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The One Free Share Tip A Day offering yesterday was my review to date of my macro themes for 2013. Some – such as a US Fiscal Cliff fudge, with no meaningful progress on tackling the budget deficit – have been spot on, but others have not come to pass currently. The following comes with help from my friend and colleague Steve Moore – he is as bearish as I am about equities but we both offer two caveats.
For those who do not know Steve Moore’s background: he joined t1ps.com straight from University and was its senior writer for two years up until October 2012 when he resigned with immediate effect on a point of principle (an article containing a number of statements with which he did not agree was issued in his name without his knowledge). Steve is now working with myself and Lucian Miers on the Nifty Fifty newsletter
Steve also writes under his own steam and you can see his work HERE
I originally stated back at Christmas that I did not see 2013 being a great year for equities given valuations against a backdrop of minimal global, and especially UK, GDP growth. I noted in yesterday’s update that I was perhaps overly bearish at the start of the year but that the macro economic backdrop continues to look pretty grim to me and that this is perhaps a calm before a storm. I have been going over some of the recent company-specific analysis undertaken by Steve Moore and, taken in aggregate, this looks to offer further support to my view on this point.
As part of a bigger project ( more on that soon) Steve has been looking mainly at FTSE 250 stocks for the past month. You can see all of his work HERE
Steve’s analysis has included the likes of FTSE-250 safety, health and environmental technology group Halma plc and fellow index constituent engineering software provider AVEVA Group . I don’t see these as sexy growth stories but they are trading on ratings which suggest otherwise. In other words the good news and the defensive quality of their earnings is already discounted.
You do not get value if you pay far too much for safety!
For those which do look to have some relatively exciting growth potential – such as information security company NCC Group or solid state lighting technology business Dialight plc and provider of high technology tools and systems for industry and research, Oxford Instruments – their currently prevailing ratings look to leave precious little room for any disappointment.
In other words if targets are met the shares may prove good long term investments. If they are missed by a fraction watch out big time.
Steve has found precious little compelling value in his analyses of larger stocks – one of the more interesting opportunities perhaps being this global provider of business process outsourcing and software solutions for accident management, repair and estimation and claims management.
And so why are valuations of mid-caps (and to a lesser extent blue chips) so fully stretched? Steve and I believe that there are two reasons for this.
- Of lesser importance is a move within equities to safety. The bottom end of AIM is a cesspit of ineptitude, dodgy management and businesses without the critical mass to justify the costs of being listed. There are probably 300 zombie companies on AIM. And thus some investors have understandably moved out of small caps into the perceived safety of more liquid stocks.
- Of far more importance has been the flight from bonds. I (correctly) warned that there was a bubble in bonds at the start of the year and while it has not gone pop it is deflating fast. And that has seen institutional investors switch out of bonds into more liquid equities. But the reality is that many FTSE 250 stocks are – in institutional terms – really not that liquid and thus these fund flows have pushed share prices ahead at an alarming rate.
It is perfectly possible that both trends will continue. And thus while Steve and I are bearish in terms of fundamental valuation we accept that equities could head either way on a six month view. But ultimately gravity cannot be defied forever.
And so is there value? Well yes there is. There is the odd FTSE 250 stock which offers both safety in terms of earnings visibility and some marginal (if not a lot) of near term upside. Rather predictably I alight on Domino’s (see here) as an example of this.
Further down the ladder there are some AIM stocks which have been tarred with the “It is on AIM so it must be avoided” brush (I phrased that diplomatically) but are actually proper businesses with critical mass and generating profits, cash etc. I suspect that if they moved to the main market and joined the FTSE 250 they would get a very rapid re-rating.
The best example of this and – in my view – the best managed company on AIM is Advanced Computer Software (LSE:ASW) which I wrote up in detail HERE
This all supports my view that the current time is certainly not one for indiscriminate stock investment. However, in any market conditions, there are always some under-researched nuggets of value and, with most other investment avenues looking relatively unappealing, the identification of these stock-specific situations looks to have the potential to yield particularly attractive rewards. Steve and I are not rushing to issue new share tips on our Nifty Fifty offering (which we co-produce with Lucian Miers). But there is value if you look hard enough. Slow and steady wins the race.
Thank you for your blog article.Thanks Again. Fantastic.
insurancewhisper