I am sitting on a UK contrarian big cap value portfolio and watching it slowly but surely grind its way up and up. US Mag7 investors would not recognise the price action and here is why.
It is almost funny, but all of a sudden the FTSE 100 is on the move. You might be forgiven to imagine it has broken out. Take a peek.
It is contrarian to say if you buy cheap stocks and sell them when they are not cheap you will do well. However, those kinds of contrarians do well, because when cheap stocks which are god companies turn, they can recover a long way. Its far down the food chain from US stocks that go to the moon and magically can maintain incredible valuation metrics, but the profits are still pretty good if you can stomach going against the herd.
So I’ve maintained the UK market is in for a torrent of takeover, because many of these painfully cheap companies make more than enough money and cashflow to enable a purchaser to fund the price of buying them on credit and repay the debit in a few years and frankly who wouldn’t buy a great company for nothing. Its what private equity does and if you are a US/European/Indian/Chinese company on a 25 to infinity P/E, why wouldn’t you buy British P/E in single figures?
The answer is because the government will say ‘no,no,no.’ Foreign companies will sniff around of course for opportunities but when your advisers point out the country recently passed a ‘national security law’ to block your cunning plans, quite a few players are going to the lose appetite. How can you asset strip a ‘nationl champion’ when the trenches are already dug and opposing forces armed.
This hasn’t stopped a flow of UK takeovers, but clearly the barricades of legislation designed to block takeovers successfully acts as a damper. It is also a damper to the price, because a wallowing FTSE beast is not going to be carved up for a 40% premium and that’s a drag, both literally and figuratively.
Well, who knew, the new British chancellor just replaced the boss of the ‘competition commission’ famous for his proactivity in spiking the canons of deals, such as the Microsoft Activision takeover deal, to send a message that government is serious about letting business and nature take its course.
So now it is open season for foreign companies with way better valuation metrics to sauce up their earnings by strip mining the FTSE 100.
It’s a spartan approach and it just might work. The UK does actually do or die well, but you never know, it might work.
It will certainly work for investors at least why the process is underway. If the market takes its course it should drag up valuation and should do so to a level where the bargain basement price vanish. That could be because there is nothing left or it could be because after a rampage, FTSE 100 company price look more like those of Germany and the US.
If it goes wrong there is good upside for investors and if it goes right the prospects are even better.
So next stop 9000 and if I’m right, expect a parade of M&A that will tell you its game on for the London Stock Market.
Ding, Ding… going up!