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Finding value in distressed companies

BlackRock’s Mark Lyttleton argues that the stockmarket is excessively pricing in potential difficulties in raising capital.

 
Finding value in distressed companies

BlackRock’s Mark Lyttleton is seeing value in distressed companies, arguing that the stockmarket is excessively pricing in potential difficulties in raising capital.

Lyttleton (pictured), manager of the £1.5 billion UK Absolute Alpha fund, believes the spate of recent rights issues show that companies can quickly reverse their financial position.

‘Actually, the credit markets aren’t closed anymore, companies can do rights issues,' he said. 'A company can transform its finances really quickly, and a lot of companies have done that in the last few months.’

He said that price-earnings ratios can be deceptive when analysing value, as they can be based on very low earnings levels that are set to rise. ‘Sometimes the best thing to do is to buy companies with a P/E of 50, because those earnings are almost zero,’ said Lyttleton.

Despite the market rally, Lyttleton said he is also seeing value in companies like TescoInmarsat and Tullow Oil.

He argued that lots of uncertainty still existed over market outlooks.

‘The big question over the next six to 12 months will be, 'How sustainable will that rally be?' - I think the jury is out,’ he said.

‘I’m cautiously optimistic the world will heal itself,’ he added.

Lyttleton has been making changes to both the nature and the extent of his shorts exposure on the fund as the market rally has taken hold.

He has shifted his shorts exposure to larger companies in response to illiquidity concerns over some of his exposure to smaller and medium-sized companies.

Lyttleton is sanguine about the losses incurred as a result of shorts as the market has risen. He pointed to companies he had been shorting because of major challenges to their business models.

‘The share price goes up because people think green shoots are coming. We’ve had some shorts go up against us,’ he said.

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