The week of Kurt Vansteeland: ‘Let the beast go!’


‘Full bull’ is a succinct summary of investor sentiment. If you are venturing into the rodeo, it is better to take out insurance. You will find the best policy in Halle.

Let the beast go. It is one of the late Jean-Luc Dehaene’s most famous quotes, when the Prime Minister briefly imitated the locals on a trade mission to Texas in 1995 by riding a pneumatic bull at a rodeo show.

I had to think about it when I watched the current bull ride at the fairs. To be clear, the vaccine news from first Pfizer / BioNTech and then Moderna – always on Mondays – is uncompromisingly good news for mankind. Finally, the prospect of a bit of normalcy in the course of 2021. I even wantonly – at KLM’s tenth plea to convert my voucher into a booking – booked a flight to Canada in June. The audacity of hope, quoi.

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Normality where the always himmelhoch jauchige investor now takes a solid advance, without already knowing what that would normally look like exactly. Stock market strategists are getting in each other’s way with bullish notes. “Investor nirvana,” JPMorgan writes. At the other Morgan, Stanley, strategist Graham Secker writes that we have left for a few years of stock market rally. ‘We predict 30 percent profit growth for European companies in 2021 and 20 percent in 2022,’ it sounds.

Secker’s argument is eminently valid. European companies cut costs mercilessly during the pandemic. To the extent that even an early revenue recovery lower on the profit and loss account can provide substantial leverage. The strategist also thinks the sector rotation from growth stocks to more cyclical industrial stocks and banks could continue for some time. “The reflection rotation is real this time, after many false springs.”

Eliminate shock

For the record: big tech – with a large part of the expected profit in the distant future – has profited fully in recent years from long-term interest rates that have tended towards zero over an increasingly longer period. That made $ 1 expected cash flow in 2040 worth nearly as much as $ 1 cash flow now.

Morgan Stanley predicts that long-term interest rates can finally (somewhat) higher in the coming years, now that policymakers worldwide are willing to do anything to get rid of the pandemic shock as quickly as possible through direct income support or through an economy that allows them to gain unimpeded momentum. “Extreme reflationary policies, especially at a time when production has already substantially recovered, will eventually boost demand excessively and lead to inflation,” said Morgan Stanley chief economist Chetan Ahya.

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This is not to mention the fact that central banks are more than ever underestimating ‘real’ inflation. An interesting study by the International Monetary Fund shows that in 2020 central banks will be more misguided than ever on food inflation. Even before the pandemic, the legitimate question arose to what extent the consumption baskets that central bankers place on a pedestal still reflect the real world. Now that the pandemic has turned our consumption into a whirlwind, the answer is gradually: not at all.

So it is possible that inflation has been declared dead a little too soon. But until the new birth, no one can afford to stay away from the pneumatic bull. Bank of America Merrill Lynch describes the sentiment in its monthly survey of the world’s asset managers ‘Full Bull’. And then you better enjoy the ride while all those bulls put their cash to work.

F * ck the sidelines

As Frank Vranken of Puilaetco rightly pointed out after the first vaccine breakthrough and accompanying instant buying wave: ‘This shows that it is important never to be on the sidelines. The days when markets advance 6 percent make up the bulk of the return over the calendar year. The investor who missed Monday’s rally has largely dated his year. ‘

So: don’t stand on the sidelines. Green leader Kristof Calvo is right on that point.

Nevertheless, it seems sensible to include some insurance against accidents as well. And then it is never a bad thing to have companies in portfolio that are already generating substantial cash now, instead of sometime in 2040. Then we will inevitably come to Solvay. CEO Ilham Kadri immediately focused on cash from the moment she took office. By scrapping cash-consuming projects such as a tight new head office and valuing departments that generate solid cash flow.

Since 2012, Colruyt has taken almost a fifth of itself off the stock exchange through bulk purchases of its own shares.

The result: a free cash flow that will increase by half this pandemic year – while an important customer such as aviation is in the rag basket – to around 900 million euros. That is more than double the 400 million that absorbs the total dividend of 3.75 euros gross annually. In other words, we can regard the dividend – which has not been reduced by the chemical giant since the 1980s – as safe.

Lisa De Neve, analyst at Morgan Stanley (yes, it’s their week) thinks Solvay will be able to generate 1.8 billion net cash over the next four years through Kadri’s ‘intense focus’. So after dividend payment. That would allow the chemicals group to more than halve its debts, from 2.7 to 1.3 times the annual operating profit before depreciation.

Nevertheless, the best insurance against a runaway bull on the stock exchange is not to be found in Nederover-Heembeek, but in Halle. Look at the price chart below. It is almost unpleasant how Colruyt moves like an ‘anti-Bel20’. With sometimes breathtaking price increases in March, while the bottom was lost for the Bel20. And recently a red price policy again, while the rest of the Bel20 is experiencing a vaccine rally.

Colruyt has been translating its horribly good finger on the pulse of the Belgian consumer for years into a solid cash flow and a reinforced concrete balance sheet. And has been converting that cash into a surefire investment for years: itself. Over the past decade, Halle family packs bought its own shares, and then put most of those pieces through the shredder.

Soil protector

The result: since 2012, Colruyt has taken almost a fifth of its own off the stock exchange, which means that the family of the same name, without having to buy more, has also strengthened control over the supermarket chain. The purchases can best be seen as a kind of ‘deferred dividend’. Every share purchased and subsequently destroyed is one less hungry mouth. Colruyt’s total net profit has risen steadily earlier this decade (see graph). But due to the creative destruction, earnings per share have risen much more sharply. And Colruyt was able to increase the dividend from 0.95 to 1.35 euros per share without allowing a (much) larger part of the net profit to flow to the shareholder.

Last week, Colruyt bought its own parts for the first time since March. Quite modest: 8,000 pieces per day. But rest assured that the group can and will use its soil protector where necessary. As of this year, the new company legislation no longer allows Colruyt to buy up a maximum of 20 percent of its own shares after the approval of the general meeting. That restriction has been lifted. “From now on, the maximum threshold will only be determined by the amount of the resources available for distribution,” Halle points out on his website about investor relations.

Long story short: if you are thrown off the bull after an overly enthusiastic ‘let the beast go’, you better land on the Colruyt bottom protector.


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