Sometimes a break with routine can do you a favour. I usually listen to radio news from 1pm, as a break from writing. However, on October 16, I was so bored by the subject matter on World at One, that I returned to my PC early.
Glancing at share prices, I noticed a regulatory news announcement on British Energy, a company in my portfolio, at 13.15pm, three minutes before. The shares, which had been up 5p earlier, were down 10p. I don’t chase down every such item on every share I hold, but on this occasion I went straight to it.
It was a technical-sounding announcement about pipe corrosion and boilers at Hunterston “B” and Hinkley Point “B” power stations, and a leak of cooling water at a reactor in Hartlepool. Without being an engineer, it was almost impossible from the description to assess the severity of the news.
However, four things set off my “shareholder danger” klaxon. One, the announcement was deemed material enough to be worth making. Two, it was serious enough to warrant an analyst conference call. Three, the shares were already falling. Four, it didn’t come out first thing in the morning as most scheduled announcements for UK companies tend to. That might imply either some extended boardroom discussion about whether or not to make the news public or some extensive last-minute redrafting.
I only took 30 seconds to consider what to do. I had to sell now, and ask questions later. Part of this decision was based on the background to the purchase. I had bought British Energy shares on May 9 this year at 680p. I expected them to benefit from soaring oil prices and the high cost of carbon emission permits. This would make its zero-emission electricity more valuable, without increasing costs. They were also a lowly rate in price/earnings ratio terms at 11 times forecast earnings, and promised an attractive dividend of 6 per cent. The government’s plans to lower its stake were sure to draw more attention to what I expected to be a stable and reliable investment.
The timing of my purchase hadn’t been great. Two days later the market correction began, and although British Energy outperformed the broad market, the shares still fell. By August, though, it had climbed back to 750p, and I was feeling satisfied. Then on September 19, the company made its first announcement about cracked pipes and boilers, which the market did not take well. The shares fell by around 50p, to trade below 600p.
As I raced to log on to my brokerage account, I tried to recall whether it was the same old boilers this time or not. In the end I decided it didn’t matter. On a different browser window I could see on my live price screen that the shares were now down 20p, with volume climbing. By the time the indicated sale price for a market order was displayed, I was offered only 511p, down more than 40p on the day. I took it, and I’m glad I did.
Overall, I took a 25 per cent loss on British Energy in six months. Had I missed the announcement, I would have been 38 per cent out of pocket by the end of the day. The loss of capacity as plants were withdrawn for maintenance meant that the company, which usually produces 20 per cent of Britain’s electricity, would undershoot its output expectations.
Tempting as it is to blame management, it is probably intrinsic to any company running ageing equipment that breakdowns do not run as predictably as investors would like. While that is a lesson learnt, three other aspects of dealing with the company gave me comfort. One is that British Energy was only 2 per cent of my portfolio, and the overall loss barely noticeable. Two, I stumbled on the news quickly and could measure its significance, aided by access to real time prices. Three, I didn’t hesitate to sell and take the loss.
I’ve sold quite a few non-performing stocks this year, including ditching two gambling-related shares as I mentioned in this column in July. I’ve also sold, for a small profit, stakes in both BG Group and Burren Energy, having held each only a couple of months, because I wanted to trim my exposure to energy stocks now that the Iran crisis has gone quiet.
The process of weeding out losers isn’t always so hurried and dramatic as it was with British Energy, but it is continuous. If there’s a moral to this story, it is that to keep any kind of portfolio humming nicely, you have to throw out the old boilers.
Nick Louth is an active private investor, writing about his own investments. He may have a financial interest in any of the companies, securities and trading strategies mentioned.
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