Saturday, March 29, 2008

This too will pass

This week, as a HBOS shareholder, I received its 2007 annual review in the post. Given some of the rumours that have been going around the stock market it is surprising that Halifax has sufficient liquidity to afford the postage costs of mailing all its shareholders!

Anyway the report starts with a report by the chairman, Lord Dennis Stevenson CBE. I would like to quote one sentence from his report:

"Gradually this current market liquidity dislocation will pass."

There you have it! It is not Armageddon, nor the end of all UK banks. Investors in UK banks, myself included, should print out this sentence and stick it above their laptop screen to provide perspective when reading the latest market rumours.

Of course Dennis could be wrong but he wasn't made a Commander of the Britsh Empire for telling big porky pies!

I think the market has totally mis-priced UK banks at the moment and I am putting my money where my mouth is. Each month I am buying more Barclays and RBS shares through a regular stock purchase plan. My expectation is that by the end of this year those purchases will be showing a healthy profit; of course it could take longer. But there is an 8% yield to make the waiting easier.

There are two ways this situation could play out for the banks. They could carry on doing what they are doing and when the liquid crunch passed their share prices will soar. Or they could go the way of Northern Rock and the shares will become almost worthless. The market is obviously deeply unsure which way things will swing. I do not believe Barclays and RBS will suffer this fate. For one thing it would be a disaster for the UK banking industry and the government will try not to let it happen.

But I don't think it will come to that. UK Banks are knuckling down, doing what they do best and eventually this crises will pass and investors will focus on something else.

Lets see if I am right!

Saturday, March 15, 2008

The man with a plan

I am a man with a plan - armed and dangerous.

I recently noticed that RBS is on a 2008 PE of about 5 and is yielding about 10%! Barclays is on a 2008 PE of about 6 and has a yield of about 8%.

Another company I own - Gilead Sciences (GILD) - is on a 2008 PE of 25 and has no yield.

I think at these levels the UK banks offer a far better risk / reward ratio than GILD. GILD has been fantastic for me, gaining 30% last year when most of the market was going down. But now it is relatively richly priced compared to the market and I don't see anything on the horizon that will stimulate the share price. Obviously GILD has great defensive qualities as its HIV drugs are needed whatever the economic climate but on the other hand a company like United Utilities has similar qualities and is on a 2008 PE of 13 and yields 5%. At times like this a decent yield is most welcome. GILD has growth of course but its HIV drugs can't gain market share forever.

RBS and BARC on the other hand just need to recover to previous levels to double in price! Even if that recovery takes 4 years that is 20% annualised and a chunky yield on the way.

So the question is, are RBS and BARC heading for some kind of meltdown or will they recover in the medium term? If you believe that this is not the end for UK banks then they are a fantastic bargain.

However the current share price may not be the bottom so I am going to drip feed the proceeds from selling GILD into BARC and RBS over the next 8 months or so. Hopefully I have learnt something from previous experience of rushing to buy "bargains" only to see the share price continue to fall a lot further.

Happy hunting!

Saturday, March 08, 2008

A sane investor in an insane world

It is a while since I have examined a company closely on this blog. And in one sense there seems little point. Why analyse a company carefully to arrive at a valuation when the market is ignoring company results and trading on fear and sentiment instead.

But this is a trap that investors must avoid, similar to the temptation to give up on the stock market altogether at times like this. This is actually an exciting time for investors. The market is proving to be very inefficient at pricing securities and the patient investor can take advantage by buying shares that have ridiculously cheap valuations.

The strange thing about this bear market is that stocks weren't in a bubble at the start of it. Valuations last October were merely average, not crazy like they were in 2000. That should mean that the bear market is a relatively mild one but having said that prices keep going down even when I think they must have bottomed out.

RBS is now at 330p, half the price is was 12 months ago. If 12 months ago I had told you that the share price would halve in the next year, what sort of catastrophes would you have imagined that could cause such a fall? Severe global recession maybe or corporate fraud? Or maybe a large and risky acquisition? Or maybe a combination of all 3? But for the fall to be caused by an attractive acquisition, the risk of recession in a couple of big markets and the write down of some assets in unbelievable.

Warren Buffer with his $40 Billion war chest must be rubbing his hands with glee at the moment. I am just buying some very cheap shares on a monthly basis and learning some lessons:

1) Be more fussy about what you buy. There are thousands of options and if you are patient you may be rewarded with a better price.

2) Try to keep some cash available. The problem with schemes such as always having 10% cash so that bargains can be picked up is that as soon as you use some of the cash to buy a bargain then you have to sell something else to maintain the ratio. So I won't have a ratio but it wouldn't hurt to have a little war chest of my own.

3) Lower the risk by being defensive. Growth shares are really being hammered in this market. Cheaper shares with a healthy dividend should hold up better.

The second most important lesson is not to give up on the market. Unless this is the road to Armageddon the market will recover at some point. And if this is Armageddon then it doesn't matter where your money is!

But the most important lesson is that money doesn't make you happy anyway so spend most of your time investing in more important things!

God bless you.

Saturday, March 01, 2008

Market Madness

This market is crazy at the moment and I really am not enjoying it. If I had a large cash pile and no equity positions I would take great pleasure in grazing on some bargains. But as I, as always, am 100% invested it is a bit disheartening watching the market ignore solid results and keep pummelling the share prices of companies I own.

RBS and CSR reported this week, two companies who share prices have already been severely punished.

RBS's results were totally solid and the share price remained flat.

CSR reported solid results and a slightly worrying outlook and the shares dropped 20%! So CSR is now on a 2008 PE of 7.

The problem with CSR is that it has guided for a flat H1 in 2008 and slight growth in H2. This is not growth company performance. So CSR is now not a growth company but has no dividend or share buyback scheme. No wonder the shares have lost their popularity. Still I would have thought they deserve a forward PE of more than 7!

There are exciting products in the pipeline and if CSR can manage to deliver on some of their promises then the share price will recover.

These are troubled times on the stock market. They remind me slightly of early 2003 when the market fell because of the threat of war in Iraq. When the war actually started the market recovered strongly. Now the market is falling because of the threat of recession. I expect that if the recession actually starts or if even better the growth rate of the economy picks up then the market will recover quickly.

For now though I will be watching my portfolio from behind the sofa!