BY ADRIAN KEMPTON-CUMBER
CHART NAVIGATOR
Using Fundamentals to Find Failures As regular readers will know, I like to approach trade ideas from as many different angles as I can. This month I'm having a look at fundamentals, like company borrowing, dividend payments and so forth. As interest rates have already started rising in the US, it's reasonable to expect them to rise here in the not too distant future. After years of low rates, many companies have regarded low interest rates as the new norm, and my bet is they've exposed themselves to unrealistic amounts of borrowing. In some cases they've done this simply to prop up failure in normal business, or to maintain dividends. These – especially the latter – are terrible reasons for borrowing simply because interest rates are low. With rates so low, even if we saw a rise of just 1 or 2 percentage points then the amount of extra interest payable might increase the cost of servicing such a debt by as much as 100%. It's a big deal. It's worth remembering though that many of these companies also have pension black holes – another potentially explosive threat to their balance sheets. So I'm going to look at companies that may be setting themselves up for a fall by doing some logical guesswork based on their own published numbers. It's important to use a reliable source for the data we use. ShareScope is an
excellent package that many of you probably already use. It's the leading share analysis tool in the UK. As well as a host of technical indicators, which
“AFTER YEARS OF LOW RATES, MANY COMPANIES HAVE REGARDED LOW INTEREST RATES AS THE NEW NORMAL, AND MY BET IS THEY’VE EXPOSED THEMSELVES TO UNREALISTIC AMOUNTS OF BORROWING.” I use regularly, it also has a wealth of fundamental data which is useful for just this kind of analysis. You can find literally hundreds of metrics by changing parameters going back up to 11 years, and forecasts into the future for some as well. The point here is the methodology. You might choose to apply slightly different parameters than I will, but that's the whole point. As private investors we find opportunity,
and hopefully profit, in not doing what everybody else does. Don't be afraid to be different. We are probably going to find it easier to identify companies that are likely to fail here rather than ones that are likely to do well. We could use another approach to find the success stories of tomorrow.
James W Copeland / Shutterstock.com WM Morrison (LON:MRW) is a company I wrote about in the Blog recently. I suggested they are likely candidates for a hostile takeover in the supermarket wars that are playing out in our towns and cities. During a period of significantly increased borrowing, they've also increased their annual dividend. We're range bound between roughly 150p and 200p on the chart, and a fall below the range could signify a measured move down to pennies, hence my suggestion of hostile takeover at some point. Borrowing remains high and you can see that it has been increasing while the shares have lost half their value from around 2013.
48 | ISSUE 13 – APRIL 2016 Master Investor is a registered trademark of Burnbrae Media Limited | www.masterinvestor.co.uk