Best stock investments
I don’t look at non-US newsletters all that often, but we do have a nice core of readers outside of North America, particularly in the UK and Australia, so I like to take a gander from time to time at the newsletter pitches being spun out by publishers in those countries.
And this one certainly caught my eye, because even though they load up the excitement the investment case is fundamentally pretty reasonable — there’s no promise of 10,000% gains, and it’s a real and profitable company they’re hinting at. Sometimes you just need to sit at your kitchen table and eat your simple breakfast of toast and coffee, and not dream about eggs benedict and mimosas under a thatched roof in the tropics.
The pitch is from the Motley Fool Share Advisor, which has been around for several years as the Motley Fool’s attempt to fully flesh out its UK operations — much like Agora before them, the Fool and one or two other large US financial publishers have spread their tendrils around the world (or, at least, the English-speaking part of the world) in search of a way to expand their brands and build their mailing lists. The ad letter comes from Mark Rogers, who apparently is now co-advisor for that newsletter, and they’re trying to get you to sign up for a £79 subscription (normally £149, naturally). That’s about $112 at today’s exchange rate, by the way, similar to where the Fool usually prices their flagship Motley Fool Stock Advisor for US customers.
Here’s the lead-in to the ad that caught my eye — at first, I thought this was another one of those 3D printing ads about manufacturing being dead (don’t worry, it isn’t):
“R.I.P. for British Manufacturing?
“Not So Quick. Hidden Along the River Wyre, a Phoenix Is Rising from the Ashes…
“How One Lancashire-Based ‘Invisible Dynamo’ Is Quietly Staking Its Claim as a World Leader in the Aeronautical, Medical, Energy, Automotive and Smartphone Industries
“INSIDE: Your Opportunity to Get in on the Ground Floor of what I’m calling ‘A Powerful NEW Industrial Revolution’”
This ties in nicely with the local news, since big steel company layoffs in Wales and elsewhere (most recently by Tata Steel) have folks worried about the competitiveness of the UK’s manufacturing base. Here’s more from the ad:
“But not all is doom and gloom in the world of British manufacturing.
“As the dying embers of UK steel production slowly smoulder out, you could be forgiven for missing a powerful ray of hope… in our own back garden.
“It’s time you were introduced to an unheralded, world-leading British company which finds itself in the vanguard of what I consider to be an exciting new ‘industrial revolution’.
“Deep within this nondescript industrial estate in Lancashire, lies what I like to call ‘Britain’s Invisible Dynamo’. A media-shy, ‘under-the-radar’ company — busy producing a breakthrough 21st century plastic.
“Stronger than aluminium… more durable than titanium…and 70% lighter than steel …
“This new-age polymer is already a key ingredient in automobile engines, iPhones, the Boeing 787 Dreamliner, medical implants and dental applications. (More about these in a moment.)”
Man, there’s something about British speaking that just makes you think the Queen is about to walk into the room. That extra “i” in aluminum is almost enough to make me drop to my knees and start saying “mum.” It’s no wonder that Wall Street bigwigs were so obsessed with the fashion of hiring English-accented secretaries, some of us former colonials just can’t help thinking there’s something special about the home country.
But anyway, that’s the basic idea of the pitch — that despite the fact that the UK steel companies are (like most steel companies around the world) getting crushed by Chinese competition, there’s still money to be made in high-tech manufacturing… or, as Mr. Mcguire said to Ben Braddock, “plastics.”
This is the most hyperbolic part of the ad:
“I believe its shares are currently undervalued – and may offer UK investors a sterling opportunity to get in on what could be the beginnings of a major technological advance.
“Who knows? It could be to the medical industry what micro-processors were to PCs…
“To the Oil & Gas industry what GPS was to mapping…”
I don’t know whether it’s the weaker free speech protections in the UK, or the different investor protections, but I’ll take that “understated” hype over the “we’re going to cure cancer and get you a 40,000% return” pitches any day of the week. I doubt it works as well as an ad, but that doesn’t bother me so much — it at least sets more reasonable expectations for investors.
So what is the stock that Mark Rogers says is “One of the UK Stock Market’s Most Underappreciated Gems?” Here are a couple more clues:
“It’s boring, obscure, and downright mundane. Are you OK with that? I hope so. In fact, that’s one of the things I like most about this £1.3bn juggernaut.
“You see, I get excited when I spot a business producing something essential… stuff that is exceptionally well made… selling at tremendously high margins… but almost no one is talking about it….
“This Lancashire-based firm specialises in the production of a highly versatile form of plastic known as polyetheretherketone — or mercifully, PEEK for short….
“According to the company, their PEEK product is one of the highest performing engineering thermoplastics in the world….
“PEEK is extremely durable, and 70% lighter than the materials traditionally used in cars and aircraft. It’s chemical resistant, can deal with extreme temperatures, it can be used reliably inside the human body without risk of poisoning, and it’s recyclable too….
“The company’s website makes a bold claim: ‘It’s Time to Scrap Metal.’”
We’re told that this company is making materials that go into Apple’s iPhone, as well as dental and spinal implants (and that implant division now represents 26% of profits)… an that they’re “stepping up the value ladder” to become less and less of a simple raw material supplier as they tailor their products to specific markets.
And the understated Brit’s version of hype, again:
“Bottom line: I consider ‘Britain’s Invisible Dynamo’ to be a solid long-term buy-and-hold opportunity at today’s prices.”
Guesses? Don’t worry, we’ve got an answer for you — but first, a couple more specific clues so we can be 100% certain:
“… priced at 14.4 times expected earnings over the next 12 months…
“… no debt, £53m cash in the bank, a potential 6% yield on offer (that’s factoring-in a projected special dividend payout)… £263m in sales.”
So yes, we can tell you that the Thinkolator’s got this one nailed: they’re teasing Victrex (VCT in London, VTXPF OTC in the US). The US OTC shares trade very infrequently, probably due to lack of interest, but it’s a decent-sized company (market cap around $2 billion) and volume is reasonable in the UK, so I would assume that most US brokers should be able to clear orders for you using the OTC symbol as long as you bid slightly above the current price in London while the London market is open (so, before 11:30am EST).
This is when I should insert my standard disclaimer about trading OTC or “pink sheets” or “grey sheets” stocks, even when the company is fairly big and “real” and has a meaningful trading volume in their home country. Trading OTC (that means “over the counter,” by the way) stock symbols is fundamentally risky, particularly in cases like this where there’s no real US volume — so if you’re ever tempted, be sure to research the company well, you would own the same portion of the same company as those who trade the shares directly in London, but these are not positions you can trade in and out of easily so it helps to be quite committed to a long-term hold. I always suggest trading on the home exchange if you can, I like using Interactive Brokers for direct access to the London market (and Hong Kong, Australia, etc.), but many other brokers will also allow you access to some overseas markets or trade direct in London for you if you call them, sometimes with a higher commission rate.
Victrex does indeed have a large PEEK plastics plant in Lancashire on the River Wyre, just outside the seaside town of Blackpool. And they have been trying to move up the “value chain” and sell more customized plastics and more finished products to their customers. Essentially all of their business is outside of the UK, selling plastic gears for automobiles or plastic tape to aerospace companies or plastic films to phone manufacturers… you get the idea, they do essentially all of their manufacturing in the UK, and export 97% of it, so keep in the back of your mind that this is also going to be impacted significantly, at least over relatively short periods of time, by exchange rates (their expenses are mostly incurred in Pounds, they sell to customers who work in Yuan or Dollars or Euros, the stock trades in Pounds, most Gumshoe readers would then translate the stock price back into Dollars, etc.).
And to my eye, it looks relatively appealing but not at all urgent — they reported just a week ago and there won’t likely be any news for quite a while, so you can likely take your time and research it if you’re interested.
The good? They do pay a solid dividend, which has been growing (and they pay a special dividend in many years as well); they have been consistently growing revenues, earnings and dividend over the past five years; they don’t have any debt; their margins are fantastically high for a manufacturing firm.
The bad? The first half of the year, announced last week, was weak, with double-digit drops in revenue and earnings (they say they’re going to make that up in the second half), and even though they have generally been growing they typically haven’t grown very fast — sometimes the performance has been effectively flat year over year (growth of 1% or less); they aren’t dirt cheap at roughly 15X earnings; as an exporter, they may well face serious headwinds if the UK pulls out of the European Union; oil & gas is a significant part of their business (for piping and valves) and has been obviously weak; and the consumer electronics revenue, perhaps partly because of shifting iPhone volume throughout the year, looks “lumpy.”
The “I don’t know?” I don’t know what the competitive landscape is like for their PEEK product or thermoplastics in general, or the future growth prospects, and I don’t know whether they have a real competitive edge. They seem to have a solid niche, given the specialized nature of many of their larger product lines, their stated move away from commoditized products, and their high gross margins, but they’re quite small and this is the first I’ve ever looked at the industry at all.
The brief press note about their interim results is here if you’re curious. The five-year financials (through last September) are here at the London Stock Exchange site. Their latest investor presentation is here. That’s about all I’ve got for you so far — I’m inclined to research it further, given the potential for growing new markets and the fact that they were able to significantly increase capacity but haven’t levered up with debt… but maybe I’m just being a sucker for a relatively low-hype ad.
The company did actually get a passing Barron’s mention a couple weeks ago, because it’s the largest holding in the T. Rowe Price International Discovery mutual fund managed by Justin Thomson — so lest you think it’s completely unknown, here’s what appeared in print on April 2:
“The fund’s top holding is Victrex (VCT.UK), a specialty-chemicals business that makes a high-performing plastic called Peek, which can replace metals in areas as varied as aerospace, automotive, medicine, and offshore oil-drilling. ‘It’s as strong as steel but lighter and less brittle,’ Thomson says. ‘It is developing new applications in conjunction with its customers, and not just waiting for the market to come to it.’”
It’s your money, though, so what matters is what you think — so please, dig in and let us know with a comment below. Thanks!
– Best stock investments