Pawbrokers ABM (Albermarle & Bond) slid 12% to 24.75p amid ongoing uncertainties about the future of the business. The company’s bank has agreed to defer a covenant test until the end of the month, clearly indicating that it has a major debt problem. The company’s largest shareholder, EZCORP, has currently declined underwriting an equity raise or helping with a revised banking package.
I had written about ABM in the past, very favourably, selecting it for an income share. Clearly, a huge blunder on my part. I had sold my shares in November 2012 at 251p. My notes say it was the purchase of PFD (Premier Food) shares. Clearly, I had no insight into the working of ABM, and my selling out before its calamitous fall to sub-25p was pure luck. I had completely failed to spot the inherent risks in this company. I have no defence.
In my Stockopedia portfolio, I see that I sold the shares at 131p on 29 April. This was a reaction to the trading update that ABM pushed out on Fri 19 April after hours. As I noted on my blog on the 22 April, “You just know that it’s going to be bad when a trading statement is released after hours on a Friday”. The share price dropped rapidly. I obviously got cold feet.
I think that there are (at least) 3 take-aways from this:
- It is important to understand the business, and its debt. The company had a high z-score and interest cover, but that didn’t mean that the company wasn’t over-leveraged
- It’s never too late to buy, and it’s never too late to sell. I sold shares in ABM *after* the steep sudden decline in April. The shares rebounded a little after my sell point – showing considerable inexpert timing on my part – yet, in retrospect, it was a great price to get out at
- So-called “safe income shares” are often riskier than you think. We’ve seen this in companies like TSCO (Tesco) at he beginning of 2012, where the company’s shares fell 20% on the back of a disappointing trading update. The company still hasn’t recovered to its pre-fall price of around 400p. They often have limited upside. The “safer” they are, the greater their rating, making them particularly vulnerable to any negative impacts. In the case of something like Tesco, their perceived safety is generally well-earned. The risk of disappointment is ever-present, though. In fact, even if you had bought after Tesco’s crash – say on the 24 Feb, you would have returned 12.7% to date, compared with the Footsie of 9.3%. You would have beaten the index, but not by a huge margin.
Happy investing to you all.