Albemarle / H&T (ABM)(HAT)

A missed opportunity

It’s always difficult looking back and trying to glean lessons for things in the future – the past is so inherently noisy that I wonder if many over-rationalise their losses and their wins. Any one investment has a plethora of movers, some of which one might not have identified, and in totality almost certainly one weighted wrong. That’s not to do down on stockpicking, obviously – I’m a stock picker –  there’s just lots of company specific noise. I do think there’s a danger in losing your money in, say, HMV, and concluding that stocks like Thornton’s (I used this example after Thornton’s rather spectacular rally) don’t look attractive because they share some of the same characteristics. I sometimes get that impression, and I do feel it a little myself.

With that proviso; that I might be over-thinking it; I reckon I missed a trick on Albermarle & Bond Holdings and H&T Group. Both of these companies are pawnbrokers – indeed, both are very similar companies. The main difference, though, is the best type of difference for investors – they were trading at pretty divergent valuations last year. See the graph below, taken from Google Finance, which shows the price movement since the first of my posts:

Here’s what I said then, almost a year ago:

I actually looked at Albermarle and Bond yesterday shortly after writing the post. The one overarching feeling I had when glancing over the annual report was one of the huge similarities between the two businesses. I’m not really sure how such a large valuation gap (ABM trades at almost twice the P/E) is justified. Broker forecasts probably explain the market ratings, since HAT is forecast for a significant drop-off in EPS next year and ABM is forecast to rise slightly.

Citing broker reports as a ‘reason’ for a difference in valuation is poor form, and I’ve tried to stop doing it since my young days. The problem is one of cyclicality – you’ll see it time and time again where firms will have their forecasts raised after a price rally or cut after a drop, without any new material information. You might argue they know more than I do, and the rally is indicative of an improvement I just haven’t recognised, and you’d have a point – but it’s still bad form. As an investor, I want to be identifying those underlying reasons – not chalking a valuation difference up to ‘better forecasts’ and leaving it at that. What I’ve said above dovetails pretty nicely with my comments on HAT on ADVFN, too, which hinted at another angle:

HAT’s price, to me, implies pessimism in the trends for pawnbroking – a scenario that will only occur if the general economy picks up pretty rapidly. This makes it a rare share in the current market – cheap looking while being (potentially) negatively correlated with wages/economic growth etc.

It should be fairly obvious where I’m going from here, then; we have two very similar bussinesses, trading on very divergent vaulations. In fact, the thing I disliked most about H&T was its exposure to gold buying – something I think is a complete dead-end and was just something to be milked for a few years, artificially inflating returns – and ABM were more involved in this.

I reckon, then, if it’s not too cheap to say this in hindsight, that I missed a fairly obvious long/short. I’m not sure you find many companies as similar as this faced with such differing market opinions. To be fair, I should note that not all of ABM’s woes are down to a simple rerating – a realisation it did not deserve its lofty multiple. A rather large contributor to the enormous share price drop last week has to be the resignation of the CEO, with a notably forceful line in the trading update:

In these circumstances the Board has decided that new leadership is needed.

Yowch. No gentle kick for him, then. Still, one has to wonder how much of that boot is down to the high expectations placed on ABM in the first place. Let’s be honest – the market set expectations, and the board missed them. Is the problem of the board underperforming, or of high expectations? I haven’t done anywhere near enough research to conclude, but the question is a pertinent one.

Still, no use dwelling on the past. What’s my insight for the future? Well, HAT’s price also dipped pretty significantly on the news. It’s down about 10%. The economics of the situation here is interesting – this sort of news almost inevitably implies that HAT won’t be doing as well as hoped – if the market tanks, the market tanks – but how much of it is company specific? They did note ‘high street competition’ as a cause for the decline, and HAT have been rather aggressively expanding. Realistically, I can’t read too much into it. The only logical thing to do is stick with my conviction in the first place – that HAT are a good company at a low price.

I did buy on the basis that its part of a portfolio, to be fair – nearly all my stocks at the time were rather correlated with the economy (kitchens, houses, vans used in the construction industry) – and HAT offer the other side of that coin. The transition out of the extraordinary profits from gold buying might be a painful one, but at this price (barely above book value) I think the balance of risks is broadly right with all the varied and differing outcomes.

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