In a way, we're back to the ground we trod last week – everything a manager does is for the good of the thing he manages. That's the team for the football coach, the investment fund for the investor.
You never found Manchester United's Sir Alex Ferguson, the greatest manager of his generation, making flakey judgements because he confused the good of a player with the good of the team. Similarly, Peter Lynch, an outstanding fund manager of the 1980s and 1990s, pithily warned us: "Don't fall in love with the stock because, as sure as hell, it won't fall in love with you." Both understood the brutal truth that players/securities are no more than the means to an end – to get the best possible results for the whole group (the team or the fund).
Besides, Mr Lynch was always happy to churn the holdings in the Fidelity Magellan Fund that he ran. When he quit as manager in 1990, he reckoned he had bought over 15,000 stocks during his 23 years in charge. "No wonder I'd gotten a reputation for never having met a share I didn't like," he once quipped. But his promiscuity hid a purpose – to run with those holdings that did well and quickly discard those that did not.
Bearbull's dilemma is that I still wonder whether I should dump the loss-making holdings in my income fund, bookmaker Ladbrokes (LAD) and aircraft broker Air Partner (AIP). It's not that I fear taking the losses. I can concur with the words of Jesse Livermore, one of the great speculators of the early 20th century: "A loss never bothers me after I take it. I forget about it overnight." Same here.
But, perhaps like Mr Jackett, I wonder whether I’ve found a possible addition to my squad – sorry, fund – that may do better. The one I have in mind is safety-equipment maker Latchways (LTC). In April – when the Latchways share price was 1,015p – I crunched the numbers and reckoned that around £8 a share was a fair price to pay. Today, after another profits warning was followed by a miserable set of results for the first half of 2014-15, the market's 'offer' price is 745p.
Yet the outlook for Latchways is also relevant. The company makes harnesses and anchoring points for people working at height; whether it's, say, on the wing of an Airbus A380 or 300 feet up an off-shore wind turbine in the North Sea. So some of its revenue depends on maintenance spending, but much relies on capital projects. When fewer buildings go up in Europe or – crucially – when growth of Europe's off-shore wind-energy industry stumbles, Latchways suffers. Consequently, in the first half revenue fell by 17 per cent, pre-tax profits by 42 per cent and earnings by 39 per cent.
However, Latchways has been around for more than 20 years, so its bosses understand the stop-start dynamics of the industries it serves. They also know there is growth potential in the developing world, especially as health and safety requirements catch up with the developed world's. This points to a bright future, but there remains the question of the price to pay.
It helps that each Latchways share comes with 90p-worth of cash. Add that into updated valuation models and I get figures comfortably clear of the 745p share price. True, capitalising cash flows – normally my preferred method – produces a less reliable result than capitalising accounting earnings. That's because Latchways usually does little capital spending – on average, just a touch more than its depreciation and amortisation charges. This implies there is insufficient 'development capital spending' – the amount above those charges – to generate future value. However, in 2013-14 capital spending soared. Bringing that contribution into the five-year average produces enough development cap-ex to generate between 150p and 300p per share of future value. Add that to 550p of value from capitalising average free cash flow and 90p of cash and valuation estimates go far above the share price.
Maybe too far to be reliable. Better, perhaps, to use contrived-but-steady accounting earnings as the numerator in an alternative valuation model, where I get a figure still clear of 800p. And, by way of reassurance, Latchways has a good record of turning accounting profits into cash. Over the six years 2009-14, its average conversion ratio was 87 per cent.
This supports the notion that Latchways can do a job in the Bearbull Income Portfolio, especially as its shares come with a 5.3 per cent dividend yield. But maybe not overnight because the share price – a bit like the striker Wolverhampton have just signed – lacks momentum. Ditto Air Partner. Meanwhile, the one where gathering good news seems most likely to turn fortunes is Ladbrokes. I'll certainly stick with that one, but – like Mr Jackett, I dare say – I'll keep reviewing my options.
