Investors’ Chronicle: JD Wetherspoon, IG Group, Argo Blockchain

BUY: JD Wetherspoon (JDW)

Wetherspoon’s current challenges — reflected in share price weakness in 2020 — present opportunities for investors, writes Megan Boxall.

Previous recessions have sparked a decline in property prices, which presented opportunities to well-funded companies. That is the thinking behind JD Wetherspoon’s £93.7m fundraising. Institutional investors who backed the placing — including its largest existing shareholder Columbia Threadneedle — agree with the logic. The company raised the full amount it was asking for at 1,120p a share — only a slight discount to the mid-market closing price of 1,183p a day earlier.

Private investors, who have been diluted by this placing, will hope that the money can help Wetherspoons replicate its last post-recession performance. Between 2009 and 2019 the company opened a net 185 pubs and increased average weekly sales from each pub by almost £20,000. 

Not all pub groups will be as well funded as Wetherspoons and opportunities are almost certain to emerge as peers go out of business — government restrictions have made it almost impossible for smaller businesses to survive. Curfews, lockdowns and a ban on takeaway alcohol sales have reduced Wetherspoons current revenue to zero, while pre-Christmas restrictions removed the seasonal spike in business that most pub groups usually enjoy. 

The company also points to the fact that it spent £13m on measures to keep its establishments “Covid-secure”. That expenditure offsets the aid offered by furlough schemes and business rate reductions — support that is set to unwind far too quickly.

Margins are weaker at Tim Martin’s company than they are at some of its peers, so investors looking for more certainty from a pub group should perhaps look to Youngs. But the fundraising is grounds for optimism.

BUY: IG Group (IGG)

The recent bitcoin price rally has been good news for IG whose crypto asset holdings tripled in value in the six months to November, writes Alex Newman.

A strong set of interim results for IG Group were trumped by news of the investment platform’s proposed acquisition of fast-growing US online brokerage tastytrade, in a $1bn (£733m) deal funded by $300m in cash and the issue of 61m new shares.

Founded in 2011, tastytrade comprises two entities: a financial education network with an audience of just under a million “knowledgeable” traders, and a fast-growing online options and futures brokerage in the world’s largest derivatives market.

As is standard practice, IG shareholders have been assured the transaction will prove accretive to earnings per share — albeit by low single digits and on an adjusted basis — in the first full year post-completion. The company points to minimal risks associated with integration, client attrition and absence of cost synergy targets as sources of optimism.

Numis saw this is as reason to lift its adjusted earnings expectations to 63.7p per share for the year to May 2022, though FY2021’s forecast was held at 72.3p. Some investors will require more convincing, judging by the muted immediate market reaction to the deal.

One concern could be valuation. IG is paying just over 20 times’ tastytrade’s pro forma pre-tax profits for 2020, a banner year for client activity but one in which the pre-tax margin also slipped from 57 to 42 per cent. By contrast, IG trades on less than eight times’ trailing pre-tax profits for the 12 months to November, while margins climbed to 55 per cent for the half-year period, up from 40 per cent the prior year.

Having canvassed plenty of opinion, chief executive June Felix told us she is convinced IG is buying into a long-term secular shift toward self-directed trading, rather than a Covid-inflated bubble. “This is not Robinhood, this is a deal focused on customers who know what they’re doing,” she said.

Nevertheless, wherever retail-focused derivatives platforms go, twitchy regulators are never far behind. What assurance does IG have that tighter market oversight is not coming, particularly with the incoming Securities Exchange Commission chairman Gary Gensler yet to lay out his priorities?

“No one can predict regulation,” acknowledged Ms Felix. “But this is a well-established, well-regulated business today. There’s much more understanding of equities markets [in the US], of which options and futures are a sub-set.”

Shareholders can at least take comfort from a proactive attitude toward the UK financial watchdog, which last week warned cryptocurrency investors should be prepared to lose all of their money. IG says it is winding down its crypto products and positions here.

All of which feels like further vindication of IG’s international push, and a sign that the trajectory is towards growth, however volatile.

HOLD: Argo Blockchain (ARB)

Argo’s share price has doubled since the start of this year. But that ascent has been punctuated by ups and downs, writes Harriet Clarfelt.

Cryptocurrency miner Argo Blockchain has raised £22.4m via a private placement just days after bitcoin served up a reminder of its inherent volatility, soaring past the $40,000 (£29,380) milestone before retracing some of its gains.

Argo, which floated in London in the summer of 2018, announced this week that it would issue 28m shares at 80p each to certain institutional investors who had already subscribed to the placing.

The group plans to use the net proceeds “for working capital and general corporate purposes”, which it said included the expansion of its mining capacity in the first and second quarters of 2021, bolstering its installed computing power.

Argo says its goal is to run an “efficient mining infrastructure that supports the continued growth, innovation, and function of the world’s top blockchain networks”.

Blockchain refers to the technology underpinning the trading of bitcoin and other cryptocurrencies, removing the need for third-party banks and traditional financial infrastructure partners. As Argo explains it, cryptocurrency mining “is the process of verifying transactions and adding new blocks to a blockchain ledger”.

After escalating from roughly 20p on Christmas Eve to an all-time high of 145p on January 8, Argo’s shares have since endured a rather bumpy ride.

The volatility of cryptocurrencies is one the reasons behind mounting concerns about the risks they pose to ordinary investors. The Financial Conduct Authority warned this month that consumers buying into high-return cryptocurrency “should be prepared to lose all their money”.

That said, some might argue that those seeking to engage with the crypto market would be better off looking into “pick and shovel” plays — the stocks facilitating cryptocurrency transactions, rather than the digital assets themselves.

Chris Dillow: Gold and inflation

Gold has been a fantastic protection against inflation over the very long run. It has kept pace with 2,000 years of wage inflation. It’s been a fantastic long-term store of value.

In the short term it’s much less obvious that gold protects us against inflation. There are two different ways of looking at the numbers here.

One way is to consider the correlation between annual inflation and annual changes in the sterling price of gold. If gold protects us from inflation, this correlation should be high. But it’s not: it’s been just 0.28 since 1971.

In fact, gold has been poor protection against inflation even over quite long periods. In sterling terms, it was lower in 2005 than in 1980, even though the cost of living tripled in this period.

We can put this another way. If gold were a great short-term hedge against inflation its price in real terms — that is, adjusted for inflation — should never fall. But it can do so, and by a lot.

But there’s another perspective here. Instead of looking at actual inflation we can look at expected inflation, as measured by the gap between conventional five-year gilt yields and their index-linked counterparts. If we look at the 10 biggest annual rises in this measure since data began in 1985, we see that gold rose on nine of these occasions. This suggests that gold can indeed protect us against fears of inflation.

In truth, though, the ability of gold to protect us from inflation depends upon why inflation rises.

There are some types of inflation that do see gold do well — such as those caused by rising commodity prices or a fall in the pound.

But there’s another type of inflation which can be bad for gold — that caused by a cyclical upturn. Such upturns can see gold fall for two reasons. First, stronger economic growth can increase investors’ appetite for risk, causing them to dump safe haven assets such as gold. And second, economic upturns raise expectations for interest rates. And because gold pays no interest, it becomes less attractive when investors anticipate higher returns on competing assets such as cash.

It was for these reasons that gold did badly during the late 1980s inflationary boom and during the 2010-15 upturn.

This is a problem, because if inflation does rise in the next couple of years it is likely to be the result of a stronger economy, in which case gold might not do well.

Now this does not mean you should dump it. For one thing, the Fed and Bank of England have promised to keep interest rates low until the economic recovery is secure — and if interest rates don’t rise much, gold won’t fall much. And for another, this upturn might be largely already discounted by equities — and if shares don’t rise much the safe-haven demand for gold will remain strong.

Instead, we should think of gold as a protection against some types of bear market in equities — such as those caused by investors becoming more risk-averse. This makes the metal worth having, regardless of your opinion about inflation.

Chris Dillow is an economics commentator for Investors’ Chronicle

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