6 Red Flags That Could Have Kept You Out Of BLUR Group

13th May '14 by Ben Hobson

8 comments 16515 reads

The terrible announcement from BLUR Group (LON:BLUR) yesterday absolutely pummelled the stock price, down 40% on the day. After an already dramatic drawdown from its recent highs this was salt in the wounds of optimistic investors in the stock. This is a company which had been heavily promoted by the broker community to private investors and many have been badly burned.

At Stockopedia we are all about finding companies with sound fundamental and technical backing. We promote the investment preferentially into good, cheap, improving stocks rather than expensive, speculative, deteriorating stocks. The law of averages, and a wealth of literature shows that investing in the former is a far more lucrative pastime than investing in the latter. Unfortunately, we humans are addicted to a good narrative, and it makes us susceptible to believe the hype around story stocks like Blur.

While not everyone invests solely using smart data like we do, we do believe the insights from the Stockopedia StockReports can keep even story driven investors out of some of the worst potential investments on the AIM market. Blur Group’s StockReport has been something of a ‘train wreck’ in recent months and has been filled with red flags.

In order that subscribers can learn from this episode we’ve highlighted half a dozen of these ‘red flags’ in the following report. Whenever you see a set of these flags in a stock you own or are considering buying remember that you are fighting statistics. Think twice, there are plenty more fish in the sea.

1. Extreme Valuation

Unfortunately for so many Blur Group shareholders the company’s valuation has been propped up by hype and promise. At its peak (graphic right) the company was valued more expensively than 98% of the market according to the Stockopedia ValueRank.

With no earnings or dividends, the company couldn’t call on traditional valuation metrics like the P/E or Yield to cushion a fall, and other metrics like Price to Sales and Price to Book were at nosebleed levels. The ‘traffic lights’ in the graphic are clearly ‘red’ indicating the stock ranked very poorly versus the market and its sector peer group. When investing, it pays to remember that value investing beats glamour investing - Cheap stocks beat expensive stocks.

2. Dubious Earnings Quality

While Blur Group has had no profits to speak…

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PhilHofGrowYourDough

13th May '14

Hi Ben,

I was totally unaware of the print feature and it's ability to present different versions of the Stock Report.
That's a very nice feature, thanks for highlighting it.

Regards
Phil

Ramridge

Hi Ben. Have you looked into the frequency of false positives with respect to this analysis? My gut feel says a significant proportion. I am prepared to bet that Asos a few years back would have produced a similar number of red flags. Regards. Ram

Edward Croft

Ram - the thing about ASOS is that it hasn't bled money every year - it's been remarkably (amazingly) profitable. Also it's F-Score has been great - at 8 or 9 for as long as I can remember - the fundamentals just kept getting better. That's been the key point there. Loss making companies with no earnings are the biggest red flag to me - personally I never go near them.

re. ASOS - I have noticed the M-Score has been flagging there recently - that's been quite timely given the sell off.

Cjenkins8

Hi ed
I too hadn't noticed the historical records available via the print button - very helpful.
Any chance of putting the beneish value and the montier value on the stock report adjacent to the F score and Altman Z
Excellent article
CJ

The Beneish score is just below the Altman score on StockReports. It's the "Earnings Manipulation Risk" indicator. If you hover over it you'll see the link - click it and a popup appears.

Wol

27th Oct '15

Hi Ed
Interestingly, the Beneish M-Score did not identify Globo as an earnings manipulation risk. Any chance you could tweak the criteria or create another screen to identify Globo type accounts manipulation? Or maybe we just have to accept that the computers will never do all our work and that we will always have to do some thinking too (aided of course by Paul Scott's analysis).

Julianh - well the overall M-score didn't flag Globo as high risk, but it had some big red flag risk factors if you broke it down. I did mention this on several occasions - e.g. this comment back in January 2014.

Regarding Globo - as I said we do have our earnings quality metrics which in general veer to 'ok' for GBO. But that doesn't mean they aren't showing risk factors. Have a look at the Beneish Earnings Manipulation checklist and it's clearly flagging accruals, SGA & quality of assets as risk factors.
http://www.stockopedia.com/apps/beneish/?ticker=LO...
The Montier 'cooking the books score' clearly flags depreciation rate issues and inventory buildup. http://www.stockopedia.com/apps/montier/?ticker=LO...

The problem with a firm that's genuinely determined to cook its books is that it can paint whatever picture it wants. I have no idea why some of those risk factors dissipated since but we can't put accounting manipulation out of the question.

We've got 2 earnings manipulation indicators here at Stockopedia - Beneish M-Score and Montier C-Score. They both only have percentage hit rates so there will be false negatives and false positives on both sides. Ultimately the benefit of broad brush quant scores like this is that they flag stocks across the whole market, which is something a lone analyst will never do, but they won't be able to dig into the nitty gritty and uncover singular frauds and deceptions - which is something someone like Paul is so able to do with his forensic accounting.

The great benefit at Stockopedia for subscribers is we've got both sides covered - blanket quant from the algorithms plus forensic analysis from Paul. So the dodgy companies out there ain't going to sneak through the gaps!

pka

"The great benefit at Stockopedia for subscribers is we've got both sides covered - blanket quant from the algorithms plus forensic analysis from Paul. So the dodgy companies out there ain't going to sneak through the gaps!"

That's true, but only for small companies, which are the only ones that Paul comments on. There have been some notable examples over the years of fraud in big companies, e.g. Maxwell Communications, Polly Peck and Enron.

6 Red Flags that could have kept you out of BLUR Group

1. Extreme Valuation

2. Dubious Earnings Quality

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Ben Hobson

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