The most recent purchase to my "Value and Recovery Portfolio" appears to be bedding in well. The Value part of the portfolio may not meet the strictest definitions of investment criteria but I am one of those who feels that the last couple of years will prove to be a great opportunity that will "literally" pay dividends for years to come.
The objective here is to retain a low maintenance core of holdings that will return me a valuable dividend income stream each year whilst still having the fundamental financial strength to grow its profits and dividends in the future relative to my initial investment.
The high probability of a recovery in the share price provides substantial icing on the cake whilst minimal trading will control my "management cost".
Remember my earlier comment about being wary of new paradigms, well the tech bubble was built upon the "sandy" idea of buying companies that would take years to make a profit (if ever), which left multiples of sales as the only measure relevant to investors. Debt levels were dismissed by those suggesting this new paradigm but wages and costs still needed to be funded by the growing herd of followers looking for the promised land (pyramids optional).
As more were persuaded to join the flock (for fear of losing out), the money flowing in became the only thing driving up the values of these "back of a fag packet" start ups. Predictably, anything with ".com" at the end of its name had investors throwing money at it as they sought to get on board the next big thing having missed out on the last one and being reminded by their peers.
Consequently, the value of so called bricks and mortar businesses fell significantly despite increasing profits and tangible dividend yields in excess of bank account interest (sound familiar). However, once the smoke was blown away from the reflecting surfaces, making profits, rather than imagining them, came back into fashion and those profitable companies came back into demand as the tech bubble imploded.
My view is that once the pain of the current situation becomes a memory, albeit a painful one, then a measure of order and forward looking will return to the market.
I do have to admit that the greatest opportunities at the bottom of the market passed me by as I hid away paralysed by fear as seemingly all rational thought and behaviour left the markets.
Anyway, looking around the markets today, there are still companies with significant brands, presence, and history to influence our social behaviours and lifestyles both on a national and global scale. Many of them still seem to be on valuations at attractive discounts to where they would be if "sentiment" was more positive, as opposed to the general feeling of pessimism that is stalking the global environment jumping on any optimism. Recession and "we're all doom'd" are the only soap boxes in town it seems.
These brands and companies won't be sinking in the malaise, instead the questions being raised in every boardroom will be "what are the opportunities and how can we maximise them?" or "how do we adapt, and become more lean and efficient to protect our cashflows and profitability". I can't think of a single business leader worth his salary who will accept "there's a credit crunch on" as an excuse for not responding to the changing situation (except Banking of course where bonuses are seemingly paid out regardless).
Coming back on track, my latest investment is in BP.
Principally, this is on the back of an anticipated recovery in BP as it resolves the Mexican Gulf disaster and ensures provision is in place to meet liabilities.
The company has made significant progress in putting this provision in place by divesting non-core assets that in the company's words "may be of greater value to another operator" and with £13bn now raised against a £19bn year-end target the company is well on its way to doing what it said it would do.
A new broom at the helm, as Tony Hayward bore the brunt of the PR mismanagement, will also help perception.
With substantial intelligence as to the scale of the disaster and the cost to BP, the company at 473p is on a forecast 6.8 times P.E ratio for this financial year. This is still a substantial discount to Royal Dutch Shell (10.8 times and 5.3% yield) and global peers like ExxonMobil (12.4 times).
With a potential restoration of the dividend as early as February 2011 and returning credibility there is likely to be growing momentum behind BP's recovery particularly if the price of crude oil continues to rise with global demand (currently at a 2 year high of circa $90 a barrel).
At the end of the day, BP is still a major player in an essential commodity with limited and restricted availability until alternative fuels and technologies are developed and economically viable. Should the company close that discount to RDS by just 25% then that will put the share price at 540p, a gain of 14%.
There is also mileage in the view that if the BP brand is beyond repair in peoples perceptions then it will likely be taken over. But, in comparing BP to its peers we have to consider the Exxon Valdez disaster that affected Exxon and, more recently, the reserves debacle that Royal Dutch Shell found itself trying to contain.
The footnote lesson from history being that both companies have recovered. However, in the case of Exxon, although the Valdez disaster took place in 1989 it has only just completed paying for that disaster some 20 years later.
Anyway, when making purchase decisions over the last 12 months I have attempted to discipline myself to "buying on the dips" as opposed to the peaks, preferring to miss out on some investments until another opportunity arrives.
Inevitably, there will be dips in the market so I have tried to let the market follow a 2 or 3 day fall before investing. Picking up on Warren Buffets allegory of Mr Market, the philosophy to follow is to:
"be fearful when others are greedy, and greedy when others are fearful!"
In the case of BP, I wasn't brave enough to call the bottom (not even in the same time zone), but the timing of my investment followed the renewed fears of sovereign default in the wake of Ireland's rescue package giving me a 10% gain relative to today's price.
So, in conclusion, BP is in my Value and Recovery Portfolio in anticipation of share price recovery and the restoration of a dividend, which will then cement its place on merit.
No comments:
Post a Comment