Two weeks have passed since the Royal Bank of Scotland announced a £9.6m pay package for its new chief executive. It was a jaw-dropper then and it still is, in spite of efforts to make some cosmetic changes to the package.
Obscene pay packages and incompetent or weak supervisory boards have been in the headlines since the banking sector self-destructed last year. Sadly, little has changed.
I have no problem with Stephen Hester’s base salary of £1.2m. Top-notch talent requires top-notch wages. But I do not understand the need for a further £8.4m incentive package. Supporters claim the package is fair because the RBS turnround is challenging. Funny that. I thought he was paid £1.2m a year precisely to handle a challenging job
The RBS board appears to believe £1.2m merely encourages Hester just to turn up for work each day. Getting him to act costs extra, it seems.
It is also worth reflecting on the stance of the UK government. It led the pack of outraged critics in the last 12 months. It is now a major shareholder in RBS. Its silence is deafening.
Turning to the stock market, the ‘small is beautiful’ trend continues to flourish. The only money-losing segment in the first half of 2009 was the FTSE 100, which had slipped 4 per cent as of June 30.
Slightly smaller companies within the FTSE 250 did much better, gaining 17 per cent, on average. Graham Secker of Morgan Stanley observes that cyclicality probably played a role. His analysis finds that almost half of all 250 constituents are cyclical companies, versus just 13 per cent of the FTSE 100. History teaches that cyclical shares tend to do better when the broad economy begins to improve.
One notch down on the size rankings is the FTSE Small Cap index, which rose 21 per cent in the first half of 2009.
Smallest of all is the Fledgling index which consists of about 200 of the UK’s smallest fully-listed public companies. It rose a whopping 49 per cent in the first half of 2009. These tiddlers were probably locked out of bank lending in 2008 and had to make aggressive cost cuts to survive. They are now lean and mean, and have greater upside potential than some of their bigger, slower-moving competitors.
Of course, no trend runs forever. But as yet, there is no sign of a reversal, in spite of the unbelievably strong first-half record of the tiddlers. Given this strength, I keep searching for candidates within the small company arena.
One company that caught my eye was Xaar. It designs and manufactures high-tech printheads for expensive industrial printers. The company has no involvement with highly competitive and low-cost personal printers.
Last year was one that Xaar would prefer to forget. The worldwide economic slowdown hit sales. Chinese manufacturers, an important market for the company, were especially hard hit. A licensee then cut prices to build its own market share. This forced Xaar to cut prices.
However, I suspect that Xaar is now near the beginning of a trend reversal. The graph suggests that other investors agree. The shares crept up in the last six months without any positive earnings news. I pounced last week after share prices rose above a well-defined resistance area.
Several factors probably contributed to the rise. One important issue is Xaar’s recent decision to close its high-cost Swedish operation and move production to the UK. This will entail some short-term costs but yield long-term benefits.
Another positive factor is a steady flow of new products that are helping Xaar regain market share. Industry reaction to Platform 3, its latest printhead line, is very positive. Manufacturers are incorporating it into their own new printers in ever-increasing numbers. As sales rate rise, Xaar will benefit from ramped-up printhead production.
Xaar has also broadened its efforts to become less dependent on China. Sales in India and the US, both increasingly important markets, are rising.
Share prices have risen strongly in the last few trading days and I hope the uptrend will continue. Xaar issues a fresh trading statement during the week of July 15. With luck, it will provide further zip to the share price trend.
Stock market historian David Schwartz is an active short-term trader, writing about his own trades and strategies. Send any comments or suggestions to tradersdiary@ft.com
