The dangers of investing in a kneejerk reaction the moment the stock market opens at 8am were amply demonstrated by what happened to shares in Royal Mail (RMG) when it produced its first half results. Those who bought in haste were left to repent at leisure.
I avoided the original Royal Mail flotation just over a year ago because I am a long term investor and I felt that mail is a dying industry. I initially regretted my decision when the share price soared but earlier this week the shares were already back to the level they commanded immediately after the float.
It was déjà vu on a shorter time scale as an interim dividend of 6.7p and a rise in revenue sent shares higher for just as long as it took to get past the first three paragraphs to the results table showing a sharp fall in profits.
Funny how often chief executives cannot bring themselves to admit that profits are down when it is so much easier to stress the less important positives. There was just the briefest reference to the parcels market being “challenging”.
In fact, you struggled to find the admission that Amazon (AMZN) is reducing the number of parcels going through the mailing system and that mail competitors are fighting to maintain their market share, thus putting more pressure on Royal Mail.
It will not be long before Royal Mail asks to be released from its commitment to deliver mail to all parts of the UK at an equal price or be paid a government subsidy to do so. After all, this is now a property company that delivers mail as a side-line.
In the meantime I would not consider investing in a company that cannot be upfront about the challenges it faces.
Manufacturer Still on the Slow Track
Toy maker Hornby (HRN) may be on the right track but it is always slower going on the upward haul compared with the downward spiral. The first half pre-tax loss has been halved to £520,000 and now all rests on the Christmas season. Given that consumer spending was up sharply in October and people seem to be shopping earlier for the festive season this year it is not too much to hope for a return to profits for the full year.
New boss Richard Ames ended the troublesome contract with a Chinese manufacturer in the summer so one hopes that the supply problems that have plagued Hornby for years are over.
I have a very small holding in Hornby which is showing a loss. I have looked at the company several times over the past two years wondering whether to top up my holding and hope for better times but I haven’t managed to persuade myself to do so yet. Perhaps now is the time to start looking again.
Political Uncertainty to Impact Markets
We thought it was a seismic shift in UK politics in 2010 when David Cameron decided to form a coalition government rather than rule as a Conservative minority but we may just be heading for another hung parliament where both Tories and Labour might be have to form a government with the support of smaller parties.
You can interpret the latest by-election victory for UKIP in many ways – UKIP on the march, the Conservatives coming close enough to bounce back, the Labour vote holding up well.
One way or another, the political uncertainty will hang over the stock market for the next six or seven months. It isn’t having an effect on shares yet as the FTSE is attempting to establish itself above 6,700 points and perhaps we shouldn’t worry too much about what might never happen. Enjoy the run-up to Christmas but be prepared for a New Year hangover.
