DPLM – Diploma – Trading statement

DPLM (Diploma) is a company that doesn’t attract much attention. It issued its Q1 TU (trading update) today, with revenues up 23%. Net funds are up, too. All good to see. The market has been a bit undecided how to take the results, but it correctly stands up 1% to 1010p.

Dividends were 4.6p a decade ago, and have risen to 20p. It has averaged a ROCE of 24.2% according to Stockopedia. It’s a cracker of a company, which I hold.

BUT, a PE of 21 does look rather high for this company. It is also worth noting:

The very substantial depreciation of UK sterling against all the major global currencies contributed a 17% increase to reported Group revenues

So a lot of that revenue increase is due to currency translation.

Personally, I think Sterling will bottom shortly (which is of course adverse to DPLM) on the basis that:

  1. it’s at a 35 year low
  2. the majority of economists expect the pressure on Sterling to continue.

I work on the simple premise that economists basically have no idea what they are talking about, so when they say things like “and it can only get worse”, you have a big contrarian indicator.

They say that nobody rings a bell at market bottoms … but, well, sometimes they kinda do … and the people ringing the bells are politicians, economists and experts. They may not necessarily sound like bells, but they are bells nevertheless.

If you have a long enough memory, then you may recall that when the UK joined the ERM (Exchange Rate Mechanism), Sterling soon shot up to the top of its permitted range, and we had to take measures to weaken Sterling. Yes, believe it or not, Sterling became too strong for awhile.

Roll forward a few years, of course, and the whole thing crunched into reverse. We shifted to the bottom of the range. Lamont wasted huge amounts of taxpayer money trying to prop up our currency. It was a complete failure. He might as well have just set fire to it.

We had to beg Germany to lower their interest rates in order to make our currency more attractive. Germany said “no”, on the basis that they had to think of themselves first. Fair enough, I suppose, but that, my friends, tells you everything you need to know about the EU.

We now find ourselves in what is basically the complete opposite situation. Interest rates are low, we want to withdraw from the EU rather than tighten our bonds with it, and the pound has plummeted rather than soared. We should now expect Sterling to recover, in mirror image of what happened when we joined the ERM.

Anyhoo, I still have my holding in DPLM, but I expect they’ll be plent of profit-takers to emerge. That’s just my take on things.

Stay safe out there.

1010p

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Sold my RTN – Restaurant Group

RTN (Restaurant Group) has been a sorry old performer for me. In retrospect, I should have sold out in March 2016 after the profit warning, and saved myself a lot of heartache.

RTN is a bit like NXT (Next): it has had a good run-up to 2015, but then came off the boil.

RTN was tipped by Questor in October 2016, and the shares have made a bit of a comeback since mid-December.

Gross margins had decreased for 27 w/e 31.7.2016, and I think I would want to see that reversing before having more confidence that we’re in proper turnaround mode.

There is a lot of contradictory data floating around, so I don’t think it’s clear which way this is going to go.

I had previously decided to tough it out until the results, which will be published on Wed 25 Jan. The thing that tipped me over the edge, though, was that results are going to be published much later than normal. The results are generally published on the 9th of Jan, although last year they were published on the 14th.

This seems suspiciously like a case of “bad numbers take longer to add up”. It might all be just paranoia on my part, of course, but a cynic might say that they know they are going to produce lousy numbers, and are hoping for some kind of pickup in the beginning of January in order to have something positive to say.

Anyway, this is in so way a “sell” recommendation. I’m just saying what I did.

See you again on the 25th, when we’ll know whether I am right or wrong.

346p

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Well, interestingly, China

I don’t know about you, but I am sick and tired with everyone expressing an opinion about China. I am so bored with China. And yet …

McKinsey published a report earlier this month: “What can we expect in China in 2017?” (https://goo.gl/8E9kd0). The general tone of the article was negative.

In December 2016, the Guardian reported “China to rein in outward investment as domestic growth stalls” (https://goo.gl/zKRxm7). Also, Forbes reported “China Blowing Major Bubbles In 2017).

Even more ominously, “Trump threatens 45% tariffs on Chinese goods” (thisimoney, January 2017, https://goo.gl/Qmv3XD)

BUT …

I saw an interesting article on the Montogo Consulting website: “Price is what you pay, value is what you get”. (https://goo.gl/yBAozL). They concluded that trailing PE was a better indicator than CAPE as a predictor of future returns. They also cited Invesco Perptual research that CVI (Composite Valuation Indicator) as being the best guide. The CVI is a combination of trailing PE, PBV and dividend yield. They did not elaborate as to how the composite was calculated precisiely.

But maybe we don’t have to. I decided to create 3 tables giving the top (or rather bottom, depending on how you look at it) 5 countries in each category. Here is what I came up with:

  • PE (ascending): China, Russia, Turkey, (Emerging Europe), S. Korea, Singapore
  • PBV (ascending): China, Russia, S. Korea, (Emerging Europe), Singapore, Austria
  • Yield (descending): Czech, New Zealand, China, Austria, Australia

China is the only country that is coming out as cheap on all 3 metrics. Countries coming out as cheap on 2 out of 3 metrics are: Russia, S Korea, Singapore, and Austria.

So yeah, China. It’s easy to find investing trusts that invest in China or Russia directly. BEE (Baring Emerging Europe) would be a good place to invest in Emerging Europe generally. BEE is over 50% invested in Russia, with stakes of over 10% in Turkey and Poland. Only 3% is invested in the Czech Republic.

Other countries will be more difficult to invest in. I could not find an investment trust that invested in Singapore, for example. Singapore is a highly developed country, dare I say it more developed than the UK. Singapore looks to be the cheapest developed country out there.

I don’t think I’ve been so bullish on China; although admittedly, it was a low bar to jump over.

Stay safe out there.

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On the other hand, maybe not

This just in: sun continues to rise each morning, puppies are still adorable, and oxygen is still free.

I made a note to follow-up on an article in Citywire (https://goo.gl/vDlqxH) written a year ago. The headline was “RBS says ‘sell everything’ in ‘cataclysmic’ warning “. The worries were deflation, oil prices, S&P500 was coming off the boil, and China.

All these people who are long oil and mining companies thinking the dividends are safe are going to discover that they’re not at all safe.

I think it’s fair to say that the prediction was truly terrible. Oil and mining had a fantastic year. The All-Share index was up 20%, and the Footsie reached an all-time high.

I can do no better than to quote the words of Peter Lynch:

The way you lose money in the stock market is to start off with an economic picture.

I would also like to add that I think calls for the market top are premature. The market has had a stonking run lately, that’s true. And just because it’s gone up a lot, does not necessarily mean it will go up a lot more. Of course. But Ken Fisher looked at the behaviour of markets, and observed that bull markets end with a whimper, not with a bang. So we should probably look for a listless pattern to the market before calling a top.

Stay safe out there.

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WINE – interesting chart

WINE (Majestic Wine) released their xmas trading results today, sending the shares up 4% to 337p in early trading, stating:

Group sales up 15.3% – on track to be in line with full year expectations

I had a quick look-see at them yesterday, figured that the results would probably be good, but too risky to buy at their price and debt levels. Here’s the chart over the last year:

There was a nasty gap down at the end of September 2016. That’s your cue to head for the exits. The chart gets interesting after that. The company released half-year results in mid-November, causing a spike in the share price.

Notice the nice bowl in the charts as, although the share price wobbled a bit after the announcement, you can see a positive trend returning.

Let me make the bull case on this. WINE said that they were still on track for their target of £500m revenue by 2019. Let’s suppose that they can make net income to revenue of 6%. That’s more like their longer-term average, than recent figures. So we might expect net income of £30m. Let’s put on a reasonable multiple of 15 for that. So you’ve got a company worth £450m against its current market cap of £226m.

Not bad at all. There are plenty of assumptions in this calculation, so feel free to believe, disbelieve or adjust according to taste.

I decided to have a dabble.

337p

Update 10-Jan-2017: I want to emphasise that I took just a small position here. There is no certainty that I made the right call. There is a reasonable bear case for this share, too.

For a  glass-half-empty view on WINE, if you’ll forgive the pun, Paul did a write-up on Stockopedia today.

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Supermarkets – sigh of relief

MRW (Morrisons) released their trading statement today. LFL exc. fuel were up 2.9%.

Supermarkets have been so embattled that the news sent the share price up 4% to 247p. TSCO and SBRY also saw their shares rise.

Actually, judging by the chart alone one might have expected the results to be good:

I don’t own own MRW, I own SBRY instead. So I am not out of the woods yet. SBRY has a Stockopedia Value score of 90, so I am not expecting bad things tomorrow. SBRY has been a very lack-lustre performer for me, but it looks like I may want to hold on, absent any disasters tomorrow.

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Concerns about Japan as an investing idea

Nearly everyone seems to love Japan again. The only real detractor I found was on What Investment (https://goo.gl/TxjHvz):

Bell remarked that while Japanese corporate earnings may rise this year, ‘that may already be in the valuations.’

According to Starcapital, Japan has a CAPE of 24.9 and a PE of 19.4. That hardly makes it an obvious buy sector in my view. Furthermore, according to Trustnet stats, Japan is the third best-performing sector over 5 years, topped only by biotech & healthcare and tech media & telecomm.

Given the good 5-year performance, and toppy-looking valuations, I am far from convinced about the merits of investing in Japan.

Stay safe out there.

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