Tonight I’m gonna party like it’s 1999…
I was dreamin’ when I wrote this, so sue me if I go too fast. But life is just a party and parties weren’t meant to last. Prince – 1999
In 2000 Baltimore Technologies, an Irish internet security firm which had never made a profit, and never paid a dividend, moved into the FTSE100 at the expense of Scottish & Newcastle Brewery. Three months later, it was kicked out and worked its way down the FTSE, to AIM and oblivion; in 2003 the company was turned into a cash shell, a vulture fund swooped in 2004 and it delisted in 2005. I hope that all investors who bought in on the way up managed to sell for more than they paid, but I’d put decent money on such investors being in the minority.
Earlier this month Kodak announced it was to launch its own cryptocurrency, which sent the stock price shooting from $3 to $12; it has since fallen back to $6.5
Just Eat, effectively a technology firm which unites hungry people with restaurants, entered the FTSE 100 at the back end of last year. It looks a compelling story of growth, profit before tax rising year on year, acquisitions of rivals and global expansion. The share trades on 65x earnings, that’s a staggering figure (the FTSE100’s p/e is 16), and has yet to pay a dividend, retaining profit for reinvestment and expansion. The technology it provides is key, but in the accounts around 75% of gross assets is “goodwill and other intangible assets”.
Purplebricks, the online estate agent, has been criticised for overstating its sales; even when rebutting the attack they effectively said “yes, we overstated, but not by as much as you (the analysts) are implying”. They made a loss last year, mainly on the basis of trying to break into the Australian and US domestic markets; with no profits, there are no dividends. The share is a growth prospect at the moment, but the latest analyst report suggests they are overvalued by as much as 200%.
In the last couple of weeks we have seen Carillion and Capita in deep trouble; this has thrown the spotlight on the sector, and there is an element of sector contagion in the falling share prices of Interserve and, to a lesser extent, Mitie. Mitie is probably the best placed, although it is small, has balance sheet “issues” and is subject to a FCA investigation over the timing of a profit warning, it pays a dividend and has recently been awarded a key prison contract by the government.
Interserve looks like a small version of Carillion; the share price is down 74% over the last twelve months and not all of that can be attributed to sector contagion. It has huge debt - £600m – and, despite cost cutting and redundancies, is negative cashflow, cannot meet its bank obligations and has political question marks over its key contract with the State of Qatar.
It doesn’t quite feel like 1999 yet although there are some worrying trends; the FTSE 100 is high relative to historical values (but not necessarily to future ones) and there are stocks which appear to be massively overvalued by the market. This shouldn’t be a cause for panic though; the stocks quoted above are highlighted because they make a point; momentum investors will see the potential in Just Eat even at a p/e of 65 (I’ve bought Fevertree (FEVR.L) on a p/e of over 70), and value investors will see potential in Interserve, being 80% cheaper than a year ago.
The FTSE 100 closed on 12th January at 7778, the highest close to date. Since then, it has fallen by just over 4%; is this the beginning of a fall, or are the stocks you were prepared to buy at the start of the month just 4% cheaper?