BUY: JD Wetherspoon (JDW)
Wetherspoon’s current challenges, which are reflected in the weakness of the share price in 2020, offer opportunities for investors, writes Megan Boxall.
Previous recessions have caused house prices to decline, which has created opportunities for well-funded businesses. That is the idea behind JD Wetherspoon’s £ 93.7 million fundraiser. Institutional investors who supported the placement – including largest existing shareholder Columbia Threadneedle – agree with the logic. The company increased the full amount requested of it to 1,120 pa – only a small discount on the average closing price of 1,183 pa the day before.
Retail investors, who have been watered down by this placement, hope the money can help Wetherspoons repeat its last post-recession performance. Between 2009 and 2019, the company opened 185 net pubs and increased the average weekly sales of each pub by nearly £ 20,000.
Not all pub groups are going to be as well funded as Wetherspoons, and it’s almost certain that opportunities will arise when their peers leave the business – government restrictions have made it almost impossible for smaller businesses to survive. Curfews, bans and a ban on take-away alcohol have brought Wetherspoons current earnings to zero, while pre-Christmas restrictions eliminated the seasonal surge in business activity that most pub groups typically enjoy.
The company also notes the fact that it has spent £ 13 million on measures to keep its facilities “Covid-proof”. This spending offsets the help that vacation programs and price cuts provide to businesses – a help that will unwind far too quickly.
At Tim Martin’s company, the margins are weaker than those of some of his colleagues. Investors who want more security from a pub group might want to turn to Youngs. However, fundraising is cause for optimism.
BUY: IG Group (IGG)
The recent bitcoin price rally was good news for IG, whose crypto asset holdings tripled in the six months to November, writes Alex Newman.
A strong set of interim results for IG Group was fueled by news of the investment platform’s proposed acquisition of the fast-growing US online brokerage Tastytrade in a $ 1 billion deal funded with $ 300 million in cash ( £ 733 million) and the issuance of 61 million new shares.
Founded in 2011, Tastytrade is comprised of two companies: a financial literacy network with an audience of nearly a million “knowledgeable” traders and a fast growing online options and futures broker in the world’s largest derivatives market.
As usual, IG shareholders were assured that the transaction will have a positive impact on earnings per share in the first full year after closing – albeit in the low single-digit range and on an adjusted basis. The company points to minimal risks associated with integration, customer churn, and the lack of cost synergy targets as a source of optimism.
Numis saw this as a reason to raise adjusted earnings expectations for the year through May 2022 to 63.7 pence per share, even though the forecast for fiscal 2021 was 72.3 pence. Some investors will need to be more persuasive, judging by the market’s subdued immediate response to the deal.
Evaluation could be a problem. IG pays a little more than 20 times the pro forma pre-tax profit of tastytrade for 2020, a banner year for customer activities in which the pre-tax margin also fell from 57 to 42 percent. In contrast, IG traded less than eight times its trailing pre-tax profit in the twelve months to November, while margins rose to 55 percent for the half year from 40 percent a year earlier.
After soliciting many opinions, CEO June Felix told us she was convinced that IG was interested in a long-term mundane shift towards self-directed trading rather than a Covid-inflated bubble. “This is not Robinhood, it is a business aimed at customers who know what they are doing,” she said.
Wherever there are retail-focused derivative platforms, however, the nervous regulators are never far away. What assurance does IG have that stricter market supervision is not coming, especially if the new chairman of the Securities Exchange Commission, Gary Gensler, has not yet set his priorities?
“Nobody can predict regulation,” admitted Ms. Felix. “But this is a well-established, well-regulated business today. There is a lot more understanding of stock markets [in the US], of which options and futures are a subset. “
Shareholders can at least take comfort in a proactive stance on the UK financial watchdog who warned last week that cryptocurrency investors should be ready to lose all of their money. IG says it operates its crypto products and positions here.
All of this seems to be further confirmation of the IG’s international push and a sign that growth is on the way, even if it is volatile.
HOLD: Argo Blockchain (ARB)
Argo’s share price has doubled since the start of the year. But this rise has been interrupted by ups and downs, writes Harriet Clarfelt.
Cryptocurrency miner Argo Blockchain raised £ 22.4 million through a private placement just days after Bitcoin created a reminder of its inherent volatility, and passed the $ 40,000 (£ 29,380) milestone before tracing back some of its gains.
Argo, listed in London in the summer of 2018, announced this week that it will issue 28 million shares at 80p each to certain institutional investors who had already subscribed to the offering.
The group plans to use the net proceeds “for working capital and general corporate purposes”. This included expanding mining capacity in the first and second quarters of 2021 to boost installed computing power.
According to Argo, the goal is to “operate an efficient mining infrastructure that supports the continued growth, innovation and functioning of the world’s leading blockchain networks”.
Blockchain refers to the technology that underlies trading Bitcoin and other cryptocurrencies that eliminates the need for third party banks and traditional financial infrastructure partners. As Argo explains, cryptocurrency mining is “the process of reviewing transactions and adding new blocks to a blockchain ledger”.
After rising from around 20p on Christmas Eve to an all-time high of 145p on Jan. 8, Argo’s shares have been quite a bumpy ride since then.
The volatility of cryptocurrencies is one of the reasons for increasing concerns about the risks they pose to ordinary investors. The Financial Conduct Authority warned this month that consumers who choose a high-yielding cryptocurrency should “be prepared to lose all of their money.”
However, some might argue that those who want to get into the crypto market are better off looking into “pick and shovel” games – the stocks that facilitate cryptocurrency transactions than the digital assets themselves.
Chris Dillow: Gold and Inflation
Gold has been a fantastic protection against inflation over the long term. It has kept pace with 2000 years of wage inflation. It was a fantastic long-term store of value.
In the short term, it is much less obvious that gold is protecting us from inflation. There are two different ways to look at the numbers here.
One way is to consider the correlation between annual inflation and annual changes in the price of gold in sterling terms. If gold is protecting us from inflation, that correlation should be high. But it’s not like that: since 1971 it’s only been 0.28.
In fact, gold was a poor hedge against inflation even for long periods. In pound sterling terms, it was lower in 2005 than in 1980, although the cost of living tripled during that period.
We can put it another way. If gold were a great short-term hedge against inflation, its real price – adjusted for inflation – should never fall. But it can do a lot.
But there is another perspective here. Instead of looking at actual inflation, we can look at expected inflation as measured by the gap between traditional five-year gold returns and their index-linked counterparts. If we look at the 10 largest annual increases in this measure since the data began in 1985, we see that gold has increased on nine of these occasions. This suggests that gold can actually protect us from inflation fears.
The truth is, gold’s ability to protect us from inflation depends on why inflation is rising.
There are some types of inflation that gold does well – such as those caused by rising commodity prices or a fall in the pound.
But there is another type of inflation that can be bad for gold – caused by a cyclical upswing. Gold can fall during such booms for two reasons. First, stronger economic growth can increase investor risk appetite and lead them to keep assets like gold in safe havens. Second, economic booms raise expectations about interest rates. And because gold doesn’t pay interest, it becomes less attractive when investors expect higher returns on competing assets such as cash.
For these reasons, gold did poorly during the inflation boom in the late 1980s and the 2010-15 boom.
This is a problem because if inflation rises over the next few years, it is likely the result of a stronger economy. In this case, gold might not do well.
That doesn’t mean you should throw it away. For one thing, the Fed and the Bank of England have promised to keep interest rates low until economic recovery is secured – and unless interest rates rise sharply, gold will not fall sharply. On the other hand, this upswing could already be largely discounted by stocks – and if stocks don’t rise sharply, the demand for gold as a safe haven remains strong.
Instead, we should look at gold as a protection against some types of bear markets in stocks – such as those caused by investors becoming more risk averse. This makes the metal worth it, regardless of your opinion on inflation.
Chris Dillow is a business commentator for Investors’ Chronicle