post

Bear Market or Bull Market?

Despite falling on the last day of the week, stock markets (notably the US) still registered decent gains, boosted by the huge $2Trillion package of support signed off by the House of Representatives.

A manic rally during the week saw the US market climb more than 20% in 3 days, the best 3 day run since the 1930s, to enter what the Wall Street Journal termed a new bull market. We think it’s a bit early for such optimism, although with so much cheap money sloshing around the world there are suggestions the recovery could be quicker than many are currently expecting.

A new term took centre stage this week in the lexicon of company announcements with ‘Covid-19’ updates dominating the corporate headlines. Our associates Investors Champion issued daily commentary on many of these updates, which you can read from the link here.

Fundamental clients have free access to the Premium Content of the Investor’s Champion site so please let us know if you register so we can upgrade your account to premium.

Thankfully, the vast majority of our portfolio companies, have the reassurance of a net cash position and look well placed to see out the current crisis without the requirement for further equity injections. Unlike the financial crisis of 2008/09, banks are also in far better shape and happy to extend credit if required.

Companies are also set to be given considerable financial support from governments so that they can pay their staff, which should help prevent a major social collapse as well as an economic one.

Top marks this week go to consumer goods giant Unilever, which has committed to a huge package of support, and Redrow founder Steve Morgan, who has pledged £1m a week from his foundation to charities helping some of the most vulnerable sectors of society cope with coronavirus.

Companies across all sectors have been forced to cut their dividends in response to the current crisis and balance sheet strength is being tested to the extreme. Even those businesses with apparent cash reserves are drawing down on credit lines in advance of the barren period ahead.

It’s clear that, having gorged on cheap money for far too long, many businesses have little in store for rainy days, let alone the sort of biblical flood now being experienced.

Many companies take great delight in referring to their strong balance sheets, but these are often dominated by high levels of debt. Bill Gates, co-founder of Microsoft (a Fundamental portfolio company) remarked that, in the earlier years of the company he always wanted to have enough money in the bank so that even if their customers didn’t pay them for a year, Microsoft could still keep paying everyone and also continue to carry out necessary research and development. Microsoft had the luxury of gross cash of $134bn and net cash of $55bn at 31 December 2019 – the latter double its annual operating expenses, suggesting Gates’ philosophy remains to this day. If only others had adopted a similarly prudent stance.

We expect plenty of volatility over the coming weeks and months, but there could also be some excellent opportunities to buy inherently good companies at rock bottom prices.


post

Dividends at risk: apply some cash flow common sense

During these testing times the dividend yield can often prove illusory. While many companies are well-placed to continue supporting their dividends, many others, burdened by high levels of debt and declining cash flow, will be struggling to support the cash payments with short term survival sadly the primary focus.

Faced with a meaningful decline in its clothing and home business, Marks & Spencer (LON:MKS) has decided to cut its final dividend to save £130m. With £4bn of net debt at 30 September 2019 and a £230m interest bill last year it looks a wise move as cash flow declines.

We would like to think that Sage Group (LON:SGE), the provider of accounting and payroll software, should continue to see the cash come in. As a precaution, it has decided to suspend its recently announced share buy-back programme in order to preserve a high level of liquidity, but we think the 3% yield is reasonably safe.

Unilever’s (LON:ULVR) defensive attributes are illustrated by the modest 14% fall in share price over the past 6 months and a resilient performance in March with the shares marginally higher. Unilever has always paid a dividend and the forecast yield of 3.7%, not to mention its fantastic portfolio of everyday products, look extremely appealing in the current low interest rate environment.

It’s a different story for many smaller companies whose earnings and cash flow might be at risk. Despite the luxury of cash in the bank, Quartix Holdings (LON:QTX) prudently announced a cut to its final and special dividend this week.

Johnson Service Group (LON:JSG) is also cutting its dividend.

EMIS Group (LON:EMIS) and Curtis Banks (LON:CBP) both appear to have the desired balance sheets and cash flow profiles to be able to continue to support their dividends. But if the crisis drags on longer than expected even their dividends could be at risk.

Dividend seekers should not be swayed by forecasts, which are rendered meaningless in the current environment, and the focus should be on real balance sheet strength, debt and cash flow. Debt is fine if the cash flow is assured, as has always been the case.

Fundamental General and AIM portfolios include many of the companies mentioned in this post.

If you are looking for high levels of income from your portfolio please speak to Chris or Stephen on 01923 713890

This is an extract of an article published by our associates Investor’s Champion here.  


post

Why are Markets so Volatile?

An excellent article today in the Wall Street Journal ‘Why Are Markets So Volatile? It’s Not Just the Coronavirus’ commented how the stock market is now dominated by computer-driven investors that rely on signals such as volatility and momentum

Since the mid-February market peak, the Dow Industrials have closed more than 1,000 points lower on six trading days and rebounded at least 1,000 points four times, not seen since 1929. Adding to those moves, and potentially hastening them, are technical factors that have little to do with how investors feel about the outlook for companies, earnings and the economy.

In a dramatic shift since the financial crisis, the market today is dominated by computer-driven investors whose machines react to a series of technical and other factors, as well as by more-traditional investors who rely on reams of fast-flowing data. On many days, forces such as the market’s volatility and momentum, derivatives activity and the market’s liquidity—how easy or difficult it is to get in and out of trades—can help drive trading.

As long -term investors, we invest in companies based on their fundamental attractions and have little interest in apparent short-term trading opportunities, which only serve to enrich the brokers.

The clue is in our name!


post

Our current thinking on the ‘Corona Crash’

This week’s stock market sell-off has been indiscriminate and, with a few rare exceptions, has materially affected the share prices of all companies, large and small.

The Financial Times has highlighted how the S&P500 index, dominated by some fantastic cash rich companies, experienced its quickest fall into a bear market on record, taking just 16 sessions. While the coronavirus, oil price and recessionary fears were the catalyst for the sell-off, the speed and severity of the fall was primarily due to the proliferation of automated computer trading systems which now dominate the trading of large company shares around the world.

In this regard it is noticeable that, at the time of writing, the FTSE AIM index has fallen 23% year to date which is marginally better than the 29% fall experienced by the FTSE All share and broadly in-line with the 22% fall of the S&P500 index respectively. Where smaller less-liquid companies generally bear the brunt of any market sell-off, this is a surprising outcome and very different to what we experienced during the Financial Crisis of 2008-9. It could also reflect the prevalence of many investors in AIM holding shares for Inheritance Tax planning purposes, who are obliged to display more patience.

The impact of the coronavirus is clearly going to be more meaningful for world economies than originally anticipated. Certain sectors are going to experience a challenging period over the next few months as expensive assets remain under-utilised and staff need paying.

Thankfully, Fundamental portfolios have no exposure to oil and gas and resources companies, where even the blue chip names have seen their share prices fall significantly more than the overall market. Shares in Royal Dutch Shell are currently down 41% year to date pushing the forecast yield to 12%, if those forecasts are to be believed!

With recessionary fears now uppermost in the minds of many we are adopting a cautious stance to bargain hunting on the stock market. While some shares appear oversold, this is often for good reason given the questionable short-term outlook and need to support a hefty debt load and interest bill.

We are long-term investors (not short-term traders) and remain focused on investing in businesses whose balance sheets and cash flows offer the desired support in the short term and where there is no immediate risk of debt and interest burdens causing financial distress.

Many of our portfolio companies have the comfort of being in a strong net cash position, whose cash flows are reasonably predictable and continue to support meaningful dividend payments. From our perspective any bargains will therefore need to meet the key criteria of a strong balance sheet and reliable cash flow.

There is no modern precedent for the ‘Corona Crash’ which has the potential to materially disrupt our way of life over what will hopefully be a relatively short period. As the virus spreads, nobody is sure of how or when it will end. Markets dislike uncertainty and therefore the current volatility could continue for some time yet.

We remain confident in the long-term prospects of our investee companies and the markets will inevitably rebound. As we have communicated previously, at some point this can create opportunities to buy companies at irrationally low prices.

As the end of the tax year approaches please don’t forget to use your ISA allowance. There is no requirement to invest cash immediately, which can simply be held on the account to invest at a later time.

If you would like to discuss potential opportunities please email or call Chris or Stephen on 01923 713890.


post

Opportunity Knocks!

Saudi Arabia’s move to swamp the world with cheap oil has sent oil prices down as much as 30%, with global equities also crashing.

As the stock market mayhem ensues, the 10-year US Treasury yield has fallen to a record low of 0.32%, ironically only adding to the appeal of good quality companies with robust balance sheets. Who in their right mind would want to lend to the US government for a meagre 0.32%!

Excellent companies, with no direct connection to the oil price, briefly saw their share prices experience significant falls. Experian (LON:EXPN), a provider of data and analytics solutions, saw its share price fall 30%, before recovering to settle down 6%. This sort of irrational behaviour is manna from heaven for long-term investors like us.

Oil and gas companies and anything related have experienced greatest weakness, with the share prices of Royal Dutch Shell (LON:RDSA) and BP (LON:BP.) down more than 25% at one point. Thankfully we don’t invest in these relics of a bygone era!

IG Group (LON:IGG), the online trading platform for equities and derivative instruments, which should be doing nicely from all the increased volatility, experienced system difficulties in the mayhem, which won’t have gone down well with clients seeking to trade the volatility.

A lower oil price will be helpful to the beleaguered airline groups, who are experiencing a sharp drop in passenger numbers because of the coronavirus, and its noticeable that shares in Easyjet (LON:EZJ) and Dart Group (LON:DTG) only suffered modest share price falls as the oil price sank.

With plenty of other priorities in the short term, notably a well-funded response to the coronavirus, in the current circumstances we fail to see how the new Chancellor can put forward a responsible Budget later this week.

As the stock market rollercoaster continues excellent buying opportunities will appear for those with available cash and who haven’t used their annual ISA allowance. Our model and bespoke portfolio services are well-positioned to benefit from this.


broadcast

Bargain hunting on AIM

In this interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses potential bargains on AIM following the market sell-off.

Companies covered in the interview include:
AB Dynamics (ABDP) – designer and manufacturer of advanced testing systems for the global automotive market.
Argentex (AGFX) – provider of foreign exchange services to SMEs and high net worth individuals.
Alpha FX (AFX) – foreign exchange and payments specialist working for corporates and institutions
Dart Group (DTG) – leisure travel (Jet.com and Jet2holidays) and distribution (Fowler Welch)
Dotdigital group (DOTD) – omnichannel marketing automation and customer engagement platform
K3 Capital Group (K3C) – leading business and company sales specialist

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for more than 15 years.