Appliances Online is now AO, and it’s a hit with the market. Shares leapt 40 per cent as it floated in London today. The facts:
AO had revenue in the year to March 2013 of £275.5m, on which it made net income of £6.8m: a 2.5 per cent net profit margin.
With a shiny new market cap of £1.68bn it is worth almost as much as Carphone Warehouse or Dixons, two major high street retailers. It is big enough to make the FTSE 250 (subject to other criteria).
Basic valuations look fanciful: It is priced at 247 times trailing earnings, or six times sales.
But no one cares about traditional valuation tools any more. AO is an online retailer, and they’re where it’s at. Its shares are not about earnings or dividends this year, next year or the year after; they are about first-mover advantage, an option on AO becoming the Amazon of the fridges-to-cookers world.
How exactly should we benchmark hedge funds? It is obviously unfair to compare them directly to equity indices, as the whole point of hedge funds is to aim for an “absolute” return, not a return relative to gains in the equity market. They will naturally under-perform an S&P 500 tracker in years like 2013 when the stock market shoots straight up.
I drew attention last week to the way hedge fund returns have been left badly behind by long-only equity returns over the five years of the post-crisis relief rally, and this understandably provoked comments that this was an unfair comparison. There are also obviously many methodological problems with creating hedge fund indices. Hedge funds have many different strategies, and they may be particularly prone to “survivorship bias” – those that do not have a good story to tell tend to shut down quietly, and do not tell index compilers about their record.
However, hedge funds do have to accept that their offerings will be used by asset allocators trying to use them to balance against the main asset classes of equities and bonds. On that basis, the following chart, produced by Barclays’ capital solutions group using HFRI indices, is very interesting.
It confirms a basic intuition: hedge funds did very well during the bursting of the dotcom bubble, more than held their own during the subsequent 2002-2007 rally, and have had a far harder time of it in the last five years. Why might this be?
Old stock market wisdom has it that as goes January, so goes the year. As with “sell in May”, “run your winners” and so many others, there is some truth in the saying: in 62 of the last 85 years the US market has moved the same direction in January as in the full year ahead.
On the other hand, the first day of trade is irrelevant, as Howard Silverblatt at S&P Dow Jones Indices points out.
As the festive season approaches investors will be preparing for the boring but essential job of selling some of their wonderfully-performing US shares to rebalance their portfolios back into underperforming bonds, protecting some of those gains.
The question investors face is whether such diversification will help protect their portfolios in the future.
Where are all the bears? Even some of the usual suspects have stopped growling, with David Rosenberg of Gluskin Sheff going so far as to dispute the idea that he’s a permabear. There are a few still carrying the flame – Russell Napier, the stock market historian, thinks the S&P 500 will fall to 500 – but with the S&P now at 1,772 there are few willing to listen to the growls.
Money has been piling into European shares as fears of the euro imploding recede, the economy shows signs of life and investors look for the next trade after Japan.
But the “eurozone shares are cheap” theme might have run its course. This chart shows the discount of eurozone forward price-to-earnings compared to the US, as a percentage (using MSCI indices).
At first, the idea that the Nobel economics prize should be shared between Eugene Fama and Robert Shiller sounds absurd – akin to making Keynes and Friedman share the award.
Gene Fama, of the University of Chicago, is famous as the father of the Efficient Markets Hypothesis, after all, while Yale’s Bob Shiller is famous primarily for being the principal critic of that hypothesis.
Investors have used all sorts of valuation models in the past 20 years. Which to use for Twitter, now that it is preparing to float?
Here’s another handy measure: price per worker. Twitter is more than its staff, of course. But it’s a useful sanity check on any valuation. The higher the value, the more investors have to assume there’s something really special about their assets – factories (a carmaker), intellectual property (think cure for cancer), innovative culture (Apple?), near-monopoly position (once Microsoft, now Google).
Russell Napier’s Anatomy of the Bear seems to be quite a cult classic among investors. I regularly see it on portfolio managers’ desks. Meanwhile, his video interviews with the FT in the years since the crisis also seem to have created quite a cult following. This week he completed his fourth interview with us since 1999, and he is sticking to his claim, based on historical experience, that the S&P 500 will need to slide down below 500 once more before this bear market is over (he did say 400 in the book).
How much has his story changed, and how seriously should we take him? This obviously divides opinion. So here are his previous interviews with us, in chronological order.
Just what depths of political stupidity are markets discounting? The partial shutdown of the US government passed with little or no impact on the markets that stood to be most affected, even though there was uncertainty about it to the end.
Almost all European stock markets opened higher, despite the news from the US. The dollar index dropped 0.35 per cent in the minutes following the realisation that the shutdown would happen, and then recovered somewhat. The yield on the benchmark 10-year Treasury bond gained 5 basis points to 2.66 per cent – still far below the 3 per cent it briefly touched a few weeks ago. So what has happened so far – the failure to agree on a budget and an initial shutdown of the US government – has evidently been priced in.