Financial Lifecycles – The Circle of Life
- Note Just like my 17 year old daughter financial stocks can have violent swings. There are adolescents where everything works well. You invest capital, get a good return, profits and share prices grow. As you get older the ROCE starts to reduce and believing you are infallible you keep investing at ever reducing ROCE until eventually it hurts. Markets get sucked in here and the warning sign is when profits are growing on the back of capex, the brokers are saying it’s a growth stock and no one is watching the long and slow decline in ROCE. Inevitably for those that recover from this experience it will involve cutting the capex when returns start to improve. Coming out of rehab its important to find a new path to organically grow which can be a difficult time. Such is the circle of life and investing.
- Our note released yesterday names and shames the stocks at each point of their lifecycle. Example stocks are:
- Adolescent : AFH Financial
- Fading returns: Mattioli Woods, Polar Capital
- Rehab: Brooks Macdonald
- Transitioning: Brewin Dolphin
- Rebuilding : Liontrust, Miton, H&T
- Exceptional High ROCE : Jarvis Investment Management
- Returns : As one would imaging the best returns are to be made from the adolescent, recovery, rebuilders and high return stocks. Fading Returns are dangerous and those lost post rehab stocks are dangerous too. An equally weighted portfolio of each basket would have produced year to date:
- Adolescents +36.9%
- Fading Returns (8.7%)
- Recovery +9.7%
- Transitioning (15.9%)
- Rebuilders +20.6%
- Steady State (-0.5%)
- Exceptional ROCE stocks +26.6%
City of London Investment Group – Trading Update
Share Price 400p
Mkt Cap £107m
- Update The company reports on AUM for the year being up 10% to $5.1bn. Which is a useful way to report when AUM are down 5.6% over the 3 months since March. The core EM strategy underperformed while Frontier strategies and Developed Opportunistice value outperformed. PBT for the year to June is expected to be £12.8m. EPS is expected to be 39.3p and the total dividend is expected to be 27p
- Estimates The £12.8m PBT is a little ahead of the forecast £12.5m PBT and the EPS of 39.3p is also ahead of the 37.8p expected with the 27p dividend being in line.
- Valuation PER is 9.8X going forward with a 6.6% yield. Margins are 38% and net cash is c £16m
- Conclusion One day it seems likely this company will be acquired. Until then the 6.5% yield may be useful to collect while we wait.