Lyons' share
PORTFOLIO JOHN BULL
The Bank of England talks about the dangers of a recession in the next few months--and three days later (last Friday) Mr Harold Lever stands up at a Press Club dinner to repudiate the notion that it is government policy to induce a recession either by fiscal or monetary means. On this occasion the City will, 1 think, take the Bank's words more seriously than Mr Lever's. Meanwhile equity prices stay down. At just over the 390 mark, the Financial Times ordinary share index is back to the level at which I started my first portfolio with £5,000 about twenty months ago. My profit before expenses over that period is £1,365 or 27 per cent. My experience has not been dissimilar from the majority of unit trust managers, that is I found it pretty difficult to keep up with the index when it shot up to 520 (as recently as last Janu- Valuations at 16 June 1969 First portfolio 100 Empire Stores at 51s 3d.. .. £256 125 Phoenix Assurance at 32s 9d .. 5203 330 Witan at 18s 6d £305 500 E. Scragg at I8s 3d .. £456 500 Clarkson (Engineers) at 18s 104d £472 60 Rio Tinto Zinc at 119s 6d .. £358 1,000 Associated British Foods at 8s 8fd £434 1.000 Jamaica Public Service at 6s 3d £313 133 Electric and Musical Industries at 48s 9d £324 100 Lyons `A' at 78s 9d £394 200 British and Commonwealth Ship- ping at 36s 6d f365 200 Forte's Holdings at 44s .. £440 200 Bowater at 52s 3d .. £522 1.000 English Calico at 8s £400 Cash in hand .. • • .. £1,123 £6,365 Deduct: expenses £260 Total £6,105 Second portfolio 600 Pillar Holdings at 16s 10fd. 1364 15 Kaiser Steel at £36 8s £546 250 Lonrho at 44s 6d .. £556 100 British Petroleum at 135s £675 300 Vosper at 16s 3d £244 1,000 Allied Breweries at 151 744 .. £781 300 J. Bibby at 27s 9d .. . 1416 100 Burmah Oil at 99s 3d £496 Cash in hand .. • • £915 £5,135 Deduct: expenses 5,185 Total £4.950 ary). The main reason was that it always seemed prudent to keep a significant por- tion of one's funds uninvested. On the way down, it is just this policy which pays off. But pleasant though it is to have a 27 per cent profit now that the index is back to where I started—how much better to have taken the 40 per cent appreciation I had at the top of the market.
What is the right strategy now? First one has to keep one's eyes open for two im- portant indicators—trends in company pro- fits and trends in world interest rates. I do not believe that there can be any lasting re- vival in ordinary share values until com- pany profits start to rise again. The latest forecast is that they will remain flat for most of this year with some slight pick-up in early 1970, though on the Bank of Eng- land's forecasts that seems a slightly optim- istic appraisal. For the time being I think the right assumption is that company pro- fits are flat or falling. Nor do I think that equity prices can get off the ground until interest rates come down. As I mentioned last week, a growing number of pension fund managers would rather take the cer- tainties in redemption yields which the gilt- edged market provides (with no capital gains tax to pay), than hope the average long-term growth rate for equities (3f per cent per annum) will reassert itself.
Second, after a 25 per cent fall in the index, it is a bit late to start selling shares —unless, that is, you think that prices have another 10 per cent at least to fall, which would make this the most serious bear mar- ket since the war. Of course you should con- tinue to throw out companies whose results fail to meet expectations and switch into those which look set to do well when prices recover. What you should not (repeat not) do, though, is to ditch good investments at this stage. Third, it may eventually prove right to buy gilt-edged securities before it is right to move back into equities. When interest rates finally turn, the upward move- ment in security prices will be very sharp indeed. I don't doubt that the interest rates now being conceded will be thought amaz- ing opportunities before long, though at the moment, having seen Metal Box pay 10f per cent on a loan, we wonder whether the next major borrower might not have to pay 11 per cent. Fourthly, I think that some of the convertible stocks now being issued will prove to have considerable attractions. Take the Alcan Aluminium (uk) convertible. Issued with a 9 per cent coupon and allowing conversion into the ordinary shares at par from- 1976 onwards there were hardly any takers and the first price across the tapes on Monday morning showed a seven-point discount. In time, though, the Alcan stock ought to show big rewards.
It is a relief to be able to turn to the recent profit figures of J. Lyons, which is proving a very good company in which to be invested during these difficult times. Last March, you will remember, the company surprised the market by forecasting record profits of £4.4 million for 1968-69 compared with £3,775,000 in the previous twelve months. That put the shares up 3s 6d to 82s. Last week, however, the company announced that the actual figure for 1968- 69 was £4,776,000 before tax. Which put the shares up 4s to 76s. Thus second half earnings were a good deal higher than en- visaged. If the company can hold its higher profits level during the current year earn- ings per share should come out at 5s 4d, which indicates a modest price earnings ratio of fourteen or so.
But the story of J. Lyons is not just that of an out-of-line-price-earnings-ratio. What J. Lyons has is surplus property and, there- fore, cash. In this period of an unprece- dented tightness of money, Lyons is in a strong position and the board shows every sign of making the most of its fortune: There will be more to write about J. Lyons when the annual report appears at the end of the month. But it is already clear that the shares are one of the most attractive counters in the market
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