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Time to buy?

21/8/2015

1 Comment

 
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As it cannot of escaped your attention that markets have been having a rough ride this month on the back of the slow down in China, collapsing commodity prices and liquidity flowing out of emerging markets. In addition this has all happened before the US Federal Reserve may or may not start raising interest rates next month or are investors trying to force them not to? It is also interesting that the Chinese have moved on from copying Western products to copying their financial policies with their own market manipulation and plunge protection squad, although they don't quite seem to have got the hang of it yet. I noted with interest that the markets were the lead story on the BBC News at 10 last night and Robert Peston was trotted out in a report and live in the studio.

The FTSE 100 has been at the centre of this with its heavy exposure to international Oil and Mining companies which have been hit hard by these developments. Thus as you can see on the chart above it has collapsed down towards lows seen late last year and earlier this year having pierced 6300 this morning before rallying slightly above that level again at the time of writing before the US opens and it has become oversold on the RSI. Thus 6200 would appear to be a support level of sorts for the index for what that is worth and with the market getting oversold, if this is just another wobble in the on going global struggle for growth then it might be time to buy again? I note according to Stockopedia that the Median PE for the UK market is a fairish looking 14.4x with a median yield of around 3% so why panic?

Well on the other hand, given we have had a 6 year bull market fuelled by Central Bank Liquidity and Global debt levels are now probably higher than they were in 2009 in some cases, maybe we should fear some tears if this proves to be the end of the line before the world goes into debt rehab and if it is the start of the breakdown. Now looking at the chart again, while I'm no great chartist, I guess some could come up with some kind of wedge between 7100 and 6200 which has just been broken by the plunge below 6500. This might suggest a downside equal to the height of the wedge and therefore target levels of 5600 or so but I wouldn't bet the house on that happening but may be worth bearing in mind if 6500 acts as resistance now and 6200 does not hold this time.

The other thing one can do as an investor is to ignore the macro noise as Warren Buffet recommends and quite frankly, unless you are investing in trackers, the index level other than as an indicator of sentiment and how the market has been doing is not that relevant. Therefore at times like these I usually like to go bargain hunting in the stock market to see if I can find anything which has been reduced to clear by the volatility or for other reasons. After all I don't get worried when I go to the supermarket and see some fillet steak reduced to clear - no I think ooh a tasty bargain I'll have some of that.

So with that in mind I was tempted to treat myself to some damaged goods in the stock market in a stock which has certainly been reduced to clear by quite some margin. It is a stock I have written on in the past and traded successfully despite my reservations about it. The stock concerned is Utilitywise (UTW) which has collapsed recently as their year end update disappointed and led to 7 to 8% earnings downgrades as their expanded sales force failed to deliver enough sales growth this year. After these and the 25% fall in the share price since then (see chart at the end) this one now trades on just 7.6x next years earnings with a forecast yield of 4.5% on the back of some more strong growth forecasts. This suggests that the stock is either cheap or that the market does not believe the numbers or that the growth will be achieved.

Talking of which the main concern with this one is the accounting, so I have been taking a closer look at that in their report and accounts for last year. I note that their are some large accruals in the accounts which is often a sign of accounting irregularities and therefore maybe the market is onto something with this one?

From a closer inspection of last years accounts I note:

In relation to the commission recognition where they book 85% of the revenue up front even though the contracts can last up to three years. I see they provided some sensitivity analysis in note 2 talking about what happens if the customers usage is <>15% out and say that could have a "material" impact on reported revenues and profits. They also say a 1% change in commissions would hit revenues by £420,606 which seems very precise! They also use a discount rate which could also be a swing factor if this goes up or down.

I guess as most of the commission comes from (presumably) a few of the big energy suppliers not too much of a worry, but as the CEO of another competitor company said yesterday it is a bit of an unknown with SME's but this would be more so in a down turn probably. See this article for more details on that. I also note that >50% of their 2014 revenue came from 2 customers (see note 5) as far as I can tell, but I presume these are big energy suppliers so probably OK, but clearly a risk if these play hard ball on commissions or decide to use others as well as or instead of Utilitywise.

The other thing I wonder about is the resignation of the deputy CEO who apparently was previously FD. My concern here could this be due to a bust up between him and the CEO? Especially as he was previously FD could he have been arguing for changing the accounting policies perhaps but being over ruled and therefore could this be an example of a charismatic / dominant CEO getting his way and the other guy going as a result? I could be completely wrong but that would be my conspiracy theory.

Any way despite those issues and my reservations I did decide to take the plunge and pick up a small holding yesterday in the hope that if they can address some of these concerns then maybe it can recover somewhat, however I must admit I'm feeling a bit uneasy about it, but sometimes they turn out to be the best investments. The other point to note on the shares that as well as being listed on AIM it is only a £126m market cap. and only has a 19% free float after taking into account directors holdings and a long list of quality institutions headed up by Woodford Asset Management who increased their stake again recently to 26%. This might help to explain why it moves in such mysterious ways.

So there you go one example of reduced damaged goods in the stock market sale, but as I always say you pay your money and take your choice, but as ever make sure you do your own research as I guess this one could still go horribly wrong from here -  phew must go and do some exercise now, have a great weekend if you can given the weather forecast hopefully I might get some cricket in if I'm lucky.
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1 Comment
catflap
21/8/2015 05:39:12 am

Thanks for your thoughts regarding the general market. This is kinda what i was thinking too. Markets rarely move in a straight line. Although I am surprised that the market is moving so decisively in August which I presumed as a dull month. I expected any excitement to come in September or October. Perhaps this is the dress rehearsal?

I like the supermarket analogy very much. However I expect further reductions in due course.

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