U.K. FTSE 100: Good News, The Fire Sale Is Underway

I am sitting on a UK contrarian big-cap value portfolio and watching it slowly but surely grind its way up and up. U.S. Magnificent Seven investors would not recognize the price action, and here is why:

It is almost funny, but all of a sudden, the FTSE 100 is on the move. You might be forgiven for imagining it has broken out. Take a peek:

It is contrarian to say that if you buy cheap stocks and sell them when they are not cheap, you will do well. However, those kinds of contrarians do well because when cheap stocks – which are good companies too – turn from a bear trend, they can recover a very long way. This investment tactic is far down the food chain from the momentum investing in U.S. stocks that go to the moon and magically maintain incredible valuation metrics, but the profits in contrarian value investing even in the U.K., are still pretty good if you can stomach going against the herd.

I have maintained that the U.K. market is in for a torrent of takeovers because many of these painfully cheap companies make more than enough money and cash flow to enable a purchaser to fund the price of buying them on credit and repay the debt within in a few years. Frankly, who wouldn’t buy a great company for what amounts to nothing? It is what private equity does. And if you are a U.S., European, Indian, or Chinese company with a 25-to-infinity P/E, why wouldn’t you buy a British company with a P/E in single figures?

The answer is that the government will say, ‘No, no, no.’ Foreign companies will, of course, sniff around for opportunities, but when their advisers point out that the country recently passed a ‘national security law’ to block such cunning plans, quite a few players are going to lose their appetite. How can you asset-strip a ‘national champion’ when the trenches are already dug and opposing forces are armed?

This hasn’t stopped a flow of U.K. takeovers, but clearly, the barricades of legislation designed to block takeovers from abroad successfully act as a damper. It is also a damper on the ongoing price of FTSE shares because a wallowing FTSE beast is not going to be carved up for a 40% premium, and that’s a drag – both literally and figuratively.

Well, who knew? The new British chancellor just replaced the boss of the Competition Commission, famous for his proactivity in spiking the cannons of deals – such as the Microsoft-Activision takeover – to send a message that the government is serious about letting business and nature take their course.

So now it is open season for foreign companies with far better valuation metrics to juice up their earnings by strip-mining the FTSE 100.

It’s a Spartan approach from the government, saying in effect ‘do your worst’ to economic predators, but that cold-blooded position might just work to kick the London market out of its malaise.

This ‘laissez faire’ will certainly work for investors, at least while the process is underway. If the market takes its course, it should drag up valuations and do so to a level where the bargain basement prices vanish. That process could be because there is little left to buy at all, or it could be because, after a period of corporate rampage and looting, FTSE 100 company prices start to look more like those of Germany and the U.S. That is how it is meant to work in free markets.

If this strategy goes wrong, there is still good upside for investors, and if it goes right, the prospects are even better.

So, next stop: 9,000. And if I’m right, we can expect a parade of M&A that will tell you it’s game on for the London Stock Market.

Ding, ding… going up!