Encouraging news from AIM

While the prior week closed with stock markets buoyed by promising news of a potential Covid-19 treatment from Gilead Sciences (US: GILD) this week was different story, with trial results casting doubt on the effectiveness of its drug remdesivir.

The quest to find a test, treatment or vaccine for coronavirus is certainly heating up. Academics and companies have shifted resources away from traditional operations to fight the Covid-19 battle and identify solutions which could make a big difference to how the UK deals with the illness. Successful companies are likely to enjoy an enormous boost amid the demand of a population under siege.

The challenges posed by Covid-19 could also provide a big turning point for the UK’s small pharma industry which has languished for several years as the plethora of companies which listed around 2015 have struggled to commercialise treatments. Now money is flowing freely into these early stage businesses as the world tries to battle the pandemic.

Abcam (AIM: ABC), the global leader in the supply of life science research tools and one of our AIM portfolio companies, issued a reassuring update this week. Many of Abcam’s customers are directly engaged in the effort to develop diagnostic tests, vaccines and treatments for Covid-19.

Many companies are continuing to struggle in the lockdown. Staff furloughs and equity raises are helping them scrape through the challenges. Although some will not come through the carnage unscathed many others remain cash generative and their operations are in high demand, meaning dividends can still be paid.

AB Dynamics (LON: ABDP), the specialist provider of advanced testing systems and measurement products to the global automotive sector, announced excellent interim results this week. Founded in 1982 as a vehicle engineering consultancy, the group arrived on AIM in 2013 at a share price of 86p and market capitalisation of only £14m. Despite recent steep falls, the shares are still up over 1600% since IPO and the business looks in great shape with plenty of cash and a new manufacturing facility to support its growth. Fundamental AIM portfolios hold shares in AB Dynamics.

Fevertree Drinks (LON:FEVR), the world’s leading supplier of premium carbonated mixers, reassured with its full year results, reporting strong growth in overseas markets and encouraging signs of progress outside the key tonic category. It is hard not to be impressed with Fevertree’s constant product innovation and slick marketing, which encourages customers and consumers to keep coming back for more. Fundamental started acquiring shares in the company for client portfolios towards the end of January 2020 and it has certainly been a tricky period. Covid-19 has severely impacted Fevertree’s On-Trade business although Off-Trade has been doing very nicely as consumers stock-up at home. This has always has always been a terrific business, generating high margins and returns on equity and heaps of cash. Our primary concern surrounded the high valuation for what was essentially a single product, UK-centric business. It is now much more than this and if it starts to deliver in the US and other overseas markets, we believe the shares could deliver handsomely over the coming years. While our entry point wasn’t ideal, it was certainly much better than a year or so previously when the share price was more than double current levels. You can read Investor’s Champion’s in-depth of review of the results here (Fundamental clients have free access to Investor’s Champion’s premium content).

The timing of our investment in Dart Group (LON:DTG) was far from ideal. A few months later and the operator of the airline and Jet2holidays leisure travel business was the vanguard of the coronavirus with the majority of its business is on hold and fleet grounded. The good news is that management now anticipates pre-tax profit for the financial year ending 31 March 2020 will be as high as £270m, 49% up on the prior year, although that’s reflective of the past and the short term outlook is clearly very different. Surprisingly, given the current economic climate, they are seeing customers making bookings for late summer 20 and winter 20/21 programmes, with encouraging numbers choosing to rebook rather than cancel. With a decent balance sheet, carrying £1.5bn of cash at 18 March 2020 the group should come through the current crisis in reasonable shape.

The week was dominated by news of the tumbling oil price due to falling demand as much of the world remains at home and fears that storage facilities will soon be full to capacity. Fundamental portfolios thankfully have no exposure to oil and gas markets.

Fundamental AIM portfolio holding Smart Metering Systems (LON: SMS), which installs and manages smart meters and carbon reduction assets, confirmed the completion of its asset disposal for £282m. The group now has the luxury of £45m cash at bank, access to a fully undrawn £300m revolving credit facility and importantly a portfolio of assets which will continue to generate lots of cash, whatever the economic climate. SMS announced the deal on 12 March 2020 as markets were in turmoil, thereby benefiting from some impeccable timing. The 4% dividend yield looks relatively assured and we remain happy holders.

A first quarter trading statement from Unilever (LON:ULVR) showed how even the most defensive companies are struggling to maintain any semblance of growth in the current environment. The blue chip saw increased sales of hygiene (Eg Domestos; Lifebuoy) and in-home food products (Flora; Hellmann’s; Marmite; Pot Noodle and plenty of tea) which benefited from the rush to stock-up. However, non-existent out of home consumption is affecting its food service and ice cream business (Ben & Jerrys; Wall’s). This well-diversified giant  will be impacted less than many and is still able to maintain its quarterly dividend which will be paid on 4 June. Fundamental general portfolios hold shares in Unilever.

To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion.


News from a single company lifts global stock markets

As another turbulent week came to a close, stock markets were lifted by news that a drug developed by US listed biopharma group Gilead Sciences (US: GILD) may be showing promise as a Covid-19 treatment.

Of 125 patients recruited by the University of Chicago for Phase 3 Trials taking Gilead’s drug remdesivir, of which 113 cases were considered severe, most have been discharged, according to a report from STAT News. Gilead cautioned how anecdotal reports, while encouraging, do not provide the statistical power necessary to determine the safety and efficacy profile of remdesivir as a treatment for COVID-19. It expects data from the trials to be available at the end of April, with additional data from other studies coming in May.

Earlier in the week smaller US listed biotech company Moderna (US:MRNA) also encouraged with news of promising early data from a Phase 1 trial of its experimental Zika vaccine, which could be a good sign for its Covid-19 vaccine, currently in Phase 1 trials.

Here is a summary of news over the past two weeks from some of the other companies we follow, many of which are holdings in our AIM and Bespoke client portfolios.

London’s growth market AIM experienced a 20% decline in market value in March falling to levels last seen during the financial crisis years of 2008/09. At the end of the month there were 843 companies on AIM, with its total market value of £74.3bn some 21% lower than the value at the end of February. Restructuring and corporate finance specialist FRP Advisory Group (AIM:LON) was the sole AIM newcomer in the month and it certainly joins at a time when its services should be in high demand.

Our latest quarterly update covering the performance of Fundamental AIM portfolios during a torrid quarter for equities can be downloaded from our Publications page here.

Even accounting software group Sage (LON:SGE) has suggested that it is likely to be impacted by the current crisis alluding to a potential slowdown in new sales. Up to now the group’s business operations have continued with minimal disruption and with cash continuing to flow it looks in much better shape than many. Sage is a constituent of Fundamental general portfolios.

Online spread betting group Plus500 Group (LON:PLUS) splits opinion among investors, but there is no doubting its dividend appeal, which is receiving an extra boost in the current climate. For the three months ending 31 March 2020, group revenue rose an eye-popping 487% to $316.6m due to the increased volatility across global financial markets. The group reiterated its policy to return at least 60% of net profits to shareholders, through a combination of dividends and share buybacks.

British video game developer Codemasters Group (LON:CDM), which specialises in high quality racing games, issued a positive trading update for its financial year ended 31 March 2020. The COVID-19 pandemic has seen an acceleration in the move of the group’s games to digital downloads which has also contributed to higher margins.

The share price of HomeServe (LON:HSV), the international home repairs and improvements business, has bounced strongly over the past few weeks and the latest update was characteristically reassuring with all group companies continuing to respond to emergency repair requests from customers in all the countries where it operates. At the current share price of 1107p, Homeserve shares trade at a heady 25x forecast earnings for the year ending March 2021. This is an excellent business, with evident defensive attributes, but there is surely better value around.

With its entire estate of 787 cinemas in 10 countries closed as a result of the pandemic, these are desperate times for leading cinema operator, Cineworld (LON:CINE). The $7.6bn of net debt the group carried at the December 2019 year-end, suggests a major re-financing will be required. The shares have fallen 80% from the highs of May 2019 an could be tempting recovery play for the brave.

WH Smith (LON:SMWH), which had been delivering consistently excellent returns until the pandemic brought its business to a standstill, found plenty of willing support for its fund raise, securing £165.9m at 1,050 pence per share, a modest 4.0% discount to the closing price the day before. Directors showed commitment, acquiring in aggregate £475k of shares in the placing. Fundamental portfolios hold shares in WH Smith.

Specialist credit hire and legal services provider, Anexo Group (LON: ANX) has drawn attention to a preliminary judgment announced on 6 April 2020 in the High Court of Justice regarding the class action against Volkswagen AG, which could be very good news for Anexo. The judgment ruled that VW group subverted key air pollution tests by using special software to reduce emissions of nitrous oxides under test conditions. A specialist team within Anexo’s legal services division is currently acting on behalf of a large number of individuals who have registered their intention to pursue a claim against VW. Our associates Investor’s Champion covered the announcement in more detail here.

Online wine retailer Naked Wines (LON:WINE), which sold its Majestic Wine business last year, announced higher levels of demand in all of their markets, but particularly in the US. Thankfully, following the sale of the Majestic business, Naked is well-funded, with over £50m of cash and no debt at 31 March 2020. Perhaps its time has come during this challenging period and the shares have certainly performed strongly over the past few weeks.

In an open letter to shareholders, stockbroker Jarvis Securities (LON:JIM) reassured that it is business as usual. The group has benefited from a marked increase in trade volumes following the election result in December and due to the recent heightened market volatility. There was further reassurance of its intention to pay a second interim dividend in June 2020. Full year forecasts for the year ending December 2020 are a dividend of 27.8p, which equates to a seemingly reliable yield of 6.4% at the current share price. Fundamental AIM portfolios hold shares in Jarvis.

dotdigital Group’s (LON: DOTD) business model should be standing up better than most and the customer engagement platform, a mainstay of Fundamental AIM portfolios, is predicting only a slight softening of revenue this year, with earnings and cash for the full year to 30 June 2020 anticipated to be in line with forecasts. With 90% of revenues recurring, no client representing more than 1.5% of revenue and cash of £22.0m at the end of March, the group remains in decent shape to weather the crisis.

SIMEC Atlantis Energy (LON:SAE), the global developer, owner and operator of sustainable energy projects, has seen minimal disruption to its tidal business with its flagship MeyGen tidal project in Scotland continuing to export power reliably to the grid.

Just before the Easter break, Abcam (AIM: ABC), the global leader in the supply of life science research tools, announced it had raised £110m at 1100 pence per share. The Cambridge based business, which supports two-thirds of the world’s 750,000 life science researchers with its antibodies, reagents, biomarkers and assays, is one of AIM’s largest companies and a long term holding in Fundamental AIM portfolios.

Apple Inc. (US:AAPL), a holding in Fundamental general portfolios, has launched a smaller, lower-priced iPhone SE to tempt customers. This is a radically different move for Apple, befitting the more challenging economic climate, as the technology giant has previously focused on launching more advanced products at higher prices to compensate for shrinking unit sales. With many customers preferring a smaller phone, it could prove a successful move to help reinvigorate iPhone sales and further boost the sale of apps and cloud storage.

To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion


Encouraging news from the week

Bioventix (LON:BVXP), the developer of high-affinity monoclonal antibodies for applications in clinical diagnostics, announced excellent interim results for the six months ending 31 December 2019. Revenue rose 21% to £5.3m and pre-tax profit was up 31% to £4.3m. The operating cash inflow was £4m boosting period end cash to £5.5m.

Bioventix isn’t facing quite as many challenges as others companies during the coronavirus lockdown. Healthcare products and services are priority products, with diagnostics among the most crucial. Management therefore expects its customers will continue to operate and Bioventix will continue to supply antibodies to them.

It’s also one of the few companies in the current climate able to commit to their dividend, with a 20% increase in the proposed interim to 36p.

Fundamental AIM for Inheritance Tax planning portfolios hold shares in Bioventix

While operating in totally different sectors, Bioventix joins Sage Group (LON:SGE) and Microsoft (US: MSFT), both Fundamental portfolio companies, as one of the more resilient companies on the stock market in the face of the current crisis.

Manufacturer of commercial floor coverings, James Halstead (LON:JHD), announced record 1st half results and, as a preferred supplier to the health service, its products continue to be in high demand.

For the 6 months ending 31 December 2019 sales rose 3.7% to £130.4m, pre-tax profit was up 2.8% to £25.2m and basic earnings per share increased 4.1% to 9.5p. The operating cash inflow of £28.4m boosted period end cash to £64.3m, just what’s needed going into the current crisis.

The group contemplated long and hard about the payment of its dividend. Approximately half their UK workforce and around 60% of former employees (who are now pensioners) are shareholders and rely on the dividend for income. Accordingly, they have decided to declare a first interim dividend of 2.125p per share, representing half of the interim dividend they would otherwise have declared. They will subsequently review the payment of a second interim dividend in August when visibility of the global economy may be clearer.

Who would have thought that flooring would have demonstrated such defensive properties. James Halstead is a long-term holding of Fundamental AIM portfolios.

Argentex Group (LON:AGFX), the provider of foreign exchange services to institutions, corporates and high net worth private individuals has kept a relatively low profile since listing in June 2019 but it continues to deliver on the significant promise. Fundamental AIM portfolios have started acquiring a satellite position in Argentex.

The latest trading update covering the 12 months to 31 March 2020 highlighted a strong performance, with revenue up over 30% to c.£29m and management confident of meeting full year profit expectations.

Somewhat surprisingly, there was no mention of material impact from the current crisis, other than continued strong performance. Non-Executive Director Henry Beckwith was an enthusiastic buyer of shares earlier in March and holds a 6.5% stake.

It appears to be almost business as usual for surgical and advanced woundcare specialist Advanced Medical Solutions Group (LON: AMS).

With £65m of cash in the bank and no debt at 31 December 2019, AMS is in robust financial condition. Furthermore, in the unlikely event that it’s needed, there is also an undrawn unsecured £80m credit facility.  AMS is committing to a final dividend for 2019 of 1.05p per share, which will cost approx. £2.25m.

AMS is another long-term core holding of Fundamental AIM portfolios. (LON:MONY) reported 2% overall growth in revenue for the first quarter ending 31 March 2020 with insurance related revenue leading the way, growing 8%, while other areas saw reduced activity.

Diversified revenue streams, strong cash conversion and net cash of £30m at 31 March means the group is able to commit to the final dividend of 8.6p per share, which will cost £46m and equates to a yield of 2.93% at the current share price of 293p.

While other, previously admired, online groups like Rightmove (LON:RMV) and Auto Trader (LON:AUTO) have been found wanting in the current exceptional environment, MONY continues to deliver, although that hasn’t stopped the shares falling 30% from the July 2019 highs.

Pets at Home Group (LON: PETS), the UK’s leading pet care business issued an encouraging update for its financial year ending 26 March 2020, with full-year underlying pre-tax profit now anticipated to be slightly ahead of expectations following exceptional levels of demand, both in-store and online, in the last few weeks of the financial year as customers stocked up.

While the group carries substantial debt (net debt was £539m at 30 Oct 2019), unlike many retail businesses, its designation by the UK Government as an “essential retailer” means business continues and cash continues to flow.

PETS is also generously helping communities with £1.1m of funding to nominated pet charities, a £1m crisis fund for colleagues and discounts to NHS workers.

While revenue will clearly be impacted over the coming months, PETS is in a better position than many retailers and, as a result, the shares have held up better than most.

CMC Markets (LON:CMCX),the online derivative and stockbroking trading platform, issued a very positive update for the year ending 31 March 2020.

If, as is likely, stock markets remain volatile CMC will continue to reap the rewards, that’s assuming its clients don’t suffer too many losses!

The supportive environment and CMC’s strong balance sheet means that it will be able to commit to a dividend equivalent to 50% of profits after tax. Consensus forecasts for the March 2020 year were for a dividend payment of 14.43p per share, equivalent to a yield of 7% at the current share price, however, this might now be on the low side given the very strong final quarter.

While stock markets have tumbled, CMC shares have proven to be an excellent contrarian investment, rising 35% over the past 3 months.

To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion


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.


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!


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.


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.


Coronavirus encourages stock markets to take a breather

The indiscriminate sell-off in global equities due to the spread of the coronavirus has, not surprisingly, resulted in material weakness across Fundamental portfolios in the current quarter.

As is usual in these circumstances, the selling has been indiscriminate and even companies considered traditional safe havens have seen their share prices fall. Smaller companies as always have felt the brunt of the sell-off, as have those businesses most directly affected by the impact of the virus.

Diageo, the global drinks group and a constituent of our Ultimate Stocks portfolio, has warned how the virus is affecting its business with global sales now expected to be between £225m and £325m lower than they would have been otherwise. Though meaningful, that’s relatively small in the context of a business which generated sales of £12.8bn last year.

Apple, a long term portfolio holding, previously warned that it would fail to meet its quarterly revenue target of $63-67bn due to temporarily constrained supply of iPhones and a dramatic drop in Chinese shoppers.

Airline, hotel and leisure sectors have been hardest hit with the share prices of portfolio holdings easyJet, Dart Group, Hostelworld Group and Booking Holdings suffering material falls over the past few days. The proposed IPO on AIM of Meininger Hotels, a European hotel and hostel operator, could certainly prove challenging in the current climate.

Portfolio holding Walt Disney Co has also seen its shares slide as its theme parks in Hong Kong and Shanghai have been temporarily shut down. News that Bob Iger, its highly-regarded CEO of the past fourteen years, is also retiring sooner than expected (although he had already extended his stay) also came as a surprise.

Long term holding Microsoft is dealing with the outbreak by donating generously to the recovery efforts in China. That includes RMB 40m worth of products, services and solutions to equip frontline hospitals and medical workers, as well as providing free cloud services to mitigate the impact of the outbreak for businesses and students.

In the gloom of the stock market rout it was pleasing to see price comparison group report excellent results with a 9% increase in revenue and 10% increase in profits as it reaped the rewards of a diverse product offering. This business continues to display many of the characteristic we look for in an exceptional company.

At the smaller end of the scale, the share price of Ramsdens has also been particularly weak. This company has been enjoying strong growth from its foreign exchange offering which will clearly suffer in the short term as fewer people travel from UK. However, it will also be a beneficiary of the soaring gold price which has climbed to its highest level in seven years.

If there is one positive from the outbreak of the coronavirus, it is that global healthcare systems have been alerted to the need for better contamination control. It’s hardly surprising therefore, that the share price of legacy AIM portfolio holding Tristel, a specialist manufacturer of infection prevention and contamination control products, has climbed to new highs over recent weeks. While it could be a big long-term winner from greater investment in global infection prevention, the share price appears to have become a little over-heated. You can read a full commentary on Tristel’s progress from our associates Investor’s Champion here.

We remain happy with our selection of excellent companies, which will continue to generate growing profits and cash for many years to come. Contrary to what is implied by the current sell-off, they certainly haven’t all turned into bad businesses overnight.

With the US stock market having recently scaled all time highs, a pause in our opinion was long overdue and we view a correction at this point as beneficial to the long-term health of stock markets.

Equity investment should be viewed as a long-term exercise and, unless investors have a near term requirement for cash, see no reason to run for cover at the first sign of short-term difficulties.

We anticipate further weakness in global equities over the coming weeks as the coronavirus spreads inexorably around the world, as unfortunately seems likely. However, human nature is such that, when things ultimately settle down, people will be keen to get out and enjoy life once more. Where applicable, we will therefore look to buy and add to selective holdings as opportunities arise.


Why are UK investors reluctant buyers of US listed shares?

We are puzzled why many UK investors appear reluctant to acquire shares in some of the best known companies in the world, preferring to delegate responsibility to some mediocre fund manager via a collective investment vehicle, which often has hundreds of holdings, many of which are also mediocre.

The US stock market’s considerable outperformance of the UK market, over virtually any long-term time period you care to mention, appears to have gone unnoticed by many UK investors.

While the FTSE100 index of leading UK shares has risen 31% in the past 10 years, the US S&P500 index is up nearly 200%. We acknowledge that these returns exclude dividend income and the UK market has always offered a higher yield, however, even factoring in dividends, that’s a still a huge outperformance.

The FTSE250 of mid capitalisation stocks, which is supposed to be a better reflection of the UK economy, has ironically generated superior returns to the 100 index, climbing over 100% over the same period, however, this is still meaningfully lower than the US. Fundamental Bespoke portfolios have benefited from some wonderful mid cap success stories with Games Workshop, the designer and manufacturer fantasy miniatures, the pick of the bunch over the past few years.

If one is seeking to achieve superior investment returns it seems logical to fish in more abundant waters and the US market is stocked with a rich variety of fantastic companies, many of which will be familiar to UK investors.

Apple, the largest listed company in the world, whose products and services are ever-present in our lives, is one of the easiest companies to analyse and understand. Why wouldn’t you buy shares in a company whose product you have become so dependent on ? Microsoft is another familiar name whose software most people use every day but which bizarrely won’t be found as a direct holding in many UK equity portfolios. We appreciate the products and financial excellence of Apple and Microsoft, both of which have been long term holdings of Fundamental Bespoke portfolios.

Our new Ultimate Stocks portfolio aims to simplify the process of investing in great global companies, some of which are listed on the UK market, but the majority on the US and other well-regulated overseas markets.

The portfolio contains 25 companies, many of which are popular with their consumers and in high demand. We’re on the hunt for quality and real organic growth which can provide excellent returns for shareholders over the long term.

Investors in our Ultimate Stocks portfolio will benefit from holding shares in some fantastic global businesses, full visibility of holdings, minimal transactions and low fees.

To find out more please contact Chris or Stephen on 01923 713890 or email [email protected]


Fundamental’s elephants are galloping fast

It’s been a big week of announcements from many of our portfolio holdings and some our large cap companies are putting their smaller peers to shame, delivering stupendous growth.

As the world’s largest online payments provider with the fastest growing mobile platform, Fundamental Ultimate Stocks Portfolio holding PayPal Holdings (US: PYPL) was bound to benefit. The fast-growing US giant added 37.3 million active accounts in the three months to December 2019, increasing its total customer number to 305 million. If PayPal keeps up this pace of growth, it won’t be long before it processes over $1trn of payments in a single year.

The rising number of AirPod wearers is reflected in the fact that Apple (US: AAPL) reported a 36% increase in revenues from its wearable devices business in the final quarter of 2019. Meanwhile, continued demand for the higher priced iPhone 11 drove sales higher at the company’s largest division with iPhone revenue up 8% to $56bn in the all-important Christmas quarter. The only disappointment in a record quarter for Apple was the services division, where revenue growth of 17% was below expectations and down from the 18% growth reported in the three months to September 2019. It’s incredible to think that 17% organic growth from a 40 year old company valued at US$1.4 trillion could be considered as being below expectations.

The data revolution to cloud hosted subscription-based services is already being reflected in the financial performance from long-term portfolio holding Microsoft (US:MSFT). In its fiscal second quarter to December 2019, the company reported a 14% increase in revenues to $36.9bn, driven by demand for cloud services across multiple product suites. Azure, the company’s cloud services and data centre platform reported a 64% increase in sales with cloud revenues now contributing a little over a third of total group sales.

It wasn’t all good news from our portfolio companies with results from UK listed Unilever (LON:ULVR) and Diageo (LON:DGE) hampered by the changing tastes of the modern consumer.

Diageo’s interim results reflect the trends of the wider alcohol market: consumers are drinking more posh booze, but less overall. Volumes were flat on the previous year, but net sales rose 4% to £7.2bn.

Changing tastes and price hikes were also an issue for Unilever where more than half of the 2.9% increase in revenues reported in 2019 was driven by higher prices. Like Diageo, demand for Unilever’s products is being upset by changing tastes of the modern consumer: the everyday cuppa is out, herbal tea is in. Thus, PG Tips and Lipton have joined the growing list of out-of-fashion brands which Unilever has put under “strategic review”.

Focus on the future stretches beyond the product portfolio at both companies. Diageo and Unilever recently topped the FTSE 100 responsibility index compiled by media group Tortoise, which highlights the main ESG (environmental, social and governance) investing principles.

You can read a full analysis of both Diageo and Unilever in the Ultimate Stocks Portfolio section of the Investor’s Champion website. Fundamental clients have complimentary access to the premium content on the site.

Contact Chris or Stephen at Fundamental Asset Management on 01923 713890 for information about our general investment portfolios, investing in some great global companies.