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When last summer we acknowledged the poor timing of our earlier advice to buy shares in Ceres Power, the fuel cell company, we had no idea how much worse things were going to get. But the shares went on to fall by a further 47pc by early February.
Questor attributes this severe slide to the steady worsening of inflation expectations over the second half of last year.
As a company whose prospects for significant profitability lie several years hence, Ceres is just the kind of stock that investors get nervous about when inflation rears its head: they start to see the attraction of businesses that will make them returns now, in today’s money, rather than in the devalued currency of the future.
But the share price has recovered strongly from its 517p nadir of Feb 8. Partly this is thanks to the announcement the company made the following day of a new three-way joint venture arrangement in China involving Bosch, the German engineering giant, and China’s Weichai.
Matt Evans of Ninety One, the asset manager, whose enthusiasm for Ceres prompted our tip, said the joint ventures were “likely to materially derisk China”. As they offered greater protection of intellectual property and showed “the commercial potential of the Ceres technology as validated further by Weichai and Bosch”.
Questor suspects that the shares have also benefited from a renewed sense among investors that green energy sources such as Ceres’s fuel cells will be part of the means to wean the West off Vladimir Putin’s oil and gas.
Set against that, the war in Ukraine has given another boost to inflation and further undermined the investment appeal of out-and-out growth stocks.
Faced with such an unpredictable brew of economic and political forces, we should perhaps take a step back and remind ourselves of the original case for investing in Ceres: that it has world‑beating green energy technology and a business model.
It is based on leaving manufacturing to partners, that offers the prospect of rapid growth in production all undertaken at someone else’s risk and funded by someone else’s capital.
We are however asking readers to take a lot on trust: that the technology will attract enough customers that Ceres’s partners will build fuel cells in sufficient quantities to offer a decent return, in the form of royalties, for its investment in its designs.
But the case is just as strong as when we first tipped the shares – or stronger still. We’ll hold on.
Questor says: hold
Share price at close: 731p
Update: AJ Bell
If we bought a good business too expensively with Ceres Power, can we buy a good business cheaply with AJ Bell?
Admittedly the shares are 27pc higher than when we advised readers who took part in its flotation in December 2018 to bank a quick 50pc profit a month later. But the business is also a lot bigger and a lot more profitable.
“It may have been the right call to sell three years ago but since then the firm has reported three years of strong earnings growth – of 26pc, 28pc and 13pc,” says Eric Burns of Sanford DeLand Asset Management, whose Free Spirit fund recently invested in the stock.
“The operational performance of the business has gone gangbusters – this is a company that has grown very strongly over the past two years without the share price keeping up.”
Some investors worry that investment platforms’ profits are too tied to the performance of the stock market as a whole. AJ Bell’s headline charge, for example, is 0.25pc a year of a customer’s assets. If the stock market crashes, so too will that customer’s wealth and AJ Bell’s cut of it. But Burns says there is more to the story.
“Rising interest rates are good for platforms because they mean more interest on customers’ cash deposits. A rise of a quarter of a percentage point in interest rates would offset a 10pc fall in the markets, for example,” he says.
“And while it is anyone’s guess what markets will do in the short term, our holding is not predicated on markets having another good year; it’s more a structural story over the next five to 10 years. This is an ably run and respected business and one that treats its customers well.” Time to buy.
Questor says: buy
Share price at close: 305.2p
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