Severn Trent, bid fails, so is it now cheap?

One of the interesting things about following a bid story is what happens in the immediate aftermath when the bid is turned down and the potential buyers withdraw their offer and walk away. 

The short back-and-forth battle between Severn Trent and LongRiver Partners has come to an abrupt end, with the consortium announcing the withdrawal of its bidding interest for the water group late on Tuesday night.

The result was a sharp drop in Severn Trent's share price on Wednesday morning, down as much as 8.0% early on.

The stock surged to multi-year highs last month after the consortium - comprising Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme Limited - first announced its intention to take over the company, the latest UK utility group to attract the attention of foreign investors.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=10090&action=news&story_id=20958376

The bid had been increased to 2200p a share which at the current price of around 1760p means that it is now some way off what the bidders were prepared to pay, and even further away from what Severn Trent themselves seemed to think was fair value. Difficult to say what that figure is, but it looks like it must have been a number that was high enough to make the bidders walk.

However, is the company now worth around 450p less than that bid price? Leaving aside looking at the fundamentals, it is always interesting to see how the market gets hyped when there is a chance of a bid, price gets pushed up to what is thought to be as close to a sale value as possible, often higher, which makes you wonder why it was priced lower in the first place. Euphoria of the bid plays its part, bandwagon jumpers get in hoping for a quick profit, but if someone was prepared to pay 2200p now for Severn Trent does that mean it is a bargain at around 1750?

Things aren't as simple as that as quite often the bidding company over values and pays too much. A few years back, a private bidder was prepared to offer over 200p a share for HMV, a company that in stock market terms went bust and is now privately held, the recent buyer getting it and all its potential future problems on the cheap. Severn Trent isn't HMV. As a utility stock it clearly has a premium value to longer term investors.

Next week the company goes ex-dividend, so anyone buying before the ex-div date will pick up 45.5p a share. By then, given the failed bid and the current state of the markets in general, the share could fall even further. Therein lies the problem, at least in the short term Severn Trent is in a down trend and anyone buying in for the dividend may well see further falls until the dust settles and market sentiment decides it's looking cheap again and their must be other potential bidders out there. One might assume that at some stage in the future, further bids, not necessarily from the same consortium, are likely to be made in what is an attractive sector for takeovers and you have to wonder if 2200p is now the minimum benchmark for anyone interested in Severn Trent.

FTSE shuffle time, Russian miners out, builders to get promoted?

It is perhaps a sign of the times that the quarterly FTSE100 reshuffle due to be announced this week could see a couple of under performing miners drop out, replaced by companies from the bullish construction sector.

Both Evraz, the steelmaker and iron ore producer in which Chelsea FC-owner Roman Abramovich has a major stake, and precious metals miner Polymetal International are expected to be relegated from the main board at this week's FTSE Group quarterly index review.

Buoyed by signs of a recovery in the housing market, which has stoked demand for their shares, analysts say Travis and Persimmon are in line to take their places.

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Travis shares are up 40%, Persimmon 50% this year, in part driven by the Help to Buy intervention of the UK Government, widely seen as a potentially dangerous prop to the housing market, but the type of policy typically undertaken by the politicians when house prices stop going up.

"The wider construction market obviously remains under pressure but housebuilding is an important component of what Travis does," said Andrew Nussey, an analyst at Peel Hunt. He said the Government's Help to Buy scheme had aided homebuilders, Travis' "principal customer base". and "more activity from the housebuilders translates into more business for Travis".

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Persimmon currently trades on a P/E of over 20, Travis 16.1, so both have generous valuations, but are clearly in a sector that should benefit for the next 2 to 3 years from Government intervention.

Meanwhile, despite the bullish stock market move since the new year, Evraz is down almost 50% in that time, Polymetal around 35%.

Video market round up for the week ending 7th June 2013 (up to 6th June)

A week ending round up of the markets from Steve Briggs YouTube channel.

Included in this video is a look at several FTSE100 and 250 stocks, potential trading tips, support and resistance points, etc. Stocks covered include Fresnillo, RPS Group, Royal Dutch Shell, Salamander Energy and Weir Group.

Links:

Steve's YouTube site http://www.youtube.com/user/sjb5555.

Useful charts and analysis can also be found at http://www.flickr.com/photos/stevebriggspics/

BATM profit warning - the dangers of swimming with the smaller company tiddlers

A while back I had a small position on tech company BATM Advanced Communications. It was a blue sky option, quite risky, but the news flow had been good and the trend was up, good things were expected. I actually closed that trade, in part out of the boredom of waiting, for a small profit.

Today, BATM reported to the market a profit warning and like all bad news, perhaps even more so when it comes from a smaller company, you can expect fireworks on the share price.

Networked telecoms group BATM Advanced Communications warned it expects first half revenue and profit to be materially below management expectations.

The group, which provides technologies for the networked telecoms and medical laboratory equipment markets, said components supplied by third parties failed to arrive during May as scheduled, and consequently it was unable to fulfil orders and was forced to postpone deliveries.

"However, the backlog remains substantial and, with certain components required to complete some orders having been received, the group is working towards clearing this in the second half of 2013," it explained.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=11175&action=news&story_id=20945622

Another smaller company that had been going well until recently was IDOX. It's recent report also disappointed and fell below expectations.

The Company is encouraged by the underlying progress made in all of its businesses during the first half and continues to be excited by the multiple growth opportunities available to it. However, in light of a slower than expected first half of the year, the Board now thinks it is prudent to anticipate full year EBITDA is likely to be no less than £18 million, which reflects uncertainty of timing as to when those opportunities will crystallise.

http://www.digitallook.com/news/rns/20926283-30992/IDOX-Trading_Statement_html

Both companies seem to be suggesting positive times ahead, that these failures may simply be a blip, but the lesson to investors is clear, the unexpected announcement will hit your shares hard and fast. So fast that if you are in and without a stop loss there is almost no chance of getting out quickly when the bad stuff hits the fan. Even if you have a stop loss, it would need to be guaranteed, otherwise the fall would go straight through it. The same can be true of the bigger companies of course, but smaller companies, especially those with stretched valuations on the back of momentum, can dive a lot quicker when things go wrong, or don't work out  as the market expects.

Charts below;

The QE conundrum, when will it end? Not anytime soon.

Current market sentiment has in part turned negative because of an interpretation of the last US Fed statement that seemed to suggest that QE would be tapered down at some stage in the months to come. Bernanke's statement was actually somewhat vague and didn't really say anything that should come as a surprise to the market.

From May 22;

...markets have focused on one thing he said in the Q&A session where he was asked directly whether the Fed could make a decision to wind down its bond-buying program before Labor Day. Bernanke’s response that the Fed could change course “in the next few [FOMC] meetings” depending on prevailing economic data caught markets a bit off-guard, and seemingly leaves a door open for some Fed tapering sooner than Bernanke’s prepared testimony would have indicated.

http://blogs.barrons.com/incomeinvesting/2013/05/22/bernanke-doesnt-rule-out-fed-taper-in-the-next-few-months/

Since then the markets have been falling fairly steadily, even on a Tuesday where after 20 consecutive up days, yesterday was negative in the US. So far there hasn't been that much damage to US markets by Bernanke's comments and in one sense, why would there be? The key words from the Fed are likely to be "depending on prevailing economic data", which is basically saying the same thing as before.

At some stage markets are going to have to find a way of doing business without QE, but until that happens, sell offs like the one in the last week or so are arguably not happening because of the fear of QE ending, that is merely the excuse. Surely those in the market know better than that?

If and when QE does end the most likely option taken by the Fed and other Central Banks will be a gradual winding down if and when economic recovery is supposedly under way and not until then. It is this balancing act that will probably be difficult to time because who really knows when that will be. Chances are the Central Banks don't know, but having started the game of QE they are the ones that have to live with it.

Interesting that markets are down a little today in part because US job numbers came in lower than expected.

U.S. stocks declined on Wednesday, extending losses into a second day, as data found U.S. private-sector job growth and productivity below expectations. 

“More attention is being brought to the economic data, so everyone can play Nostradamus and guess what the Fed’s next move will be,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said of ongoing guessing as to when the Federal Reserve would begin tapering its $85 billion in monthly bond purchases.

http://www.marketwatch.com/story/us-stocks-extend-drop-into-second-day-2013-06-05

But hold on, surely the next move by the Fed after relatively weak numbers like this is fairly predictable? Chances are there will be no tapering and no change while the data is as up and down, some good, some bad, as it seems to be and you don't need to be Nostradamus to see that.

Tesco, up today, ready to disappoint tomorrow?

It was a surprise today to see Tesco on the rise.  Fair enough the market was up as often seems to be the case on Tuesday at the moment. A rise of 6p, 1.7% in the share price to a little over 364p might not seem much, but it comes on the eve of an IMS that is expected to disappoint. In fact, judging by what some are saying, Tesco could deliver a terrible set of figures tomorrow, a reminder of its UK profit warning back in January 2012.

Tesco’s first quarter results out Wednesday are likely to disappoint, according to Investec. 

The broker expects like-for-like sales to fall as much as 1.0% in the UK, 2.5% in Asia and 5.0% in Europe. It downgraded the stocks to a ‘sell’ rating and issued a target price of 295p. 

"The UK still lacks momentum and international is going from bad to worse," Investec analyst Dave McCarthy said. 

He said the international side of the business is a growing problem and after 15 years there is no sign of acceptable returns. 

The company’s latest results will come after the retailer last month reported its first annual profit decline in two decades. 

http://www.digitallook.com/news/20941271/Wednesday_preview_Tesco_to_report_first_quarter_results.html?username=&ac=

This analysis, especially on Tesco's international performance is a little unfair. 15 years of no sign of acceptable returns? That's pushing it considering they have been growing fairly strongly in most of their overseas markets for some time. You do wonder if Investec have a short on at the moment when they make silly statements like that.

But why the enthusiasm of the price rise today? Why would anyone be buying today if tomorrow is going to produce a bad result? Could it be that some in the know were selling today, the price being ramped up slightly to draw in as many eve of bad IMS statement mug punters as possible? In other words, the long term buy and hold retail buyers? Perhaps that is being too conspiratorial, but given the expectation of further bad news, the best Tesco shareholders can hope for in the morning is that things aren't as bad as predicted and the market reacts kindly. Chances are if the IMS is bad, Tesco could fall a lot more than the 6p it gained today. Let's see what happens in the morning.

FTSE100, bull run over or just pausing for breath?

So, we ended the week with it feeling a little like the old volatile times of not so long ago, a little complaceny being shaken off. The market seems to have turned its attention back to worry about macro issues and some old fears seemed to resurface. Does this mean the current bull run is over? A look at the charts would suggest no, at least not until some serious damage is done to the longer term weekly and monthly charts.

Below are the FTSE100 daily, weekly and monthly charts. The daily is bearish, the latest move down putting a dent in the previous bullish mood. However, one look at the weekly chart shows it still has a little way to go before the bullish trend can be said to be over. MACD is just turning negative, but is some way off the zero line, it could easily turn back up again. The Monthly chart is still positively bullish, MACD still looks quite strong. The monthly chart does give some hope to bears in that the latest candle with a long upper shadow is negative and bearish.

A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks

Worth noting however, that price had been outside the rising Bollinger Band on the Monthly chart and has now fallen back within it. Price had effectively got ahead of itself and once this happens it is not unusual to see it fall back inside the band. The Bollinger Band is still positive.

All to play for next week, the FTSE currently called to be down around 50 when the markets open on Monday.

Daily, weekly and monthly charts below.