Are rights issues right for me?

I’ve been burned before, so I’m already somewhat reluctant to take up my rights for additional discounted shares. You see, during the financial crisis that sent markets south from 2007 to 2009, I took up my rights to buy additional discounted shares in some supposedly sound companies (including big banks) that subsequently went bust. Therefore, what seemed like a series of no-brainers – cheap shares! – turned out to be money traps.

Now that I’m older and hopefully wiser, I know that shares in companies such as Rolls Royce shouldn’t be bought simply because they’re being offered at a lower price before.

Is the Rolls-Royce rights issue right for me?

So, now let’s look specifically at the Rolls-Royce rights issue that was announced on 28th October and requires me to respond by 9th November.

The share price gapped-down on news that the rights issue had been approved by the majority of existing shareholders. This price plummet was due to the new “diluting” shares being issued, and it means my currently held shares are already worth at least 60% less than they were before the announcement. Latest price: about 84.5p per share.

However, I can now buy some of the newly issued shares – ten of them for every three shares I already own – at a bargain basement price of 32p-per-share.

Running the numbers

Does all this make your head hurt? Mine too. I swear that these rights issues are designed to dumbfound us ordinary investors. Heck, I can barely do the maths to calculate what my new average purchase price would be, let alone work out whether 32p per share is actually a fair price to pay for more Rolls-Royce shares.

I could dig deep into the company fundamentals and pundits’ new earnings predictions to try to make some sense of the opportunity on offer, but in this case I think it would be futile. Nobody knows what will happen next. With the second wave of the coronavirus making the future even more uncertain for aerospace companies that have sold hardly any new commercial airliners recently, I’ve decided to sit it out and let my Rolls-Royce rights issue entitlement lapse until the smoke clears. There’s no smoke without fire, and – as I said at the outset –  I’ve been burned before.

A final thought

Whenever I make an initial exploratory investment in my very diversified portfolio, it’s an amount of money that I don’t mind losing entirely if the worst happens. I hope for the best but will accept the worst, and I won’t lose my shirt if I never bet the farm on any single stock.

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Tony Loton owns shares in Rolls-Royce Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What’s wrong with BT shares?

Historically, BT has suffered from the same problems as other privatised or semi-privatised former state-run utilities such as Royal Mail: legacy technology, universal service obligations, and an onerous pension scheme. I don’t want to talk about those things today.

I want to talk about what I think is wrong with the fixed broadband business. With most if not all people – even my elderly dad – having a mobile phone these days, the only reason anyone still has a BT line is for supposedly super-fast broadband. Since my dad doesn’t do broadband internet (or any internet at all) he doesn’t use BT any more. Nor does my father-in-law. Nor do I.

For at least five years, I’ve been operating with only a mobile phone that provides me with a 4G internet connection at least as fast as (and probably more reliable than) I could get with BT broadband. I can tether my laptop and TV to stream movies, and the necessary “unlimited mobile data” plan costs me no more than the equivalent BT broadband. Best of all, I can take it with me wherever I go.

Despite what the government says about needing to get super-fast fixed-line broadband out to everyone in the UK, I think that fixed lines will become totally redundant when 5G really gets going.

Can 5G save BT?

These days, BT isn’t only a fixed-line telephone and broadband provider. Having divested itself of its original mobile brand Cellnet in 2002, which became O2 and was sold to Telefonica in 2006, BT subsequently bought rival mobile operator EE in 2016.

This was a good move, in my opinion, because EE was the first and is maybe the best provider of super-fast 5G services in the UK. If anything can save BT, 5G can, but this is not yet reflected in a rising share price; maybe because of the likelihood that 5G services will cannibalise BT’s fixed broadband customers who (like me) will ultimately be happy to be mobile-only.

Should I buy BT shares now?

Actually, I already have bought some BT shares, but only as a test purchase to see which way the price goes. I often do this with stocks I have my eye on, with a view to scaling in (buying more) by averaging down if the price goes down or pyramiding up if the price goes up.

If you think I’m mad to look at buying more either way, I can tell you that I’ll only average down (with a little more money) if I can do so at a much lower price point, and I’ll only pyramid up when I have sufficient profit in my original position to offset the risk of the new investment.

Finally, what really interests me is that on the one-year price chart, BT shares seem to have flatlined:

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Tony Loton owns shares in BT Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The share price not only shot up, but “gapped up” without passing through the price points in between. How can we find out what caused the price gap?

What causes a price gap?

When the prices of stocks such as Aston Martin and McCarthy & Stone make big moves even before the markets open, it’s usually because some news has driven those morning share price movements. Although you can’t trade the news by anticipating it, unless you have insider information, the stories behind major moves can provide valuable insights into whether those price changes are likely to be permanent.

It’s not always good news, and prices can also gap down. A good example is Wirecard AG, whose share price gapped down in mid-June. The contrarian in me wanted to buy in on the basis that the shares would surely bounce back. However, a review of the news revealed that this banking tech titan’s Asian bank accounts were missing about £1.9bn that couldn’t be accounted for. And it wasn’t the first time that this German company had been subject to negative news relating to some sort of financial scandal. What happened next is that the share price continued to go down, down, deeper and down, thus making my contrarian play impossible.

When I see that a stock’s price has gapped up or down at the start of the day, the first thing I do is Google (or Bing) the stock’s name or ticker symbol to see the stories behind the price move. I use my search engine’s menu option to limit the results to “past 24 hours” to see only the latest stories.

So, what’s the news driving Aston Martin’s morning share price movement?

Now for the moment you’ve all been waiting for: the news behind the Aston Martin Lagonda Holdings morning share price gap-up of about 18.5% from approximately 54p per share to 64p per share.

After market hours yesterday, it was announced that as part of a £1.3bn refinancing package, German car brand Mercedes Benz would increase its current small stake in Aston Martin to 20% by 2023. This long-term tie-up also involves some technology transfer, with James Bond’s favourite motor brand gaining access to Mercedes Benz’s electric transmission systems.

It’s not all good news because the British carmaker also reported a halving of revenues (to £124m) and a loss of £29m compared with a profit of £43m for the same quarter last year. This may have been why the share price fell back nigh-on immediately to almost close the gap, which is what often happens while short-term traders are still deciding what they want to do with the stock.

So, what do I want to do with my Aston Martin shares now? Keep holding, of course, but possibly with my customary stop order to protect some of the profit I’ve accrued.

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Tony Loton owns shares in Aston Martin and McCarthy & Stone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why banking stocks have been beaten down

Although they haven’t been told to close, it’s hard for banks to make money when interest rates are so low, and even harder if interest rates actually turn negative. Then add the prospect of a no-deal Brexit and US election uncertainty into the mix.

But the low interest rates can’t last forever, the pandemic will pass, Brexit will be completed (one way or another), and the US election will remove a lot of international uncertainty.

Why the FTSE banks will bounce back

Ultimately, the banks will bounce back because we’ll always need them, and the only thing that will upset this particular applecart is if the challenger fintechs such as Starling and Monzo succeed in disrupting the banking market. However, I think the familiar FTSE 350 banks will be around for a lot longer than the challengers would like, mainly because they’re upping the ante with their own mobile apps.

The banking bounceback has begun

On 27 October, the HSBC share price shot up somewhat on news that the bank was considering reinstating its dividend after profits had beaten expectations. That’s good news for investors, as may be the news that the bank is looking to cut costs. The share price was already rising from its lowest point, and – until today – this month-long rising tide had lifted all the British banking stock boats including Banco Santander, Barclays, Lloyds, and Natwest.

The dynamics are somewhat different for European and American banks, which is why I’m only betting on British banks. Stick with the stocks you know!

How I’m betting on the banking bounceback

Okay, I’ll admit it. Even as a committed Fool, I operate a spread betting account, which allows me literally to “bet” on the individual banks or the FTSE 350 basket of banking stocks. But I’m no day trader, and my long-term investment approach is no different in this account than it is when investing via my tax-efficient individual savings account (ISA) or my self-invested personal pension (SIPP). Whichever account I work with, I buy and sell exactly the same stocks or other securities at exactly the same times. The only things that are different are the fees I pay and the amount of money I make when I make the right investments.

So far, so good, with most if not all of my banking stock positions currently showing a profit in all my accounts since September. But diversification could be crucial because any one of my individual banking investments might not be a good bet, as my Foolish colleague Roland Head has previously suggested.

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Tony Loton owns shares in Banco Santander, HSBC Holdings, Lloyds Banking Group, and Natwest Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One of the examples he gave was that of Apple, the share price of which had stayed relatively flat for a good number of years – maybe even decades – before going stellar after the turn of the century to become the world’s most valuable company. Look at a long-term stock chart and you’ll see what this looks like, but bear in mind that the apparently flat historic share price could actually have looked quite bumpy at the time.

This author’s ideas intrigued me. I tried them for myself with some success, and the idea of finding such flatlined stocks that are about to break out of their previous price ranges is a cornerstone of my investment strategy to this day.

A recent example of a company whose share price had flatlined for at least a few months, between April and October this year, is retirement homes builder McCarthy & Stone. I’ve previously written about what happened next when the price enjoyed a breakout from its consolidation price range when takeover talk came from US private equity group Lone Star.

Another stock with which I had similar success over a similar timescale was estate agent Countrywide. After this year’s stock market crash caused by the coronavirus pandemic panic, Countrywide’s share price flatlined at a price consolidation level of around 60p per share. Not only did this share price subsequently break out to a higher level, but – after falling back a bit – it then went on to rise steadily higher. I’m still holding on for the rest of the ride.

So, do I have my eye on any flatlined stocks that could yet break out of a current price consolidation? Yes, and one of them – which you might have heard of – is Aston Martin. Although the Aston Martin share price has risen a lot since May, it still looks pretty flat to me on the long-term price charts. That’s why I haven’t only got my eye on it, but some of my money on it too, in my diversified portfolio.

Am I making any predictions about what will happen to Aston Martin? No, of course not. But I know that if this stock does go stellar, I’ll be in it to win it, just like I was with McCarthy & Stone.

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Tony Loton has shares in McCarthy & Stone, Countrywide, and Aston Martin. The Motley Fool UK has no position in any stock mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Being in it is no guarantee that you’ll win it, of course, but I can guarantee that you won’t win it if you’re not in it.

Let’s look at the recent example of McCarthy & Stone (LSE: MCS) shares, which increased in price by about 40% on 23 October on news that private equity group Lone Star had put in an offer to buy the retirement homes builder for 115p per share. It’s not the first time I‘ve seen a stock’s price shoot up unexpectedly on the news of an offer having been made.

Were you in it to win it with this stock? I was! Not because I knew the news was coming, which would necessitate some insider knowledge that I didn’t have, but because – somewhat luckily – I’d incidentally invested in McCarthy & Stone shares exactly one week beforehand when the price had fallen back to its prevailing flatlined level of around 72p per share.

This wasn’t clever stock-picking, however much I’d like to think so, because this stock was simply one of many I’d bought in a diversified portfolio of positions that looked to have more upside than downside price potential. Diversification is good because it limits my downside risk of a single stock going bust while at the same time increasing the chances of being “in it to win it” with at least one successful stock pick.

So, did I sell my McCarthy & Stone shares at the first whiff of a 40% profit? No way! I’m not foolish enough to sell out too soon; I’m Foolish enough to hang in there for even higher long-term profits. However, I did place a protective stop order at a few pence below the new prevailing price, just in case Lone Star’s lone offer was taken off the table. This is my preferred use of stop orders: to protect a profit rather than lock in a loss. And, for the moment at least, it means I’m still in it to win it if the price goes even higher.

Incidentally, I recently read on a financial forum how an amateur investor had made millions in a demo trading account. Investing in a demo portfolio initially is not a bad way to learn the ropes, and this participant’s paper performance sounds impressive, but if you ask me, he hasn’t really won it because he’s not really in it…

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Tony Loton owns shares in McCarthy & Stone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.