Update: First Derivatives
Shares in First Derivatives, one of our Inheritance Tax portfolio’s holdings, have fallen heavily this month despite an absence of news or updates from the company, writes Richard Evans.
Instead the decline was prompted by the publication of research by a hedge fund that had “shorted” the stock.
The fund, ShadowFall, said it regarded First Derivatives’ shares as overvalued.
“We think it’s masquerading as a software firm when really it’s a consultancy or recruitment business, which would imply that its shares should trade at 12 to 15 times earnings, not 30 times,” Matt Earl, of ShadowFall, told Questor. “We think the shares have a long way to fall – in our view they are worth no more than £20 and possibly as little as £10.”
We tipped the shares in January at £41.60 on the basis of a conversation with Harry Nimmo, of Aberdeen Standard Investments, (we added them to the IHT Portfolio in June at £44.50).
Nimmo acknowledged that margins tended to be lower in consultancy than in software. He said First Derivatives didn’t separate results from its two arms, which would make the business easier to understand.
But he added: “I’ve been an investor since 2010 and have no reason to believe that the management is anything other than genuine in what they are doing. We feel that we know this company well and trust the managers.”
He said he saw “no substance” to ShadowFall’s allegations, which included criticism of First Derivatives’ relationship with its auditors, but described the hedge fund’s timing as “exquisite” because shares with high earnings multiples attracted much of the selling in the current market correction.
Nimmo is holding on to his shares and Questor’s advice is to do the same.
It is now more than two years since the Income Portfolio launched – next week we will publish a full update on its performance.