Good morning!
Digital Barriers (LON:DGB)
This is a heavily loss-making provider of advanced surveillance technologies. Preliminary results for the year ended 31 Mar 2014 have been published this morning. As you can see from the two year chart, the periodic lurches down are when the company disappoints in trading statements and results:
This is the big problem with loss-making growth companies - nobody really knows how to value them, since there are no profits that you can apply a PER to, in the conventional way. So the entire valuation rests on expectations of future profits, which is little more than guesswork.
Company management teams, aided and abetted by the whole City machine of brokers, PR people, etc, plus the perma-bull muppets on bulletin boards, relentlessly talk up company expectations (sell notes are very rare, and dissenting voices are chased away!). Therefore when hard facts come through at results time, this very often throws a bucket of cold water over inflated share prices, as investors realise that things are nowhere near as positive as they had been encouraged to think.
This is why I try to avoid loss-making growth stocks. Or if I do succumb to temptation, then it's usually either something that is completely off the radar of other investors, or something that has been a serial disappointer - already has a bombed out share price, everyone hates it, but it has enough cash in the bank, and the first signs of commercial success are peeping through. That's the convergence of factors which is most likely to lead to success, in my opinion. Every now and then it can lead to spectacular success too - I've had lots of multibaggers using this approach, but also quite a few failures too, so we're very much talking about the high risk end of the market here.
Sorry, I've rambled off the point. Back to Digital Barriers. Group revenes actually fell - usually a very bad sign for a growth company in my experience, from £23.3m to £19.0m. Although they've found a way of showing growth, by labelling some products as "core", which has created a growth rate of 18% for that category. Nice work - someone deserves a bonus for coming up…
