Monthly Archives: March 2016

Sports Direct – the new Glencore

My favourite topic, Glencore, seems to have hit a sideways trajectory for the last few days. That and the lack of noise on the ADVFN bulletin board may mean that this share is ready to rejoin the grown ups and trade like a FTSE 100 member rather than a 2 year old on their third packet of Haribo. As I’m attempting to generate returns well above the conventional, I’m probably looking for more sugar high than responsible citizen so whilst I will continue to hold Glencore it may be time for me to lighten up on it again to generate some dry powder.

Talking of 2 year olds tantrums, I bought into Sports Direct after my post about them last week. I was a bit early, as they have continued to drop but that is a good opportunity to buy more at a cheaper level. Mike Ashley appears to be a difficult character, I grant you that, but did he build the business without being able to solve a staff issue? Presumably before the company went public he was able to work these things out for himself. Still, better to have a 25 year old analyst point out how to run the business properly, according to the textbooks they’ve read, written by people who’ve never run their own businesses either. I got my Ph.D before I ran my own business in the same subject area, and let me tell you they bear absolutely no relation to each other. I mean clearly the fact that Mr Ashley doesn’t talk nicely to Analysts or show much respect for our Politicians must mean he’s forgotten how to sell a football shirt. So I think this could be my next Glencore. The more I dig into this share the more I like the prospects over the next 12 months, primarily because it has become fashionable to not like it for no good quantitative reason. All I need now is for some Analyst to say something insightful like “if Sports Direct never sells another thing then the shares are worth zero” and I can jump into the sell off with both feet.
Still shorting Ocado, not working out so well and shorting Euro vs USD which is.
Current portfolio valuation £152,796

Super Mario, Kuroda and Yelland in the Phantom FX war

So Mario Draghi wants the Euro to devalue against the dollar. He can’t say this because outright currency wars aren’t really considered cricket and in any case, if you tell people you are doing it then they react and it gets you back to where you started. Mario is therefore avoiding an outright currency war by dropping the deposit interest rate but then saying it is unlikely to go down further.

 So the ECB announcement went something like this:

Interest rates to -50bp – Euro drops against the dollar making European exports cheaper and imports more expensive – therefore more domestic cash will stay in the Eurozone and more foreign cash will enter to buy the cheaper exports. So far so good.

Extend TLTRO – the funding mechanism meant to make banks lend more. Mario did this by making the TLTRO rate the same as the deposit rate – i.e. banks can now borrow money from the ECB and get paid for it. Is that going to cause a flood of banks borrowing extra money to lend? Unlikely – it didn’t exactly cost a fortune to borrow TLTRO money before and will make very little difference. But, in terms of negative interest rates damaging Bank profitability it helps to stave off the panic so markets like it – Mario is playing a blinder.

Widening the basis of QE to include investment grade corporate bonds. Now everyone is getting very excited – something that might actually impact the real economy!

At this point the Euro is dropping like a stone against the dollar. Marvellous, the Eurozone are happy.

Then the Q&A where Mario seemed to say that further interest rate cuts were unlikely. Like a child given 20 Christmas presents but told they can’t have the 21st, the market then throws a huge tantrum. Euro gains big time and the unspoken aim of all this comes unstuck.

Kuroda at the BoJ tried something similar with the same result. Easing designed to bring the Yen down against the dollar actually ends up with a stronger Yen.

And then last night we have the FED guiding for less hikes – possibly lowering interest rates this year – which would be a rather embarrassing repeat of what happened the last time the FED hiked rates and had to reverse the decision in quick order. So queue more dollar weakness. As I write EURUSD spot is 1.1332.

Which way now? Who knows, but the Bank of England is announcing its MPC decision today. There is no surprise available here – they will keep rates on hold – with the Brexit vote coming up anything else would be crazy – but just because everyone knows what they will say, there will still be a reaction from the FX market way bigger than any news.

Sports Direct

So the project is currently treading water in a Beta dominated risk on risk off movement. Glencore up and down 5% daily depending on what commodities are doing. I’m thinking about my strategy whilst treading water and it has to be buying in on bad news. Markets always seem to overreact and sometimes for the strangest reasons.
Take Sports Direct for example (LSE:SPD). I first bought into this share at about 50p in the early 2000s – it had dropped down from its IPO price of about £3 basically because Mike Ashley didn’t communicate with the analyst well or provide them with nice cake and coffee at investor days.
So bring that forward to today and SPD is at 392p – not far off 3 year lows. They have dropped out of the FTSE 100 which would mean you’d expect it to sell off to some extent. However, when I look at the numbers:
PE 9.5
EPS 40.6p (EPS growth 31.82%)
Operating Margin 11%
PEG 0.3
Gearing 34.5%
All this looks pretty solid to me. Add to that we have Euro 2016 and the Olympics this year which would normally give SPD a big boost in kit sales etc (2012 had this effect).

So why the sell off? Well there’s the issue about a profits warning – but let’s face it those are often more about the analysts getting it wrong than the fact that the business has suddenly turned bad – it hasn’t. Then there is the Mike Ashley factor again – this time refusing to come to talk to Parliament about staff issues. So Mike Ashley is uncommunicative and uncooperative – and that’s news apparently. Turns out he’s quite good at running a sports shop though, so once I’ve done a bit more digging on the numbers that might be my next trade.
Today’s stubbornly sideways portfolio valuation: £149,532

The Restaurant Group takes a beating

ISA is now £147,848.66 plus I lost more money shorting the Euro against the Dollar so spread bet account stands at £1,871 to bring the project total to £149,719.66 – so pretty much flat on the day and the project so far, BUT – what a kicking the Restaurant Group took! down 22.6% on the day on the back of negative trading views for the current year. This is now at a 3 year low market cap of £844 mln and a PE of 12.43.

The Restaurant Group (RTN) own Frankie and Benny’s, Garfunkels and Chiquitos – basically the one step up from fast food restaurants that congregate around Cinemas.

So I’m already a holder of these shares because in the Cinema space they do seem to have a good hold of the limited real estate put aside for dining. UK Cinemas tend to be focused in out of town locations / retail parks so this dining space can be lucrative and relatively free of competition. However, there is a flood of “easy dining” opening up in the UK which is more than offsetting any increased spending from consumers generally. Profits were pretty much flat at around £85 mln.

So is this a buy, hold or sell?
Personally I see this as a short term buy – the company is still solidly profit making, has some of the best known brands in this space and has a dividend yield of 3.4%. Is this going to win the easy dining war? I don’t know – what is clear is that actually these weren’t a particularly bad set of results and it shouldn’t be a surprise to anyone that there is competition in the dining market – so the reaction today was very exaggerated. I expect these to bounce in the next couple of weeks and to that end I added 755 shares at 421.5 pence. There are long term issues with this type of business (but none of them are news today) and so I’m seeing this more as a trading position currently than a longer term growth story.

Trading day 3

glad I sold some of my Glencore yesterday. Huge drop on back of commodity reverse. Portfolio value now at £149,792.53 so basically back where I started. However I do think that the drop was overdone. Fairly sure the shorters would have been getting involved at 170p. Which makes me think perhaps this range trades for a while now. Going to hold my current 20,000 shares for a while as I’m a big fan of the way Glencore management have addressed their balance sheet issues and I think there is deep value in this share. Very sad to hear about the accident at the Katanga mine today.

Lots of Brexit news and views around as expected. I expect that will mean sterling will continue to sell off and inward investment will drop until we know the outcome. Personally I think we should stay in. If I get the time I will write in more detail why I hold that view.