morning smallcap tweet: Intu the unknown
Carr's (LON:CARR) Novacyt SA (LON:NCYT) Intu Properties (LON:INTU), Trakm8 Holdings (LON:TRAK)
Carr's (CARR) guides FY significantly below mgmt expectations due to weak agricultural markets and delayed engineering contracts in Asia.
Novacyt (NCYT) covid-19 test sales booming.
Intu (INTU) grim as expected. "The decline in values in the second half of 2019 from the impact of yield and ERV movements suggests an acceleration towards the point where we believe valuations should start to stabilise." An acceleration? Is that supposed to be reassuring? "We will focus on placemaking, curating our space..." Oh please. I'm short.
In line: Trakm8 Holdings (LON:TRAK)
Increasingly I'm hearing perspectives that stock x is now cheap, the question obviously is, by what measure; it isnt cheap based upon this years forecast earnings, as we have literally no idea what they may be. If it's cheap on historic earnings, has the current price retraced to a price of a year or more ago, and consider if that company is different now to what it was If it's cheap based on a future recovery on what basis do you consider that recovery may happen.
I guess my point is, be patient, nobody has a gun to your head to buy. As PI's we have far more flexibility than fund managers, a fund manager would probably need to buy into a falling market for lots of reasons, a PI doesn't, albeit illiquid stocks may well need different strategies.
Sure, if your investment horizon is long enough, all things being equal, any bad buys in good companies will probably be ok in the fullness of time. Also I absolutely agree that timing a market is hard, some say impossible, but we are in freefall.
Anyway, obviously each to their own, just thought I'd share where my mind is.
Keep safe
In this market, even if a stock was cheap, it would likely get cheaper.
If that was the case why wouldn't it be lower already? If "the market" knew it would likely be lower, why would anyone in "the market" be holding it and not selling to re-buy at the lower price?
I'm assuming you don't believe markets are efficient then?
Fair point. Markets look like getting cheaper again today and there may well be further lurches down as other countries get to where Italy is now. However, we are nearing a 20% correction already and if I was holding a lot of cash I would be looking to drip money in from here on a long-term view. In other words, don't get caught by the classic private investor mentality of waiting for all to be well again. By then you will have missed it. Try to buy at the point of maximum panic but be aware that there won't be a big neon sign saying this is the bottom!
could not agree more
What indices would you buy? I am not buying anymore UK b.c I am massive overweight here already...
I have never managed to buy at the bottom and mostly when I have tried to buy at the bottom they have moved lower, after 35 years of investing I have learned markets move down faster than they recover (I am a Slow learner) and for me the most profitable strategy is to buy when a recovery is underway. Taking notice of Momentum is the single most profitable lesson I have learned by far