TATE, TSCO, ASC

The stock market has been very interesting this year, and even large-cap shares have been vulnerable. There’s no such thing as a safe share.

TATE (Tate and Lyle) issued a
profit warning, with supply chain issues, weather affecting corn plant production, an an industrial incident at its Singapore facility. Shares are down 17% to 607.5p in early trade.

TSCO (Tesco) shares are down another 2.4% as at writing, with a share price of 198p. I wrote about Tesco at the end of August
(http://is.gd/fiA5WN), and came up with a fair value for Tesco of 200p, based on a dividend growth model. So TSCO do not look compelling value to buy, at the moment. I now think my estimate of value is likely to be overstated, though. The recent news of accounting mis-statements must surely mean that my assumption about future dividends was too optimistic. Its bonds slid. In June, Moody’s downgraded Tesco’s rating to Baa2, “an obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.” It is still considered investment grade. At the time, Moody said that Tesco’s outlook was stable, so another downgrade was not anticipated. In light of recent developments, it will be interesting to see if there is a shift in its ratings.

TSCO is an example of a value investors worst nightmare. They look cheap all the way down. Things go from bad to worse, and what once looked like good value now looks like overvalued. We must constantly remind ourselves that value investing is no panacea, and that cheap PEs could merely be a reflection of low (or even negative) growth, or riskiness.

TSCO still has the ability to rock the markets, suggesting that the share price has not fully absorbed all information. From where we stand today, there looks like there could be a lot more bad news down the pike. I’m glad I am on the sidelines merely looking on.

I think one thing that can save investors a lot of money is to never to double-down on a losing trade; except, perhaps, under the most exceptional of circumstances. I’m not keen on pyramiding, either. My view now are to plonk your money down, without makeovers. It’s all about risk control. Investors must always face the possibility that they could be wrong. Don’t compound your mistake. If the fundamentals turn against you, and there’s a change that contradicts your original views on the company, then I think it is best to get out. Close your position. Gone. There’s nothing to stop you setting up a new one some time down along the line. But you want to make sure that the fundamentals are in your favour. Tesco is really going downhill, and there’s no telling how far down it will go. Price will follow fundamentals, and they are crumbling at the moment. There’s no telling how bad it will get. It’s better to stay uncommitted. Don’t be trigger-happy. At some point Tesco may be a great turnaround stock. Then will be the time to invest.

ASC (ASOS) has been a remarkable rollercoaster ride for shareholders. I advised against buying on takeover speculation, when the price was 2686p. Redrut on Seeking Alpha argued for a valuation on £30-34. In April, I noted that ASOS had made a “death cross” at 4236p, which is often regarded as a bearish indicator. I never advocate making buys/sells based purely on technicals. Fundamentals, and valuations matter, with technicals, perhaps, giving an indication of market psychology. In this instance, the death cross was a signal that worked. To my mind, its signal was fairly clear: ASOS is a fantastic growth stock but on sky-high valuation levels. It had great momentum behind it, and the lesson here is that a death cross should have been taken as a loss of momentum. Those that had not spotted that the momentum game was over, and did not view the shares in terms of fundamental pricing or valuations are likely to have suffered large and confusing losses. So beware. I am not trying to dismiss momentum investing, as there is considerable evidence to support the view that it works. But you have to know “where you are” in valuation and market psychology terms. Momentum investors need to know “what kind of share they own”. I think they also need an exit strategy. No investment strategy is infallible. Not one of them. Investors need to work out for themselves when they should book profits, or cut losses.

Back in March, I produced a valuation for ASOS at £20. The shares were at 5528p at the time, so the valuation must have looked like complete madness. The share price is not 1951p. To be honest, I never actually expected it to reach that level. At around May time, it looked like the downward momentum would reverse, and that my valuation of £20 would be wide of the mark. So, I am as surprised as everyone else that the shares actually made it to £20. Note, however, that at £20, the shares could have only been considered fairly valued at the time. The fundamentals are not as favourable as they were then, so if I were to take another stab at valuation, it would be lower. I note that Stockopedia has flagged ASC with two 0 long screens and 2 short screens: M-score and earnings downgrades. Despite being at its 52w low, and having hit a high of 7195p, I think it is a risky trade to go long on. Maybe there will be a trend reversal in the near future and prove the bulls right. I don’t know. I think it’s a bad way to bet, though.

ASC 1955p. TATE 607.5p. TSCO 198p.

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About mcturra2000

Computer programmer living in Scotland.
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