Moyes’ departure no panacea for United

David Moyes: Disastrous reign at Manchester United. Photograph: Anthony Devlin/PA Wire

David Moyes: Disastrous reign at Manchester United. Photograph: Anthony Devlin/PA Wire

 

Manchester United’s travails may be exercising fans but investors appear remarkably nonchalant – shares last week nearing all-time highs.

This was not a simple knee-jerk reaction to the ending of David Moyes’s disastrous reign. Markets price in future events, and investors have likely anticipated his departure for months – shares bottomed below $15 in February when the full extent of United’s deterioration became evident. Since then, despite missing out on Champions League qualification, shares have made their way back to the $19 level.

United’s problems go deeper than Moyes, however. UK hedge fund manager Crispin Odey, who is short the shares, last week warned United are “one product cycle behind and are being found out”.

Around £150 million is needed to rebuild an ageing squad. With a market capitalisation of $2.9 billion, estimated 12-month earnings of $38 million, and no guarantee of near-term Champions League qualification, it’s hard to share investors’ optimism.

The paper can be viewed at http://goo.gl/KhDd32



Sell in May and go away?
Talk of “sell in May and go away” routinely does the rounds at this time of year. Should you?

No. Many explanations are offered for historical summer weakness – investors taking their holidays, pension flows, even seasonal affective disorder – but there is no definitive explanation. Markets often rise in summer, and it may be a fluke that they often don’t.

Still, it’s a genuine historical curiosity.

Market anomalies tend to fade away once they become widely known. Although the Financial Times referred to “sell in May” as far back as 1935, the pattern has actually accelerated in recent decades.

Since 1950, a $10,000 May-October investment in the Dow Jones Industrial Average would have produced a small loss, compared to a $694,073 return from November to April. One study found it to persist in 81 of 108 countries analysed, including Ireland.

To repeat, it may be a fluke but it’s not a myth.

Quindell takes on short sellers
Short-selling outfit Gotham City Research’s description of AIM-listed insurance outsourcer Quindell as a “country club built on quicksand” caused panic last week; shares more than halving before recovering some ground.

Nearly £1 billion was wiped off the value of Quindell, which aims to join the FTSE 250 in June, following Gotham’s 74-page report. Quindell was bound to be upset – Gotham says its shares, 40p last Tuesday, are worth “no more” than 3p, with up to 80 per cent of profits being “suspect”.

Still, Quindell’s response – it called the report “highly defamatory”, is seeking legal advice and is reporting “co-ordinated shorting activity” to authorities – may have been too defensive as research indicates matters often don’t end well when companies sue short sellers.

Shares had risen eight-fold since last May, inevitably bringing increased scrutiny. The best way of quelling concerns is to engage with analysts and get on with running the company. If Quindell is persuasive the share price will recover and the shorts will move on.


Apple split not a concern
Apple last week followed Google in deciding to split its stock, its 7:1 split ensuring shares will soon trade around the $80 level.

Apple’s split boosts its chances of inclusion in the price-weighted Dow Jones Industrial Average, but is otherwise an entirely superficial and meaningless exercise – right?

Not entirely. Sure, splits are a cosmetic exercise as the market value of the company is unchanged. However, one study found companies that split their stock in the 1990s outperformed their peers by 9 per cent the following year. Another found similar one-year results between 1975 to 1990, with the differential growing to 12.2 per cent in the three years following the split. Another examination of the 1988-2012 period found splits indicate sustained strength in future earnings.

The stock split may be essentially unrelated to outperformance. Rather, it may be such gains are related to both momentum and valuation – companies that split their stock tend to have done well in the past, while gains are typically larger when companies trading at low price-earnings ratios split their stock.

Critics see Apple’s split as evidence that it is running out of ideas, but the data should comfort shareholders.


Disasters and risk-loving CEOs
What doesn’t kill you will only make you more risk-loving, says a new study which looks at how childhood natural disasters affected the future risk tolerance of chief executives.

The study, which examined 1,700 US CEOs between 1992 and 2012, found those who were exposed to extreme natural disasters went on to adopt a cautious corporate approach. However, those who lived through natural disasters without “extremely negative consequences” appeared to become desensitised to risk, leading more volatile and leveraged companies.

Other studies confirm this picture.

CEOs brought up in the Depression are averse to debt; those with military experience pursue more aggressive policies; those who fly small aircraft take more risks; those with bigger mortgages lead more leveraged firms.

The paper can be viewed at http://goo.gl/KhDd32

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