KISS goodbye to UtilityWise

2nd Jul '17 by GrindertraderUK

20 comments 10131 reads

INTRODUCTION

A few days ago I sent out the following tweet.

I feel these 5 small rules are as true today as they were when I first realised simplicity. Robbie Burns the Naked Trader taught me most of these rules and his book is still my own personal bible. It is kept in my desk drawer and every few months I scan over it again, just to help refresh my memory and to keep my investing discipline in place.

This tweet was sent the day before the now infamous UTILITYWISE | Projected Under Consumption Of Energy Contracts | RNS. The RNS stating the following;

" that it [The company] has been made aware of apparent material levels of under-consumption in certain contracts placed with one of the major energy companies dealt with by the Group (the "Energy Company"). "'

Subsequently the share price dropped around 40% on the day. The share price has been in a downward momentum since May 2014. Utilitywise (LON:UTW) has been and still is a hotly debated stock and more interestingly between some investors that I follow and have a huge respect for.

This post today will focus on simplicity and why sticking with simple, easy to understand rules should in most cases keep you away from the risks associated with the likes of UTW.

As always I want to mention that while I have posted my opinions in the past I have never been a professional writer. My grammar and spelling can be appalling but I hope my message I want to bring is clear enough.

But before we go onto simplicity lets first talk about my most loathsome word of all - adjustments. (ok so there are quite a few nasty words i could categorise but I'm going to stick with adjustments as a pretty good contender for the most loathsome word ever.

ADJUSTMENTS

Okay so I am sure many highly sophisticated, experienced analysts, accountants, investors will think that adjustments are important! Of course by adjusting the figures said person will be able to calculate a more accurate view of the accounts for valuation purposes. That's fine but I think Im pretty amateur to be honest. As an amateur I'm probably at a disadvantage to the experts and up…

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The Phoenix

2nd Jul '17

Great post Ian re cashflow do you use operating or free cash flow as your guide ? also any other tips for stuff you use on stocko for red flag hunting ?

tony moxon

Ian, what please are your current QVM holdings and exactly what performance have you achieved since your first £20k test portfolio?

If you feel comfortable sharing these details it would be a big help to me as someone who is just a few days into Stockopedia.

Many thanks,

Tony

JohnEustace

Also Utilitywise (LON:UTW) had previous form regarding their accounting practices. Paul Scott wrote about it here a number of times. I go with the Warren Buffet adage "It's rare that you find just the one cockroach in the kitchen."

shipoffrogs

""Diluted adjusted earnings per share, with Adjusted earnings stated before exceptional items, non-cash accounting charges for share-based payments and amortisation of intangible assets acquired in business combinations and the associated tax impact of these adjustments, remained at 9.6p (H1 2016: 9.6p - as restated).""

I do so like that after all that the comparative figure is "as restated".

GrindertraderUK

3rd Jul '17

clarea. Normally I use FCFps share. As a guide I want to check that it is close to or preferably higher than EPS. But there should only be a small difference between EPS Basic and EPS adjusted, diluted, normalsed etc etc or i stay clear.

thanks Ian

Hi Tony, I will be publishing a final update on the 20K StockRanks Portfolio in October.

I was certainly amused with the that one. good luck shipoffrogs

Thanks,

Tony

Ramridge

Hi Grindertrader -
I am very much in tune with your thinking. An early thinker of the KISS principle was the 14th century English Franciscan monk William of Ockham, who articulated what is now known as Occam's Razor.
There are a number of different interpretations depending on your field of study, but in its widest sense the principle can be stated as "If you have two equally likely solutions to a problem, choose the simplest."

Applying this to our world of investment, it says to me that if you have two company accounts, one opaque, full of adjustments and difficult to interpret, and the other a model of clarity, then choose the latter one. In the long term that will be the more profitable choice.

One last point. I have been following Minervini's approach and your 5 points are right at the top of his own set of criteria. Kindred spirits.

Best. Ram

Hi Rambridge,

Thank you for a nice response to my post. I do not know much abut William of Ockman but I would imagine him turning in his grave, if was to see how complicated we have got our lives into! The path of least resistance is normally the laziest, but one that suits me fine to get the same end results and i find it works, well most of the time.

May I ask is Mark Minervini you refer too?

best wishes
Ian

Hi Ian

There is a sort of active thread on Mark Minervini which you can find here .

Thanks again Rambrige. I read he changed your investing style. It is fantastic to find a working system that suits you. I'm currently working through Phil Oakley's book but i'll read Marks soon after.

6th Jul '17

If Panmure Gordon researcher Michael Donnelly find valuating Utilitywise as 'not easy' what chances do most of us noobies have? [1]

Panmure Gordon & CO

"We try to form a valuation methodology - and it's not easy

[1 ]Screen snipped and quote from Panmure Gordon Support Services Flash Utilitywise dated 29 June 2017. Accessed from www.research-tree.com a paid service to which i have a subscription.

For the bull case WheelieDealer has written a latest blog

Look to the Future now, it’s only just begun - with Special Guest Star UTW - Part 2 of 2

Wol

You are so right. I bought into UTW a couple of years ago and almost immediately sold again at a small loss.
Why did I buy - one of my biggest psychological weaknesses when it comes to investing is that I hate missing out on something good. This too often leads me to override the risk warnings.
Why did I sell again - for all the reasons you give. "Adjusted" is the biggest red flag in any RNS. Paul's report showing that UTW recognise profit before it is real was a clincher. Paul doesn't always get things right but when he offers such a big warning it would be daft not to take note.
I am not so worried when a full reconciliation between adjusted and accounting figures is shown PROMINENTLY and when the unadjusted figures are good too. When the pure accounting results are not easily found that means they don't want us to see them. Because they tell the truth.
Many thanks for your write up.

Ken Lowes

8th Jul '17

HI Ian
I had a two day exposure in UTW! Thought I would be a hero and invested the day before the year end report sold out on the day of the report for a 12% loss, as the NT says" I feel great about the loss" especially now. On your theme of simplicity. Some years ago I was told there are three stages to success Starry eyed enthusiasm followed by complicated sophistication into mature simplicity,. Sadly too many people get stuck in phase two. Pleased to see you have graduated with honours.
Regards
Ken

Hi Ian for the cash flow test do you use eps or eps normalised to compare against also if there's a large difference between eps and eps normalised does this sound alarm bells for you ?

I'm hoping to get on Robbie's follow up seminar soon seem to remember you saying it was a step up from the 1st (which was good just to hear the great man wax lyrical).

10th Jul '17

Hi ken, good to hear from you again.

I admit to often falling back into category two. I have just completed a basic book keeping course and away to start a years part time course on Financial & Management accounting. I want to understand accounting better, however my end game here is to be better at spotting frauds at an early stage so that I can short them. The risk here of course is forgetting my simple approach when going long. Referring back to the Naked Trader books keeps me from sliding too far backwards

all the best to you Ian

Hi clarea,

Sorry I thought I replied to this earlier today!

I only use EPS if the difference between EPS (basic) and the rest EPS adjusted, normalised, diluted etc have very little difference. i.e EPS Basic 8.7p and EPS Adjusted 8.5p. If EPS Basic was reported at 8.7p and EPS adjusted was 6.2p. That's not ok. That in itself can make a big difference to valuations. I have no clear rule, rather just using my experience to determine if an EPS can be trusted or not.

best wishes Ian

Silver Moon

22nd Jul '17

I guess I got lucky with UTW having bought in July 2016 and sold out 4 months later, just before fund manager Woodford bought in. It was a gamble, it was before I read some very disapproving blogs from former employees of UTW and also before I joined Stockopedia, but if I'd known then I would not have made a 28% gain.

Well done on the 28% gain. However you could make 28% gain on stocks that are easily understandable and can carry less risk, because the risk is more understood. When I make posts like this, I am talking about why 'on average' keeping out of complex scenarios will help 'on average' improve your gains.
UTW might turn out hunky dory, I just don't need to be invested in it for the reasons in my post.

KISS goodbye to UtilityWise

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GrindertraderUK

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