My historical databases occasionally provide unexpected benefits.
A television commentator stated last week that July’s 8 per cent gain on the FTSE 100 was very rare and “will probably not be repeated within my lifetime”. He warned investors to tread cautiously in the near future.
My data provided me with a completely different spin on last month’s rally. There were 32 other occasions since 1950 when the UK stock market gained at least 8 per cent in a single month. Shares continued to rise in the following month 24 times, a 75 per cent success rate.
Statistics such as these provide no firm guidance for the immediate future. But they make the point that I should not be too quick to close down positions merely because of last month’s strong gain.
Last Monday brought news that Celsis, one of my recent trades, was the target of a surprise takeover offer. Ordinarily, announcements of this nature are pleasing. But the Celsis offer brought little joy. The acquirer offered 232.5p per share, a disappointing premium over the previous day’s closing price
I do not understand why the Celsis board accepted this weak offer. Celsis is a steady profitmaker. Company-sponsored research by Edison suggests its fair value is almost one third above the offer price. Celsis pays no dividend although it can afford to do so. I suspect that a commitment to pay a reasonable dividend could have boosted its share price to a level very close to the offer price, assuming management wished to remain independent.
Another point to consider is that the world economy is at the bottom of a downturn and an expansionary phase approaches. Market statistics suggest a bull market is underway. In this kind of environment, an independent Celsis will probably be worth more in the near future without a takeover premium.
My conclusion is that the acquisition price is too low. I wonder why a major financial institution such as Gartmore accepted such a poor offer so quickly. I contacted Gartmore but no one was available to explain its decision.
The deal is now quite advanced with 38 per cent of the shares already committed. Even so, I am hopeful that uncommitted institutional investors with clout will do the job that the Celsis board should have done and demand a higher price.
On a more positive note, I notice a development in the ongoing bull market. Strong gains are occurring in the shares of companies that are posting losses or weak profits. Investors appear to be ignoring recession-linked results and focusing on the approaching economic rebound.
I missed several of these rallies but am trying to compensate by investing in competitors that have yet to rally. I view it as the stock market version of lateral thinking.
This strategy led me to open a position in Havelock Europa. The company was once mainly a shopfitter but has diversified into educational furniture and equipment and point-of-sale printing. Havelock shares were marked down by more than 80 per cent from their 2007 peak. To my way of thinking, this was a massive overreaction. The City still thinks this company is a one-trick pony with heavy exposure to shopfitting. It forgets that Havelock now has two other revenue streams.
In common with other companies that are rallying these days, Havelock will probably show a small loss when it reports first-half results later this month. But it expects to return to profit in the second half.
And while new shopfitting contracts by major retailers are likely to lag in the months ahead, revenues in Havelock’s point-of-sale printing division are expected to improve in the second half. Meanwhile, the education division appears to be recession-proof. Much of the spending is financed via Public Finance Initiatives (PFI). The government likes PFI because it can pass today’s costs on to future generations. For this reason, PFI is likely to survive budget cutting in the months ahead.
Havelock’s price chart provides further good news. The shares appear to have bottomed out. A gentle uptrend has been in place for several months. If my lateral thinking works, these shares are ripe for a healthy bounce. A dividend of more than 9 per cent provides some downside protection should the earnings report disappoint.
Another thing that I like about Havelock Europa is its low daily trading volume. These shares are off the City’s radar screen. As a result, once the shares start to move, they might move strongly.
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
