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Questor: our most successful stock comes under attack. What should we do in response?
Shares in Future, the publisher, have gained 273pc since our tip but a ‘short‑seller’ says they are overvalued
Someone is not impressed by Questor’s most successful stock tip of recent years. Future, the magazine publisher whose shares have gained 273pc since we recommended them two years ago, has attracted the attention of a “short-seller”.
ShadowFall, a London-based investment firm, has declared itself to be “short” of Future’s stock, which means it will profit to the extent that the company’s share price falls.
It has published a lengthy document that sets out why it thinks Future does not deserve a stock market value of £1.5bn, the figure it had reached before ShadowFall went public with its dossier.
The document is couched in somewhat technical language so Questor asked its author, Matt Earl, ShadowFall’s managing partner, to explain his misgivings about Future.
“The company has grown by making a lot of acquisitions and it has tended to pay 1.2-1.9 times the sales of the businesses it has acquired,” he said. “But shares in Future have been trading at about seven times sales.”
The only way the latter valuation can be justified, he said, is if the disparate parts can be melded together into a growing, cash-generative business. “We think the market is pricing in tremendous optimism about this,” Mr Earl added.
He said his research indicated that what he called one of Future’s “pricier” acquisitions, Mobile Nations, had suffered a 50pc fall in website traffic over the course of a year, while the value of another, Purch, had been written down by about £40m after its acquisition.
“It sounds like Future has overpaid for Purch. This calls into question its acquisition-based strategy,” Mr Earl said.
He also questioned Future’s reported 11pc in organic growth for 2019 and described sales by executives of their own stock after they had asked shareholders to fund an acquisition as “a slap in the face” for investors. “Future’s management have largely cashed in,” he said.
“The firm just keeps buying more and more businesses and in my experience this approach never stands the test of time – you rely on the next acquisition to sustain growth and meanwhile you need to make a success of the previous ones.”
Future declined to comment on the allegations.
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However, Richard Power of Octopus Investments, whose holding in Future prompted our original tip, said he was sticking with the shares.
“We have taken some profits over the past six months as we need to manage the size of the holding,” he told this column. “However, it remains a top holding. We were delighted with the brief trading update on Monday. The management have a strong track record of upgrades following acquisitions.”
But we are going to take a safety-first approach and bank the very handsome profit we have made on this stock.
We have the highest regard for Mr Power’s skills as a fund manager and we are not saying he is wrong about Future; ultimately it is a matter of opinion and interpretation.
But he is a human being and therefore bound to see the positive side to something he has committed to and be disinclined to accept the analysis of a short-seller that has a financial interest of its own.
Overall our feeling is that ShadowFall’s attack, whether justified or not, will linger in investors’ memories and that the share price will therefore struggle to make meaningful progress from here. And banking so large a profit can hardly be imprudent.
We advise readers to watch this one from the sidelines and sell.
Questor says: sell
Ticker: FUTR
Share price at close: £12.98
Update: Ferguson
We tipped Ferguson, the plumbing supplies firm, three weeks ago and yesterday it announced plans to list its shares in America, either as the main or an additional listing.
Exact plans will be announced in due course but the shares rose by 6.9pc on the news because analysts expect the stock to attract a higher price-to-earnings ratio in America.
Questor says: hold
Ticker: FERG
Share price at close: £73.78
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