Market Musings 2/7/11
It’s hard to believe that we’re already into the second half of the year. Looking over the books for H1, I see that in euro terms my share portfolio was down 1.3% in the first six months of 2011, but this doesn’t concern me unduly, given sterling’s 4.6% decline against the single currency during the period (my UK exposure has oscillated between 40% and 51% of my portfolio since the start of the year). While I would obviously would like to be repeating last year’s double-digit gains, given the troubled macro backdrop for me this year has been more about trying to hold on to what I have than trying to chase alpha. Looking ahead to H2, the removal of QE2 is likely to have serious consequences for risk asset valuations, while the upcoming results season should bring a lot of profit warnings our way. Speaking of which, an Ernst & Young survey during the week revealed that UK plcs issued 75 profit warnings in Q111, the largest number since Q109 and a 47% increase on Q410, with most of the profit warnings occurring in the retail, media and support services sectors. I’ve tried to position myself for what I see happening in H2 as well as I can, by remaining overweight cash, and selling the more expensively rated consumer-facing stocks in my portfolio since the start of the year (the latter strategy has been vindicated by recent profit warnings in the UK in particular).
I divide my portfolio into two segments – the biggest one comprises my “core positions” – the ones that I see as long-term holds due to their inexpensive ratings, strong market positions and “will never give me a sleepless night” characteristics. The smaller one is my trading portfolio – the stocks I intend selling once they hit my price targets. There are only four names in that – France Telecom, Ryanair, Playtech and Trinity Mirror. France Telecom has been good to me over the years, paying me a 9% gross dividend yield each year since I bought it, but I’m worried about the sustainability of its business model over the longer-term and also the political interference which prevents it from cutting its bloated domestic workforce. Playtech has a potentially huge structural opportunity as gaming markets liberalise, but I fell out of love with it due to its handling of its recent acquisition of businesses from its largest shareholder. Trinity Mirror‘s businesses might be very exposed to the UK consumer, but I see it as a value play. The company prints 5 national newspapers and 160 regional titles in the UK, makes underlying operating profits of £120m a year and has cut net debt by 25% in the past year to £266m, thus giving it the financial staying power to keep going as weaker competitors go by the wayside. While it’s undeniable that more and more advertising will transition away from print, it doesn’t bother me if the pie shrinks so long as Trinity Mirror’s share of the pie is able to grow to make up for it. Trinity Mirror also owns freehold property assets worth 72p a share, versus a current share price of around 42p. So as debt shrinks and competitors exit the market, I see good upside for the shares from here. Ryanair looks a strange one to have ready to be drop kicked out of here, but I see it as a hedge against the oil stocks in my core portfolio. If oil sinks in H2, Ryanair should spike up and I have a few things in mind to recycle the proceeds into when the time comes.
(Disclaimer: I’m a shareholder in Uniq plc) In other news, I was interested to see Greencore’s share price fall below €1.00 during the week – the way it has been trading of late I wonder if some market observers are betting on a successful outcome in its battle to buy Uniq – which some brokers suggest would be at least part funded through a rights issue. Speaking as a Uniq shareholder I would welcome a share alternative, given the synergy benefits that would arise from a merger between the two.
Here are some interesting statistics I saw during the week: Morgan Stanley says China produces 80% of the world’s toys, and accounts for nearly half of the clothing imported into Europe.
One51 parted company with its CEO Philip Lynch last night. I’ve written about the company before, and again reiterate my view that the company should seek a full listing on the Irish Stock Exchange to improve liquidity and transparency. (Disclaimer: I am a shareholder in ICG plc) I wonder whether Lynch’s departure will have any consequence for its holdings in listed companies ICG and IFG, not to mention grey market listed NTR.