By David Schwartz, 31 August 2010
Bulls and bears are finally in agreement. Both are worried about trading prospects in the weeks ahead. Pessimists continue to focus on the possibility of a slide back into recession. Optimists worry that higher taxes and rising unemployment will restrain economic growth, even if another recession is avoided.
Seasonal stock market trends add to the gloom. May, June and September were once regarded as the three worst months of the year for equity investors. But September is now winning this ignominious beauty contest, presiding over a fall in the UK stock market 12 times in the past 21 years.
However, stock market prospects for the month ahead are not all one-sided. It is common knowledge that investors are frequently wrong-footed if there is widespread agreement about future prospects. Also, there is an interesting positive twist in the historical statistics that leads me to be positive about prospects for September.
Despite September’s gloomy reputation, the records show that shares rarely decline in bull markets following an August plateau or a decline like the one we have seen this year. In fact, you have to go all the way back to 1944 to find a September bull market decline following a disappointing August. Even then, the UK stock market fell by a relatively minor 1.5 per cent in September.
So for those who believe, as I do, that the bull market of 2009-10 has further to run, worries about a painful September downturn are of no special concern.
Keeping an eye out
One thing I notice is a change in trading behaviour at the individual share level. Investors are more focused than usual on upcoming corporate announcements. Significant increases in trading activity often occur in the weeks ahead of an update, especially if the news is expected to be good. In contrast, low trading volume tends to be the norm if no business update is scheduled.
This growing focus on upcoming announcements led me to purchase shares in
Until recently, Ricardo did much of its business in the automotive sector. Detroit’s "Big Three" accounted for more than half its US business. The industry was badly hurt by the recession. Ricardo suffered a very sudden termination of all fresh orders and profits fell sharply from July to December 2009, the first half of its fiscal year.
But the company enjoyed a healthy bounce back in its fortunes during the second half. Its incoming order book grew at an escalating rate. Orders were 11 per cent ahead of the previous year in January to April 2010. The gap increased to 16 per cent in May to July.
The recent recession caused Ricardo to make substantial adjustments to its business model. It is no longer as dependent upon traditional Western auto manufacturers as it once was. The company now enjoys increased revenue from the US and UK defence sectors and has developed relationships with auto manufacturers in several booming emerging economies. It also provides services in the marine and renewable energy markets and is considered to be a global leader in the development of clean diesel technology.
To my eye, many of its new activities offer considerable promise for the future. For example, one of its government contracts is for downsizing traditional gasoline engines to reduce fuel consumption. Another is for electric vehicles. The company has unrivalled experience in this area, having already worked on more than 30 hybrid vehicle and battery systems. A third recent contract addresses the concept of an "intelligent electricity grid" that can make use of irregular power sources such as wind power.
The icing on the cake is fresh government emission regulations that will cause a resurgence of revenue from its traditional auto market. Institutions are beginning to take notice and are quietly buying Ricardo shares. Seven of the last eight transactions reported to the public were purchases. I expect a substantial profits improvement in the second-half of the year.
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