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Share price should not be the principal focus for investors – or analysts

22/11/2016

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

If you were to plot the course of Anglo American’s share price over the previous 18 months, you would end up with a chart that looks very much like a valley or, bearing in mind we are talking about one of the world’s largest miners, a quarry. From £11.65 on 1 May 2015 – around a third of its all-time high seven years earlier – the shares slipped to a low of £2.21 in January before steadily recovering to stand just shy of £12 this month.

So 2016 has proved a markedly better year for Anglo American than 2015 – although its annual results are unlikely to count among its highlights. This is because the announcement took place in February, which led to a distinctly awkward conference call with the analyst community, who were unhappy about the direction of commodity prices, the direction of Anglo American’s profits and, in particular, the direction of its share price.

Analysts may write rude things about a company from time to time but it is rare indeed for them to say rude things to a company’s management team. After all, without access to management, the job – their job – of writing any sort of meaningful analysis on a company and its prospects becomes a whole lot harder. As such, when analysts talk to management they tend to be very nice indeed. Too nice, some might say.

Yet on that February conference call with Anglo American’s senior management, the analysts were not nice at all. Taken individually, none of the comments perhaps matched one from a similar call two months earlier – the splendidly passive aggressive “We all make mistakes. Ours has been so far to continue with the ‘buy’ recommendation of Anglo” – but, without exception, the analysts were very down on the company.

Essentially, in their view, Anglo American was in trouble; it was in need, at the very least, of a rights issue to help stabilise its balance sheet; and, even if the rights issue were to take place, it might not be enough to save the business. “You sound a bit more confident than I think the numbers suggest you should be,” said one analyst. “Can you give us some more confidence that this can actually be turned around?”

Anglo American’s management did their best to do so but their audience remained deeply sceptical. Equally clearly, however, others were convinced because, over the last nine months the business’s share price has pushed steadily upwards to reach a recent high of £11.93 the day after the US presidential election – albeit giving up a little of that ground in the fortnight since.

When Anglo American came to announce its interim results at the end of July then, the tone of that call with senior management was rather more chummy – more business-as-usual. This time, far from intimating the company needed a rights issue if it was to have any chance of surviving, the analysts appeared so convinced of Anglo’s financial strength, their main focus was on when it would be reinstating its dividend.

In less than six months, the analysts covering Anglo-American went from “Why would investors believe you can do this now when you haven’t been able to do it in the last three years?” (Share price: £3.90) to “Thanks very much, guys. Well done on the performance” (Share price: £8.30) – from which it is hard to escape the conclusion sell-side analysts are as susceptible to having their emotions driven by share prices as anyone else.

Here on The Value Perspective, of course, we will always maintain it is far better to stick with a value-based strategy that helps take emotion out of the investment equation. In the case of Anglo American, such an approach helped us not only to ignore the shares at £30-plus in 2008 (and again in 2011), when much of the rest of the market was so excited, but also to take advantage when they were 10 times cheaper – from which entry point, the current price of £11 looks a good deal more appealing.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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