To gain a proper understanding of how this company operates a little differently from traditional drillers and miners such as Rio Tinto (LSE: RIO) (NYSE: RIO.US), Royal Dutch Shell (LSE: RSDB) and BP (LSE: BP), it’s helpful to dig a bit deeper into the company’s previous interim earnings statement. At the end of H114, Glencore reported adjusted EBITDA of $6.5 billion, which was up 8.5% on the same year-ago period. Of that, it reported that a chunky $4.9 billion was comprised of operating cash flow.

Compare this to Rio Tinto’s results, where cash flows from operations were just $2.7 billion on the back of similar profit before tax of $6.09 billion. It’s clear that there is a fairly wide berth between what Rio Tinto is doing and what Glencore is up to. But what is the magic ingredient that accounts for nearly double the amount of operating cashflow in the case of Glencore?

Liquid Cash

Unlike major mining companies, Glencore makes sizeable earnings from marketing activities – today, sales and trading – related to a wide range of commodities.

Thus, while commodities prices didn’t fare the best over the first half of last year, strong volumes among copper and thermal coal trading meant that the firm was able to show some stellar earnings results on the back of, in large part, income derived from activities related to brokering these commodities.

Glecore’s comparatively high operating cashflow has meant the company was in the perfect position to enhance earnings in creative ways, which it did by announcing a buy-back of $1 billion of its own stock. That move may prove fortuitous, for it comes just as profitability is on the rise and the company’s share price has begun to look considerably cheaper (Glencore has fallen 17% over the last half-year period). This is a wonderful scenario as far as shareholders are concerned, since they can now expect to participate in earnings increases derived purely from the company’s dividend payouts, compounding upside.

Well Diversified

Glencore works a little differently to traditional mining companies in that it’s really a sort of hybrid broker-miner to the commodities market. (It is from this legacy from which the firm hails from, after all, as the Mark Rich commodities trading company). So in addition to benefiting from multi-directional markets where volumes are high, Glencore’s management team is always focused on making smart, low cost acquisitions of mining and commodities firms where synergies are high for Glencore to roll out its giant distribution model across the global commodities trading floor. Savvy acquisitions such as those of Xstrata in the past few years have thus meant that the company is still getting better value on mining activities than competitors despite a weak market price.

But that’s not all. The company is the most diversified natural resources company around. Compare that scenario to Shell, which is pure-play oil and gas, or Rio Tinto, which is essentially a one-way directional bet on metals prices and it quickly becomes clear how much hidden value lies beneath the surface than can be gleaned from Glencore’s day-to-day market environment.

Distinctions such as these are easy to forget in the midst of the deafening crushing of commodities prices, but they are critical: 42% of Glencore’s earnings come from marketing activities; of combined marketing and mining activities, 14% of earnings are from agricultural products and 16% are from energy products, with the remainder derived from metals.

In other words, it’s going to take much more to impact this broad, far-reaching giant negatively. Given the traditionally higher multiples commodities firms can command, the shares, at 17 x earnings, look like temporary bargain here.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

But that’s a dangerous bet to make: problems that were sparked last year are likely only the start of bigger woes for this chaotically managed company, which is struggling to provide any evidence it can deliver on what appear to be false promises made to shareholders over the last three years.

The company boasts that by taking over Mobile Doctors in 2011, it was able to increase revenue to over £50m, and that a subsequent acquisition of Ai Claims Solutions further increased revenue three-fold and made it an appealing bet to insurers.

On the surface, bold claims of revenue enhancement looked true for a while: last time the company reported revenue for the first half of 2014 it claimed it had made £357.3m in sales.

However, the company’s cash position had by then also dwindled nearly 90%, to £18.9m, and bullish promises of providing all cars in the UK with fleet-tracking devices were looking more like hype than heat.

Alarm bells were rung loud at the end of 2014 when the company’s chairman Robert Terry was ousted from top spot, who subsequently unloaded 25 million shares onto the open market in December. 

A More Defined Target

The real problem with investing in Quindell is that this investment strategy blindly overlooks the key reason investors would want to buy a provider of fleet-tracking software: to capture the potential of being involved in what might become a takeover target in the next 24 months for a major road insurance company such as AA or RAC. 

In an industry with the potential for big market scale, but where hype and over-promotion seems to be the dominant characteristic, you want to look for the companies that are producing real, measurable results for customers where those relationships are likely to still be around in five or ten years time. Those are the companies that make the most interesting potential acquisition targets.

If you’ve made money on Quindell in the recent run-up, and still want to stay invested in the sector, look to a more wholesome and better-valued option than Quindell. 

Quartix (LSE: QTX) offers a compelling investment case. In contrast to Quindell’s perception-before-product approach to doing business, it has been steadily building a nice solid business supplying niche, relationship-focused customers such as Larne Borough Council and Apex Lifts over the past decade, when the technology first appeared on the market. Quartix has been in business since 2001, considerably longer than Quindell’s three-year sojourn around British motorways.

Crucially, Quartix’s management understands what Quindell’s doesn’t: that fleet-tracking device installation is not a one-size fits-all business model. For insurers, it’s only feasible to adopt the software for customers with premiums over the £700-£800 per year mark, since the cost of installation and running it is already around £150 per year. 

A portfolio of strong customer relationships and a solid management team make Quartix a much more viable takeover target than others in the sector, and especially Quindell. Management’s control over its business is borne out in the company’s earnings. The company estimates that it will earn £4.9m in EBITDA during 2014, with a 14% increase in sales to £15.1m; these earnings follow a 40% rise in EBITDA from 2012-2013, so they look conservative. For 2015, the company is promising shareholders a distribution of 50% of free cashflow to shareholders, so the valuation looks sweet. 

That sounds like something with the ring of truth to it, as well as plenty of value and upside: for shoppers such as big insurers looking to get in on the action, that’s usually enough to make them take a closer look.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

So it is in the UK investment banking and advisory market right now. For a real-life example of such trend in action, look no further than gusher Cenkos Securities (LSE: CNKS). Compare the recent rise of this upstart to a dreadful year for top-tier bank, Barclays (LSE: BARC) (NYSE: BCS.US), and it’s easy to see how Cenkos makes for an attractive target for a competitor of pretty much any size bigger than itself.

A Simon Peter That’s Proving The Doubting Thomases Wrong

Last year, Cenkos posted interim profits of £23.5m – representing a 653% increase over the same period in the year before.

While impressive, many investors were a little weary of the results, since around half the company’s H114 revenue came from what looked like a one-time deal: the IPO of insurer AA. However, a round of mayhem in the financial sector mid-year, with Barclays, RBS and Lloyds getting slammed with big fines for mis-selling to their customers, compounded with a slow summer in equity issuances, meant that despite posting stellar profits and showing an increase of 164% in cash on its balance sheet, Cenkos was still trading for peanuts come the end of December. 

Right now, Cenkos is selling for around 5x earnings, despite having proven that it can play in the major leagues with much more established competitors.

With a market cap of £115m, there’s simply no better value publicly listed financial services firm on the UK market right now. Let’s look at some of the most compelling facts for the advisor being deeply undervalued:

• For a start, there’s that famous AA IPO, which pretty much every analyst in the City wrote off as being overpriced initially. Since June, however, the insurer has jumped 36% in value and it still looks cheap after paying off debt. Unbelievably, AA is starting to look like an enviable client.
• Cenkos has also had a number of wins recently fundraising for its other clients, further showing the strength of its distribution power. In the second half of the year, the advisor raised £424.9 million. Those placements will produce an estimated £20-£25m income for that period.
• Accounting only for the income derived from private placements conducted in the third quarter of 2014 (estimated at £15m), Cenkos is still trading at a valuation of less than 10x earnings for the period! On top of that are broking and advisory fees, which add up to another 20% on top at least. Contrast this scenario with rivals such as Numis, where the same multiple for the period is – at its most generous – in the 40s, and it’s easy to see the recent value on offer.

Cheap … But Hardly Just Chips

Barclays looks like a firm with distinctly average pools of talent in dire need of reinvigorating their lacklustre and heavily institutionalised investment banking operation. In the past year, Barclays has posted a 16% decline, wiping out all its shareholder’s 5-year gains and making the stock a 15% money-loser for the period. 

While Cenkos is up just 44% in the past 5 years, more than half of that has been earned in the past year alone. And the company is still a fraction of the price of any other comparable competitor!

Cenkos is exactly the kind of fountain head gushing from the spring with great management, a bulging client base and a healthy cash position that both firms need to look at to take part in what appears to be a return to exciting times for mid-cap stock issuance.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

But not so fast. For while the price of ARM has extended in the last three-month period, so has the stock’s beta (the calculation of its overall price volatility). Beta measures the risk of holding a stock during the period in which returns are being calculated: the higher the beta, the lower the risk-adjusted return.

In the case of ARM, the stock plunged almost 13% in value to a 52-week low over the period before it resurfaced, creating a higher beta value. Thus accounting for ARM’s beta therefore produces a risk-adjusted return of barely 3% or so over the previous three-month period. That no longer looks like such impressive growth. So what does right now?

A New Idea For A New Year

As growth investors, what we want are stocks where growth is consistently being managed – not the stuff that is tarnished by wild interim high-low swings. This is especially important if you like to shuffle money between different holdings as various investment opportunities appear on the horizon.

Of course, technology is a great place to find this sort of growth, as its effect is to streamline costs while producing exponential income. Combine these two forces and you have something resembling constant value creation in a portfolio.

For a company harnessing these kinds of attributes via an interesting strategy revolving around acquisitions, look no further than Ideagen (LSE: IDEA).

Since mid-December, Ideagen has risen in value by a fifth, compounding a year-long 17% climb. (Contrast this to ARM’s recent rally, which merely shortened a 52-week 9% decline overall.)

Ideagen’s intrinsic market capitalisation jumped to £63.5m in December when the company raised £17m for an acquisition it picked up after a new stock issuance that was oversubscribed by a whopping £40m, including 11 new institutional shareholders. The company still trades well below this valuation, making it appear like great value.

Why all the fervour in the City for Ideagen’s shares? Because the company uses tech in tandem with strong management to both increase the earnings and decrease the costs of the acquisition target, creating constantly exponential P/E growth. That in turn means a share price that keeps rising with an impressive risk-adjusted return attached.

Ideagen’s strategy is to make an acquisition, then centralise costs of the target to cut back 10% of overhead while creating cross-selling synergies to drive revenue growth an additional 10%.

Is It A Bird, Is It A Plane …. No, It’s A Superstock 

Ideagen’s acquisition at the end of 2014 of software developer Gael is a classic example of how the company creates value. For a start, Ideagen picked the maker of risk and compliance software – which supplies the life sciences, aviation, healthcare and manufacturing industries – up for a song, at 7.8 times EBITDA.

The acquisition, when spread out across the company’s existing sales channels, is immediately earnings-enhancing. Gael will add £9 million in revenues and EBITDA of £2.3 million to Ideagen’s 2014 earnings, and those earnings are expected to grow at an exciting 24% clip throughout 2015.

In addition, Ideagen picked up 1,000 new customers in the tricky compliance and standards management sector, including various NHS units and complex manufacturing clients.

That’s a value-creation story you’d be crazy not to take part in.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Well, come Tuesday, and the insurer acquired rival Beaumont for a song, sending Jelf shares 10 % higher the following day.

With great companies that are on the up, you can’t afford to sit about and wait for bargains, especially in markets that are a little on the saturated side with poorer-performing companies that hold no appeal whatsoever right now. Probably the poorest comparative performer this year has been Tesco (LSE: TSCO), which I tried to warn readers off only weeks before all the major trouble there began. There’s been a lot of chat, but the truth is that things aren’t likely to get much better there any time soon, so if you are holding on in vain trying to recover previous losses with a little late-stage momentum rally, you are better off looking elsewhere.

AA To The Rescue

Appropriately enough for investors whose portfolios could do with a repair right now, AA (LSE: AA) holds some really nice appeal going into the New Year.

It’s worth noting briefly first that are a number of superficial quantitative similarities between AA and Jelf: both companies are trading at around 25x P/E, both are up 42% in 2014, and both have recently received affirmations of “buy” ratings by the investment bankers who represent them (and therefore know them best) in the past month, accounting for an identical 14% rise in the share price over the past financial quarter.

These are not mere coincidences, despite the fact that the companies are far apart in size (AA is worth £1.85 billion right now). Good stocks tend to trade similarly for a good reason: the same investors are buying them at more or less the same time. Also, they have competent management teams that are judging the market right, skipping the need to go announce something important when the going is rough and instead saving the pitch for when everyone’s in the mood.

That said, these past two quarters have been especially tricky, however great your timing of the market feed might be. Which is why it’s especially impressive in the case of AA that the company, loaded up to the eyeballs in debt, went for the chance to IPO in July and has since posted such an impressive performance.

Red Hot IPO

AA owes a lot of its good fortune right now to its advisers Liberum, who seized the chance to steamroll an 11^th hour deal into the market by pitching AA’s former owner with an impressive case for the British insurer to go public over the summer when no one was looking.

But it’s also shown that with the newfound headline status and extra capital, it can deliver on the things that matter to investors – and fast. Thus, while AA’s actual numbers of policies in force have shrunk on the year-ago period as it has contended with the same difficult operating environment that everyone has lately, the company’s profit for the period is 88% higher, at £28.9 million. That’s the kind of story that just makes you feel great about IPOs.

Revenue increased in line with the insurer’s cost of sales, which is important when you are dealing with claims, as any spike in sales costs not matched by income at some level leaves the company’s future growth exponentially more open to the risk of value erosion, since the same policies also potentially lie in wait as claims.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

If you bought into the falling price of Aviva, just as I suggested, then you will have made some good money. But while Aviva might turn out to be a good buy-and-hold investment, gains have hardly been forthcoming for these sorts of investors thus far, who may have gotten a little more choppiness than they had bargained for. When relative value goes out to tide, you need a different sort of dinghy to ride into shore.

Nimble & Cash-Rich: Jelf Group

It’s best in these sorts of conditions to focus on nimble players with low levels of leverage and lots of earnings coming in that can be used to snap up smaller competitors and sideline businesses that find themselves unstuck in the same environment. For an example of just such a company, look no further than Jelf (LSE: JLF).

Jelf has leaped an astonishing 42% in the past year, and while the bulk of that action took place in the first quarter, all the signs are on the wall that it’s about to do something similar again in 2015.

Until British insurance premiums pick up again, it’s unlikely that any insurers are going to have operating earnings growth to write home about. Which means that the opportunities in this sector from an investing standpoint are with those companies that can scale out their business lines quickly while maintaining existing operations in a relatively competitive hold.

Acquisitions, Acquisitions, Acquisitions

That’s much easier said than done, but it’s what Jelf’s management team has proven capable of doing with the £135 million of market cap they have to work with and steer upwards. In May, the company completed the purchase of The Insurance Partnership Services (TIP) for £12 million, principally to boost up its presence in Hull, Leeds and York, which were showing signs of significant economic improvement.

A glance at this week’s earnings report by Jelf proves that the bet appears to have paid off nicely. While the company could report that the added operations decreased its overhead expenditure as planned, it also revealed that it has paid off a lot of the debt incurred before the acquisition as a result of stronger-than-expected earnings generated by the TIP acquisition. Overall, Jelf wiped £7.8 million pounds of liabilities off its balance sheet, bringing net debt down to just £5.7 million. That’s something to shout about in any market.

Given that Jelf has proven apt at managing the complex and messy process of integrating less-than-stellar subsidiaries into its fold right in time for what may be the last big shake-out of SME insurers for a while, there’s lots of reason to be optimistic that the company’s share price might rocket next year at least as much as it did in the course of this one.

It’s fair to say that investors should probably place a much higher acquisition premium on Jelf’s deals right now than on those of some of its rivals (after all, who else do you see doing the same?) 

So if we assume an EBITDA acquisition multiple of 24x earnings to account for the outperformance, and dilute the forward projection over 122 million outstanding shares, then Jelf is fairly priced at 312p. Even if we cut that multiple in half, there’s still 156p of value right now in the stock, which is 25% above where it sits.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

What is often missing from the analysis that investors carry out when looking at these sorts of companies is a realisation that the process of a stock going from “growth” phase to “normal” phase is not a straight line: it’s frequently messy and full of early warning signs such as medium-term declines.

ARM Holdings: Your Essentially Run-of-The-Mill Stock Pick 

There are few better examples of such a company on the UK markets in this transition right now than that of chipset maker ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US). ARM has capitalised big time off the surge in smartphone – and in particular iPhone – users in recent years as a result of its contract with Apple to supply the relevant chipsets installed in the Cupertino tech company’s insatiable mobile innovations.

As a result, if you had gotten into ARM five or 10 years ago in a big way, you would now find yourself sitting on piles of cash. In the past five years, ARM has leaped 546% in value; over a 10-year period, it’s made 955% gains, and that is despite being caught in the crossfires of one of the worst recessions in history that mauled stock valuations.

Then in the last year, something changed, as ARM tumbled 10%. The evidence is clear this trend is exponential (i.e. ongoing at an increasing rate): if you pull the chart out to reflect year-to-date declines, ARM shows a 17.5% drop in value. And yet ARM is still 80 times earnings – in other words, in growth stock territory.

What’s happened is that ARM is still operating in what is considered deep growth-stock territory: namely, the manufacture of complex parts for mass-scale mobile devices. Given the recent positive momentum in the stock market generally, ARM has been able to hold onto its high market valuation for perhaps a little longer than it usually ought to. For make no mistake about it, this is no growth company any more.

Lacking In Growth, High On Liquidity

Evidence of this fact is borne out in the company’s earnings statements. In the first quarter of this year, ARM made £187.1 million in sales. That number declined slightly to £171.2 million in the second quarter. It’s not especially significant here that sales declined quarter-on-quarter: different seasons tend to produce varying results, especially in the case of tech companies. What’s more important is the overall stability of the earnings rates.

ARM pointed out in its earnings presentation in July that USD revenues from North American operations were up 17% year-on-year while GBP revenue overall has increased 9% in the same period. It also highlighted the fact that it generated net cashflow of £86.7 million, meaning the company is comfortably profitable and as such that its balance sheet is nice and liquid.

Which is all great news, of course, except for the reality that such facts alone do not justify a forward earnings valuation of 40 times future earnings. Growth in North America is what every company with operations there pretty much has experienced in the past 12 months, as the economy is starting to get going again after a half-decade slump.

What’s more, producing a healthy cashflow is news to the chief executives of most growth companies, who are constantly dealing with cost of capital equations as they try to figure out new and even more creative ways to plug next year’s hole in the income statement other than by diluting their shareholders, most of whom are sitting on huge short-term gains.

In other words, ARM is a great company: it’s just not worth £12.8 billion in market value. It’s probably, in all fairness, worth about half of that right now.

If the stock declines another 40%-50% over the next 12 months, you may wish to consider picking it up at those levels. If ARM goes on an acquisitions splurge of nimble high-growth subsidiaries before then you might want to think about buying this stock, but not before the market has priced in a similar valuation penalty for the act of ARM’s management spending its cash holdings.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

With BP’s 2010 oil spill in the Gulf of Mexico still looming something in the region of $42-odd billion-big over the company’s balance sheet, and Shell’s boardroom mouthing off at government policy wonks the whole time, anyone in their right mind should steer clear of these two toxic twins, so the thinking goes.

For this reason alone, despite recent better-than-expected earnings news from both companies, and some clear, decisive management leadership displays in the past month from what amount to two great chief executives, these companies are both dragging their heels, selling for a measly P/E of 12 amid peers in their 20s (some even higher).

A Special Situation

That’s a shame, and not because profit at Shell was up nearly 45% last year to $6.1 billion, or because BP expects a similar bump in its earnings come end of 2014, forecasting a healthy $30 billion of net cash flow.

It’s a shame because with Russia becoming an even more central political hot potato, making an investment in two of Britain’s oil giants right now is actually more exciting than ever before.

For investors, it’s a chance to safely hone a strategy that makes money managers millions every year: spotting what are known as “special situations” – unique storms of all the ingredients you can use to reap rare windfall one-time gains. It’s the only opportunity you’ll ever get to share in a deal where your side got the upper hand over Vladimir Putin, too.

From Russia With LNG

Foremost right now, politicians in Westminister and Washington DC from both sides of the aisle seem fairly united in their opinions of Putin. While some investors might feel similarly sickened by the political affairs in Ukraine recently, it’s hard to deny that both Shell’s CEO Ben van Beurden and BP’s chief executive Bob Dudley haven’t taken extra special vigilance when it comes to looking out for the interests of the stakeholders whose money they handle.

As a result, both CEOs have barraged governments in the west with stinging criticisms every time they have made noises about embargoes and heavy sanctions. That has stirred up fuss at home, especially as it’s all for the sake of corporate profits.

But when it comes to investing your hard-earned cash on what is in large part a gamble on someone else’s leadership approach, it’s sure nice to know these gentlemen think of it as your money!

A Corporate Rocket Launcher

But the real gem is in the fact that essentially, both firms are handing Putin his ambition of building out Russia’s territory in the form of oil and gas networks across central Asia.

Since BP and Shell have their own lucrative stakes in the Russian economy as it is, these are only about to leap in value. In fact, the signs are there that this is already under way.

BP’s investment in Russia is the single biggest of all oil companies in the world. With  £7.67 billion invested in a joint venture with the Russian state company Rosneft, there were rumours that plans to extract shale in the Volga-Urals might be blighted as a result of the Ukraine situation spiralling out of hand. BP, however, waved off the concerns over the summer, claiming that “the arbitration does not concern BP and neither is Rosneft actually a party to it”. Permissions to drill, it seems, were forthcoming from the Russian officials.

Meanwhile in the case of Shell, which has a 10 million metric tonne LNG claim in the country, van Beurden recently seems to have secured an additional 5 million metric tonnes. 

These are the first of many treats in store of shareholders of BP and Shell in the coming years.

How To Get One Over Putin

Both van Beurden and BP’s chief executive Bob Dudley know exactly what they are doing: seizing a once-in-a-lifetime opportunity.

That opportunity? It’s the chance to get one over on the man who wins hands down at every negotiation. By assisting President Vladimir Putin at a time as politically delicate as this, there’s no way both fat cats don’t come out of this deal grinning from ear to ear with more expedited projects and hand-me-down profit sources than they know what to do with. And that’s wonderful news if you are one of the beneficiaries!

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The bad vibes all kicked off on 8 September when stockbroker Charles Stanley issued its second profit warning in less than half a year, citing an erosion of its profit margins despite the broad growth in the financial services sector this year generally. Shares of Charles Stanley tumbled 10% on the news.

A week later, on 16 September, fashion retailer ASOS fared no better when it confessed that it expected to earn about 30% less than forecast after a fire in a warehouse demolished its retail stock while the recent increase in the value of the British pound eroded what earnings it had left from overseas sales.

But it was Tesco that really set off the panic attacks when the grocer admitted that it had overstated its profit guidance by £250m, resulting in the immediate suspension of four senior executives, including the UK managing director. “Disappointment would be an understatement,” Dave Lewis, the company’s one-month-in CEO, wearily conceded.

Have No Fear

But fear right now is a rash overstatement. In fact, things aren’t that bad at all, least of all within the bulk of the FTSE 100 index constituents, where any dips right now should definitely be seen as potential free value if the price is right. That’s because the above-listed concerns, once dissected for what they are, appear vacuous.

And just for the record, economic growth in the UK is actually looking to come in much stronger than predicted at the end of 2014, at 0.8%, according to broad consensus.

Dissecting The Root Cause Of These Jitters

Charles Stanley is seeing profit margins erode away just as it admits it is, but what it doesn’t say is that is because it is bleeding away its market share. That’s the result of having strong competition. These competitors are for the most part in the form of FinnCap and Cenkos (the latter is publicly listed on AIM, incidentally).

Let me clarify what I mean by competition so you get an idea of why Charles Stanley is such a melodramatic mess on the market right now.

FinnCap, with over a hundred clients, is now AIM’s number one broker in the UK after just eight years in business. It also became a top 10 LSE broker this year, too. Unfortunately for investors, the company is privately owned (by its 95-odd employees, as it happens), for this year the company’s revenue surged 36% to £15.5m, while earnings fared similarly. Trading revenues were 80% higher!

Just in case you missed it, that’s the real reason Charles Stanley is hurting right now.

As for Tesco, I warned investors last week about the fact that management had obviously no idea what was wrong with the company, and even suggested the new CEO might end up selling it off in bits, a fate that right now doesn’t look so improbable.

And in terms of ASOS’s woes, well, a fire in a warehouse can hardly be considered to be the end of the world as long as it’s a one-off event, and a stronger sterling is part of the consequence of the economy being in such great shape. For companies that are part of the FTSE, that’s ultimately a plus.

More reading

The Motley Fool owns shares in ASOS, Charles Stanley and Tesco.

Given that Tesco today announced an overstatement of its sales, and that the retailer’s new CEO David Lewis comes fresh off a 27-year stint at Unilever (LSE: ULVR) (NYSE: UL.US), it’s worth taking a closer look at whether Unilever is as safe as many assume.

Is Unilever’s competitive position really as secured right now as its reputation for having 2 billion global customers justifies? I don’t think so. In fact, there are signs that this company’s somewhat inflated growth might be starting to backfire.

Unilever has increasingly pursued an overseas strategy in the past 5 years, most aggressively in emerging markets, which account for over half of its annual sales. Within the emerging markets, the bulk of these sales are made in Asia.

That alone should sound warning bells, whatever the broad direction of emerging market growth looks like. That’s because fast-growing economies will tolerate foreign market-share dominance on their home turf for as long as they are not able themselves to provide identical products via their own homegrown brands. 

So while you might have some chance at staying the long haul profitably in such markets if you are a pharmaceutical giant with complex patents under your belt, or a high-technology company with a unique proprietary software to offer, if soaps, skin and hair care products, tea and savory snacks are all you have going for you then the competition is only going to get hotter – and quickly.

A Recent Chinese Whisper

For example, while in China it’s true that in the past few years Unilever has achieved market share dominance in the cosmetics range with its Lux, Ponds and Dove and Clear brands, by far the majority of this has been in top-tier cities such as Shanghai and Beijing.

Which has been great, but that strategy is not likely to deliver the company a significant increase in growth going forward, since the major untapped market share now lies in many of the second-tier industrial cities such as Dalian, where workers are finding themselves more flush than ever before as a result of increased demand for their services as available labour has dried up in light of the exporter’s recent manufacturing boon.

For these customers, who are much more traditional in their product discernment tastes, local rivals such as Inoherb and Bawang have been ready at the gate to snatch up the newly hygiene-conscious teenagers and early-20s consumers dashing to the supermarket to pick up a skin moisturiser before their Friday night date.

In many cases, what this means is that foreign firms eyeing the market segment are partnering with the local brands, which is a deal that favours the home team, as you might expect. (Shanghai Jahwa’s two-year old partnership with Kao is a case in point).

Homegrown Hygiene Habits

The examples above focus on mainland China of course, but this sort of pattern is not just restricted to the Chinese mainland: it’s the case with many fast-growing markets which have zoomed ahead in previous years and are now flush with international investment.

The evidence of this trend is born out in Unilever’s earnings: sales fell a sizeable 5.5% to €24.1 billion last quarter.

The company attributed this to a cooling off of emerging market spending, which is especially worrying, since it suggests that management doesn’t understand why it’s emerging market sales have cooled some 40%. It’s true that emerging economies are slowing down, but not so much that consumers are opting out of their hygiene!

They are just buying their own homegrown brands, that’s all. And local competitors are using the edge they have now to erode margins of foreign rivals.

More reading

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.