Investor column: Argentex, Stagecoach, Dixons Carphone
BUY: Argentex (AGFX)
A slight drop in revenues is a commendable result given the larger business disruptions, writes Mark Robinson.
Currency broker Argentex posted a 30% drop in adjusted operating profits to £ 8.7million at the end of March, with financial performance limited by stable interest rates, points (yield ) on futures contracts being close to zero.
Futures points allow the group to take a larger spread on trades and can generate additional income when clients initiate a swap to draw on their futures contract. However, the trader continued to increase the number of clients and the number of actively traded companies despite a difficult trading environment.
Group chairman Lord Digby Jones said the increased volatility at the start of the year “ultimately resulted in trade hesitation”, while the total number of trades and their average value subsequently declined.
This is not surprising given that business requirements for foreign exchange trading have been temporarily reduced due to the wider business disruption. And it should also be remembered that 40% of the activity is related to financial services.
However, the group revealed record customer activity in the second half of the year.
Lord Jones added: “As volumes return to the market, I am confident in the platform Argentex has built to meet this growing demand. “
With more and more banks leaving the market, the business opportunity grows, as evidenced by the group’s extensive presence in the Netherlands and Australia. A positive beat given a stop / start trading environment.
HOLD: Stagecoach (SGC)
The market has made offers to travel agencies ahead of a possible easing of restrictions, but will this benefit Stagecoach, writes Julian Hofmann.
A multitude of adjustments, discontinued operations, separately disclosed items and one-time charges made Stagecoach’s annual results almost incomprehensible. On paper, at least, the balance sheet returned to positive assets for shareholders of £ 61million, although these did indeed consist of goodwill and intangible assets.
The general impression was that while passenger numbers are sure to pick up, management admitted that it would take “some time before demand for our public transport services returns to pre-Covid levels.” Which is fortunate, in a way, because, judging by the condition of the books, management will be spending most of their response time in a staring contest with their banks.
To this end, Stagecoach has negotiated waivers of covenants on its debt until next year, when these will again be stress tested, in exchange for maintaining a minimum level of liquidity. . An instantaneous current ratio of 0.79 indicates that the balance sheet may not have enough short-term assets to meet its short-term liabilities, so obtaining a grace period was a minimum requirement. Putting in liquidity meant stopping capital spending, reducing the dividend and managing cash flow to generate a £ 39.5million reduction in overall net debt. Stagecoach also carries a pension liability of £ 263million.
Meanwhile, while the end of Stagecoach’s rail franchises removes a source of continuing risk, it leaves the company with a long tail of responsibilities and contractual obligations over the lost franchises. These have a book value of £ 88.4million which, if settled tomorrow, would increase the consolidated net debt by the same amount, bringing it to £ 401million. The pandemic had some financial benefit for the company as its drastically reduced overall mileage meant a significant gain on its £ 4million fuel blankets.
Overall, Stagecoach’s predicament places it in an investment territory of special situations, in that the likely drivers of a price recovery are more related to management’s administrative actions, rather than a fundamental recovery of its markets. While Stagecoach’s strong operational gearing will help it recover, in the event of a takeover, it is impossible to rule out a major debt restructuring, or a dilutive investment to control the balance sheet. Paradoxically, the prospect of either scenario, while disruptive, leaves a medium-term price recovery in play for the more daring investors. Consensus estimates of adjusted earnings per share place Stagecoach on a forward-looking note for fiscal 2022 of 19.
WAITING: Dixons Carphone (DC.)
Will the benefits of working from home and the boom in home entertainment evaporate for Dixons when the economy returns to normal? Arthur Sants writes.
Dixons Carphone’s mission to become a successful “omnichannel” retail business has gained momentum thanks to lockdowns, with homebound consumers increasing their purchases of televisions, laptops and video game consoles.
The pandemic has forced Dixons to step up investments in its online business. The result was a 103% increase in online electricity sales to £ 4.7 billion. The group attributes this good performance to its Shop Live feature, which allows online customers to chat with in-store staff and get real-time advice via video.
Strengthening online sales helped push electricity sales in the UK and Ireland up 14% to £ 9.6 billion. However, the permanent closure of the small standalone Carphone Warehouse UK stores resulted in a 55% drop in revenue for UK & Ireland Mobile, limiting overall sales. Good news for investors is that the cost savings have helped it increase free cash flow to £ 438million. This cash allowed him to repay his leave and pay his £ 144million VAT deferral, while restarting his annual dividend at 3p.
Analysts expect adjusted earnings per share of 10.95 pence for the year ending April 2022, up from 10.7 pence in fiscal 2021, according to FactSet consensus estimates.
The overall electricity market has grown 25% over the past two years and Dixons has demonstrated impressive digital agility, gaining 6% of the UK online market in fiscal year 2021. However , the group’s long-term outlook depends on the accuracy of its claim that people’s attitudes towards technology (and how it is purchased) have ‘fundamentally changed’, or whether the events of the past year constitute a transient pandemic induced by a pandemic. fashion.
Chris Dillow: How the past misleads us
With bitcoin’s price almost halving since its peak, it’s tempting to get a feel for schadenfreude towards cryptocurrency investors. But we shouldn’t be so smug, because one of the mistakes they made is a common but costly mistake that many of us make in other contexts.
This is the recency effect: when we assess the investment outlook, we place too much weight on recent events and thus overestimate the likelihood that recent trends will continue. So, for example, recent high returns from cryptocurrencies have led investors to overestimate the likelihood of high future returns.
Cryptocurrencies, however, are by no means the only example of this mistake.
For example, after the stock market crashed last March, Steve Utkus of Vanguard discovered that his company’s clients were more pessimistic about stocks than before the crash and thought the market was riskier. Their valuation has been tainted by the recent drop in prices – too, we now know.
This error can cause big losses. By the end of the tech bubble in 2000, stocks had become dangerously overvalued because investors believed the recent high returns on tech stocks would persist. And, just as gravely, adhered to the stories used to justify the high valuations of tech stocks.
Professionals are as prone to recency bias as retail investors. Banks overloaded themselves with mortgage derivatives in the mid-2000s because recent experience suggested they were safe – oblivious to the fact that recent experience has not contained a period of falling house prices, volatility and panic and therefore was a terrible guide to the future.
How can we reconcile all this evidence with another fact: that we also overweight the experience of our formative years – years which for some of us are far from recent?
Simple. The impact the evidence has on us is U-shaped over time. The experiences of our formative years and our most recent are overweighted, while those of a few years ago are underweight.
But recency bias is not always a mistake. Sometimes it makes us money.
Think back to 2015 and imagine you were thinking about buying US stocks. If you had had a long historical perspective, you would have been reluctant to do so because they seemed expensive then – in fact, at an all time high compared to the rest of the world. If, however, you had only looked at the previous months, you would have seen good relative performance and easily built a story on how attractive US stocks are.
And this recency bias would have served you well: since 2015, the US market has outperformed the rest of the world thanks to the soaring prices of major tech stocks like Amazon and Apple.
We have other strong evidence that recency bias works – the simple fact that dynamic investing does. Dynamic investors buy good recent stocks and profit from them on average.
In fact, a different form of recency bias might help explain why stocks have momentum, a 52-week stock top is a benchmark for investor expectations: if a stock has peaked recently, investors are reluctant to push it higher because they find it expensive, even though the stock is benefiting from good news such as surprisingly strong earnings growth. This causes these stocks to be undervalued after good news – with the result that they come back up later.
You might think this is all hopelessly inconclusive: Sometimes recency bias works, and sometimes it doesn’t.
Not so. It is a warning to us to know what we are doing. It is silly to assume that the future will look like the recent past and to believe that the stories that purport to explain the current investment climate will continue to apply in the future. What’s not silly, however, is riding the moose cleverly. This requires an exit strategy, such as the rule of sell when prices fall below their 10 month (or 200 day) average: this would have made you exit Bitcoin at around $ 40,000, saving you a loss of 15 %.
Unfortunately, however, it is difficult to outwardly distinguish between these two strategies simply because their recent returns will always be very similar when the markets are rising. That’s why it’s hard to spot really good fund managers – and judging them on past performance, even over a few years, is in itself a form of recency bias.
Chris Dillow is an Economics Commentator for Investors’ Chronicle