Neil Collins’ Notebook – The (Almost) Invisible Bull

You may not have noticed, but there has been a roaring bull market in two of the UK’s least loved market sectors. Those “uninvestable” banks which are not allowed to pay dividends have led the charge. Since the hidden charms of Barclays were highlighted here on November 6, the price has jumped from 110p to 148p. Lloyds Banking shares (October 16) looked absurdly cheap at 27p. They now cost 39p.

At the end of October, BP shares could be picked up for less than £2, as investors fretted about the open financial drain of Beyond Parody, the company’s second shot at going green. The shares are 270p today. Royal Dutch Shell, the oil giant with a new-found appetite for unpredictable dividends, has risen by 40 per cent in five weeks.

Oils and banks are dominant sectors in the London market, and underpinned the FTSE100’s best month since 1989. They demonstrate, once again, how opportunities lie with the least fashionable stocks. The rush to buy the oils, after so many portfolios had thrown them out in a fit of virtue signalling, has nothing to do with either company’s ambitions in wind, electricity generation or new technology. These look as much of a liability for the shareholders as they did a month ago.

Rather, the surge reflects the quiet rise in oil prices. Brent crude briefly hit $50 this week. As usual, predicting the oil price has defied the experts, so it is brave indeed of Capital Economics to forecast $60 by the end of next year. If that is anywhere near right, shares in the big oil duo will also be a lot higher than today. Doubtless Shell would have another dividend policy by then.

As for the banks, they are profitable and adding to their reserves, to the point where they have the financial firepower to resist anything short of armageddon. it’s a racing certainty that they will restart paying dividends next year. Should the authorities dare to tell them not to, the question of whose shares they are will go to the courts, and a pretty unedifying sight that would be:

Banks: we have the right to pay dividends we think we can afford.

Bank of England: Things look so ghastly ahead that we don’t think you can afford anything.

Both of these sectors are recovering as the likelihood of recession, er, recedes. In the eyes of share buyers, Covid is yesterday’s problem. The world in 2021 is going to be awash with competing vaccines, and consumers in developed countries who have had nothing to do but pay off their credit card bills will have cash to burn.

The same number of customers will be going to a smaller number of pubs, as so many will have been killed off by the brutal policies of the British government. Shares in J D Wetherspoon, the UK’s most efficient pub operator, have risen by 40 per cent in six weeks.

Rather than recession, the next problem is more likely to be inflation, as surviving suppliers of goods and services struggle to meet surging demand. Businesses battered through no fault of their own have every justification to put up prices to claw back some of their losses. From today’s perspective, inflation looks like a nice problem to have. When it finally arrives, it will not turn out like that at all.

Serves the trackers right

When Homeserve arrived in the FTSE100 index in June, the tracker funds had to buy it, at around £13. The pandemic has not been as good for this insurer of home systems as the bulls hoped. Since its entry at a value of £4.4bn, the share price has shrunk to £10.50, so the market value of £3.55bn is not enough to retain its place in the index. The trackers will have to sell at a thumping loss when the index is reshuffled later this month.

One replacement is Pershing Square, a very unusual investment trust, which is more accurately described as a hedge fund. Run by Bill Ackman, it controls one of those fashionable special purpose acquisition vehicles, to spare exciting private companies the trouble of a formal public share offering. His stated aim is “to acquire smaller pieces of superb businesses over which we have substantial influence”, essentially in the US.

He’s had a stand-out year, as the net asset value has risen by 63 per cent. The market values the business at £6.5bn, still a 21 per cent discount to NAV, which helps to explain why Mr Ackman has been mad keen to get into the index, devoting two pages of his half-year report to the subject.

As he explains, inclusion will raise the Pershing profile. As he does not add, it will also force those johnnie-come-lately trackers to buy the stock with their (diminished) proceeds from the sale of Homeserve.

With a tear in his eye…

Sometimes, analysis can be an emotional business. Shore Capital’s Clive Black has looked again at Greggs, the inventors of the vegan sausage roll. This is a terrific company, we all agree, which has been sideswiped by the arbitrary and capricious lockdown rules.

So keen are investors to look forward to better times that the shares have bounced by 50 per cent since their September low. On Morningstar’s figures, at £18.40 they sell on a magnificent 555 times earnings, and a yield of less than 1 per cent.

Strewth, there are limits, as Mr Black does not quite say in his commentary. “We struggle with the group’s implied valuation given the challenges the business faces and…an equity which is very elevated to our minds…Accordingly, with a heavy heart, we reiterate our SELL stance on Greggs’ shares.”