Friday Reading

Eyes Forward

Rather unsurprisingly, my Twitter newsfeed today has been filled with stories of a rather unusual variety – far from the serene UK value bliss (I hope I’m painting a pretty picture!), Facebook’s IPO and the surrounding media commentary has grabbed much of the attention. I look on with mild interest and a sense that it’s a sign of our times – I remember one tweet earlier in the week (sorry, I forgot who) wondering whether price to book value really has any relevance any more, given how much of what makes a successful company – especially an internet one – is weird intangibles that are essentially impossible to value. It’s pretty easy to get into the cyclical argument of saying ‘Facebook’s intangibles can be calculated by doing a DCF on their cash generation’ – fair enough, but working out the value of the future cashflows of a business is exactly the role of the markets, and not accountants. There’s a reason markets do it – they do it best.

I should say that my opinion is probably to be expected given all I blog about – I think there’s serious question marks over its ability to generate substantial amounts of cash for investors, and operating in what is almost certainly the fastest moving sector the world has ever seen, it’s somewhat unsurprising Facebook has to make expensive acquisitions to stay on its game. I don’t think it can possibly generate enough of a return to justify a $100bn price tag.

On more UK based news, I was rather surprised to see French Connection issuing a pretty negative trading update yesterday. Like-for-like was down 12%, with no real positives in sight barring their still strong balance sheet. Entertainingly for my recent dip into trend forecasting, the results for the LFL period this year to last year match up pretty nicely. Maybe it does have some value! Either way, Mark Carter provided some commentary on the strikingly mixed looking value characteristics of the share, and Richard’s 2 minute summary provides a good basis for anyone interested in the share. Since the trading update was accompanied with something like a 30% drop in price, it always strikes me as rather shortsighted that investors are so turned off by stocks having recently issued some bad news. I suspect the underlying story is the same as before, just the specifics are slightly more questionable.

Given the pummeling the markets have been taking in the last week, I also once again find myself looking at the banks – an eternally daunting prospect. Nick Kirrage at the Value Perspective provides a continuing contrarian viewpoint, focused on the fact that, essentially, if people want to be bearish, they will find a reason to be bearish. As someone interested in economic psychology, that’s an enduring theme – one of the most slippery cognitive biases we all face is the tendency to absorb information which supports our prior conclusions and not weight so heavily information which disagrees with them. Philip O’Sullivan last week published a piece called ‘Turning the Corner’ with a pretty strong case for holding the shares of RBS – essentially, that things look to be moving in the right direction; and that in the long-term, there are several drivers for share price growth which may be clouded out by the issues in the Eurozone. I’m achingly tempted to buy a bank simply because I think all the psychological factors say it is exactly the type of stock that would be mispriced. At the same time, I can’t shake the feeling that it is a fool’s game to buy without at least a basic understanding of the rather complex annual reports. Maybe I should bite the bullet, hole myself up for 3 days and dig in!

Finally, something interesting to think about – Geoff Gannon and his competition to value a mystery stock. I was rather saddened to see he made it rather difficult by picking a stock with the some great growth characteristics – I feel instantly more uncomfortable.. best of luck!

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