Private Investor: Dirt cheap doesn't mean it's a bargain
Saturday 21 June 2008
Looks like I managed to call the house-builders right. My sixth sense, if you like, told me they were a bad bet, even at the current depressed valuations. Well, when I say sixth sense, I suppose I really mean the published accounts and trading statements, especially of Barratt Developments.
This household name has lost some 95 per cent of its value at its peak, and this week it lost another 10 per cent of the remaining 5 per cent. I think there is more pain to come here, though the renegotiation of its banking covenant seems to have given the shares a fillip.
The banks won't let it go bust, that's for sure, because running a bank is bad enough without having to run Barratt's land bank as well. What would you do with Barratt's plots and half-finished homes? So Barratt, like other house-building firms, will stay listed, but it seems destined to become a penny share, a victim of overextension, the credit crunch and its own banking covenants.
Just because something is dirt cheap, doesn't mean it's a bargain. As I said last week – and it's nice to be vindicated for a change – bottom-fishing doesn't mean just buying the "cheapest" shares out there. I wouldn't buy Barratt at any price.
Mind you, my recent investments in the bombed-out banking sector haven't been great either. The last time I looked, my holding in Alliance & Leicester was down 23 per cent. I only started buying into the stock at the end of last month. Every time I think it can't go lower, it does.
It's difficult to believe that a few years ago the shares were looking at the £10 mark. Now they're barely above £3, and have halved in the space of a year.
So I've bought some more, and this time have the distinction that I really have bought at the bottom – the all-time low, so far, of 304p. They dropped by a colossal 6 per cent on Thursday on the back of some more gloomy predictions about the housing market from HBOS. Yet its views didn't seem that much more miserable than any of the other authoritative views on real estate we've seen over the past few weeks. It looked like a classic case of overreaction on the back of admittedly discouraging developments.
Longer-term, I think we've all been a bit spooked by Northern Rock. In a way, the Bradford & Bingley saga is more apposite. Not a happy tale, to be sure, with a failed rights issue and ever higher arrears in the buy-to-let market, but at least someone wants to buy into Bradford & Bingley, even if it is an American private equity group.
That, you might recall, was what was supposed to happen with Northern Rock and was supposed to – and actually did – place some sort of floor under the Rock's share price, until hope ran out. Even on the eve of nationalisation, the shares were still worth about 100p, I think, and were trading freely.
My point here, then, is that the very worst of the credit crunch might be over and that the interest of private equity groups in snapping up the smaller brethren in the field at bargain prices is probably undiminished. They know a good deal when they see one. For those shareholders, like me, who have been buying at the bottom of the Alliance & Leicester market, that should be good news.
Even if Alliance & Leicester has to go to exiting shareholders for more money, the new Financial Services Authority rules on short selling during rights issues should do the trick in protecting the interests of investors.
There should be no attempt by the authorities to try to circumvent this by allowing the likes of Barclays to abolish the rights of pre-emption enjoyed by existing shareholders. It is a violation of the rights of property, and I hope that bodies such as the Financial Services Authority, London Stock Exchange and the UK Shareholders' Association will be doing their bit to resist companies indulging in such practices.
Leaving Barclays out of it, and talking in general terms of principle, the scope for abuse and corruption in such deals is abundantly clear. Pre-emption rights turn existing shareholders into extremely effective regulators. Besides, it is their business and they need to be helped to stop careless or incompetent managers seeking an easy way out of their difficulties.
So I think most of the banking sector's troubles are "in the price", though the price does seem to be shrinking every day.
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