I’m sure I wasn’t the only person flattening cardboard after Christmas and wondering who makes this now ubiquitous packaging. There was hardly a day in the run-up to the holidays when I wasn’t signing for a brown box too big for what was packed inside. What a great business, I thought.
I was reminded of a conversation I had 20 years ago with Jim Slater, who thought the best way to play the then rapidly-inflating dot.com bubble was to buy Federal Express shares. Delivering online purchases and boxing them up - two examples of the old picks and shovels investment theory that the money is made most safely in the secondary beneficiaries of any boom. Denim jeans were the route to riches in the gold rush, not prospecting for the elusive metal.
Five minutes on Google led me to some fascinating trivia on the humble corrugated cardboard box. It’s durable, cheap and environmentally-friendly - 88pc of boxes are made from re-cycled paper, ideal for shipping goods around the world without destroying it. No surprise, then, that more than three-quarters of European goods are moved in brown boxes. The global market for engineered paper product, as I’ve learned to call it, is estimated to grow at 4pc a year, rising from $269bn in 2017 to a far from trivial $336bn in 2023.
My browsing also led me to one of the FTSE 100 companies you’ve probably never heard of, DS Smith. As I suspected, Smith is doing very nicely out of the e-commerce boom. In December, the company announced half-year profits up 27pc from a 15pc rise in sales, even if the growth in volumes slowed marginally in the period. Smith’s profit margin is a healthy 10pc. It raised its interim dividend by 14pc.
Imagine my surprise, then, when I looked at the company’s share price. Having peaked at nearly 540p last June, the shares ended the year under 300p. None of the potential explanations for this 45pc fall seem particularly satisfactory - higher polymer prices squeezing the company’s plastics business (which is up for sale), general fears about a slowing global economy, falling prices at some of the companies the business supplies - including Amazon, Asos and Next.
I haven’t done the research yet to know if the shares are worth buying now that they are priced at just eight times expected earnings this year and offering an income of around 5pc, although on the face of it that does set my contrarian antennae twitching.
The market seems to have decided that the retail sector is a lost cause, even if the recent trading statements have in the main been weak rather than disastrous. But look beneath the surface and a clear picture is emerging. The gap between those retailers who have recognised and invested in the online opportunity and those that have not is widening. We may be buying a little bit less overall but that trend is far less important than the shift from bricks and mortar to the internet.
So, the outlook remains bright for the picks and shovels businesses that are benefiting from the continuing online migration. Looking at DS Smith’s chart, I do wonder whether the fall in the shares is less about the company itself and more about an indiscriminate aversion to investment risk and, in particular, UK investment risk.
Another five minutes research on what used to be called Datastream delivered a list of 71 companies in the UK whose shares have fallen by more than 50pc over the past year but risen by more than 10pc in the past 10 days.
This didn’t surprise me unduly because I’ve started looking at the value of my pension again after a few weeks before Christmas of studiously averting my gaze. That’s always a good indicator of rising investor optimism.
It is probably no coincidence that all three of the companies mentioned above that DS Smith supplies have experienced this share price boomerang. Asos is on that list of 71 significant rebounds, down nearly 80pc last year and up 50pc since Christmas. Next fell by a third in 2018 and has rebounded by 20pc. Even mighty Amazon fell by 34pc in just three months and has since risen by a quarter.
Last week was the third straight week of gains for MSCI’s broad index of global shares and the biggest weekly gain since November. The positive tone is evident across both developed and emerging markets. The speed and scale of the response to better news on trade and interest rates tells me that investors overcooked the pessimism between October and the end of the year.
Another indication that we may have reached a turning point in the UK is the relative outperformance of value-focused investors. Two investors who make a virtue of scrabbling around in the market’s dustbins, looking for shares that no-one else is interested in, are Fidelity’s Alex Wright and Investec’s Alastair Mundy, who manages the Temple Bar investment trust.
Since Christmas, Wright’s Special Situations fund, which fell 19pc between May and Christmas last year, has bounced by 7pc. The Temple Bar trust was 18pc down over the same period and has since recovered by 8pc.
After ten years in which market movements have tended to be relatively uniform - everything moving in the same direction - and subdued, it feels like normal service has been resumed. Shares are overshooting in both directions and correcting savagely when sentiment changes again.
This may feel unsettling, but it is great news if you are in the business of picking winners and avoiding losers. This is an excellent time to be an active stock-picker.
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