Can you profit from the sin stock anomaly?

Published on Stockopedia

A study published within the 2009 Journal of Financial Economics, written by H. Hong and M. Kacperczyk and entitled, The price of sin: The effects of social norms on markets, provides evidence that the stocks of publicly traded companies involved in producing alcohol, tobacco, and gaming have long acted differently to the rest of the market.

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French Value Situation; Gevelot SA Unlocking Value, Hefty Cash Balance

Gevelot SA, is a French company that produces industrial equipment. Like the majority of European industrial companies, Gevelot has suffered over the past five years. Between 2008 and 2013 revenue declined 1.6% and net profit has been erratic. However, the group had value hidden in its balance sheet.

This year Gevelot raised €62.8m from the sale of its minority interest in the Canadian firm KUDU Industries Inc. This sale did skew results, net profit for the first half of this year came in at €59m, after adjusting for this one-off gain. Consolidated operating income of the group excluding special items came in at €4.8m for the period. Net profit from continuing operations came in at €2.9m for the first half.

Still, after this cash infusion Gevelot’s balance sheet is strong and the company is trading below its cash balance. At the end of the first half the group had €146.4m in cash and short-term investments and €126.1m in liabilities. Total assets amounted to €316.1m. Shareholder equity at the end of the period amounted to €190m, with just under 1m shares in issue, book value currently stands at €211m per share — 93.6% above current levels.

It remains to be seen how the company will deploy its capital, however management commenced a share repurchase plan over the summer, authorising share purchases up to €3m. Additional moves to create value could be on the cards including special dividends, or tender offers.

This information is only intended to act as a starting point for further research. You should always do your own research before initiating a position. If you have any ideas or reflections on the above information, or informative insights, please leave a comment below.

Market Sentiment

“…The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands…”

Warren Buffett

Iraqi Oil; More Risk Than Reward?

The Kurdistan region of Iraq has been considered the Holy Grail of oil exploration for around a decade now. Oil companies of all sizes have struggled to get their hands on acreage within the region, where oil literally seeps out of the sand.

Until a few weeks ago oil production from the region was restricted, as oil could only be moved out of Kurdistan by truck, or sold into the domestic market at a significant discount to Brent.

However, a newly constructed pipeline has allowed producers to transport crude from Iraqi Kurdistan in Turkey, where it can be pumped onto tankers and sold into the international market at international prices.

The problem is, no one wants the oil. Iraq and Kurdistan are still trying to reach an agreement over oil sales from the region and until a conclusion has been reached, the international community is keeping its hands clean.

The United Leadership oil tanker was the first tanker to be loaded with Kurdish crude, 1 million barrels to be exact, at the end of May. The tanker set course for the U.S. Gulf Coast but reversed course south of Portugal with a new destination, Gibraltar for orders.

According to the The U.S. State Department, the US does:

“…not support the export or sale of oil absent the appropriate approval of the federal Iraqi government…”

After heading towards Gibraltar, United Leadership tried to unload its cargo at the Mohammeddia refinery in Morocco, where it was swiftly turned away.

Originally, the oil was reportedly destined for Italy or Germany but as of yet, the tanker has not made a move to either country.

The Iraqi government has referred the oil on board as “stolen and smuggled”, warning that any private firms buying the crude would be liable to legal action.

So, it seems that Kurdistan’s oil boom is still struggling to get off the ground.

Source: Italy Warns Firms Against Buying Kurd Oil After Iraq Threat



Gaps are Appearing in the Gold Market

The gold market continues to act as if the forces of supply and demand don’t exist. The number of claims per ounce of gold stored at COMEX’s vaults have reached a high of 110 per physical ounce. Meanwhile, record levels of physical gold have been flowing into Hong Kong and Shanghai. One of the biggest sellers of the yellow metal to Chinese buyers has been the well publicized GLD ETF, which has been selling off its physical holdings. Numerous other funds have been following suit to the extent that some are now refusing physical delivery to clients who have demanded it. Further, there is also a gap in China’s gold consumption data, 500-tonnes to be exact, in other words $23 billion worth of gold has disappeared within China. This has sparked speculation that The People’s Bank of China has been an aggressive buyer, secretly stockpiling — the bank does not publish data on reserves.

The price of gold has been distorted, while paper traders in the West sell the metal, physical buyers continue to snatch it up, distorting the price. According to Ed Moy, chief strategist at Morgan Gold, this could be the beginning of a gold shortage.

Chinese Debt; The Looming Crisis

2.6 trillion yuan, or around $0.5 trillion of Chinese non-financial corporate debt is expected to come due during 2014. This figure includes principal repayments and interest and is the largest figure on record for Chinese companies. Last year gear ratios among non-financial Chinese companies reached 93%, while the average across Asia remained below 70% and has done for the past decade.

But with so much debt coming up for repayment, Chinese companies are facing an increasingly hostile lending environment. Back during December Chinese ten-year AAA rated corporate bond yields hit 6.2%, while the average rate for similar-rated notes globally touched 2.68%.

Still, there have been no corporate bond defaults in China’s publicly traded debt market since the central bank started regulating back in 1997. However, with levels of gearing hitting a record, a record amount of debt coming up for maturity and bond yields soaring, a perfect storm could be brewing.

Cracks already appear to be showing in the market as the Industrial & Commercial Bank of China more than tripled its bad loan provisions during the first six months of last year, from 7.7 billion yuan, to 22.1 billion yuan. China’s courts have also seen a surge in bankruptcies.

Unfortunately, if things start to go wrong the whole country could be engulfed in a financial crisis very quickly. The shadow banking industry within China is huge and the use of wealth management products, of WMP, which use a pool of instruments such as securitized debt to achieve an above average return, has surged recently. The yields on these instruments has hit an all-time high of 5% to 8% recently. Defaults by corporate bodies, or local government agencies could hit this WMP market hard and it would not be long before the market capitulated.

Luckily, the Chinese credit market is somewhat contained, so a credit crisis would not be as catastrophic as ’08 but with around $2.8 trillion in government and many trillions in corporate debt outstanding within China, repercussions of a debt crisis would be felt around the world.

Actively Managed Funds Consistently Outperform Trackers

According to research conducted by FE Trustnet, the average active UK growth fund has beaten an average, standard tracer fund over a period of one, three five and ten years. To say that this is astonishing is an understatement. Many market commenters have been reiterating the benefits of passive of active for some time now, and even market oracle, Warren Buffett has bet against actively managed hedge funds, making a $1 million bet with hedge-fund manager Protégé Partners that a simple stock-index fund would beat a handpicked selection of five hedge funds over a decade. Of course, hedge funds are not identical to actively managed trusts and funds as fees are usually higher and range of investments broader.

FE Trustnet summarizes that over the last ten years, the average UK All Companies fund has delivered 128%, while the average tracker has returned 105%. What’s even more worrying is the deviation of tracker returns from the mean. For example, the Halifax UK FTSE 100 Index Tracking fund returned 72% over the period, with a tracking error of 7.5%. Halifax’s FTSE All share tracker also significantly underperformed its benchmark, returning just under 90% compared to a benchmark return of 130%.  

It would appear that the problem is fees. The investment community has been so driven on selling these products, boasting that they have such low fees and transparent structure, that many have missed the point. If a fund has fees, no matter what they are, it is not a true representation of the index. A fund with a TER of 1.5% per annum, will underperform the index by 1.5%, after fees are taken out. Compounded over a longer time frame this is bound to have an effect.

Personally, I would be prepared to pay extra for an actively managed fund with a chance of outperforming the market. Trackers have no chance of outperforming and will certainty underperform including fees. 

Oh, and if you’re interested, according to Reuters and a study commissioned by KPMG, during the period 1994 to 2011, hedge funds delivered an annual return of 9.07%, compared to a 7.27% return from commodities, 7.18% from stocks and 6.25% from bonds.