Investing on the London Stock Exchange continues to be a test of nerves, with sporadic falls of more than 100 points on the FTSE 100 index setting back every attempt to recover ground lost since April. Each fall, has however, proved to be an opportunity to buy.
I have tempted fate twice in this column, most recently last week, by suggesting that we would not see 6,000 again. Such a pronouncement quickly proved premature but I am not disheartened. There is clearly a floor around that level that is holding time and time again.
I have mopped up stocks at what I consider to be bargain prices with the last of my ISA allowance. I am racking up dividends, and as soon as there is enough for another modest purchase I will snap up a solid company offering a decent yield. There will be no shortage to choose from when the time comes.
Poundland Stretches its Pennies for M&A
What’s the opposite of a Freudian slip? I accidently referred to Poundland (PLND) as Poundstretcher on Share Radio when I should have said Poundshrinker. The shares had fallen more than 10% that day for a variety of worrying reasons.
Poundland said it had raised £50 million in a share placing that went most of the way to pay for the £55 million acquisition of rival budget chain 99p Stores. So far so good. However, the placing was at a 10% discount to the previous night’s close, which would have been fine for a rights issue but not confidence-inspiring in a placing.
Naturally, the shares fell below the placing price – and, crucially, well below the 300p flotation price 18 months ago.
Worse still, it appears that trading at 99p has deteriorated since Poundland did due diligence to support its bid. Matters were made worse because the Competition and Markets Authority took longer than expected to give clearance, leaving 99p in limbo. Poundland was thus faced with going ahead anyway, which it is doing, or wasting more time and doing more damage by repeating the due diligence and possible reducing the offer price.
Even worse, Poundland’s own stores saw a decline of 2.9% in like-for-like sales. Total sales did grow because Poundland has been opening new stores at a faster rate than expected but running the extra outlets will add to costs.
As household incomes recover from the squeeze, it is possible that shoppers will feel less desperate to buy in low price stores. All in all, I think that Poundland is a risk too far in a retail sector that continues to struggle with rising costs and increased competition.
Glencore Too Risky for Me
It is perfectly respectable to take a gamble on commodity prices recovering – I did so on Rio Tinto and am just about holding my own – but Glencore (GLEN), far more than Poundland, is most certainly a risk too far. It is a classic case of saying that if you don’t understand what a company is doing, don’t invest in it.
Glencore is more than a commodities miner and refiner, it is also a trader whose wheeling and dealing was supposed to help it through the economic cycles relatively unscathed. On the contrary, the deals that no-one quite understands have exacerbated the downturn and left Glencore overstretched and heavily exposed. A £1.6 million fundraising last week is a tiny contribution towards a £7 billion debt pile.
The shares tumbled below 100p, leaving those who subscribed to the placing with a loss of 20% in less than a fortnight. Despite a recovery to three figures, the shares are likely to fall further. Don’t touch them with a bargepole. They have shed two-thirds of their value since April. Any rise is a chance to get out and cut your horrendous losses.
All Roads Lead to Leeds
I shall be running a seminar and sitting on a panel at the Leeds Investor show on 15 October but I will have time to chat to any readers of this column in between. Please come and talk to me if you are there. Details are on www.leedsinvestorshow.com .
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. His views are not necessarily the views of Morningstar UK.
