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Invensys and C&W show that the broader stock market sometimes fails to see value potential

17/01/2014

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

In Potential upsides for struggling sectors, we considered ways unloved companies might enjoy a change in fortune, whether it be their own attempts at self-help, such as Home Retail Group’s current business strategy, or a bit of luck like one of Dixons’ major competitors going bust. Another possibility, twice illustrated in recent weeks, is that some third party recognises – or at least believes they recognise – the value within an unloved company that the broader stock market is failing to see.

Thus, for example, British engineering group Invensys saw its share price jump more than 25% on 28 November after announcing it had agreed the sale of one of its divisions to Siemens for £1.7bn. This sum, which at the time equated to pretty much the entire market capitalisation of the company, has put Invensys in a position where it can solve much of its existing pension fund difficulties while still returning some cash to shareholders.

The sale was essentially something of a ‘double whammy’ in that it raised a very decent amount of money for Invensys while also making the remainder of the company a lot more attractive. This led to the strong rally in its share price.

Meanwhile, on 3 December, Cable & Wireless Communications – one half of the former Cable & Wireless that split itself into two back in 2010 – saw its share price rise by 6% on the news it is to sell its ‘Monaco & Islands’ division for a price close to two-thirds of its entire market capitalisation.

Both stories serve to reinforce the point that, when you buy a business in which nothing is assumed but bad news, you do not always have to wait for the wider stockmarket to change its mind. Sometimes someone else decides, while they can, to take advantage of the value they see. Whether their view of that value ultimately turns out to be correct is a different issue, but by making a move they often cause the stock market to reappraise what the true value of the business’ assets might be.

Investors frequently talk about how a particular company needs a ‘catalyst’ of some kind to be a compelling investment. The problem is that obvious catalysts tend to be factored in to shares prices, whilst those that aren’t obvious – such as lucrative disposals, major competitors going bust or whatever else – are by definition unpredictable and hard to foresee.

When investing in lowly valued companies investors can benefit from all such catalysts without having paid anything for the privilege. In addition to this, and most importantly, investors in cheap companies have the most potent driver of long-term investment returns, valuation, working in their favour as well.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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