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Questor: the psychological thriller that carries a simple message – buy Anglo American
When a share price slides relentlessly to the point that 90pc of the company’s market value has been lost, investors can see that a wonderful buying opportunity may have arisen. But they also know that the share price could simply continue to fall. What they need is a rational basis for identifying when a stock’s fortunes are about to turn.
One fund manager says he has just such a method – and that, in the case of today’s stock, the mining group Anglo American, it allowed him to time his purchase almost to perfection.
Better still, the same methodology indicates that there should be further gains to come.
Questor was intrigued to discover that the manager’s analysis was based less on accounting detail and more on the psychological states of the various parties involved: the company’s management, City analysts and actual and potential investors.
The story told by the fund manager, Jeremy Lang of Ardevora, reads almost like a Greek drama. But the evidence indicates that his method works: over the past seven years, roughly the time he has been with his firm, he has achieved gains of 125pc against 74pc for his peer group, according to FE Trustnet, the fund analyst.
He said Anglo’s problems began during the commodities boom.
“Its management were slow to see the opportunity that China’s rapid expansion offered and were held back by a messy set of assets that often had complex ownership structures,” he said. “By the time they got their act together and were in a position to benefit, things were starting to go wrong.” Chinese demand faltered and commodity prices fell.
This is when the managers’ natural human responses began to play their part. “Anglo was the most resistant of the mining giants to the idea that the rosy outlook could be wrong. Initially they only paid lip service to the need to change their approach,” Mr Lang said.
“They made the structure a little simpler – the number of reporting lines was cut from 60 to 30 – but they didn’t actually sell any assets.” He said management’s failure to take the problem seriously enough – to “realise that the world was falling in” – caused the share price to collapse.
“Share price performance in 2015 was appalling and yields on the company’s debt were rising. The capital markets were signalling that they had lost trust in management.” This is what brought about the conditions for a radical change of heart on the part of Anglo’s board, Mr Lang said.
“These market signals acted as a massive kick in the backside. The managers realised that they had lost so much status in investors’ eyes that they had nothing more to lose.” This is when they started to take the action that would result in the company’s recovery.
How did Mr Lang realise that this change in management’s attitude had come about?
“You could see it in the tone of their statements,” he said. “In June 2015 they were using the language of denial, blame, fatalism – it’s all beyond our control. In February 2016 they began to use the language of survival: we don’t care who was at fault, this is what we are going to do to fix the problem.” He described the change as a “Damascene conversion”.
The company decided to concentrate on just three areas – diamonds, copper and platinum – and sell its other assets. Crucially, it would use the proceeds to cut debt, not invest in other projects.” This is when Mr Lang switched from “shorting” the stock to buying.
He said things had unfolded much as he had hoped since then, if somewhat more quickly. The shares have recovered, although they are nowhere near the highs of about £34 seen in 2011. Mr Lang said he was confident that they had further to go – and this is where the emotional responses of analysts and investors take centre stage.
“Investors and analysts become ‘scarred’ when shares fall dramatically,” Mr Lang said. “It can take a long time for them to trust a company fully again. You can hold these businesses for three, four, even five years after the recovery begins. This is how long it can take for the anxiety to fade.”
In the end, he said, people start to forget and the management gets confident again.
Once this leads them to take risks once more, it’s time to sell. Again, the signs should be there in the tone of management’s statements.
Questor says: buy
Ticker: AAL
Share price at close:- 959.4p
Update: RWS
RWS, the patent translation firm tipped here in December at 301p, announced its first-half results yesterday. Turnover rose by 35pc to £76.6m and adjusted profits before tax increased by almost 40pc to £19.4m.
Keith Ashworth-Lord, who manages the Sanford DeLand UK Buffettology fund, said: "The group has an encouraging pipeline of new business in Europe and the US, with new client wins in China. While the shares have been very strong this year, upgraded broker forecasts underpin this.
"My conclusion is that there is no shortage of organic growth opportunities, likely to be aided and abetted by bolt-on acquisitions. A strong hold therefore.”
Questor says: strong hold
Ticker: RWS
Share price at close: 395p
Questor archive: telegraph.co.uk/questor