One of the first shares to attract my attention in the mid-1970s was a financial company called First National Finance Corporation (FNFC). The lender had been saved from bankruptcy twice by the Bank of England in the banking crisis a few years earlier and its share price was below a penny. I realised that I could buy 10,000 shares and still get change from £100, the most I could afford. Of course, I didn’t. Some ten years later, the company was taken over for more than £2 a share.
Peter Lynch, the renowned manager of Fidelity’s Magellan fund, coined the term “Tenbagger” in his book One Up On Wall Street for shares that had multiplied tenfold in value. But 100-baggers are of a different order of magnitude. They are rarely encountered and almost always involve recovery.
Apple’s share price has multiplied more than 400-fold in the last 18 years, but back then it was a recovery rather than a growth story. It seemed that the Apple Mac, though widely regarded as having a superior operation system to Microsoft-powered personal computers, was losing the battle for market share. The group’s share price had fallen by 75% in two years, although it was also affected by the bursting of the technology bubble.
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Closer to home, Britain’s most successful retailer, Next, emerged from the menswear chain J. Hepworth in the early 1980s, initially with just four shops. It was so successful that it expanded rapidly, with the other chains in the group being converted to the Next brand. Merging with the mail-order company Grattan paved the way for Next’s move into mail order and hence online shopping. It was ultimately critical to Next’s success.
Nonetheless, its integration, combined with Next’s overexpansion and the downturn in household spending in the early 1990s, nearly brought Next to its knees. The shares fell to 17p, marking a decline of more than 95%. Today, however, the stock sells for more than £60, making it a 350-bagger.
Recovery pick or value trap?
Interestingly, its current CEO, Lord Wolfson, once told me that as a student he had telephoned his father, then chairman, with the shares at 17p to ask him whether he, with £1,000 to spare, should buy the shares. His father said that he should have done so, but asking him had made his son subject to “insider trading” rules, so he couldn’t.
Few recovery shares in the 1980s and 1990s multiplied 100-fold, but there were many that still performed spectacularly, including BP, Asda, WPP and British Aerospace. Inevitably, though, we remember the winners, not those that didn’t make it, which makes investing for recovery sound much easier than it is.
Shortly before they go bust, shares can appear to be a fantastic recovery opportunity when in truth their business model is broken, their competitors have overtaken them, their market has disappeared, or their finances are shot to pieces. Overoptimistic investors are inclined to buy largely because the shares have fallen a lot or are seen as takeover prospects – and almost invariably buy too early even when the recovery opportunity is real.
Twenty years ago, recovery funds and trusts thrived and looked set for further success. But then, imperceptibly, the strategy stopped working. Change resulting from globalisation, technology or government intervention meant that companies in trouble no longer seemed to have the time or opportunity to turn their businesses round. The banks failed to mount an enduring recovery from the global financial crisis; the major energy companies have continued to spiral downwards and many retailers have headed for oblivion, taking their landlords, such as Intu, with them.
Archie Norman, who turned around Asda in the 1990s, achieved much with ITV as chairman, but its fortunes and share price have spiralled down since he left. Now he is struggling with M&S. Rupert Soames achieved success as chief executive of Aggreko, but Serco has proved to be a bigger challenge than he realised. Capita survives, but has not recovered.
The tobacco companies, BAT and Imperial, prospered by focusing on their core businesses and consolidating while the major miners are pulling their businesses round, helped by firmer metal prices. On balance, however, the successes have been few and the disappointments many.
The best opportunities in a generation
The Covid-19 crash may offer the best opportunities for a generation. Many businesses, especially those related to travel and entertainment, have suffered terribly from restrictions imposed by governments. However, if they have the financial strength to weather the storm, they also boast the best potential to recover strongly when it has passed and vaccines are available...
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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