Dial V for Luck
We all deserve a little luck in life and the fact that takeover rumours have swept 
Vodafone (VOD) higher over the past two holiday-shortened weeks is certainly lucky for me. Vodafone was already the second largest shareholding in my portfolio and is even more so after the latest sharp rise in the share price.
Conventional wisdom suggests that if you are already holding shares that rise on takeover speculation you generally do best to stay in for the ride.
To some extent we do make our own luck. I have consistently argued that Vodafone was undervalued whenever the share price dipped below 170p and was seriously undervalued at 160p. Well done anyone who snapped up the shares at less than 170p – you have certainly made your own luck and deserve the profit that your purchases are showing.
The really difficult question is what to do when shares rise on takeover rumours. I am not a great fan of buying shares on takeover hopes. I rather take the view that it is a risky strategy and you are likely to be wrong as often as you are right. If you find you are good at cashing in on potential takeovers, don’t let me stop you. It just isn’t for me.
However, conventional wisdom suggests that if you are already holding shares that rise on takeover speculation you generally do best to stay in for the ride and I am definitely going to do that at Vodafone.
The first consideration in these circumstances is what happens if no takeover emerges, as has now happened in this case with US partner Verizon (VZ) denying that it is planning a full scale bid for Vodafone in conjunction with AT&T (T). Usually the worst that can happen is that the target company’s shares slip back to where they were before the rumours began but quite often the shares do not fall all the way to their previous levels.
This is because a) the target company now looks more attractive since someone apparently thought it was worth taking over and b) there is still the lingering hope that a bid will be agreed at a very agreeable price. Thus Vodafone fell back only 6p to 186p on the day of the denial.
It is quite possible that Vodafone shares will drift lower, possibly below 170p again, but then I will still be breaking even on my investment and I will continue to receive dividends as consolation.
Morningstar Equity Research implies that Vodafone shares are currently fairly valued, with a 3-Star rating measuring market price against the analyst’s valuation, while both Verizon and AT&T are moderately overvalued as they both carry 2-Star Morningstar ratings.
The situation at Vodafone is unusual in that shareholders in the telecoms company would benefit more from the status quo than from a takeover. Its US operations, a joint venture with Verizon, are profitable and are generating cash and dividends to be passed on to Vodafone shareholders. A takeover bid would leave people like me with a windfall but also with a search to find another home for our cash.
The worst possible scenario is for Verizon to buy out Vodafone from the joint venture, which would bring a small windfall but leave Vodafone with its less lucrative European operations. Even in that event, it will be worth hanging onto the shares for a short term gain.
Sludge Fudge
Many people in this country will be outraged that the UK is paying £38 million towards the Cyprus bailout when we are not even in the eurozone but I think at that price we are getting off lightly. The bailout is, after all, costing £10 billion and the alternative is a certain disaster today rather than a possible disaster some time in the future.
Hopes and fears surrounding the situation in Cyprus have sent shares up and down like a yoyo, creating selling and buying opportunities. It is important to remember that while shares still represent the best place to park your cash the serious dangers of European countries going bankrupt has not gone away and one ought to remain cautious.
At this stage I would not chase shares when the FTSE 100 is above 6,400 points unless you can see a real bargain that other investors have missed, but when the index drops to 6,300 start looking.
Good Eggs
It’s great to hear that chocolates maker Thorntons (THT) will beat profit forecasts for the current year to the end of June. It says that sales for Valentine’s Day, Mothering Sunday and Easter have been ‘satisfactory’, which presumably does not really mean satisfactory but something rather better.
The shares have more than doubled over the past 12 months and rose again this week on the good news. Given the difficulties that Thorntons has experienced in the past few years, the false dawns that it has witnessed and the general malaise among consumers, I think that is quite enough chocolate for now.
Valuing Shares
New investors seeking a greater understanding of how to value shares will benefit from reading my article on page 10 of the Spring edition of the London Stock Exchange e-magazine Private Investor.
Or catch up on Morningstar.co.uk’s recent Special Report on Equity Investing, which featured detailed explanations of the discounted cash flow valuation model and other useful ratios and metrics for valuing shares.
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.
Market Performance: April 2-5
FTSE 100 Index: -2.5%
FTSE 250 Index: -3.2%
FTSE All Share Index: -2.6%
FTSE SmallCap Index: -1.9%
FTSE AIM 100 Index: -3.1%
FTSE Fledgling Index: -0.8%
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