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I've spent a lot of time trying to understand economic cycles and believe history can tell us a great deal about the future. For what it's worth this is my reading of the situation that will inform my buying, selling and shorting decisions over the next 5 years or so. It is purely my own opinion based on what I think I've learned.
We are currently just over half way through the current economic cycle. At this stage I would expect a huge economic boom to start by the end of this year which will end in a huge crash around 2026/2027. I've looked at the most recent boom and bust particularly in the context of SIG. The last boom really got going in 2002/2003. SIG was trading at 129 at the end of 2002. By the peak of the boom in 2007 SIG was trading at 1112, an increase of 760%. The crash followed shortly afterwards and the share price plunged to 85 by 2009, a drop of 92%. This performance was broadly typical of a lot of construction stocks.
So my strategy is currently to buy as many decent construction stocks as I can before the boom really gets going and to sell before the crash. SIG is my biggest holding but I have another 34 stocks which I plan to add to once I get mine and my wife's next ISA allowance. Given the unprecedented amount of money governments are throwing at the world economy I believe we will experience the biggest boom of all time. The downside to this is that we will then also experience the biggest crash of all time.
So I'll be holding onto my shares for the next 4 or 5 years then will sell before the crash. I'll be making good use of stop losses on my portfolio. There should be plenty of warning signs before the crash happens. Once the crash is clearly underway I'll be doing a lot of shorting.
For those of you interested in knowing a bit more about economic cycles you could do worse than start here (I have also invested heavily in property over the last few years):
https://www.propertygeek.net/article/the-18-year-property-cycle/
Madmick -- you're very right that eventually we will have a very big recession.
Business cycles generally comes from the Keynesian camp of economics. Before that, Marx did a lot of deep thinking here too. These two schools of thought basically say that -for many many reasons - crises are inherent and inescapable in capitalism.
Keynesians, neokeynesians and New Keynesians focus on animal spirits (I'm actually doing research on herding these days), sticky wages, insufficient aggregate demand, uncordinated investment/savings in the system and many more, oligopolies/monopolies and many more.
Marxists focus on overproduction and dwindling profits as a cause for recession (very relevant these days). They also stress the role of capitalist.resource wars (to find Weapons of Mass Destruction... haha).
Then we have the role of supply side schocks. Such as the oil recessions in the 70s. Or protectionism and trade wars after Brexit.
And of course other external shocks such as the nature we strangle and even pandemics. And many other theories and reasons for worry.
The obvious thing most recently is that governments, households and corporations have taken a lot of debt and the West is facing all sorts of structural/trade headwings. Dwingling profits and massive costs. In the UK we also managed to shoot ourselves on the foot with Brexit (cutting ourselves from our biggest market on the planet, with no solid plans to replace it quickly or ever).
My point is: We will have a massive recession. But with all these things running in parallel and even combining... it can happen much faster than we think. Government intervention is nearly spent monetarily and running out of ammo fiscally -- we can't rely on it for too long.
You make some excellent points Prof. My feeling is that there is plenty of credit about which is easing by the day (5% deposit mortgages a recent example) which will cause a boom to occur. Once credit starts to tighten then I’d expect a recession. I’m guessing this is about 5 years away but as you say it could be sooner.
Given the unprecedented amount of stimulus, I’m expecting the biggest boom of all time followed by the biggest crash ever.
Only time will tell!
Madmick62 thanks for your post. "Biggest boom of all time followed by the biggest crash ever"
But the stockmarket is " forward thinking" and therefore the SP' s we currently see, with the exception of SIG, currently reflect that " boom." How much higher can SP's go when in a lot of cases, they have returned to pre pandemic levels. This is the case with some hospitality and pub stocks, despite the fact they have been closed for a year. I feel the markets will go down from now and will take at least 2 years to get back to where they currently are. With SIG if there never was a pandemic, I still feel we would be little over a quid, a takeover bid of £1.50 would have gone through. We have less debt now, but more shares, so I feel the SP may get to 60p in the next few weeks, I hope it moves up from there.
I wouldn’t be surprised to see a significant stock market correction this year (around May time). My cycle theory then says there will be a prolonged bull market to about 2026 followed by another big correction.
In the last boom the FTSE 100 went up about 75% in the corresponding timeframe. Most construction stocks including SIG did significantly better. Given the mega amount of stimulus I’m expecting the biggest boom of all time. Worldwide there is unprecedented infrastructure spending being unleashed. This all should lead to huge increases in asset prices.
Now this is only a short story. Sig needed support. Francis had come in in February, looking around. Maybe CD and R too, as they always will be, but must have been doing due diligence on this round about then. They talk. ( he must be their man anyway? ) In the end they came up with what they did, supported by the then largest shareholder IKO., at a time when the price was teens, 20s - shaky anyway. Francis told shareholders if the CD and R proposition was not accepted, outright acquisition was one of the options. Perhaps CD and R wanted the whole thing, but at 50p. And IKO may have said, no good to me. I been supporting this for yonks, and I need 60p and a fair bit more to make it worth my while before that can work for me. And you're looking to do alright. You believe you can turn this around. So do I - it's all there, just need some cash in the bank, better management, and a bit of tarting up. And when Covid starts getting sorted, and construction takes off proper - we know what's going to happen there, helping the economy and all that - things'll improve no end. So I think it's fair to say I need at least my money back, and that's very much bottom line mind, and if you want to do just under 30% I'll support it. But no games. None of this buying 30% and then being 'forced' into a low bid. I need a bit of reassurance on that. And so will other shareholders - they're in this up to their eyeballs too. So Francis says OK, he'll write all that into a relationship agreement, with other stuff addressing their (joint ) concerns. ( board membership, maybe something on the circumstances under which a a bid may be made by CD and R, whatever else, as per my previous post )
And in the end, if not ecstatic, they were all happy, content that each would do OK, no one was going to have anybody else over, and had tea and Jaffa cakes. And C D and R got a big bill from Clifford Chance for helping. But they didn't worry, it was just a drop in the ocean.
Raleigh, I’m not sure on your theory wrt CD&R and SF. Perhaps the former was looking at the same time as SF’s appointment but that would have been coincidental. Here’s why I don’t think the two are directly linked: SF was appointed long(ish) before COVID. Then the virus hit and the Government relaxed the rules on company takeovers and funding. This relaxation allowed the PIPE without having to go through shareholders. The rules are now back to normal making PIPE less attractive.
What IKO and or CD&R do from here has the potential to be proper exciting. For what it’s worth, I’m still with you on the concept of 60p+
I am not sure on my theory either, hence the?
My understanding is it was effectively put to shareholders, including proxy votes, ( a "Covid" General meeting ) on 9th July, following circular.
"The passing of Resolutions 1, 2, 3 and 4 will enable the Company to proceed with the Capital Raise. "
CD&R Investment, the Firm Placing and Placing and Open Offer and the Directors and Senior Management Subscription are conditional upon, among other things, the approval of SIG's Shareholders at a general meeting of the Company which will take place at 11 a.m. on 9 July 2020 (the "General Meeting").
Mick, what makes you say the month of May? I dont really buy into cyclical theory but interested as to how one would come up with that date? I would have thought if there was even the remotest certainty of that date then that would have been priced in throughout the market already....the market discounts everything.
I’ve looked at what’s happened in the past in an effort to try to see what the future holds. I’m a very strong believer in cycles and have studied them going back hundreds of years. I’ve also studied what WD Gann predicted and his predictions have on the whole been stunningly accurate.
That said no one can predict the future with certainty but based on everything I’ve studied I feel it is likely that there will be a market high in early May followed by a correction then stocks will rise again to eventually end the year roughly where we started it. Then in 2022 we should experience 3 to 4 years of a strong bull market before a huge crash in 2027ish.
Only a couple of months to find out if I’m right.
Gann angles perhaps to determine possible areas of resistance or support is one thing but to use them to define future trends is another. Still, i agree the possibility of a crash is a very real one when all this fiscal stimulus runs out.
When I refer to Gann it’s in reference to his Financial Timetable that has been amazing at predicting the fortunes of the stock market.
Happy sunday folks.New to the board,just popped in to have look.Madmick read your posts with great intrest.
Agree with what your saying.Think there will be a boom and bust.But think the boom will be tied to the fed.
They seem to be messing with the 10 yr yields.
Think the recent sell off was down to 10 yr yeild and dollar both rising at the same time.Thurs Fri.The buy back late Friday came after the Bank of America mentioned Yeild curve control.Also operation twist (worth researching both).
If they go ahead with it then stock market will rocket.
How long b4 it goes bang,who knows but the fed does.
Anyway back to sig any reasons not to be buying in.
Appreciate your thoughts folks
All the best
Jefff,
I'm new to SIG, reasons why i invested, second biggest in its field (competitor is getting bad press due to Grenfell), housebuilding/ green theme, already established in UK and Europe, money will be spent UK/European side on infustructure, pure value at this price and I would consider it a UK recovery stock in a portfolio.
Downside, rising costs may hamper profits if not managed, remains to be seen on the medium to long term that management has a grip of sector and all the usual other external factors such as further lockdowns, stock market melt downs etc.
On the whole upside to me outweighs the down.
Hi Jeff, welcome aboard. I agree that what happens in America will determine to a large extent what happens to the global economy. So far from what I can see the recipe for a huge boom is cooking quite nicely at the moment.
As far as SIG goes there is quite a bit of negativity about the stock on Stockopedia. I subscribe to the service and think it is excellent and would strongly recommend it for anyone interested in stocks and shares.
Stockopedia is flagging a strong bankruptcy risk. It uses the Altman Z2 system which gives a very low score of 0.18. There are 4 metrics this system uses and SIG fails them all.
1 Liquid assets are not a significant proportion of the assets.
2 Reinvested earnings do not make up a significant portion of the assets.
3 The assets are not relatively productive in terms of earnings.
4 The firm does not compare favourably to its liabilities.
A dividend is not currently being paid and the company is currently loss making. There are other negative factors as well such as Return on Capital at -27.9% and Return on Equity -73.0%.
As a newbie I’m not yet knowledgeable enough to check the above out properly.
On balance and maybe due to some naivety I’ve made SIG the largest part of my portfolio but given what Stockopedia is saying I’m prepared for things to possibly go horribly wrong. I’ve made sure I’ve got a stop-loss in place.
I hope this post doesn’t come across as too negative because I do feel the company has got a lot going for it and hopefully will deliver a stunning performance over the next 5 years just like it did during the last boom.
Hi Highlander, I think you are referring to Kingspan as SIG’s biggest competitor. I used to work for SIG and Kingspan weren’t a competitor. They were a supplier. Broadly speaking Kingspan manufacture products and SIG distribute them. SIG are probably Kingspan’s biggest customer and the companies work very closely together.
SIG were so dominant in the market as a distributor that I can’t think of anyone that comes close to them in terms of the distribution of insulation products.
Madmick:
I'm very glad to hear that SIG are by far the greatest provider of insulation. I understand that they have a very big presence in other building materials too.
I know that Kingspan is not just a manufacturer of insulation. They own B&Q which has a very substantial presence in insulation and they service tradespeople too. Here's a link:
https://www.diy.com/departments/building-supplies/insulation-damp-proofing/constructional-insulation/insulation-boards-cavity-slabs/DIY754045.cat
And this is precisely the issue with insulation: After the Grenfell tower (where nearly 80 people were burned alive and there's a criminal case in the courts about the insulation material used), my personal guess has been that many traders will stop shoping at B&Q and other similar outlets and go shop to SiG. Why? Because SiG are true experts and it's best to get some proper advice on what to use. Even the Grenfell tower architects didn't know what they were doing with insulation from what I understand. SiG have been around since the 1950s and have true expertise on the field.
Please don't listen to stockopedia for any predictions and advice on shares. They are full of nonsense and obscure metrics that seek to dazzle people and add an air of "science" where there actually is no science. Up until a couple of weeks ago they had completely wrong data about SIG. For example, they mentioned that SIG had 600m shares whereas in fact they had 1.2bn shares.
And now they claim that SIG's liquid assets are not a significant proportion of their total assets? That actually made laugh. SIG have over 220m in the bank, in cash. That's a liquid asset and it's very very high for a company with market cap under 500 million.
I'm not an expert in Altman's ratios (he was an academic in the US) but I do know that they are purely descriptive and not predictive. What that means? It means that they have absolutely no predictive power when you re-capitalise, change your board, the UK/EU governments are splashing out in insulation/construction, when you have new patents or your old talent decides to come back to the company.
Altman's ratios look back and tell you what's there. They don't look forward.
SIG is a great investment opportunity and a multibagger precisely because the market has priced it as a failing company BUT all indications show that they will recover, will recapture market share and produce big profits (in the years to come, not tomorrow. Although the market will price that in before these years actually pass).
Jeffff asked about any reason not to buy SIG. Yes, there are:
1. It can take years for the SP to reach its previous levels -- perhaps there's a quicker multibagger elsewhere?
2. I'm pretty confident that SIG will stop being loss-making BUT I'm not entirely confident that their functional profit margins will ever exceed a low percentage. What that means: The sp will definitely rise but we don't know by how much
3. Wider market do
And: "Reinvested earnings do not make up a significant portion of the assets"
Seriously?
CD&R came along with 90 odd million of an investment. There has also been a recapitalisation by all other shareholders. All that money is "investment" and it's a massive percentage of their market cap (over 200m). These 200 million allow Francis to re-open closed branches, invest in brand new branches, get the old talent back, invest in new patents etc.
Check this out:
https://professionalbuildersmerchant.co.uk/news/sig-opens-london-warehouse/
For a company with market cap of under 500m, there's been TOO much investment if you ask me...
Seriously, these stocko gurus need to come back to uni and study some more.
Hi Prof. I’m a great admirer of your analysis and feel you make a lot of great points. This forum is very lucky to have you.
I’ve invested in SIG despite what Stockopedia says about the company. I’ve got a lot to learn and use the site as my first point of call for research into what shares I should be investing in. I know from some of your previous posts that they don’t get everything right.
I’m doing my best to try to curb my confirmation bias tendencies as part of my education so am trying to learn how to do proper research on anything negative I find. Your posts are helping with this process.
It’s been 12 years since I last had any dealings with SIG. Do things will obviously changed in that time. From what I’ve recently read about the company it seems they lost their way a bit due to poor management but are now trying to get back to where they used to be.
I’ve just done a Google search as I was surprised that Kingspan owned B and Q. From what I can see B and Q is owned by Kingfisher not Kingspan.
Unless things have changed a lot in the last 12 years Kingspan will not be involved in distribution. Typically manufacturers were not geared up for distribution and much preferred the route to market to be through specialist distributors and and other non specialist distributors such as builders merchants. The larger orders tended to mainly go through the specialist distributors such as SIG.
SIG easily led the market and despite their problems it seems they still do. They always got the best terms on products (I also used to work for one of their competitors) so know this first hand. I also used to work for the market leading manufacturer of fire protection boards and we always looked after SIG better than anyone else. They had immense power with manufacturers.
They were also very strong in the dry lining market (plasterboard) and probably market leader.
They did have the best expertise in the industry and tended to buy the competition if they were causing them a problem.
I suspect not too much has changed in terms of their dominance of the market and am very hopeful they’ll turn things around and become very profitable in the near future.
Kingfisher owns B and Q.
And as far as I know, it's focus is on trade customers.
"It has stong positions in its core markets on insulation and interiors, and roofing and exteriors. SIG is focused on specialist distribution and merchanting of products for business customers across the construction industry."
As I mentioned on Kingspan's results ( price up and up again today ) there is the strong possibility of a read across for Sig both for the new year start post results period and the outlook.
"2021 has started well, helped by strong backlogs at the turn of the year."
and
"The climate action agenda continues to gather pace globally. With energy from buildings accounting for roughly 40% of all emissions, a more thermally efficient building envelope will be vital in curtailing global temperature rises. Insulation will be central to this effort."
That’s right. Anyone can buy products off SIG but their business model is focused on trade customers. They have a sales force that actively visits large trade customers. In branch they will have specialists that focus on specific areas of the business such as dry lining. Then they have a telesales force that has a general knowledge of all aspects of the business who can then call on further expertise of the specialists. For example I was the fire protection specialist.
Companies such as B and Q will service the DIYer and smaller builder. That said there is nothing to stop this type of customer dealing with SIG if they wanted to. There is no bar on ‘retail’ customers.
Madmick -- thanks for spotting my misunderstanding about Kingfisher, nobody else on here did. I confused the two kings... I'm an academic, not into construction myself (and it shows sometimes).
Also thanks for providing an expert construction view on SIG. I hadn't realised they had such a dominant position in the insulation market.
The big picture and my rationale here is this:
--> 15 billion of revenue on insulation will eventually flow to SIGs tills (5bn is offered by the government and all this will need to happen by legislation). And that's just the UK. The EU will be spending 600 billion to green their economy and a few of these billions will be reserved for insulation. If SIG had revenues of just 2bn in the past, that will sure multiply (progressively, over the years, not in a day).
--> the Grenfell disaster (where people burned alive) has made everyone more aware of the pitfalls of using the wrong insulation. Big construction companies and smalled construction companies will now be consulting SIG even more. SIG are the experts in their field and have a long history behind them and nearly 500 branches.
--> The grenfell disaster will allow SIG to boost their margins too. They don't just offer a discounted product --> They offer insulation SOLUTIONS and guidance. That's where the (bigger) money is. That's Francis's startegy and it makes a lot of sense to me.
--> Finally, SIG is changing as a company, for the better. They will be in a position to capitalise on this seismic change in insulation. New board, new talent back, re-opening branches, their own patents, CD&R experts on board (two seats) and about £220m in the bank to make any changes they need to do and invest in whatever they need to invest.
We will just sit back and enjoy the ride to 50p, 60p, 80p, 100p and then eventually 200p and 500p if things turn out great (but that will take years).
My only worry is that CD&R will make us an offer for a mere 50p, 60p or whatever and they'll grab this before it gets the chance to fully flourish for us. Let's see... that's not certain by all means, it's just a likelihood.
gla