British stock market got talents

British stock market got talents

 

Coming to the end of 2014 and it has been an exciting year in terms of investment.  US stock market is still in bull cycle.  Russia Ruble has finally rebounded after depreciated by 40% against the USD since July.  China cut 1 year benchmark borrowing rate from 6% to 5.6% to simulate the slowing economy.  Japan Abenomics turbo charged the money printing machine and sent Japanese Yen to 7 years old against the US Dollar.

 

The global markets have some big swings and looking at the UK stock market, it may look bored from the surface as the FTSE100 is almost unchanged for the year.  However, it is actually a sweet and sour dish with a few star performers and disappointment from some counters.  The talents are Shire Plc, Dixons Carphone, Ashtead Group, United Utilities Group, Astrazeneca and London Stock Exchange Group all showing over 30% year to date return as of 21 November, 2014.　The laggards are IMI, Standard Chartered, Rolls-Royce, Tullow oil and Tesco who dropped 30% to 42% year to date over the same period of time. 

 

The UK supermarkets are have a price war and killing each other.  Sainsbury and WM Morrison are also down 29% year to date.  Grocery sales fell by 0.2% in the 12 weeks to 9 November and it is the first fall since records began two decades ago according to Kantar Worldpanel data.  It looks like the supermarket chains have passed the part of the growth curve where more shops mean more profit.  Rolls Royce and Standard Chartered may have little in common in their business but both enjoy strong growth in emerging markets.  Rolls Royce gets more order as emerging markets build more airports and their airlines buy more planes.  Standard Chartered is viewed as a global player with strong presence in emerging markets.  Russian economy is getting colder by the day.  China economy is still slowing down.  Latin American has Argentina, Venezuela and even Brazil with red light flashing.  The emerging market opportunities have become threats.  For Rolls Royce, it could mean less new orders and existing purchase getting delayed.  For Standard Chartered, it could be a double punch in less revenue and potentially more bad debt.

 

Let’s look at the bright side of life.  Dixons Carphone is up 52.5% in one year as of 21 November, 2014.  It is a GBP 4.8 billion market capitalization company and it is the largest UK electronics retailer.  It is experiencing strong growth in earnings.  According to Bloomberg data, its earnings in 2014/2015 financial year is expected to be over 2.5 times the previous year.  Dixons has really done well in a business that looks simple.  Selling mobile phones, tablets and laptops look easy.  Well, last year Comet collapsed and currently, Phones 4u is looking for buyer to save itself from liquidation.

 

Shire is a health care company in the biotech and pharma sector based in Dublin.  It is GBP 26 billion market capitalization and is up 58.6% in the past 12 months.  Worth noting that was an acquisition play with Chicago based AbbVie trying to buy Shire then move the combined company’s legal address to the UK for a lower tax bill.  The US Treasury Department stepped in and made tax inversion deals more difficult.  AbbVie probably could even sense the heat in Chicago and pulled this deal.  Without the merger story, Shire share price skydived in October from 5200 GBp to GBp 3500 level.  For the shareholders who survived the free fall or the brave ones who bargain hunt, they would be pleased that Shire has climbed back to GBp 4500 level in November.  For this kind of global merger, hedge funds will participate in two ways.  Some hedge fund managers would believe the deal would go through and try to accumulate Shire at a lower price than what AbbVie would pay for.  As the share price of Shire climbed to above GBp 5000 level in September, some hedge fund managers might think the deal may not go through and decide to short the stock.  Thus when the stock dropped in October, the hedge fund managers who shorted the stocks could be buying back.  The bounced back in Shire share price in November could reflect two things.  The real valuation of the company on its own and the fact that it is ready to be sold, it may demands some premium in valuation as it is a “ready to be served” takeover target.

 

Happy Christmas to everyone and always good to have a more profitable 2015.