The woes of this one small stock suggest that a wider portfolio cull is needed
A big blow-up in a small stock may, frankly, seem the least of investors’ problems in the current environment, but the woes of Pressure Technologies are certainly giving this column pause for thought.
Britain’s bad habits of spending more than it earns (leading to an ever‑bigger budget deficit) and buying more than it sells (as imports lag exports and lead to a big current account deficit) are coming home to roost. These issues are becoming more acute as the Government seeks to push through tax cuts and energy subsidies funded by yet more debt.
This first round of fuel bill support is already breaking faith in the pound and bond investors’ willingness to lend to the Government at anything like the historically low rates that have characterised the past few years. What happens if energy prices refuse to come down once the initial support runs out remains an awkward question.
At the same time, the Bank of England is finding out how difficult it will be to extricate itself from 14 years of ultra‑loose unorthodox monetary policy without breaking something, because the economy and financial markets are now so dependent on such largesse.
Finding out that pension funds are using derivatives and leverage to try to manage their bond portfolios and protect themselves from sharp moves in gilt prices is bad enough, especially when the latest evidence is that such insurance does not seem to help and may even make matters worse. That is an unpleasant echo of 1987’s Black Monday crash and portfolio insurance strategies that unintentionally begat more selling the lower the stock market went.
Who knows what other unexpected pockets of trouble lie out there in a world laden with complex derivative trades where ultra‑low interest rates, bountiful liquidity and previous central bank intervention have enabled market participants to take risk and convince themselves that there would be no penalty for doing so as yet another bail-out would surely follow?
All of these issues are manifesting themselves most visibly in sterling, surging government bond yields and the Bank’s emergency adoption of quantitative easing to shore up the gilt market.
But the number of company profits warnings is piling up too. They cannot be pinned on the mini‑Budget. They show how times are getting tougher for corporations as inflation, rising interest rates, slowing economies and currency volatility start to weigh.
This takes us back to Pressure Technologies. Yes, we have got the stock wrong and have paid the price with a collapse in the shares after last week’s profits warning, which cited raw material costs, higher energy bills, supply chain frictions, customer delays and company‑specific issues such as outages in key items of equipment and the inability to push up prices far enough to compensate for margin pressures.
Worst of all, the anticipated loss means Pressure Technologies is in breach of covenants and in talks with its bank. This column would expect a solution to be found and the debt to be refinanced, but it is time to move on and admit we have made a mess of the stock – even if it means locking in a nasty loss for those who bought in response to our tip of August 2018.
The combination of woes that hit Pressure Technologies, and the subsequent share price hammering, suggest that a wider portfolio review may be appropriate, especially as markets are likely to remain volatile from here.
Out must go serial market laggards – if they have done us no good in a flat‑to‑rising market, what harm could the shares do in a falling one? Out must go companies with the combination of net debt and “operational gearing” (where strong sales are needed for profits): they can go wrong very quickly. Out must go those that rely on pliant markets to realise value through asset sales: markets may not be helpful.
This leads to a cull – and an unpleasant, unfortunate one – not just of Pressure Technologies, but of ITV, Strix, Essentra, Coats, TI Fluid Systems and IP Group.
Safety first feels like the best policy right now. Any market rallies could be used to head gracefully for the exit. Sell.
Questor says: sell
Ticker: PRES, ITV, KETL, ESNT, COA, TIFS, IPO
Share price at close: 27.5p, 59.82, 121p, 210.5p, 52.1p, 123.2p, 60.8p
Russ Mould is investment director at AJ Bell, the stockbroker
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