Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
You use and like a product. Does that make it a good candidate for investment?
Legendary investor Peter Lynch thought so. “Buy what you know” was a keystone of his investing philosophy — one that earned the Fidelity Magellan fund a benchmark-beating 29 per cent annualised return under his 13-year stewardship.
Reddit users, offered shares at the social network’s initial public offering this year, were less sure. At least they had each other to turn to for advice. Multiple threads thrashed out the case for and against. After a successful debut, user interest hasn’t translated into a rising share price.
But tech platforms like having users on board. Reddit joined ride-hailing app Uber and online rental site Airbnb, which set aside allocations for eligible drivers and hosts respectively in their IPOs at the start of the decade.
Proponents in the UK range from brokers to grocery delivery. Ocado offered customers shares when it went public in 2010; so too did investment platform AJ Bell, broker Hargreaves Lansdown and, more recently, fintech PensionBee, which allocated 10 per cent of its offer to customers. Fledgling start-ups, such as knickers retailer Stripe & Stare, frequently crowdfund from users.
Accommodating customer allocations, which are usually small, is messy for bankers but issuers count on it buying goodwill and custom.
Ballast for the theory comes from a National Bureau of Economic Research paper. Figures from Bumped, a shortlived app that sought to turn shoppers into shareholders through the award of fractional shares on purchase of goods, suggest ownership drove a doubling in weekly spending, according to authors Paolina Medina, Vrinda Mittal and Michaela Pagel.
Further evidence comes from the likes of Stash of the US, which has made 62mn stock awards to shoppers at eligible brands since launching its stock-back debit card.
“Familiarity bias” means investors tend to have more exposure to stocks they know and less diverse portfolios, academic research shows. As they garner more information about their companies — assuming it is positive — they hold fast.
Of course it cuts both ways. Presuming online fast fashion group Shein makes it to market, Gen Z shoppers who return as much of their hauls as they hold on to may conclude that keeping consumers sweet makes for a less attractive business model.
For investors, two advantages attach. As Lynch noted, you know more about things you use: an improved website or new gadget is more likely to be on your radar than, say, changing processes at a chemical plant.
Some companies throw in perks. Customer shareholders benefit from discounts at a plethora of retailers and storage outfits among others. Holding Whitbread shares can get you a free breakfast in a Premier Inn.
As for the investments themselves, too many factors come into play and the sample is too small to be conclusive. Neither Uber nor Airbnb have matched the runaway Nasdaq.
But watching household habits certainly pays; even Lynch rued — many years later — missing a trick. He marvelled at the margins on his daughter’s newly acquired iPod but stopped short of buying shares in manufacturer Apple. “I should have done some work on Apple,” he lamented on CNBC’s Squawk Box last year.
London market is a scapegoat for poor performance
When a UK company’s share price goes south, simply blame the London market.
Increasingly, companies or their investors are pointing to weak trading liquidity, or a supposed yawning valuation gap, compared with US peers for poor stock performance. The London market is not in the best shape. But it also cannot be the scapegoat for all UK corporate woes.
Activist investor Sparta Capital Management is calling on London-listed engineer Wood Group to consider a US listing to address the “continued underperformance of its shares”. It references the “recent successful attempts by corporates to move their primary listing away from markets which . . . do not recognise the true worth of their businesses”.
This is delusional. Wood is no CRH or Flutter. It is a small FTSE 250 engineer that is midway through yet another turnaround after its calamitous £2.2bn takeover of Amec Foster Wheeler in 2017, which saddled it with debt and legal liabilities. Its problems are of its own making. It is not obvious why US investors would be any more willing to buy shares until the company shows it can generate sustainable positive free cash flow.
You cannot blame Sparta for agitating. Wood’s stock languishes around 142p — a painful 41 per cent below the final takeover price offered by Apollo a year ago before the private equity group got cold feet. Frankly, 240p a share for Wood looked high then. At some point between 240p and Apollo’s opening gambit of 200p, a deal should have been done.
But a New York listing would do little to solve Wood’s woes. Given its £971mn market value, it is not clear what US index it would get into.
All efforts must be directed at trying to repair Wood’s damaged reputation, after years of overpromising and underdelivering. It has a new chief executive in the form of the well-respected Ken Gilmartin. But investors have long memories, argues Jefferies analyst Mark Wilson. And its latest turnaround effort comes with a $50mn cash impact that will delay hitting positive organic free cash flow by a year, to 2025. In 2023, this was -$265mn, an improvement on -$704mn the previous year.
You can imagine the excitement on Wall Street as this mid-cap, cash sinkhole turns up. Sparta, which also wants a review to look at a sale, might fare better with bidders. But there is little reason to think a deal will be struck now, after last year’s interest faltered.
The London market has its difficulties. But false narratives are an unhelpful distraction in trying to address them.
