Foresight Capital Partners

Financial publications will have a tendency (to differing degrees) to form a bias reaffirming present financial fashions because of the very nature of their business. The success or failure of a financial media business is effected by two forces:

1. The size of their circulation which directly effects subscription revenues.
2. Whether the content and readership is valuable to any parties wishing to place advertisement with the publication.

Hence the primarily aim of any editor of a financial publication is to increase sales and produce content which will attract the best advertising rates, and that’s it. That is, the editors job is to increase revenue for his employer which may (or may not) include publishing research which is in the best interest of the readership.

Now the UK retail financial products market has a classic boom-bust cycle, where the financial products (ISAs, Pensions etc) which are the best sellers are the ones which can show the best historical performance. Hence, what was the best seller in Spring 2000, you guessed it, ‘Technology Funds’ only to noise dive over the next 2 years. At present, the best sellers are property related investment products, and as you can tell from the TV guide and newsagents shelfs the associated property investment media mania is in full swing. Hence, not only are the financial products in a boom-bust cycle but the associated media publications also follow the same boom-bust cycle. That is, in the main people buy publications in order to re-affirm views they already hold, at least this is what is implied from the sales patterns.

It is also important to point out that financial products in the main are themselves created for more marketing than investment reasons. That is, a product (for example a unit trust, hedge fund, investment trust) is created because the marketing people within the financial institution believe they can raise money for it (i.e. sell it). Whether the investment rationale is there or not, is not really the point, if they can sell it they will create it. Hence, at present for example we have numerous property investment vehicles being released and associated with these releases are large marketing budgets which will be spent in placing ads on bill boards, newspapers and magazines. Hence, if the editor of a newsletter or magazine publishes (for example) property friendly articles then it greatly increases the advertising real-estate within his publication for parties wishing the advertise property related financial products.

I am not saying that all financial publications are devoid of any value, but the reader of any publication should take everything they read with a grain of salt, and bear in mind that the editor of all such publications will be influenced (to differing degrees) by the factors described above. In particularly, the smaller the publication the more pressure the above factors will exert of the editor because put simple if they do not sell and get advertisers then they simply go bust. The publications of larger more established publications can afford to take a long term perspective but saying this the temptation are still there to effect editorial decisions. Because of the inbuilt bias resulting from the nature of the financial media section I suggest that what ever you read from what ever sources, you always do your own research using as much as possible source data which is unaffected by third party editorial before making any investment decision.

In short, there are no short cuts or quick fixes in making investment decisions, and reading editorial without independently thinking and researching the issues yourself is not a reliable path to long term out-performance.

The fact that each day I get spam emails with tips of micro-cap telling me ‘ABC going to explode’, ‘its time to fill your boots’, ‘reverse the truck and fill up on this one’; which I routinely delete each morning. These emails represent scams which are generally referred to as ‘pump and dump’ and though report to be in the ‘get rich quick’ schemes are in reality in the ‘get poor quick’ category. The site:

http://www.spamstocktracker.com/

follows the performance of share tips after and the initial ‘pump’ has gone out, which clearly shows how an effective ‘get poor quick’ scheme this is, in particular the model portfolio is down more than 60% since 5th May 2005.

For the receiver of the ‘pump and dump’ tip email the scheme is definitely in the ‘get poor quick’ scheme category but the senders of such emails make money from such scams but just buying into the share they are going to tip before the tip it, then after the tip when the price invariably raises they sell for a profit. Though this activity in illegal in all major jurisdictions it is very difficult to police and catch those responsible.

Now if you ever get any such mail (which is very likely if you use investment site) then I suggest you just delete them. Though it would be nice if there where, there is no quick fixes and no short cuts to riches in the investment world. However, there are many things to just avoid and schemes of the ‘pump and dump’ type are one of them.

We pointed out in the post Major mining stocks getting cheaper that at present the analysts estimates for this copper mining stock imply predictions for a sharp decline in the copper price in 2006. Given that we are now in Aug 2006, and the average price already this year is higher than last year the estimates which where prepared for 2006 seem to be completely out.Going forward, even if you take the warehouse supplies as an indication of the likely supply/demand balance then the LME stocks:

are at historically very lower levels implying a limited increase in supply in the near term which prices remaining firm in the near future.

If we consider the major copper mining stock of Antofagasta, then a casual glance at the stock chart (shown below) shouts ‘Bubble!’, ‘mania’; and this has often been the line taken within the popular press:

However, closer fundamental investigation implies (against PE at least) that now represents a better buying opportunity than 2001. Over the period 2001 - Spring 2006 the stock rose approximately 500%, from 500 to 2500 (the spike down is due to a stock split), where as the net profit rose from 62.1 M GBP (2001), to 725.8 M GBP (2005), a rise of 1,169%, and the earning per share over the same period rose by 1,172% (Source: Yahoo! Finance see http://uk.finance.yahoo.com/q/pr?s=ANTO.L). Hence, what we have is a PE compression, meaning that the earnings over the period went up at more than twice the rate of the share price appreciation putting the stock on a present PE of 6.03 (where we take todays price of 443.75p and 31 Dec 2005 EPS of 73.62p). So that back in 2001, you needed to invest more than 12 GBP in Antofagasta to buy 1 GBP of earnings where as now you only need to buy only 6 GBP of stock for each 1 GBP of earnings.

Now the Antofagasta business is relatively simple to understand since it primarily involves the mining of copper and hence the stock price is essentially a (geared) proxy on the copper price. Therefore, by taking a closer look at the upward price trend for copper over the past 5 years, see:

explains the dramatic changes in EPS over the same period.

Even going forward with an Average Analyst EPS Estimate for next year of 50.18p would put the stock on a forward PE of 8.82, which implies a sharp decline in the copper price which I for one do not see as a forgone conclusion. So by the PE measure at least major mining stocks such as Antofagasta have got significantly cheaper over the last 5 years.

On Friday Vodaphone Plc sold its 25% interest in Proximus, the mobile telephone market leader in Belgium, for £1.4 bn, continuing its strategy of releasing capital in either markets where it has a minority position or in companies where it only holds a minority position. As mentioned in the press release available at:

http://www.investegate.co.uk/Article.aspx?id=200608250700031022I

the proceeds from this sale will go down to paying off debt, i.e. a re-allocation of capital within the group. However, Vodaphone will still preserve its position with regard to access of Proximus customer base through a revised long-term Partner Network Agreement which will run for an initial five year term. This means that the Vodaphone will still preserve the Proximus platform for the distribution of its global products and services such as Vodafone live!, Vodafone Mobile Connect Card, Blackberry from Vodafone and international roaming services.

The strategy which Vodaphone is implementing (with Proximus above as an example) is so effective because it allows Vodaphone to invest capital in high growth areas while still preserving access to its huge customer base. Vodaphone’s key business attribute is that it can develop a service or product which is a capital intensive activity (as is the case with all high tech research and development). Then deploy this new service or product to a single market (for example, Japan or Korea) in order to refine the technology and the associated business model of the new service or product. After this initial refinement Vodaphone can instantly get huge economies of scale by re-deploying this new service or product to all markets where it has access via either Vodaphone holding companies or partnership arrangements (as in the case of Proximus).

By applying this model Vodaphone can spread the initial cost of developing the new product or service over its entire customer base which is in fact the largest customer base of any global mobile phone company. These economies of scale which result from the large scale deployment of its key GSM technologies through various holding companies and long-term partnerships are the key long-term competitive advantage which will ensure that Vodaphone will continue to be a dominant force within the mobile telephony industry.

With the shares trading on an average estimated PE of 10.64 for 2006 (see analyst estimates), a highly cash generative business which pays out a 4%+ dividend, and the new strategy of core holdings and partnership being enacting upon we see Vodaphone as a Good Buy for its income or growth potential.

Anglo Irish Bank Corporation (I.O.M.) P.L.C. at present offers the most competitive GBP deposit account on the IOM, with the Privilege Bond - 24 months paying 5.35% (AER). There is a good range of accounts with differing notice requirements, and even if you want instance access then you will still get 4.8% AER from Anglo Arish. For a full break down of the accounts available see:

http://www.angloirishbank.co.im/personal-banking/interest-rate-summary.asp

Earlier in the year and last year I was buying into BT.A with my own money and for a third party. Though the third parties fund is designed partly for income after the payment of Vodaphone special dividend of 15p on the 16th, I discovered after consultation with the individual that there was more cash in the holding bank account that the third party needed in the intermediate term. Therefore, I decided to top-up on the BT.A position this morning with some of the cash, still leaving enough cash to allow the individual in question to go on a spending binge if desired. The trade was just confirmed at 244.16p, which means I was buying in at a PE of 11.35, and a yield of around 5%, OK but not as good as earlier in the year when was buying in at a PE of under 10. Saying that, BT.A still has a very healthy balance sheet and good net operating margins at 8.54%. I am also glad to see BT.A management have the sense to not get involved in a price war in the broadband space.

If you want to read up on BT Group then I suggest that you start at the BT Group PLC page at:

http://www.btplc.com/

and read maybe the last two annual reports, also the special reports concerning the future out-look, future products and plans are very informative, then I would start looking at others analysis and commentary, a good place to start on this is:

http://finance.google.com/finance?q=LON%3ABT.A

Personally, when ever considering an investment I read (or at least try) everything I can find on the stock or topic in question. Then only after I have read a reasonable amount of material on the topic or investment do I try to rationalise the reasons for which an investment should or should not be made.

As Ben Graham (Warren Buffet’s mentor) would say, “It is the quality of your analysis that makes you right as a stockpicker, not whether the market happens to agree with you”.

DISCLAIMER: This post should not be considered investment advice, and it offered for informational purposes only.