Boring is Better in Investing


wh smith

For long term investors like myself, the consistent companies have most attraction. We don’t like the nasty shocks that get short sellers so excited. Books, journals and stationery retailer WH Smith (SMWH) is just the job with trading once again in line with expectations.

A Boring Buy

There was just nothing to get excited about in the WH Smith trading update for the 12 months to 31 August. The travel business continues to perform strongly across the board, especially the hospital outlets, and margins are on target, as are new store openings.

On the High Street, now the smaller side of Smith, the accent quite rightly remains on protecting profits, a strategy helped by the move of more than 200 post offices into Smith premises.

I hold a modest stake in WH Smith. It’s the only High Street retailer I have invested in and I am surprised that the shares have done no better than move sideways around 1,950p for the past two years, though they did surge over the previous three years so perhaps it was time to pause for breath. But Smith has consistently lived up to expectations. Compare that with the performance at Marks & Spencer (MKS), which has consistently disappointed to the point where it is in danger of crashing out of the FTSE100 index.

I don’t want further High Street exposure but anyone who does should seriously consider WH Smith as a buy – and even then it is because the High Street side is shrinking. There is no other such consistently good performer in the sector. It has continued to raise profits, earnings per share and dividends. The dividend is covered twice and the yield is about 2.6%. That’s fine by me.

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Twice as Bad

It’s bad enough to be forecasting that revenue will drop 4-6%; to find that it will in fact be 6-8% adrift is deeply worrying. No wonder shares in software supplier Micro Focus (MCRO) slumped 30% on the latest update. And there are two more months in its financial year for things to get worse.

Full marks to the board for being upfront about this and not waiting until the last minute in the hope that something will turn up. Micro Focus says customers are taking longer to make decisions, so although “there remains a significant pipeline of business opportunity being pursued” an awful lot of this pipeline would have to come to pass before year end to meet the previous guidance.

Investors who can remember the bursting of the tech bubble will know that software decisions postponed are software sales lost forever. Technology moves so fast that companies will just skip to the next generation of products when they eventually decide to buy.

Micro Focus has decided to speed up a strategic review that includes, rather ominously, “financial alternatives available to the company”. One financial alternative would be to reduce or even scrap the dividend.

The shares have dropped from 2,160p to 1,120p in less than two months. They are unlikely to start to pick up until there are clear signs that customers are buying the products again. Stay well clear until that happens.

Worthless, not Worth Less

It is rare indeed that shareholders in any company are wiped out in a single moment. In most cases, such as Northern Rock and Railtrack, it is death by a thousand cuts. There are plenty of warnings for investors to face reality, cut their losses and get out. 

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The latest example is holiday company Thomas Cook (TCG), whose shares now trade at less than 6p. It is on the verge of an agreement with Chinese outfit Fosun, banks and bondholders that may well wipe out existing shareholders.

There have been enough warnings that this could happen. The surprise is that anyone thinks the shares are worth anything at all. If you are still in, count yourself lucky you can sell for a few coppers rather than wait and get nothing, which is what I think the shares are worth.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.



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