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00:00:01
Hidden alpha in ‘ahead of expectations’, and relief in the UK motor finance saga?
1.1k Plays3 months ago
In this week’s episode, Lawrence is joined by Stockopedia CEO Ed Croft and Daily Stock Market Report writers Graham Neary and Roland head. They discuss:
- New research from Stockopedia, highlighting the potential hidden alpha when companies issue “ahead of expectations” trading updates. Ed reveals how much stocks tend to drift upwards after these announcements, how long the effect lasts, and how you can implement these findings into your own process.
- Yu group (#YU) and its latest update. This stock is featured in two of Stockopedia’s model portfolios, and the team give their thoughts on its current direction compared with its fundamental strength. Is it going to be sold from either of the portfolios?
- The UK motor finance saga. With the Treasury announcing an intervention, possibly to avoid another PPI-style scandal, is there a light at the end of the tunnel for motor finance lenders? The market seemed to think so this week, but what’s the investment case here?
If you enjoyed this, you can read daily analysis on noteworthy and hard-to-research shares with Stockopedia’s Daily Stock Market Report. You’ll also unlock award-winning investing insights, tools, and education to speed up your research process and help you make more informed decisions.
Try Stockopedia free for 14 days at stk.pe/pod.
Stocks we mention
06:44 - Frontier Developments (#FDEV)
07:53 - SRT Marine (#SRT)
08:32 - CMC Markets (#CMCX)
09:01 - Reach (#RCH), McBride (#MCB)
17:12 - Watkin Jones (#WJG), Evoke (#EVOK)
18:27 - Vistry (#VTY)
22:17 - Yu Group (#YU.)
31:54 - Secure Trust Bank (#STB), Close Brothers (#CBG), S&U (#SUS), Lloyds (#LLOY)
Extra Stockopedia content we mention:
The Jump - what to do when share prices react to Trading Statements (subscriber-only): https://www.stockopedia.com/content/the-jump-what-to-do-when-share-prices-react-to-trading-statements-1021030/
The Strategy Map - How To Pick Your Stock Market Strategy: https://www.stockopedia.com/academy/articles/introduction-to-strategy-map/
Host: Lawrence Judd
Analysts: Ed Croft, Graham Neary, Roland Head
Let us know what you thought of this episode - email lawrence@stockopedia.com or tweet us @Stockopedia.
Disclosures: At the time of recording, presenters own shares in Evoke and Yu Group.
Disclaimer: We do not provide personalised financial advice. None of our content constitutes or should be understood as constituting a recommendation to enter in any securities transactions or to engage in any investment strategies discussed in our content. We do not provide personalised recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual. It is very important to do your own analysis before making any investment based on your own personal circumstances.
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Transcript
Introduction and Agenda
00:00:04
Speaker
Hello, and welcome to this week's episode of Companies and Markets Weekly from Stockopedia. I'm Lawrence. I'm joined today by Graham and Rowland from Stockopedia's Daily Stock Market Report. We also have the pleasure of being joined by Ed Croft, our founder and CEO. ah We've got a really exciting agenda for you today.
Market Reactions to Trading Updates
00:00:25
Speaker
um First up, ah Ed, you published some new research onto the site about how the market reacts to different different flavors of trading updates as we can to discuss that. We are then going to look at some of the more interesting news from this week. U-Group is in two of our model portfolios so we're going to take a look at that after its update this week and we're also going to look at some of the news around
00:00:51
Speaker
the yeah UK car finance saga.
UK Car Finance Saga Impact
00:00:54
Speaker
ah There's a few stocks that have been impacted by that this week. So we're going to have a brief discussion around those. ah So Ed, thanks for joining us. Do you want to introduce the research that you published this week?
00:01:08
Speaker
Yeah, good to be here. um I would say it's some preliminary insights from some ongoing research, and it's a theme that's been going on since before Christmas. I wrote an article titled The Head of Expectations, which is a phrase that is very familiar to those who read trading statements every day, especially Roland and Graham, who are here.
Significance of Trading Statements
00:01:30
Speaker
And essentially it's trading statement season. So coming back from the Christmas break, you are hit by a massive tsunami of trading statements.
00:01:39
Speaker
And this is quite a this is particular to the UK market because we only have, for most companies, results that are reported every six months. And so trading statements are these sort of interim updates which really guide the market ah to whether a company is in line with the expectations or ahead of them or below them. Expectations being the broker ah forecast numbers for profits and revenues for the year, most of the case.
00:02:05
Speaker
So we kicked off, decided to really investigate this because we're actually developing some improvements to the new service at Stockipedia and wanted to really dig into these ideas and see if the sort of UK environment around reporting trading statements really had some strong actionable signals for private investors. So in the analysis, I actually found that we're in the big hump of trading statements, which sort of ends at the end of this month.
00:02:34
Speaker
And then there's kind of a two or three week period where it goes very quiet and then results statement results season hits like a bang and it's huge and because so many companies have got their year end date at the end of december there's a big big flurry now so um it's it's heroic what the guys are doing on the daily stock market report at the moment.
00:02:51
Speaker
But um so, yes, we kind of have dug into the last two years of trading statements specifically to look for the price action on the day for different classifications of ah of of announcements from ahead to significantly ahead to significantly below expectations.
00:03:09
Speaker
A lot of the what you found seemed to to center around the concept of post earnings announcement drift.
Post-Earnings Announcement Drift
00:03:16
Speaker
and I'd love for you to to introduce that as a concept because I think that's going to frame the love of the discussion that we we have later on.
00:03:22
Speaker
Yeah, absolutely. so what happens is that There's a lot of academic research on this which basically implies that when a company announces that it's got an earning surprise or its profits are above expectations, there's often a drift for the next six, eight months in the direction of that announcement.
00:03:42
Speaker
And that's what we really wanted to dig into because a lot of the research is US focused and we wanted to see what happens in the UK environment because it's slightly different here because of these semi-annual reporting periods. So what we really did is looked at all the announcements, trading statements, and had a look at what the first day jump was in price for different classifications of trading statement. So for example you might expect a significantly ahead or materially ahead announcement to lead to a price jump and obviously that does and a significantly below is a profit warning and below expectations is a profit warning and we've done a lot of research on that in the past and it drops fairly so the price drops very significantly when that happens.
Market Reaction to Expectation Announcements
00:04:21
Speaker
So we found that yes those jumps happen and
00:04:25
Speaker
We found that the jumps are obviously higher for them or lower for the more significant those announcements are. and Then we looked at the price drift over the next weeks and months, up to six months later. and We found a very, very strong correlation that for significantly ahead of expectations announcements, the higher that really the higher the jump, the more the drift was in the direction of the jump on average, and which I think was particularly interesting. because Psychologically, most people, when they see a jump in share price, and I certainly do this, I go, oh, Dash missed it. I knew that one was a good one. And then you go off and try and find something else that hasn't moved. And actually, it might be given the research, a more rational decision to actually you know use that as a trigger point for for action and buying or holding and continuing to hold. So I think that's really the key insight here is that these are giving you information
00:05:21
Speaker
on where share prices might go, or more specifically, about the expectation errors that ah that the market has about a company. And I think I'd like to dive into that just for a couple
Repetitive Ahead of Expectations Announcements
00:05:33
Speaker
of minutes. um Because what actually happens here is that companies that announce they're ahead of expectations, that means the broker expectations are behind.
00:05:44
Speaker
And one thing we've really found was that companies announcing their head often announce that their head again and again and again. And it's surprising how long it takes the brokers to upgrade their forecasts to actually match reality.
00:05:59
Speaker
And I think it's because they often um just, you know, it's ah it's a psychological trait that we get anchored on certain levels. And that happens with analysts who forecast too. They anchor their estimates at a certain level and often don't push them up enough on new information. So you then find companies go ahead and out ahead again and again and again. And that's what leads to price trends and leads to momentum. So I think this is really, um really interesting. And I think it's ah we should have more insights on this in the coming weeks.
00:06:29
Speaker
Awesome. Roland Graham, I know you've you've read Ed's article. Was there anything that that really stood out to you as as people who are ah you know part of your day jobs looking every day at these trading statements and how the market then reacts to to the detail that's in them? What what's stood out to you?
Price Jumps from Inline Trading Statements
00:06:44
Speaker
I think one thing that one thing that I found interesting that I've seen a couple of times recently is at the article talks about price jumps and sometimes what happens, even an inline trading statement prompts a big price jump. And I think that sometimes ah seems to be maybe a sign that the direction of travel on expectations is changing. And because I think what's really important here is is um not so much what the expectations are, but how they're changing and how people expect them to change and when there's a mismatch that you get these big moves. So with you like with Frontier Developments, the video game company last week, they issued an an inline statement um saying they've had good sales of their latest game and full year results and their expectations are not changed for the full year.
00:07:32
Speaker
But the shares are up 25% on the day because it is potentially, or if shareholders will be hoping, it's the end of a really bad run of results and profit warnings for this company. And so Inline can be very significant too when it's a company by a price jump. And I think it was. So that's quite interesting, I think, to something to look for.
00:07:53
Speaker
Absolutely. um Frontier Developments was a really big Covid winner. ah It had a huge run in those years from memory. I think it was in one of the NAPS portfolios for a while. I noticed actually after that change and it's suddenly the stock rank has jumped after that jump too. so It's now back up to into the 90s, having been down less than 50. Interesting. that it might Maybe it does mark the point.
Momentum in Stock Markets
00:08:18
Speaker
and I think what you say is very true, that what we found is that the jumps in price are leading indicators themselves, regardless of the classification of the trading statement. so I think there was one I was looking at. It might be SRT Marine
00:08:32
Speaker
which has got a very low ranking. But I think in the last year, yeah right at the bottom, it came out with an announcement and it led to the biggest one day jump in the database we put together, which has then led to a huge increase in the share price over the ensuing kind of six to eight months. So ah very, yeah you're right to point that out. We also had similar from CMC markets today, which issued a very short and quite terse trading update saying it was in line and has dropped quite suddenly.
00:09:01
Speaker
Yeah, that's that's true. and but CMC is kind of funny in how it communicates expectations to the market. I think there's there's always big mismatch there, which which does provide an opportunity. and i mean Going back to Ed's article, ah the main overriding point is the value of momentum. To me, that momentum is is a real factor. ah the The markets are not moving in ah in a random walk. there's there's There's clear trends that do emerge. and Ed mentioned Reach and MacBride in the article.
00:09:43
Speaker
So, sometimes you have these ah extreme situations and I think they often lead to and mismatches because it's very difficult for investors to predict what's going to happen. Analyst forecasts very quickly become out of date. So, in the case of reach,
00:10:04
Speaker
there's ah There's pension liabilities and there's there's ah fears about the secular decline of that market. In MacBride, there was ah there was a solvency concern which went away, leaving the shares ah you know free to recover in a very dramatic way so both are kind of special in their own way and so i think when investors are getting involved in these situations they do they do need to be aware that these aren't blue chips you know this is these are not situations where analysts are.
00:10:40
Speaker
you know predicting things within 1% and investors are predicting things within 1%. These are very ah sort of dramatic situations. and but Obviously, I love to cover them.
00:10:53
Speaker
How I treat it in in in my work is probably I stay positive on stocks for longer than i then I really should if I was looking purely at value, but when things are going up, you have I suppose you have to let them go up. and Then when there's a profit warning, and this is where i don't I'm not comfortable because it's countercyclical.
00:11:12
Speaker
and but or it's you know if somebody If a company gives a profit warning, I often feel like I have to cut my my own sort of view on the company to make my own view more negative now because of the risk of another profit warning and a risk of negative momentum. and I don't like doing that because I'd rather be buying when things are getting cheaper and being positive on things when they're getting cheaper, but at the end of the day, you have to respect momentum.
00:11:41
Speaker
Roland, obviously you've been covering a lot of our the the trading updates that have been analyzed on the Daily Stock Market Report over the last month. that As I had said, there's been there's been a lot of them. Are there any trends that you've spotted that have surprised you in terms of ah sectors or types of companies that have been announcing more in line or ahead of expectations than you than
Outlook and Profit Warnings
00:12:05
Speaker
you've expected? Have there been more? or fewer profit warnings than you've expected at this time of year normally? Yeah, i think it's I'm not sure that I've <unk>ve added it up exactly, but my general feeling is it's not been as bad as general sentiment might have suggested. There haven't been, at least I don't think I've covered that many really bad updates. um Investors in some ways still seem a bit gloomy or or skeptical, but
00:12:31
Speaker
A lot of the companies we've looked at, I think it's fair to say, they they're doing okay and they seem to have a reasonably balanced view on on the outlook. um Obviously, one topical area and and um one one area that could be interesting as the year unfolds is UK consumer-facing businesses that are potentially facing a big rise in minimum wage costs and national insurance. you know A lot of these companies, they've they've come up with estimates on what the cost is going to be and they seem to be taking a fairly measured tone on what the impact is going to be and whether it will be manageable. Whether this this level of confidence is going to be borne out by the results later this year will will be interesting to see. But my feeling so far is that um ah things don't seem really that bad. and you know it's ah The outlook for the year ahead seems reasonably balanced at the moment. I don't know whether Graham has the same perception or not.
00:13:28
Speaker
Well, I'm concerned about the the tax rises. um There was a bit of a pushback in the comments where I was ah sort of worried about weatherspoons, for example, where they estimate and and an additional 60 million pound cost from these tax rises, which after you know after they've paid their interest bill, they haven't got and much more than that in terms of profit left over in recent times. So ah yeah, there's there's cases where I think because the tax rises haven't happened yet,
00:14:08
Speaker
Everybody is sort of guessing what's going to happen. and and yeah I would be very worried about about how companies are going to mitigate that. Will they be able to pass on the costs?
00:14:21
Speaker
ah I would say a supermarket would have a good chance, but other businesses, I'm not so sure, but you know without impacting demand. You're certainly seeing divergent share prices across some of the retailing sector. I think two in the NAPs portfolio on the site. One is Currys and one's Kingfisher. Kingfisher has gone totally the ah the wrong direction. Currys, which seems to be benefiting, well, not benefiting, it's it's performing well at the moment.
00:14:46
Speaker
on strategic change and and that's still up trending so it is interesting. One thing I spotted in the report this morning was that I think a third of the companies you covered were above expectations and that is an it's just an interesting point. I was speaking to a fund manager called Alex Wood of Kerno Capital and he said that at the end of last year,
00:15:07
Speaker
because he monitors the sentiment across ah all the R&S every day. and He said he's noticed a a real step change in sentiment, in management confidence, which he said the last time he'd seen that led to a 20% rise in the market over the next 12 months. Now, that's not a prediction. That's just me sharing Intel. but I thought that
UK Market Undervaluation
00:15:26
Speaker
was quite interesting. so You guys will be more on the pulse of the daily ah the daily themes though. so I don't know what you think. We had a subscriber who commented saying that said the market seems particularly jumpy at the moment. Are we ah we seeing that? Are we seeing not quite the same level of ah positive share price movement that we might expect given we've got so many ah ahead of expectations updates? Ed, you've been around markets for a while. you've You look at them some more top down. What's your take on this?
00:15:59
Speaker
well I think you know the UK is a pretty interesting situation because it's been so cheap for so long and it's so unloved. and um you know We are not yet necessarily seeing the inflows on the funds that can really make a difference here, but I think that ah there is a lot of under research. There are a lot of under research companies. So there's a lot of misvaluation. There's a lot of expectation errors. And so we do see quite big changes. And I think that's probably a theme that will will last for a considerable time until the investing environment normalizes. And it's an interesting dynamic here because you you've seen the American markets absolutely fly and and the British markets have had a positive 12 months, but not participating in the same way. So I think it's all about um
00:16:43
Speaker
expectation errors and and a lack of research. and Private investors make up an important part of the market at the ah at the small cap end, and which is very under-invested in institutionally. so These significant moves are significant and very important to monitor. Roland and Graham, um I'm curious as to whether but i think you've you touched on it before, Graham, where you you said that you've covered companies that have issued a profit warning and you felt the need to to downgrade your own view of that company in line with that.
00:17:12
Speaker
Are there any companies where you've resolutely stuck to your positive or negative view of the company like regardless of what's happened in the trading update? I can be stubborn. ah you know and I've ended up arguing with my co-writers about it. 888, which became Evoque, is a company I'm a shareholder in where ah It's highly leveraged, highly dangerous, and where I've still said, well, well maybe they can get through this. ah Watkin-Jones, I was discussing that in the report today where it's a you know it's a very ah concerning situation with their remedial works for for the for the properties they've built. But I look at the balance sheet and I say, well,
00:17:59
Speaker
The balance sheet provide is a source of strength, so i'm you know I'm still going to be reasonably positive on that one ah while acknowledging the uncertainty around it. so There's lots of cases where and you know if there's a balance sheet argument, good or bad, I think that can trump ah they the earnings because earnings tend to drive share prices in the short term you know and even in the medium term.
00:18:27
Speaker
But if there's a balance sheet argument, yeah you know, bullish or bearish, that can have the final say. So that that's where I would probably be stubborn in my view. Yeah, I think what Graham said about balance sheets um resonates with me as well, really with a couple of examples of companies I've looked at recently. then ah One was Vistri, which is the house builder formerly known as Bovis Homes. They issued multiple-profit warnings at the back end of last year and after they had some problems with cost overruns and
Approach to Profit Warnings
00:19:01
Speaker
delays,
00:19:02
Speaker
to projects and the latest update just recently was in line with their revised guidance or the reduced guidance at the end of this year and it did show some improvement in trading I think completions were up by about 7% last year but I took a fairly negative view on that. i think because i think it's they they've been I think there's some more risk emerging on the balance sheet more than there needs to be and more than some other householders too. They're reporting high levels of debt, rising levels of unsold stock. and um
00:19:38
Speaker
They also kind of seem to be partly at the mercy of external partners for their developments who have been pushing back on decisions. I don't know whether maybe they're waiting for interest rates to fall there, the the partners. And against this backdrop, the management have been buying back shares as well, which seems to have contributed a lot of the increase in net debt last year. So I have so i did take a fairly negative view view there despite trading ah improving.
00:20:04
Speaker
One thing technically I'd say about vistri or a stock like that that's seen a lot of profit warnings in a row is the amount of disappointed buyers at overhead prices in the recent ah period. It often can create quite a headwind for shares to really bounce back when you've got a ah huge amount of disappointed people who've bought at a higher price. so Technically, there's some headwinds there too, I guess.
00:20:30
Speaker
this the This all reminds me of the quote about in the short term stock market being a voting machine, in the long term it being a weighing machine. How long does this if e this post earnings announcement drift last? like How long does that affect last?
00:20:44
Speaker
yeah It's Ben Graham, that's a great quote from Ben Graham, the father of value investing, who also taught Warren Buffett ah much of what he knows about value investing. and how long so The voting machine, look that the that momentum tends to persist for about a year. It's pretty categorically that price momentum and earnings momentum can reverse after about 18 months. so You tend to see the momentum effect. Generally, the sort of best time frames for tracking momentum is that six to 12-month price history
00:21:19
Speaker
ah Share price history if you find the kind of the the ones with the best price momentum and in the in the trailing six to twelve month period they often do very really rather well so that is really the kind of voting machine that goes on and it's very interesting because often momentum is started by these announcements head of expectations and answers which chain and they drive that momentum.
00:21:40
Speaker
but then actually they stop and often companies start reporting in line again and again but the share price keeps powering on and that's because you know the momentum bandwagon traders jump on and they also think and project things are going to go on for for much longer than they do and then you end up with the reversals so that's really the the way that mechanism works and and that's why the momentum rank works on the site which is actually funnily enough it's been the best performing of the three stock ranks If you had to summarise the take-homes for investors from the the preliminary insights, and obviously we can share more insights as they come, what would those be?
Key Research Takeaways
00:22:17
Speaker
ah that you should really always pay attention to ahead of expectations and especially significantly ahead of expectations announcements. They often come out as materially ahead or substantially ahead, but they really of there are quite few of them. And when they are mentioned, they are big turning points in stocks. I think U Group has won, which when it when it kicked off its big cycle of upgrades a couple of years ago and led to a huge run in the stock,
00:22:45
Speaker
starts with the significantly ahead announcement. and Then you get the ahead of announcements, the chain on the back of it. so I think that's really key. and Also, looking at the price jump on the first day as as a leading indicator of direction, they don't always work. it's It's not like there's one rule for everything. You have a certain percentage hit rate or win rate in in in in these things working. and I think was looking at it, and I think for significantly ahead, I think seventy The data set I got in the last two years was 75% of shares continued in the same direction. um so you It doesn't always work, but I think those are the key takeaways.
00:23:19
Speaker
Welcome back to part two. We're going to look at some of the headlines from the news this week that Roland and Graham you've been covering in the daily stock market report. Ed is staying with us because the first company we're going to look at is You Group.
U Group's Performance and Market Reaction
00:23:35
Speaker
It's a small cap business energy supplier. ah It's also currently in Roland stock in focus portfolio and Ed's new QVM portfolio. So we thought.
00:23:45
Speaker
Let's have a chat about it. It's got very, very strong stock ranks, quality rank of 80, value of 81, momentum of 93. Overall stock rank of 93 means it's classified currently as a super stock. ah Gave a bit of a mixed update this week. Yeah, so in summary, I think the the very short version is that growth was strong last year, but possibly less strong than expected or perhaps perhaps a little bit slower in the second half of the year. But against that that possible negative, the company said the profit margins are going to be higher than expected and that's really
00:24:20
Speaker
because of um good control over their their energy purchase contracts, their hedging arrangements for for gas and electricity, and also bad debt, which is a key risk, I think, for this business. So the market took a bit of a negative view. I was more positive overall. I think that disciplined growth is is is fine for a business like this because it's very easy for things to go wrong.
00:24:44
Speaker
if the financial controls aren't tight enough. So, yeah, I think it's ah still an attractive growth situation um at the moment. I don't know what you thought, Ed. Oh, I mean, it's ah it's ah it's a fascinating situation. it's It's been on absolute tear. And since, you know, I think late 2022, and probably one of the best performing stocks in the market since then, it must be up eight times or something like that.
00:25:10
Speaker
and it's it's been driven a huge amount of revenue growth. Just looking at the stock report from 80 million in 2018, revenues projected to be 657 at the end of this year. As you said, it was maybe a slight revenue miss. and then so I think they said revenue is slightly below expectations, but I think profit is slightly ahead. so you know What do you do in that situation? and I think I remember I was at Jové's Williams at a conference talking about U Group last year and saying that he's always been astonished at how lowly valued this is. He owned it, so he might be biased, but he was claiming the valuation should be five times higher. I think what's interesting about the company, I mean, look, it's a utility, right? It's subject to all the—I'm not an expert on this at all, by the way, so full caveats, but
00:26:00
Speaker
It's got 80 million, and um i maybe we'll have 100 million in cash by the end of this year, and 80 million at the moment, which is an enormous amount of the market cap. It's 30% of the market cap. and so I think on the forecast PE ratio, it's only a forecast seven and a half. You take out the cash, it's forecast five, and it's and it's growing strongly. I think the thing I'm concerned about, if I'm honest, you so often see in these fast growth companies a culture of sales.
00:26:28
Speaker
And we've seen this time and again, that when a sort of sales culture can take over because that they're doing all these smart meter installations and they're extraordinary growth. I don't know what the number was, but it's more than 100% in the last year or something like that. and and And they're installing these things at a real clip. But um what I've noticed is that There are some quite bad reviews online. If you go on Google reviews or Trustpilot, you see very negative reviews about the company's um sales practices. And that would be my worry here. And I think like every sort of number is is quite super impressive. The numbers are very impressive, very high stock rank. But there is a risk. And and I think the the the risk maybe is ah you know on on that sales side. But they all do seem to be riding a bit of a tailwind. and um
00:27:13
Speaker
But the market didn't take very kindly to it. I think it was down 8% yesterday or so, but it's a very fascinating situation.
00:27:22
Speaker
does the Does the update change any of sort of the those fundamental trends that we we see if we we look at its financials?
00:27:30
Speaker
I would say just looking from a purely data-driven technical perspective, and I'm not going to make a fundamentals call on it, but it's still in an uptrend. It's still in a long-term uptrend. It's high rankings. It's spitting off cash flow. It's generating so much cash. You're going to have to do something with that cash.
00:27:52
Speaker
And you know if i I don't know what they're going to do with that cash, but if I had all that cash, I'd start buying back stock or paying it out to shareholders. Because you know if they are the market caps $265 million, and if they're going to have $100 million on the balance sheet by the end of the year, that's extraordinary. So ah you know there's a real deep value case here as well as um as the other ah cases. So very high profitability measures.
00:28:17
Speaker
Yeah, I think that's first one point I'd pick up on the profitability seems to be improving, and that's a really positive factor for me. And it could be, I think, a positive for the valuation too. Generally, I suppose you can't generalize completely, but a more profitable company, it's it's there's more of a reasonable argument to support a stronger valuation, I suppose. I mean, I think one point with the cash is that possibly some of it is is one of those businesses that does need to have a decent amount of liquidity. um I think perhaps because they're entering into hedging contracts for their energy purchases and so on. I know that one reason why the cash rose so much last year from about 30 to 80 million, roughly speaking, net cash
00:29:01
Speaker
was because around 50 million was returned from their previous trading counterparty. They
U Group's Financial Overview
00:29:09
Speaker
changed to a new arrangement last year with Shell, which they say is much more effective efficient and scalable for them. So I don't know whether that means they'll need less liquidity going forward in the past, but I think it's one of those businesses where you wouldn't want to see them running up a debt balance, or at least I wouldn't as ah as a shareholder.
00:29:27
Speaker
um But yeah, I think the improved profitability, the valuation seems modest. And as you say, the risk really is that some other unforeseen issue happens, maybe reputational or or whatever, that the brings their growth to a sudden halt, which would probably have a nasty impact on the shares.
00:29:45
Speaker
Definitely. This isn't a business really that I want to pay a very high multiple for myself. It's a utility. There are things that can go wrong and it has to turn over a ah great amount of money to make a reasonable profit. And as I say, with business with its it serves the SME business market in the UK. So,
00:30:06
Speaker
could be affected by the economic cycle and rise in bad debt, for instance, a small increase could have ah a big hit on profits. So I think it's um a measure of caution is probably sensible, but I think it's, you know, financially still seems to be performing well. Obviously, U Group is in ah both the SIF portfolio and the QVM portfolio. Is it still in those? Is it getting close to to meeting any of the cell rules there?
00:30:30
Speaker
um In terms of the naps portfolio, which is morphing into the QVM, it is actually now the worst performer year to date down 10%, but that doesn't trigger anything. It's not a profit warning. So I will be monitoring that and monitoring whether it does start to trigger cell rules. I mean, one thing I'd say about ah Company like you group we have a risk rating on it which is speculative and speculative is the second highest top ah risk classification of shares in the market and what that actually means is it's very highly volatile and actually you expect the standard volatility through the year to be somewhere between forty five and seventy percent so it being down twenty percent is actually normal.
00:31:08
Speaker
for this company. and um so I wouldn't say it's out of the bounds of ah of of a typical downside volatility in this business, so in the share price. I just thought I'd flag that. For me, my timing was slightly different. I bought the shares in October and added them to safe in October. I'm still just about in positive territory. and um Unless there's a profit warning, yeah my sell rules. well but I won't be looking at selling it until much later this year um when it'll be due for a review. Lovely stuff. Moving on Graham to the the other big bit of news this week that you covered, um there are a bunch of lenders who share price reacted very, very strongly to some ah some news that came out. I'd love for you to summarize what's going on there if you could.
Supreme Court and Motor Finance Impact
00:31:54
Speaker
Yeah, sure. and So we had big, big movements in ah motor finance. um s STB, the secure trust bank was up 33% on Wednesday.
00:32:09
Speaker
Close Brothers was up 22%, and my old favorite, SNU with the ticker SUS was up 15%. Even Lloyds was up 4%, which is a big move for Lloyds. and ah It's all to do with ah Rachel Reeves ah and the Treasury who are making an intervention. They want to give evidence to the Supreme Court because the Supreme Court is reviewing a decision by the Court of Appeal
00:32:47
Speaker
from november this is. Strangely ah not an fca matter this is the courts ah sort of doing their own thing if you like and they have discovered that car dealers have a fiduciary responsibility to customers when car dealers act as ah brokers to alone.
00:33:17
Speaker
so You may remember that there was there was this other issue about ah discretionary commissions. so when you When you buy a car and and get a loan, that the commission received by the car dealer acting as a broker would vary you ah depending on the rate that the customer paid on the loan. That that is a separate issue.
00:33:42
Speaker
This issue is about the the presence of the commission of the commission in the first place and whether the car dealer should be getting fully informed active consent from the customer about the presence of a commission. This this issue has been ah of great concern to to motor finance, and and it looks as if the Treasury are going to try to get some kind of what they would call a proportionate action by the courts, where there was not some windfall, as they put it. They're trying to prevent another PPI sort of situation where
00:34:25
Speaker
No costs run into the millions it could drag on for years i mean i guess it probably will drag on for years anyway but. It's an example, I suppose, of one of the ah the risks you have in banking where these things can crop up and it's very difficult to quantify the risk because nobody knows ah what the penalties or compensation might ultimately be.
00:34:58
Speaker
Now, ah one of my faults as an investor is that I tend to be fairly positive on cheap companies even when they have a lot of regulatory risk. so I've been reasonably positive on the likes of Close Brothers and S and&U. S and&U has had the FCA all over it for ages.
00:35:18
Speaker
and Secure Trust Bank ah you know exposed to this ah problem about you know potential compensation. But these companies and their stocks are trading at extraordinary levels. and i know The UK banking sector has been very cheap for a very long time. But if you know if we've got ah you know we've got subscribers listening to us, go on Secure Trust Bank's stock report. Look at the value rank, 99. Look at the metrics that create that 99 stock rank. It's all green. It's all green to the max.
00:35:57
Speaker
because this thing is in the mud. And if the courts don't hammer it, I think there's there's an opportunity there. and But that risk, I previously compared it to the Sword of Damocles. Who knows how how how hard it will strike? But I think with that Rachel Reeves announcement, we've got hope.
00:36:22
Speaker
and would Would the courts and the government really stand by and watch and these companies get get destroyed by a court ruling over an issue that nobody really thought about it before?
00:36:39
Speaker
um Maybe, but I doubt it. It's amazing looking at the range of of cheap measures on the site. I'm having a look now. You're totally right. It's it's it's trading at a quarter of book value, a quarter of tangible book, less than free cash flow, 60% of free cash flow, ah P ratio, 1.8 forecast. it's it's you know This is a proper Ben Graham bargain, isn't it?
00:37:04
Speaker
Is this a commonality among these of real bargain bin stocks? where there are ah graey You said it was basically it's hard to quantify the risk here. Maybe we
Regulatory Risks in Banking
00:37:14
Speaker
saw something in that in the the share price reactions on the days. like Some of the smaller ones were up massively. Lloyd's was up. Clearly, some people think that this has materially shifted the risk-reward profile. but It feels like among these bargain bin stocks, that's a really hard thing to do. Potentially, you need some real specialist knowledge to be able to properly evaluate the risk here. Is that the case? Well, I think you need a crystal ball, probably, and because nobody knows. But they have been impacted. Their profits have been impacted. ah
00:37:46
Speaker
by the FCA, but I think that that but FCA issue is also going to be resolved. that because suppose part Part of the problem is there are so many investigations. The FCA is very concerned about ah ah consumer duty and customers in financial difficulty, and it has been it has been forcing these companies to to treat their customers in financial difficulty with you know with great ah care now i believe that s and u for example they already treated their customers with great care i don't know so much about it secure trust bank but. I do know that the fca has allowed collections activity to go back to normal so.
00:38:33
Speaker
I think that these investigations are definitely a kind ah you know ah problem for for for investors, but um maybe maybe it's worth maybe it's worth a gamble. I i i don't currently own S and&U. I owned S&U in the past, and but there's some great there's some great bargains out there. maybe maybe the way somebody might do it would be spread the risk across across a whole bunch of them. um But I think it's very very interesting. Just the one thing I'd say on on situations like these, we were talking about Ben Graham and we did write up actually in the academy at last year, a big article series called The Strategy Map. and there's a There's a piece I wrote in there, quite extensive. They're long pieces on deep value.
00:39:26
Speaker
ah Because these been sort of ben graham situations it feels like in in this sort of sector and ah whether you you know he would always say you get your. You get your safety through the diversification of owning quite a few of these like it's very brave to dive into one stock like this at which might be a very binary situation but actually you can get that often they are the sort situations have a very positive return.
00:39:50
Speaker
On average, across sort of diversified portfolios. so um and That's not encouraging people to buy all of these shares, which would be a huge single sector bet. and ah but That's ah just just something I thought I'd ah leave on.
00:40:03
Speaker
Of course, I will link to that article series from the Stockopedia Academy in the show notes. That's all for today's episode. Thank you so much for listening. Graham Ed Roland, thank you for joining me. I've really enjoyed it. ah If you have enjoyed the analysis and the research in today's episode, I think you will really enjoy our content on Stockopedia, including the daily stock market report and regular content posted by our other analysts including ed um you can access it for free for 14 days there's a ah link in the show notes ah you'll also unlock the rest of our stock market research platform including all the tools insights and education you need to help speed up your research process and help you make more informed investing decisions
00:40:49
Speaker
We'd also love to hear what you thought of this episode. There's an email address in the show notes. I'd love for you to email in and let me know your thoughts on the episode, any questions you have, or you can get in touch with us on Twitter or X. We are at Stockopedia on there. That's all. Thank you very much for listening. We'll see you next week at the same time for the next episode. Bye for now.