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When to Take a Second Look at Disappointing Stocks

THE WEEK: Morningstar columnist Rodney Hobson says there is nothing wrong with revisiting a stock idea - no one gets it right all the time

Rodney Hobson 9 December, 2016 | 11:55AM

The thing I like most about Twitter is that your views can be challenged, often by complete strangers. As long as it doesn’t turn you into a ditherer, having second thoughts can be therapeutic. No one gets it right all the time.

I’m nervous when profits go down and shares go up

I tweeted that figures this week from van hire company Northgate (NTG) were disappointing and noted that the chief executive is leaving. The shares leapt, however, prompting me to advise against chasing them higher. They have been on a long slow decline for the past 12 months and I would like more evidence that the company has turned the corner.

One follower put forward some evidence to the contrary: strong net asset value, cash generation, a well-covered high yield, a clear strategy, improving markets and a low price/earnings ratio.

I’ve revisited the latest pronouncement and I still feel uneasy. I’m nervous when profits go down and shares go up.

Pretax profits slipped from £42.8 million to £40 million in the six months to 31 October, with the underlying figures slightly worse. Yet the shares have recovered from a low of 311p at the end of June, reached after a 12-month slide, to push towards 500p this week. They gained 40p on the day the results came out.

On the positive side, a decline in the performance of the UK business has been halted and the political situation in Spain, the other major area for Northgate, has improved. Ireland has “grown steadily”. Northgate is confident enough to raise the interim dividend from 5.1p to 5.7p.

I wonder if this is a good time to be changing chief executive, with Bob Contreras standing down after nine years, first as finance director and then as CEO. As a replacement is already appointed to take over in only a month’s time, I get the feeling that the board is itself dissatisfied with the performance of the company. If so, it should have acted quite a bit sooner. Contreras “intends to pursue his various other interests”. I always treat that phrase with great suspicion.

I don’t think that Northgate is a bad investment, just that any improvement in prospects is already included in its share price. Meanwhile there is no room for further disappointments. By all means hold if you are already in but if you’re thinking of buying I would hope for a better opportunity. If that doesn’t happen, too bad. There are plenty more investments to look at.

The End of Globalisation?

The end is nigh. Not the end of the world but the end of the world as we know it. That’s the message of a book published this week, and although I don’t entirely accept all the arguments in it I do think serious investors should read it because it is thought provoking and challenges conventional thinking.

The Retreat of Globalisation by fund manager Gervais Williams suggests that the Brexit vote and the election of Donald Trump as President of the United States are part of a fundamental shift away from globalisation. Barriers between countries are going up, and not just on the Mexican border.

Major upheavals have happened before. Williams cites the changes under Margaret Thatcher, although that was a UK phenomenon rather than a global one.

One assertion will interest investors. One is that we will see more “dead wood” companies that have outlived their time crashing to earth and the scope for new vibrant ones to break through will improve.

When Trading is Just Gambling

The UK Government has decided to clamp down on trading in contracts for difference (CFD) for retail customers. Cyprus has done likewise and Germany, a big market for CFDs, has followed. Other European countries may well do so.

I’ve seen the usual references in the press to CFDs being an investment. Let’s be clear. Buying shares in companies such as IG Group (IGG) and CMC Markets (CMCX) is an investment – though one that looks a lot less appealing since the shares in both companies fell heavily this week.

CFDs themselves, like spread betting, are a gamble, not an investment. Don’t worry if you don’t know that CFDs are. You aren’t missing anything vital.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
CMC Markets PLC131.02 GBX0.32
IG Group Holdings PLC612.40 GBX0.39
Northgate PLC337.50 GBX1.20

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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