" Investing is where you find a few great companies and then sit on your ass." - Charlie Munger | | - Top 20 stock
- Tesco - back in the news again
- Jeremy Grantham - on the perils of rational investing
- Hugh Yarrow - The new normal is the old normal
- GlaxoSmithKline – Too popular for value investors?
Top 20 pick
Every month I screen and rank all companies listed in the UK markets, which is about 1,500 in total. Once they’re ranked (by yield, valuation and growth) I then select about 200 which are the potential investment ideas. Most of my ideas end up coming from the top 20 so I thought I’d highlight one top stock each week. Please note that I have not carried out any research on this stock, so DYOR as they say.
Dairy Crest (DGC 303p) is the UK’s leading dairy foods company with brands like Clover spread, Frijj milk and Cathedral cheese. In these hard times the company is looking to close some of its dairies to cut costs, but it remains the market leader. - Price around 7 times the average earnings of the past decade
- Little growth to speak of but very stable sales, earnings and dividends
- Substantial debts, but are they manageable?
- Dividend around 6%, so may be attractive to income investors
To see the complete list of stocks ranked for value, income and growth plus a full analysis of a single stock each month, click here to subscribe to the Defensive Value Report.
Tesco back in the news again
Poor old Tesco; it seems that the supermarket giant cannot move at the moment for bad news on the back of weaker results that investors have become used to in the last twenty years. An analogy I heard recently was that the mercy of the market is about the same as the mercy of the crowd at the Colosseum with a sea of downward point thumbs. That sounds about right to me.
It’s clear to everybody, or so it seems, that this is the end of the company's era of dominance. Expansion plans are being scaled back and focus is returning to the UK where market share is under ever more pressure. Of course, this couldn’t possibly be just part of the ups and downs which make up the story of any long-lived company.
With a ‘build them up to knock them down’ mentality, far too many intelligent people are willing to write off a dominant market force because of some teething issues. Yes, of course these could eventually snowball into the decline of the Tesco empire, but the odds of that are no greater than they are for just about any other FTSE 100 company.
And so when everybody else is selling, including Neil Woodford of Invesco Perpetual fame, a wily old pensioner by the name of Buffett sneaks in and ups his stake to over 5% of the whole company. Those who bet against Mr B do so at their own peril.
Jeremy Grantham on the perils of rational investing in an irrational world
The always interesting Jeremy Grantham has a new quarterly letter out. In it he covers several themes which are tied together with the idea that rational investing is hard, not because it is intrinsically difficult, but because people who are not students of investing (i.e. almost everybody) typically have an irrational view of it. This irrational view is almost entirely down to two behavioural quirks known as recency and loss aversion.
When the markets shoot up to irrationally high levels, as they did in the late 1990s, it should be easy for professional and disciplined investors to recognise that fact and stay out. However, in reality the professionals must do whatever attracts clients, and the clients typically have a naive view driven by recency.
This means that if the professional investor moved away from equities in the late 90s and therefore underperformed the market, clients would leave in droves and go to whoever was still riding the bull. When the bull finally crashes investors will run to the exit and often leave the asset class altogether rather than head to whoever avoided the crash. Therefore, rational investing is irrational if you are trying to build assets under management. That means that most professional investors are actually being rational when they invest irrationally and against their client’s long-term interests.
His second story is about his sister’s pension assets which he manages. Because there is no career risk he was able to do what he wanted which resulted in the assets performing better than those of his firm’s clients precisely because he was unconstrained since he never told her what he was doing or how the investment was performing. On one occasion he did inform her of a particularly bad ‘paper’ loss, to which she immediately said “sell!” to avoid further losses. He didn’t, because he knew the asset would rebound. When it did, he told her of the rebound she said “sell!” to lock in the profits. After that he avoided telling her anything.
I know from my own experience the difficulties of talking to friends and family about the stock market. A rational view of the markets is just not part of the makeup of 99% of the population, so it looks like irrational markets are here to stay.
Jeremy Grantham’s latest quarterly newsletter (PDF)
Hugh Yarrow - The new normal is the old normal
Another of my favourite writers is Hugh Yarrow, who runs a similar portfolio to mine over at Wise Investment. This month Hugh points out that we have just been through the Great Moderation, or a NICE (Non-Inflationary Consistent Expansion) decade or two and that everybody seemed to think that they were going to last forever. For students of economic history it was clear that they weren’t.
In reality economies are always beset with problems and booms really do turn to bust. There is a business cycle and an investment cycle and there probably always will be. We should get used to more frequent recessions as this is how it has been most of the time.
In fact I always thought we should have had a recession in the early 2000s and interest rates should have been kept much higher. It was the panicked fear of a simple recession and an end to the boom which caused much of the subsequent debt fuelled boom and the related Great Recession that we are now in. At some point the piper has to be paid and the longer it’s delayed, the more painful it is.
Hugh Yarrow’s Evenlode investment view
GlaxoSmithKline – Too popular for value investors?
Glaxo is a very popular stock, both among private investors and professionals. It also ranks well on my quantitative screens, so I’ve decided to take a look and see if such a popular share can really be a good investment idea. You only have to look at Tesco (which I also like and which also comes up high on my screens) to see what the normal situation is for value investments.
GlaxoSmithKline – too popular for value investors?
As always you can contact me by simply replying to this email if you have any questions or suggestions.
Yours sincerely,
John Kingham, Editor of UKValueInvestor.com and the Defensive Value Report | | |
