StockRank Movers - June 9th: Wincanton - Super Stock Or False Positive?

9th Jun '15 by Alex Naamani

15 comments 17203 reads

Wincanton is one of the more controversial stocks in Stockopedia's discussion stream. This logistics company sparked an intense debate between Ed Croft and Paul Scott earlier in the year, mainly because the company has "one of the worst balance sheets" that Paul has ever seen; however, it retains a very high StockRank (97) and has returned about 150% since it first entered the 90+ StockRank bucket. The price trend appeared to support Paul's argument between early February and late April, when Wincanton's share price dropped by around 9%.

Nevertheless, the share price has rebounded in recent weeks, appreciating by 18% since 1st May. Prices have a tendency to follow a random walk over the short-run, but over the long-term good, cheap and improving stocks have had a tendency to beat the market. Is Wincanton really a super stock or is it a false positive ?

Do balance sheets matter?

Financial health is an important aspect of quality. Poor quality companies tend to have deteriorating fundamentals and face higher bankruptcy risks. Is Wincanton a risky stock? According to the Altman Z-Score, Wincanton does have a high risk of bankruptcy. Is this a problem? Research by S&P suggests that 'lowly-geared companies beat highly geared ones by about 1% per annum'. Indeed, the chart below suggests that lower indebtedness offers greater downside protection during recessions, when weaker companies could go to the wall. For example, notice how companies with the most leverage fell harder during the bear market of 2007-08.

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Falling Quality

Wincanton may have a poor Z-Score, but around twelve months ago, investors who were bullish about the company may have pointed to Wincanton’s F-Score. The Piotroski F-Score was designed to identify companies with improving fundamentals - for example, an improving balance sheet. In July 2014, Wincanton had a strong F-Score (8 out of 9), so the bulls may have argued that Wincanton had a weak balance sheet, but was nevertheless improving its capacity to service debt. However, the F-Score has now fallen from 8 to 6, and the firm's ability to pay short term debts has decreased. Wincanton's current ratio improved between September 2013 and July 2014. But since then the current ratio has fallen from 0.75 to 0.66.

This is part of a wider trend whereby…

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Mark Carter

10th Jun '15

I have Lookers (LON:LOOK) in my personal portfolio, which is up 12.5% since I bought it. I don't own Wincanton (LON:WIN) personally, but you can see it's up 29% since purchase in my Fantasy Fund.

Whilst it's true that you can prove anything you want with statistics, I think there's something telling about this. LOOK was, in a sense, a slam-dunk "obvious" call. The valuation seemed reasonable, and the business had some good tailwinds. With WIN, the business seemed more uncertain, and there is the debt to worry about.

And yet, here we are, with WIN having outperformed LOOK. What do I take away from all this? I think it's this: sometimes you've got to play a bit of a wildcard.

Rusty2

A few points, the sp fell 15% and then went up 18% so its back to where it was? I used to hold Wincanton (LON:WIN), it is tipped in IC magazine, until I read Paul's reports about it, so I quickly sold at around 164p for a reasonably profit. I'm not tempted to buy again. The other problem with WIN is the low profit margin. I certainly would not want this type of company in a recession. I see its Magic Formula Score is A-, to me thats a red flag, I have seen some the top rated comapnies on Magic Formula Score, lets just say they are some rather dubious ones like Quindell (LON:QPP),

dasv

11th Jun '15

Isn't value rank based on EV which ignores various liabilities - e.g. WIN's pension liabilites?

In my view Value rank needs to be re-examined in light of the balance sheet weakness of WIN still producing a high value rank.

this guy has a go at providing an EV calc which includes e.g. pension liabilities to give a more representative/useful metric:-

Http://valueandopportunity.com/2012/07/03/how-to-correctly-calculate-enterprise-value/

note:-

"It is therefore no wonder that with a “standard” EV/EBITDA screener, often UK retail companies with huge (underwater) operating lease and pension commitments show up as “cheap” and then people are surprised that they go bankrupt soon (Game Group anyone ?)."

Alex Naamani

Hi,

Thanks for the feedback.

You make an interesting point Mark: "sometimes you've got to play a bit of a wildcard." I guess each stock in a portfolio has its own role. If stocks were a football team, high risk/beta stocks (perhaps companies like WIN) could be thought of a 'strikers', while low risk/beta stocks could be the 'defenders'. When the market crashes, low beta 'defenders' tend not to fall as far. High beta stocks (AKA. the strikers, or wildcards) may get crushed in a downturn, but could outperform during a bullish phase. So maybe there is a role for 'wildcards' in each portfolio. The trick is to have an appropriate balance of defenders and wildcards. See here: http://bit.ly/1L36hUM

All my own opinion of course - not investment advice. What do you think?

Best,

Alex

Edward Croft

Blimey - new 52week high here today for Wincanton. New multi-year high actually.

The thing to watch out for with Wincanton is the progression of investment type.

I've attached the StockRank progression chart here - we're moving from full QVM to Trending Value here as the Quality rank has fallen markedly in recent months.

If the momentum stalls, this could fall into Value Trap territory which is rarely a comfortable hangout for investors. If the broker numbers are cut, or the share price takes a big tumble I'd be looking to avoid.

Paul has warned repeatedly that he thinks this is a Value Trap - in fact he's long said it's bankrupt...

Anyone long should be watching this like a hawkimo and probably setting stop losses given the clear risk and uncertainty. Of course the trend could continue for some time - momentum tends to do that.

DYOR. I am not a holder, nor am I short.

red

Scary stock. 68MM in ebitda capitalized at industry average 7x leaves no value to the equity. It could appreciate at the rate of de-leveraging (30MM/215MM = 14% per year) if business remains absolutely rock solid but one slip and one loses everything. Looks like PFD did two years ago.

Damian Cannon

I'm not a holder of Wincanton (LON:WIN) but I have followed the arguments with great interest. What I don't really understand though is why its high Value Rank is such a problem.

The way I see it is that the ranks have a single purpose - to assign higher ranks to stocks that are likely, as a group, to produce better than average capital performance. From this perspective the performance of Wincanton (LON:WIN) is entirely compatible with the high ranking.

Now I can't bring myself to invest in Wincanton (LON:WIN), what with Paul's warnings giving me a huge cognitive bias, but clearly many people out there are happy to buy into the stock and continue to do so.

It may well be that balance sheet issues will eventually bring down the company but that's for the future - which the ranks aren't trying to predict.

Damian

GrindertraderUK

Hi Damian,

As the main man has always said

'There is being right or there is making money'

Being right can be years away

andrewdb

Super stock or false positive ?

Neither.

Not a super stock to me:-
As others have pointed out, as long as nothing bad happens, the stock will do well, partly due to the leverage and the leverage leaves it vulnerable to unexpected bad things.
To me that means it is a momentum based punt - not really a super stock.

The rank is not a false positive:-
The ranks are based on reported financial results, broker estimates and momentum (and maybe other public information)
All of this is backwards looking.
Look at it the other way round - if it was a 'false positive', that means that the SR system can see into the future and it somehow 'misleads' us. If this was the case Mr Croft would have been able to retire to a county / country of his own some time ago.

To me it underlines the value of the SR system - it points out that based on the past the business may have a good future.
Combine that with PaulS who looks forwards (or better yet DYOR) and the chances of ending ahead are (I really hope) greatly increased.

I wish there was someone who did a 'Big Cap' report as much of my thinking is formed by disagreeing with what I read.

peterg

Whilst it's true that you can prove anything you want with statistics, I think there's something telling about this. LOOK was, in a sense, a slam-dunk "obvious" call. The valuation seemed reasonable, and the business had some good tailwinds. With WIN, the business seemed more uncertain, and there is the debt to worry about.

And yet, here we are, with WIN having outperformed LOOK. What do I take away from all this? I think it's this: sometimes you've got to play a bit of a wildcard

I think your first sentence sums it up - you can't draw any meaningful comparison from those 2 data points alone. You have no way of knowing, from that basic price movement comparison, what the relative risks were. It may well be that LOOK was indeed a "slam dunk" call - an essential part of which is that risk should be low, and by implication performance is likely/hoped to be good, but not exceptional. WIN could well be a much higher risk buy - which Paul Scott's view certainly supports - which may well have a good chance of strong performance, but also a much higher risk of serious loss.

I haven't analysed either, so I'd certainly not choose to get into detailed comment, but I think you should think very carefully before acting on the conclusions you draw in your last (quoted) sentence. Good portfolio performance is going to come in the long term not from buying stocks that may do very well, but may turn round and hit you where it hurts. It will come from stocks that produce decent, and probably unexceptional returns with a low risk of serious loss.

Peter

I think its a matter of timing if you had looked at WIN 2 months ago it was not looking so good, down about 18% from its peak. LOOK performance is fairly similar. Not sure you can read too much into this, if WIN had gone up 50% then maybe, lots of shares have gone up recently 18% is no big deal. For example one I hold Solid State (LON:SOLI), has gone up 35% since end of March. Short term gains is about timing. StockRanking selection of highest ranked shares gives you more chance the shares will do better than lower ranked ones, if you check the performance charts this bears it out, it does not mean all ranked 90+ will do well and does not mean all under 10 will fall, in fact my best perfoming share this week is only has a SR 7, its about probability.

shanklin100

14th Jun '15

I think it would be very helpful for Stockopedia to take a view on what it means by a "false positive". This term does not appear to have been defined, having been used by Stockopedia staff both in this article and in commentary on PLUS.

Earlier in this thread, Andrewb states

"The rank is not a false positive:-
The ranks are based on reported financial results, broker estimates and momentum (and maybe other public information)
All of this is backwards looking."

I agree with this, albeit broker estimates are obviously a historic attempt to look forward.

In terms of WIN's rankings, one of the concerns I had a while back was that the -ve TBV is not reflected in the Value ranking, and hence was higher than it should be (a false positive in the parlance of this article?). This seemed nonsensical to me, but on a previous thread re WIN, Ed provided links to research identifying that this is a completely appropriate methodology to have adopted, and that I was incorrect in giving weight to a -ve TBV.

Indeed, more widely, I have not seen anything to suggest that Stockopedia's metrics are anything other than suitably derived, albeit further research might I guess lead to refinements of the methodology.

So, I take the view that stock rankings are data driven, and objective and cannot themselves be false unless some of these data are incorrect.

In the case of WIN, nobody seems to be questioning any of the data used to generate the various Stockopedia rankings. So no "false" positive there?

At the other end of the scale, with a number of foreign-based companies, particularly Chinese ones, there is wide-spread skepticism at to the quality of their accounts and the broker forecasts, all which could result in StockRankings divorced from reality.

In contrast, at PLUS, the accounts appear to be 100% accurate but, material information relating to and affecting the very fundamentals of their business model was (arguably) not in the public domain for a number of months and has only very belatedly started to be reflected in broker estimates. So, in a data driven model, once could argue PLUS has been a "false" positive.

On a separate tack,I hold shares in INL, OPM and ACSO, all of which having StockRankings in the 50's. I hold them because, I suspect allthree have positive upsidethat is not being captured by Stockopedia's methodology. Given that I think I understand the methodology, I am content to take the view that these shares are "falsely" middling and I may or may not be proved correct in due course.

I think it would helpful for Stockopedia to state what it means by "falsely" in the context of its rankings?

Regards, Martin

stock_Hunter

3rd Aug '15

Observed the selling huge qty of insider !!!!!!! Exit the counter

grb

18th Nov '15

It would be really useful for us ordinary users to be able to generate charts of rank scores over time like that...

StockRank Movers - June 9th: Wincanton - super stock or false positive?

Do balance sheets matter?

Falling Quality

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Alex Naamani

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