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David Kempton: two new share buys and two howlers

Experienced private investor highlights two new buys and two of his biggest howlers in nine years of Citywire Money columns.

 
David Kempton: two new share buys and two howlers
 

Over the nine years that I have been writing these occasional columns for Citywire Money, obviously I have not got everything right, but I have been reminded recently of two really glaring errors.

Some suggested stocks have underperformed, whilst some have doubled, even quadrupled, but I have never missed an opportunity to powerfully advocate selling at a 20% stop loss and running profits.  The two corner stones of any portfolio – cut losses, run profits.

That stop loss discipline was crucial with one of my howlers, Gulfsands Petroleum (GPX). I suggested buying the Syrian oil producer in 2011, claiming the regime was well governed and safe from the encroaching Arab Spring. 

A surprising mistake for me as a committed Arabist and old Saudi hand, but I was strongly taken to task by reader Alan Franklin.  How right he was, with the shares down 98% since, and I hope he is reading this.

This June I suggested IQE (IQE) looked fully valued, placing the shares on a ‘hold/sell’ recommendation and selling most of mine.  With the shares up 72% since that article, I was badly wrong in failing to keep running profits on the stock. Reader Robert Ray missed no opportunity to tell me – how right he was too.

I certainly don’t accept being a ‘remainer’ as wrong, but do take the criticism of being too gloomy, albeit in a year when we have somehow created a weak minority government, hammered our currency 20%, and gone from the strongest growth rate in Europe, to one of the weakest.

It’s not all gloom. I was delighted to read the lead article in the business section of The Telegraph last week, reporting that Norway’s huge sovereign wealth fund was buying gilts and London property.

I was tempted to visit Norway immediately and buy them lunch – just the action we need to help sentiment. 

So far London remains Europe’s financial hub with US consultants estimating £50,000 relocation cost per employee, with most reluctant to leave and uproot themselves from family and friends.

Oxford Economics still forecast 2.3% annual growth in London for the next four years, compared to Paris at 1.6% and Frankfurt, 1.5%.

Against this background equities hold firm for now and we play on whilst the music lasts. 

Last month I bought ITM Power (ITM), and although it’s run up 70% already, it’s still a stock to get some useful exposure to the next vehicular mobile world power source. 

Brave comment perhaps, but I’ve recently swung away from mobile lithium batteries, notwithstanding their use by Tesla, the US’s most valuable car maker. I believe that fuel cells will now gain traction very quickly as more hydrogen supply stations appear around the country. 

Hydrogen is now universally produced on site, with no more deliveries needed from outside sources. The UK electrolyser equipment is made by ITM and located at each service station for cars, buses and trains, where it converts electricity and water into hydrogen and oxygen. Ideally the electricity comes from 24-hour local wind turbines or solar panels, supported by the mains.

A car can be filled up in three minutes for a range and cost (currently, although expected to fall 30%) similar to a petrol or diesel vehicle.

The advantage over lithium is significant in grid power usage, where a single overnight battery charge consumes more electricity than several houses, whilst 43% of vehicles currently live on the street with no possibility of home charging. 

No more ridiculous queues at hotel power points or hour-long motorway coffees awaiting a 20% charge, ‘just’ enough to get you home. Obviously hybrids overcome that issue, but blow out carbon whilst supporting a dead battery. 

ITM is a small new public company with, as yet, no projected profits – buying the shares is an act of faith in a new fast developing technology, where the powerful fuel cell growth in the US paves the way.

Results in August for its maiden year as a quoted company show strong project and grant income rising 13% to £9.2 million plus £4.1 million booked after the period and ongoing negotiations for a further £12.3 million. Plus it has £3 million of cash.  Last week contracts were announced for fuel cell buses in Pau and a 10 megawatt unit from Shell for a refinery in Germany.

Irritatingly the share price has doubled in two months and you may wish to wait for market sentiment to settle down, but there is comfort in the very competent team of senior non-executive directors, with JCB owning 8% of the company.

I have just bought Augean (AUG) which looks very oversold, with the shares 55% down over the last month.

It is a specialist in the growing hazardous waste sector, with landfill and specialist treatment services including radioactive waste.

Projected revenue for 2017 is £83 million for a pre-tax profit of £7.5 million. The shares are trading on a five times earnings, with a price to earnings growth ratio of 0.2 and a projected yield of 4.4%.

The shares have been battered on news of halved profits from exceptional items; however revenue was still up 25% and confidence in the future was demonstrated by a 54% hike in the dividend. 

Last week’s announcement of full year profits ‘at the lower end of expectations’ further disappointed the market, but a cost reduction programme to save £2 million annually was also indicated.  I’m encouraged by the very savvy bunch of institutional shareholders, one of whom increased his holding last week.

I have added to my T Clarke (CTO) shares, encouraged by its acquisition of building management services provider Eton Associates last month. 

T Clarke is much more than a boring old electrical contractor; apart from a record order book, up 23% at nearly £400 million, electrical demand is growing strongly.

We need it for our banks of computers, mobile phones and soon robots, virtual reality and artificial intelligence – it is even involved in developing facial recognition building entry systems. 

On a projected year price-earnings ratio of 6.9, price to earnings growth ratio 0.8, dividend yield of 4.1%, cover of 3.5 times and cash of £9 million, the shares look too cheap and I’ve just bought some more.

These are not mainline stocks: be careful, vigilant and please cut losses at 20% and run the profits. 

David Kempton is non-executive chairman of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

11 comments so far. Why not have your say?

Capt Ahab

Sep 11, 2017 at 16:57

I have IQE again having twice lost a considerable amount of money in the early days when it went through the 20% loss and a great deal more like a stone!! this time it has taken off

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Dozey

Sep 11, 2017 at 18:01

The point about Augean is that the Inland Revenue has been feeling their collar in respect of underpaid land-fill taxes. Their liability and the amount involved are uncertain, but could be millions, and the market does not like uncertainty.

However, on the basis that no-one benefits if the IR forces Augean into bankruptcy I still hold my few shares.

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mikest

Sep 12, 2017 at 09:09

‘Hydrogen is now universally produced on site’ maybe in your universe, David. Here in the UK we have just six onsite hydrogen refuelling points, compared to over 30 in Germany and many more in the US. I believe that hydrogen fuel-cell vehicles will make a valuable contribution to reducing toxic emissions but the depressingly slow roll-out of refuelling points here will place the UK at the back of the queue once more.

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Hotrod

Sep 13, 2017 at 08:45

3 points I'd like to make.

Yes indeed Tesla are doing extremely well, but they are still not a high volume producer. It's all about critical mass. The major car manufacturers are learning fast and committed to electric. Just at the point when electric vehicles become universally accepted the majors will start producing in high volume leaving Tesla in the dust.

However I think there is a lot more mileage in Elon Musk's concept for home battery storage. Lithium battery technology and affordability is improving all the time. If the prohibitive costs can be overcome, it paves the way to near self-sufficiency in energy. Especially for farmers and land owners who have the space for large scale solar panels and/or a wind turbine.

I read with interest this week that a survey ship mapping a proposed route for an electricity cable direct from the hydro-electric plants in Norway had discovered a WWII aircraft on the sea bed. The concept of supplying electricity in this way seemed fanciful just a few years ago because of the cost of the cable and the enormous power loss over such a long distance. but not now apparently.

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TJ33A

Sep 16, 2017 at 14:00

Interesting article and comments as well. All appreciated by this reader.

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Dennis .

Sep 17, 2017 at 17:04

Charging a car from the mains is fairly straightforward. Pushing power back into the grid is much more difficult and requires a box containing a synchronous invertor, control system and step up transformers etc. I wonder how many people will have one of those fitted in their homes and how much it will cost?

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Hotrod

Sep 17, 2017 at 23:42

@Dennis

It is my understanding that anyone who has solar panels installed on their roof has the control gear you describe fitted as part of the package. How else could the system work ?

As regards home battery storage, The whole objective will be to provide power for the home at times of inadequate power generation and not supply the grid with it at all. Therefore the calculation to obtain optimum battery capacity for the size of the property and its power consumption will be critical.

As regards the cost of the electronics It shouldn't be prohibitive. Inverters are fiendishly clever pieces of kit, but they are quite cheap to make because the whole process is automated.

I have a portable generator whose speed is controlled according to demand (load) I have also fitted a frequency inverter to my bench drill to enable infinitely variable spindle speed, both work fantastically well and their initial cost was quite reasonable.

The high costs involved are solely to do with the manufacture of the battery.. Sources of lithium and other rare earth elements which can be easily processed are few and far between. And then there are the power to size and weight ratios to consider, but as I say engineers are working on it and I think they will be able to overcome these obstacles.

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Dennis .

Sep 18, 2017 at 00:05

Yes I wondered about the solar panel input story but thought that the kit used on solar panels is probably handling a much lower current than we would be taking from the car batteries if we were using the car as some sort of storage device. However I take the point that it would be mass produced electronics and therefore relatively cheap.

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Hotrod

Sep 18, 2017 at 10:08

@Dennis

We still seem to have got our wires crossed.

The fact that Tesla develop electric cars and the batteries that power them is purely coincidental.

The battery home storage concept is completely separate. From diagrams I have looked at on the internet the system will have its own battery [much larger than that fitted to an electric car] which will be situated in the garage, bolted to the floor and/or the wall. (remember this is intended for new builds initially, and the US usually has much larger garages than the UK anyway.) Larger premises such as farms will have a custom made mini-substation housed in a separate building.

You aint gonna be able to power your house electrics from an electric car battery anytime soon.

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mikest

Sep 18, 2017 at 12:21

Way back in 2008, James Heathcote of ITM Power described the idea of the ‘Hydrogen House.’ This was supposed to use solar and wind via an electroliser to generate hydrogen, which could then be stored until required. An American called Michael Strizki actually built such a house but recent updates are hard to find. I worry about batteries because of their relatively short life (at present) and the toxic waste generated both in production and disposal.

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jamescot

Oct 03, 2017 at 12:56

David,

I'm delighted to come across your article searching around on IQE, where I'm a shareholder and quite bullish on a 2-3 year view, it seems one of the most outstanding opportunities in the market and having been lucky enough to buy at 27p I have been averaging up. Personally short term the catalysts, other than new contract info, to drive the shares are zero ahead of the launch of the iPhone X, and that will then drive sentiment for the shares. The very downbeat launch for the iPhone 8 probably suggests most people are saving their money for the revolutionary X whereas the 8 is simply an iteration of the 6 and 7 - so much more to IQE than simply iPhones and even photonics...

You'll remember 20 years ago we used to have some good natters about investing in smaller companies in my Singers days. I agree with your comments about buying the Norwegians lunch, and fear that the UK's situation, bad enough as it is, could get a lot worse if the current weak government, made weaker by the hopeless Mrs May's pathetic election campaign, allows Corbynite crypto-communism to take over. What hope for investment in small UK companies then??

Would love to chat some time, my email remains the same and will send one to Kempton Holdings. Keep up the flow of interesting articles, I must look at the last 3 or 4 of them next!!

With best wishes

James C.

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