Data from the Office of National Statistics last Friday had most economists scratching their heads.
UK Market News
Yell Group plc (LON: YELL) confirmed yesterday that it had secured a fresh extension on a deadline for refinancing £3.8bn of debt.
Yell is negotiating for more time to pay off its debts in exchange for an agreement to settle £800m within 18 months. This will partly be funded by a rights issue.
Northern Rock Plc to split into two
The U.K. government today won approval from the European Commission to divide Northern Rock Plc into two parts, transferring potentially toxic assets into a new entity, reports Bloomberg.
Northern Rock will be split into a “good” bank, which will continue the lender’s profitable operations, and a “bad” bank that will sell the remaining assets, the Brussels-based commission said in a statement today.
Gold mining companies with 3rd quarter results
Over the next two weeks major US-listed gold mining companies will release their third quarter results. These include: Barrick Gold (ABX), Agnico-Eagle Mines (AEM), Anglogold Ashanti (AU), Eldorado Gold (EGO), GoldCorp Inc (GG), Jaguar Mining (JAG), IAMGOLD (IAG), Kinross Gold (KGC), Newmont Mining (NEM), Randgold (GOLD), Yamana Gold (AUY).
Results are expected to be good following the ascent of the gold price over the last quarter.
They had expected the numbers to show the UK economy had grown a little in the third quarter. But in fact GDP fell 0.4% to make this the sixth successive quarter of falling growth.
The consensus forecast was wrong: Britain is not yet coming out of recession…
These figures may, of course, be revised later on as is frequently the case. But the key question remains – how to make money in times of anaemic economic growth. Today, I’d like to show you.
How to pick shares that can grow in a slow-growth economy
To be honest, I’m not worried about finding shares that can make money. There are plenty of opportunities. If you read my advisory service, Research Investments, you’ll know what I mean. And when we consider the current climate, I’m optimistic.
You see, the low growth and low interest rate environment is likely to continue for some time. This is good for equities. Investors’ confidence is slowly returning and one legendary investor is with them.
Anthony Bolton – the UK’s Warren Buffett – said recently:
‘While there is likely to be a correction at some stage, I think the bull market will continue for some time and it is not too late to invest’. He adds that ‘companies that can grow faster than the market overall will be particularly rewarded... and bottom-up stock picking has become even more critical’.
So let us examine what we need to do to find companies capable of growing faster than the market.
The first thing is to avoid firms that are overly dependent on the UK market since the alarming UK deficit is likely to continue to hold back the economy. This does not mean avoiding UK companies but it does mean concentrating on those with a majority of sales overseas. And those overseas sales should include a sizeable fraction in the faster growing Asian economies.
Then we need to look for companies that have strong balance sheets so they do not need to appeal to banks to fund their organic growth or small acquisitions. And we naturally need competent management, preferably with substantial stakes in their own company.
But a company could meet all these conditions and still not be capable of sustained growth. It needs two extra things. The first is a leading position in its global market niche with strong links to quality customers. The second is a way of maintaining this position. And that’s where one secret weapon comes in…
The power of ‘invisible dividends’
Sustainable success depends on a company having products and services with an edge over those of its competitors. There are many examples of companies that have a temporary edge but then fail to maintain it. Or they maintain their position in a technology but find they are bypassed by a new, disruptive technology.
Examples include the way in which ultrasound imaging replaced many X-ray imaging procedures. Or the Sony walkman replaced small radio cassette players and was itself superseded by the iPod/iTunes system.
Companies need to make wise and balanced investments to sustain their competitive edge. This investment can take many forms such as research and development (R&D), marketing (particularly in setting up operations in new geographies), capital equipment and small acquisitions to provide access to a new technology or market. I call this ‘invisible dividend’ investing.
R&D is particularly important in sectors such as pharmaceuticals, biotechnology, health, software, technology hardware, defence, electronics and many aspects of chemicals to name just a few. The advantage of R&D for the investor is that companies usually give this in their accounts.
Using R&D in assessing a company
Let us take the example of two comparable companies in the software sector that have similar profits and price/earnings ratios. There may seem to be little to choose between them. But look more closely and you may find that one of them is investing much more than the other in R&D.
For example, in the software sector the average company invests around 10% of sales in R&D. Now suppose one of our two companies invests 8% of sales and the other 14%. If they are both investing wisely, the 14% company is likely to be developing more new products and services at a faster rate and this is going to show in the market in the near future.
There is something else. The 14% company is making the same earnings as the 8% company even though it is putting 6% more of sales into R&D. This means that it is already making higher margins because customers are prepared to pay more for its superior products and services. The 14% company is in a virtuous circle. It is benefiting from reinvestment of ‘invisible dividends’.
The power of ‘invisible dividend’ investing during a recession
A particular case of ‘invisible dividend’ investing arises in a recession. Some companies will cut back on R&D and other investments as they minimise costs. However, other companies increase R&D on the basis that they will enhance their range of products and services and hence show a clear competitive edge when the upturn comes.
In the last recession, overseas companies like Adobe, Intel, Juniper Networks and Nokia did this and Autonomy (AU.) and Renishaw(RSW) are examples in the UK. All benefited through rising sales, profits and share prices when the upturn came. The same will be true for the current recession.
Good investing,
Dr Michael Tubbs
for The Right Side
Editor’s note: Dr Michael Tubbs is editor of Research Investments, an investment advisory service which recommends companies that use ‘invisible dividends’ to drive profitable growth. Dr Tubbs’ acclaimed research and ‘invisible dividend’ investment recommendations is one benefit of The Fleet Street Alliance mentioned at the start of this email. You can read about this in my email on Monday 2 November.
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