Six red flags that could have saved you from the BT Profit Warning

Tuesday, Jan 24 2017 by
93
Six red flags that could have saved you from the BT Profit Warning

Nearly £7 billion of value was wiped out today in BT, formerly British Telecom, after the phone giant revealed that an accounting scandal at its Italian subsidiary was much bigger than first thought. For around 1 million individual shareholders, this sort of massive collapse at a FTSE 100 blue chip is very rare, and very bad news.

We’ve taken a look at the Stockopedia StockReport, a page that’s packed full of algorithmic insights into the company’s finances - to see if these problems could have been anticipated.

This one page online summary of the company gives every investor the insights they need to avoid these kinds of large cap catastrophes.  Let’s take a closer look and learn to read some of the signs:

1 - A High Earnings Manipulation Risk

While BT’s shares have been tumbling for some time, today’s enormous 20% mark down was triggered by the escalation of an accounting scandal at their Italian subsidiary. Auditors KPMG uncovered a serious overstatement of earnings in its Italian subsidiary over a number of years.

"These investigations have revealed that the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions."

Can these kind of accounting scandals really be predicted?  Well yes, they often can.  The Stockopedia StockReport contains a neat metric called the Earnings Manipulation Risk. This indicator has been flagging as “High Risk” for BT for some time.

58879cd70d491BT1.png

Based on the work of Professor Messod Beneish, this forensic algorithm for finding accounting frauds has spotted a ream of high profile issues in the last two decades including Enron and Worldcom. By clicking the link on the indicator a set of risk factors is highlighted for BT including:

  • A disproportionate increase in receivables suggesting that the company may have been inflating sales figures by booking sales earlier or extending better credit terms to customers.
  • Unstable asset quality - which Beneish explains is a possible sign of improper capitalization of expenses and cost deferral.  Another common accounting fudge.
58879ce66bedaBT2.png

These sorts of accounting insights are just one click away on the Stockopedia StockReport.

2 - A Falling StockRank

BT had been one of the large cap stars in the UK market recovery from the global financial crisis.  From a low of 73.5p in 2009, the shares rocketed…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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BT Group plc is a communications services company. The Company is engaged in selling fixed-voice services, broadband, mobile and television products and services, as well as managed networked information technology (IT) solutions and cyber security protection. Its segments include Consumer, which provides fixed-voice, broadband, TV and mobile services; EE, which is a mobile network operator in the United Kingdom and provides mobile and fixed communications services to consumers; Business and Public Sector, which provides communications and IT services to businesses and the public sector in the United Kingdom and the Republic of Ireland (RoI) ;Global Services, which provides managed networked IT services to corporate customers; Wholesale and Ventures, which provides fixed and mobile services to communications providers (CPs); and Openreach, which provides copper and fiber connections between its exchanges and homes and businesses. more »

LSE Price
282.8p
Change
0.1%
Mkt Cap (£m)
28,022
P/E (fwd)
10.0
Yield (fwd)
5.8



  Is BT fundamentally strong or weak? Find out More »


32 Comments on this Article show/hide all

Howard Adams 25th Jan 13 of 32
1

Ed

An excellent post, thank you.

Your elaboration on the use of the different StockReport components lifted my understanding of them significantly.

The article catalysed me to create a screen to help me see some of these warnings. Thankfully only two of my current holdings appeared.

I find your work around these aspects of how to look for trouble using Stockopedia to be extremely helpful.

Since becoming a subscriber Stockopedia and its support has led me towards successful investments I would not otherwise have found. But, of equal, if not more value, I have been saved from quite a few problems which I might have otherwise stepped into or not exited from fast enough. Now, my portfolio is less volatile, has shallower dips and is growing ever more steadily.

Many thanks
Howard

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zeibots 25th Jan 14 of 32
2

Thanks Ed, a convincing case for the quality of the Stockopedia site and what wealth it offers to subscribers even before the proposed improvements, the current strengths lie mainly in the fundamentals.
The demise of BT is beautifully demonstrated by the decline of the Stock Rank when it dipped below 80 as early as June 2015. This is where the fundamentals meet the charts in Stockopedia.
For a chartist like myself it all started earlier than that. A marked bearish divergence in the WEEKLY MACD started at the beginning of April 2015, it never looked back. Then from the beginning of Dec 2015 both the WEEKLY OBV and Acc/Dist commenced a steep decline. This is when the big boys started to leave.

For my style of investing both fundamentals and the charts have a story to tell. The old saying that just one without the other is like a one legged man in a butt kicking contest stands true. The BT demise is a clear confirmation of this.
I look forward to the future developments of the site with great enthusiasm, especially the charting facilities.

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karfoot 25th Jan 15 of 32
1

I found the chart under heading 2 'A Falling StockRank' very interesting and illuminating. As a subscriber do I have access to charts like this for each stock in the StockRank universe? If so, how do I access them? If not, are there any plans to make them available?

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zeibots 25th Jan 16 of 32

Yes Karfoot, these charts currently have only limited access but I understand that they will be available as part of the new version of Stockopedia later this year to subscribers generally.

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Mikeyflange 25th Jan 17 of 32
4

Hi,

Its interesting to note that Vodafone is exhibiting very similar fundamentals to BT and has a stock rank of less than 50 , which has been in steady decline.. Wonder if we will be having a similar discussion about Vodafone in a few weeks time ..Caveat Emptor.

Would be worth seeing a stockopedia view on VOD and whether you would make a similar prediction for VOD
Mike

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dalradian 25th Jan 18 of 32
1

If one had followed short term technical indicators as I now do,all would have sold out before the news! I bought only 770 on 30.12 when indicators where looking OK. Sentiment changed and after 4 days of red SAR I sold on 20/1 when the MACD D Histogram had also gone to red negative. I think Technical indicators give a good idea of when to get into and out of an equity (Call it a trade if you will-) One indicator on it's own can be misleading- it has taken me some time to appreciate what mixed signals can mean (or not).

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hayashi22 25th Jan 19 of 32
6

Other warning signs on BT were lots of profile pieces on how wonderful the ceo is (or was) in various papers plus new beard which suggests underlying insecurity or weak chin coverup ploy.

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Blackbelt 25th Jan 20 of 32
2

Ed -Great article.I became a subscriber in October and immediately reviewed my existing portfolio ( or rather collection of shares) in the light of the Stockopedia rankings which immediately identified BT as a problem for me.I had held the share for a few years and was showing a sizeable profit and BT represented a disproportionately large % of my portfolio.The pension deficit and Openreach were obvious areas of concern.One month after subscribing I sold my holding in BT in November and have of course been watching the share price initially drop a lilltle further (Happy) before rising (sad) over the last few weeks-leaving me wondering from time to time if I had done the right thing.Each time I returned to the Stockopedia data and each time I became convinced that I had made the right decision.I am convinced that Stockopedia's Stockrank for BT gave me the confidence I needed to make a sell decision.Thanks.

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Edward Croft 26th Jan 21 of 32
4

In reply to hayashi22, post #19

Other warning signs on BT were lots of profile pieces on how wonderful the ceo is (or was) in various papers plus new beard which suggests underlying insecurity or weak chin coverup ploy.

That's just genius....We need a BeardRank

Blog: Follow @edcroft on Twitter
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tournesol 26th Jan 22 of 32
6

In reply to hayashi22, post #19

Hayashi

What is the most important aspect of beard wearing that is relevant to investment analysis?

Length? Density? Grooming? Coverage? Colour? Greyness? or is it more to do with the possession of the thing than the thing itself? ie the recency of acquisition? the age at time of onset?

A "yeard" is a beard year - like a man-day but for beards - it measures the number of years that a particular beard has existed and might be a useful indicator. Perhaps we should have charts of yeards added into our arsenal of analytic tools. Having said that we might want to combine that parameter with a fullness metric so that a goatee worn for years has to slug it out with a full beard of recent origins.

Of course there is a venerable fons et origo for the association of beards with strength and vitality. In the Old Testament Samson derives his strength from his long hair and is invincible. When Delilah cuts it off he becomes weak and is captured by his enemies, blinded and enslaved. Only when it grows back does he recover his might and wreak vengeance on his foes. I suppose that the association between strength and hair length can easily be used to explain your thesis that beards denote weakness although it does imply a perverse inversion of its precursor belief.

So what is clearly required is a Stockopedia analytic that combines Beard Length, Age, Grooming, Greyness, Inversion, Newness and General appearance. We can call it the BLAGGING indicator.

I should disclose that I wore a beard for most of my adult life - not because I had a weak chin or felt insecure but because it was a truly manly beard and I looked absolutely indomitable with it. But I shaved it off when the greyness co-efficient exceeded 75% and immediately looked 10 years younger. These days I often skip shaving for a week or so just to remind my family that there is life in the old dog yet and that they should tread lightly around the sleeping Samson.

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hayashi22 26th Jan 23 of 32
2

In reply to tournesol, post #22

I appreciate your post. I used to work in the City so had to dress up and shave daily. I now work on a more casual basis so have no need for that and occasionally go in for a week or so of facial hair till wifely nagging forces a rethink.I was reading a piece recently which suggested that Victorian beards could indeed hide a multitude of sins. Tennyson apparently had rotten teeth so the beard was designed to deflect attention from that; Darwin had bad exzema, whilst Dickens did indeed have a weak chin.
The BT ceo strikes me as a man who is remarkably pleased with himself -probably can't believe how an ex Mars bar salesman landed such a big job.

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gus 1065 26th Jan 24 of 32
4

Perhaps we could introduce a beard tax to raise funds for impoverished BT shareholders? There are precedents, Henry VIII introduced one in 1535.

Gus.

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zeibots 26th Jan 25 of 32

In reply to dalradian, post #18

Interesting dalradian, I had not heard of SAR, had to look it up in Martin J Pring`s TECHNICAL ANALYSIS EXPLAINED. This is a 640 page book that is regarded by some as the Bible of TA.
However from an investment point of view and BT, the key was VOLUME.. Both the OBV and Acc/Dis indicators peaked on 25/11/15, after that it was obvious that the big boys had started distributing and continued to do that rather than buying. To take out the market `noise` I usually use the WEEKLY setting for these indicators.
I hope that Stockopedia in their new version will enable settings for both daily and weekly for indicators. As to the range of indicators provided, I think is OK. I follow the KISS principle. I think many investors and traders confuse themselves by using too many and sometimes obscure indicators.

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mothy9 26th Jan 26 of 32
5

Being a Stockopedia subscriber really has transformed my investment thinking. For instance, I sold a long term holding in BT a few weeks ago. I had carefully looked at most of your figures and concluded there could be trouble ahead. Correct decision! What a relief.

Your "six red flags" article was absolutely excellent. Please continue to suggest and explain different ways of using the mine of information you offer on each company. Most of us are faced with too much information to try to digest. Your pre-analyses are hugely helpful. Thanks to the whole team.

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Splode 27th Jan 27 of 32

Ed - Is the link in flag 2 (A Falling StockRank), "the StockRank performance history of the market at this link", supposed to go to the same page as the earlier link at http://www.stockopedia.com/stockranks/performance/ ?  It does not seem so. 



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SRWARR 27th Jan 28 of 32

Ed - Not a total surprise !!!!
Although I bet that there are a few punters that piled in and bought post this week's bombshell - interestingly, if you look at their share price over a 10yr period, there are sustained periods of price stagnation. This weeks "gem" may well mean a few years at the £3's level or...................worse

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zeibots 27th Jan 29 of 32

In reply to Edward Croft, post #6

Hi Ed,
With reference to Part 5 about BT, would you please read my comments of last Wed 1.56pm and Thurs 12.30pm.
Following that I`m not sure if you are referring to `momentum indicator` as part of the Momentum metric in Stockopedia or the momentum indicator.
Strangely as far as the OBV and Acc/Dist indicators in Sharescope concerned they both peaked on 25/11/15 whereas the Stockopedia ones were still in uptrend into 2016.
I`m trying to relinquish my reliance on the charting facilities in Sharescope, perhaps we can have a preview of what will be available
Finally I`m now totally reliant on the fundamental approach by Stockopedia and this has improved my investment profitability substantially..

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hayashi22 27th Jan 30 of 32
3

I suppose another thing which annoys me about the bearded one at BT is the bidding war he instigated for football rights with Sky. ( I don't follow the game too closely so hopefully this is more or less correct). Like many things it has had the opposite effect to what might have been intended. Has it enriched the grassroots game?- no. The money has gone into the hands of agents and a few top players. I suspect top agents like Jorge Mendes earn millions a year whilst the likes of 'potato face' Rooney earn £0.3m a week (that's just salary). All thanks to the largesse of the bearded wonder. So you can read in the Sun of footballers, who might otherwise be shelf stackers or labourers, with £10m houses and five Ferraris and all the bling you could ever not want....
I can hardly blame the players for grabbing what's on offer though.

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hayashi22 31st Jan 32 of 32

What did for me was some bearded prat at Logica -basically destroyed the company via poorly timed expensive acquisitions.

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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