Some new positions

Blog recommendation

If you like high quality analysis with a lot of humour thrown in (which I sincerely doubt if you are reading this). I whole heartedly recommend a guy called John Hempton. He is an Australian who runs Bronte Capital

Original thinking is highly prized by the firm. These two quotes are from Bronte’s website.

Bronte Capital chose to base itself out of the noise of New York or London to allow our true views to evolve without the interference of the street.

John believes that sitting in Australia, out of time-zone with most of Bronte’s larger Long/Short competitors, and avoiding broker research, enables Bronte to have a fresh and unique view of companies.

I can understand this. Group think can be very dangerous in investment. At the moment I can think of two things.

The first, is that the Federal reserve has the backs of equity holders. In late 2018 with Powell’s comment that QT would be set on autopilot people certainly didn’t think this was the case. So why would 12 months change their minds so much. Granted the Fed has lowered rates three times this year in what has been called a mid cycle adjustment. The markets have expected more but recently have dialed back their expectations of a cut. With the jobs report last month and the lowest unemployment in fifty years maybe rates could go up.

The second is that the out-performance of US stocks relative to the world and especially Europe and Japan can continue. See this article by John Authers who writes really well. You can subscribe to his (free!) daily points of return email. Also check out this from BlackRock. If the politics of the US were to change radically and I’m not sure Elizabeth Warren (who certainly hasn’t won yet) is quite the firebrand people thinks she is, valuations could come down a little bit. Maybe the healthcare sector would be hit harder.

Anyway back to John Hempton. He maintains a very informative blog with detailed analysis. Also not to be missed is this interview.

Who’d be an oil man anyway?

One way to both make or lose a lot of money is to go looking (and preferably digging) for oil. Tullow Oil the London listed oil exploration and mining company has had some issues this week. It started with the admission that discoveries it had made in Guyana contained less commercially sale-able oil.

Last month, shares in Tullow fell to a two-year low after it said two significant discoveries in waters off Guyana contained heavy oil, prompting warnings that the projects would be difficult to commercialise.

A bit of history:

Tullow, which was founded in the 1980s to focus on frontier markets of the oil industry primarily in Africa, was worth as much as £14.5bn in 2012. It had been a favourite of UK investors and rode the boom in oil prices for more than a decade, with its shares rising by an average of almost 30 per cent a year between 2000 and 2012.

But it has stumbled in recent years as the era of $100-a-barrel crude oil came to an end with the rise of the US shale industry. The shares, which had already declined sharply from the company’s 2012 peak, closed down nearly 72 per cent on Monday, valuing Tullow at £562m.

Another bad sign is that capex is being cut maybe leading to a self fulfilling prophecy of Tullow shrinking into irrelevance.

The company now expects to generate just $150m of annual free cash, down from $500m previously, despite also cutting its plans for capital expenditure.

The main concern is that more shares have to be issued to solidify the balance sheet (which doesn’t seem to be such a bad idea and is certainly preferable to issuing debt)

Analysts at Stifel said investors’ biggest immediate concern would be the strength of the balance sheet given the increased risk of a potential equity issuance to reduce debt because of the lower projected free cash flow.

All these quotes are from this FT article.

Oil exploration is a tough business and even once you find a deposit you are reliant on the price of oil to remain in a state so that the well is profitable.

No doubt after a plunge of about 60% on Monday there will be a dead cat bounce but I’m not tempted to join in the “bargain hunting”.

On the other hand some extraordinarily talented investors are buying into the energey market. Also it only takes a chance discovery to make the share price shoot up.

Something for the bulls and bears alike

Its been a while since I put any positions on in the markets.

  1. A limit buy order for 888 holdings @ 151p
  2. A limit sell order for Amigo holdings @ 67p
  3. A limit buy order for Card Factory @ 151p
  4. A limit buy order for Lagardere SCA @ € 19.3

Now these are a bit idiosyncratic. I’ll add a bit more if and when I get filled.

But for the moment I’ll explain some aspects of some of the positions.

888

888 seems cheap to me, they are in the online gambling market and make a good amount of profit and offer a healthy dividend yield. They have some exposure to the US gaming market which is being deregulated as we speak (I think). Now for the inevitable negates, because, it is definitely cheap for a reason! UK lawmakers are rightly planning on tightening regulations on gambling companies to protect vulnerable customers. I believe that Tom Watson (of weight loss and resignation fame) spearheaded a campaign to not allow credit cards be used to fund accounts, which seems sensible to me.

On the other hand legislation from the mother of all parliaments has become stalled for various obvious reasons so maybe the gambling companies get a bit of a breather.

The other issue they have is one of corporate governance. On an RNS dated the 15 November 2019 they say:

At the Company’s Annual General Meeting held on 21 May 2019, 21.30 per cent. of total votes cast were voted against the re-election to the Board of the Non-Executive Chairman, Mr. Brian Mattingley (“Resolution 4”).

Not a great vote of confidence!

In accordance with the UK Corporate Governance Code, the Company has held discussions with major shareholders who voted against Resolution 4 in order to understand their concerns. The Company understands that the primary reason for the vote against Resolution 4 was the length of Mr. Mattingley’s tenure as a Director of 888. Mr. Mattingley joined the Board of 888 in August 2005 and since then has served as 888’s Chief Executive Officer, Non-Executive Director, Executive Chairman and Non-Executive Chairman.

Sounds like 888 is the perfect place for jobs for the old boys!

The Board’s decision to retain Mr. Mattingley as its Non-Executive Chairman reflects the significant value he brings to the Board, including in particular his wealth of gambling industry and public company experience, deep knowledge of the business and industry contacts. The Board believes Mr. Mattingley’s continued tenure as Non-Executive Chairman benefits all shareholders.

And they’re still not getting rid of him.

Amigo holdings

Amigo holdings is a payday lender and the company’s market capitalisation has fallen from £1.3bn at its IPO to £325m.

They are loan sharks (scumbags) plain and simple but a lot of scumbags make a lot of money for shareholders so we want to be careful about shorting them. And not to mention that, unfortunately a lot of people in Britain today need to use them to cover Christmas presents for their kids, and what parent wants to see their kids disappointed on that special day.

Fancy borrowing a bit? (From Amigo’s website)

Representative 49.9 APR (variable). Representative Example: Borrowing £4,000 over 36 months, repaying £195.16 per month, total repayable £7,025.76. Interest rate 49.9% (variable). Subject to status.

There is also some boardroom trouble with the former founder who is a petty criminal returning. But something that makes me more confident on this short is that there are moves by the Financial Onburdsman Service to fine companies such as Amigo. Waiting for a government department to do something can’t be relied upon but things have been done so the momentum might be there.

Card Factory

I think Card Factory is cheap and its last trading statement on the 14 November

Year-to-31 October 2019 (“YTD”) Group revenue growth of +5.0% (2019: +3.4%) – Overall YTD Card Factory like-for-like (“LFL”) sales of +0.9% (2019: 0.0%) – Continued store roll out driving additional revenue growth with twelve net new stores opened in the quarter; 38 net new UK and Republic of Ireland stores opened YTD – On track to deliver approximately 50 net new UK and Republic of Ireland openings in the full year – Card Factory website delivered YTD revenue growth of +21.9%, against a strong prior year performance (2019: +70.9%) – The Board anticipates profits for the full year to be broadly in line with its previous expectations

Sounds reasonable but footfall declined 0.4%

Card Factory stores saw an increase in average spend, following the targeted improvements to our range of card and non-card products, but LFL sales were impacted by weaker footfall in the quarter and declined -0.4%. YTD Card Factory LFL store sales remain stable at +0.7%.

Another risk is paying the damn staff more!

The business continues to face external cost pressures such as National Living Wage

I imagine most of the shop assistants are on £8.20 an hour (if it hasn’t already increased). But this could make the staff more motivated so every cloud…

The card market is also a competitive market with low margins. Aldi have even started selling cards! Card factory does stock the funny rude ones that Aldi don’t though (weak bullish argument there).

Lagardere

I must admit as a French company this is a bit of a punt for me! The thesis is taken from this FT article regarding an activist shareholder trying to unlock value in a former French industrial giant. The son (Arnaud Lagardère) of the great man (Jean-Luc Lagardère) is in charge of Lagardere and has been using it as his personal credit card for many years. He apparently prefers to spend time with his 24 year old Belgian supermodel wife than go to board meetings. Well on that me and Arnaud wholeheartedly agree but apparently investors are not on our wavelength.

I think the fund doing this activism, Amber Capital has a decent case against him and there is signs the banks may be on side as he owes a few hundred million euros to them.

Whether or not significant value could be unlocked is another matter but with a dividend yield of around 6% it may be worth sticking around to find out.

The one big reservation I have is that the French system (and Europe in general) is not particularly amenable to activist hedge funds.

But this guy (Arnaud) is a bit beyond the pail! And as much as I hate to bring macro themes into this but with Paris hoping to become Europe’s new financial centre. If London falls into the Thames or more likely that we give ourselves a good hard Brexiting. Showing that these sort of corporate mis-demeanor’s can’t be tolerated could well attract people to Paris (along with the food!).

Written on December 10, 2019