Small Cap Value Report (31 Jan 2014) - BLNX, NXR, BVM, SKP, TEG

31st Jan '14 by Paul Scott

20 comments 25858 reads

Good morning! I have to be fairly quick this morning, as dashing off to see an interesting Listed company later this morning, and it's quite a long drive to get there for an 11am meeting. I really enjoy meeting company management, especially if it's at their premises, to get a feel for what the business looks like & how it operates. However, it's so difficult when they are scheduled for the mornings!

We were also hoping to drop in on another Listed micro cap in the same area, but it was too short notice to see them, which was a pity, as I won't be in that area again in the foreseeable future. I feel that companies should welcome investors popping in to see them - it's not a question of rolling out the red carpet & having all the Directors present, but surely they have middle management who can just take interested people on a quick guided tour? Saying no just creates a negative impression, and makes you wonder if things are shambolic that they only want visitors when they've had time to tidy up?!.

Blinkx (LON:BLNX)

It will be interesting to see how Blinkx (LON:BLNX) pans out today, after yesterday's blistering attack on a Blog apparently written by a Harvard Professor who is studying online advertising. His allegations triggered a meltdown in the share price, wiping an astonishing 32% off the share price (more intra-day), eradicating about £223m from its market cap, bringing it down to £474m.

My only observation is that this episode surely demonstrates that tech valuations are too high, and that investors don't really understand the detail of the business models. Hence investors are really being reckless in chasing up valuations so high, when they don't really know how a company operates or makes its profits, and whether that is sustainable or not.

This will surely embolden bear raiders, and I suspect there will be more exposes of this kind, triggering waves of panic selling. The trouble also is that so many of these tech stocks have legions of private investors who have punted on the share price using spread bets. That has been lucrative on the way up, but is ruinous on the way down, as the SB companies now just close people out…

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amacguk

31st Jan '14

Hi Paul,

Any comment on the NXR land sale?

Sorry I did not refresh my browser. Please ignore my last comment.

kestrel

BLNX on the way up the directors cashed in a lot of stock options

shanklin100

Paul

Re NXR and the sentence, "There is no change to the Group's forward guidance for underlying earnings or net debt as a result of this update."...

...surely this just states that the land sale is independent of the forward guidance.

So they haven't built the expected proceeds into their debt projections which is certainly the prudent approach and the land sale is completely independent of underlying earnings, which is self evident.

There is no statement here that the forward guidance won't be changed in an imminent IMS.

HTH. Cheers, Martin

Tamarix

Blinx - Anyone thinking of investing in Blinx should be sure to read the report by the Harvard professor. When you have you might not want to get involved.

Reynart

What worried me about the BLNX statement is that it prioritised making a point that a client had paid for it over refuting the allegations.

What rang true to me about the blog was the assertion that earnings may not be sustainable. Will be interesting to see how the institutions react and how strongly the house broker (Citi) supports them.

Roger Lawson

Regarding Blinkx, as I know a fair bit about this company I have put some extended comments on recent events on this blog: http://sharesoc.wordpress.com. In summary to me this looks like another case of "market abuse" on AIM similar to what happened at Globo. A somewhat overpriced stock invites shorting and then it comes under attack from allegations that are nebulous in the extreme, with little hard facts. The company then denies it but the damage is done. We surely need to do something about blogs and bulletin boards where anyone can publish dubious allegations without any come-back whatsoever.

MrContrarian

Roger,

Edelman's allegations aren't nebulous, just hard to fully understand and backed by circumstantial evidence and his own tests. Is it nebulous to assert that Blinkx is using underhand methods to boost its viewing figures and hence revenue?
I've read his blog three times and still don't get it all despite being a website author.
If the allegations are untrue then Blinkx can sue. I think you are presuming the piece is simply a market manipulation to support a bear raid. What if the allegations are true?

What I though poor was the hours it took Blinkx to put out a statement which then only contained a short blanket refutation.

Edward Croft

Further to the above on Blinkx, there's one way that investors could have highlighted trouble at the stock before the crash happened. The shorts massively ramped up their position once the stock hit 200p. Short Interest went from 2% (where it had been for a year) to 10% in less than a few weeks. This is a massive unprecedented move. Did they know something? Did they know the stock was under scrutiny? Would they really go that short a market darling so quickly without some kind of inside knowledge?

Frankly it doesn't matter to me - what matters is that people can piggyback hedge fund research by following the signals. Many know that we are working on our Smart Money indicators (stay on the update list here) - and this kind of short move is exactly the kind of thing we are looking for in the data.

See the short interest chart below. I wish I'd flagged this before the move - but we hopefully will in future !

MrContrarian: as regards your last point, as I noted in my blog, the company's senior staff are based in California, so it was hardly surprising that it took them until late in the day (UK time) to respond and that the response was brief.

As you point out, the Edelman post contains a lot of "circumstantial evidence" but is also exceedingly difficult to follow in detail. He could have spelled it out more clearly. But to suggest the company can sue does not help. That would take many months and the damage has already been done. In reality few companies sue for reputational damage because it diverts managers from more important things and just spreads the adverse publicity. The MacLibel case was a good example of why companies do not sue (an exception that showed how misconceived such a notion is for even the biggest companies)

cig

The only thing we need to do about this sort of situation is buy if we think the short thesis is wrong. Trying to legislate away is silly and counterproductive (it would hurt your members) because:

(1) it requires abolishing the first amendment of the US constitution, which is just not gonna happen. That the world is connected and not ruled from London is just a fact of life.

(2) it hurts long term investors who would be deprived from cheap entry points and are not hurt on the downside by a little bit of short term volatility that they can easily sit through.

(3) it would prevent some of short theses that are correct from being published, allowing crooked management to prosper even more than they do now.

To cig: you are jumping to erroneous conclusions about what I might be advocating. I am not suggesting inhibiting free speech which you rightly point out would not be possible. But if shorters are benefiting from posting dubious and unproven allegations from which they or their associates are benefiting then that is market abuse. Which is already illegal both in the UK and USA. Try doing that with a FTSE-100 company and the FCA would come down on you in short order. But on AIM, anything goes.

It seems very clear to me. He basically claims that Blinkx-controlled entities are doing:

(1) maliciously installing ad software against the user intent
(2) using the above software to steal ad space from the original advertisers
(3) click fraud to misrepresent the impressions to their ad buyers

if that's still not clear, let's try to translate what similar actions would look like in the brick and mortar world:

(1) burglars sent to your home and putting up posters in your living room (but not otherwise stealing anything)
(2) going round at night and papering over hoardings with your own ads without paying the owners
(3) saying your magazine sells 500,000 when it sells 20,000 when you sell ad space in it.

He doesn't/can't quantify it, so maybe it's just 1% of revenue from a small rogue team, or maybe it's a third parties using blinkx as the back end and the company themselves are innocent. That's where DYOR comes in.

I don't think it's illegal to post allegations of the kind posted in this case, and I don't think it's illegal to comment on a company and have a position at the same time (and say so!). It would only be illegal if it was made up, but here he states facts that should be pretty easy to verify.

These facts alone don't really prove as such any wrongdoing, or the scale thereof, and I don't think the post says they do: he just asks questions. Then if the market reacts funny to someone asking questions, it's not fair to blame the guy asking questions (be it someone with a short position).

cig: yes there are allegations, but actually the facts are very sparse and may be difficult to verify. The company flatly denies them. But Prof Edelman is not presenting an academic treatise on what may or may not be taking place at Blinkx. He very directly gives his opinion that the company is fraudulent. One of his concluding sentences is "I submit that Blinkx is carefully withholding this information [on how it makes money, etc] because the company has much to hide". He does not even say whether he asked the company to supply the information he wants or whether he has given them a copy of his blog before publishing and asking them to comment, but one presumes not. In other words he has rushed into publishing the allegations without any real evidence or verification. As someone who regularly writes contentious articles about companies, one of the first things I learned was to check my facts with the company and ask them to review any prospective article (which can be done in under 24 hours normally). So for example, when ShareSoc criticised the changes to Hargreaves Lansdown platform pricing they saw the press release before it was issued (and some minor changes were made as a result). The problem is that Edelman seems to have chosen not to do these things. In other words he is ignoring basic journalistic principles. Why?

Henry Walpole

I cannot see how these allegations can be described as nebulous. The blog presents evidence for its findings. The company has not refuted the specific allegations or provided any evidence of its own that they are inaccurate.

intuitive6191

To my mind research should be impartial - or it’s not research. Not knowing who sponsored the research or to what ends undermines the argument in my view.

If he had a mind to do so he could have published this using his own time and resources using a less emotive title. *The darker side of Blinkx" sounds more like the title of a thriller and most inappropriate for authoritative research. Naming one company with such a negative title was probably going to damage Blinkx even if nobody understood the argument.

At this point it’s worth making a distinction between short sellers who trade using their own skill and judgement against those who trade on inside knowledge or create events which will be judged to destabilise the share price. One is illegal – and to suggest that it doesn’t matter is counterproductive to independent shareholders.

Hopefully the timing of this research and the apparent increase in short selling will be investigated. I am neither long nor short with Blinkx – but am obviously concerned about any possible action which is puts the small shareholder at a disadvantage.

On a lighter note – where were these clever Harvard types when Madoff was trousering billions of dollars?

However, the lesson really needs to be learned that following momentum forever could suddenly go badly wrong. Also, if you do hold stocks that are very highly rated, you need to know for certain how that business operates, and that their profits are real, and sustainable.

Absolutely - I couldn't agree more. If you are a momentum investor, having a value bias is probably the smartest thing you can do to help avoid these kinds of dramatic share price cuts. In the case of Blinkx and ASOS and others you find at the ends of huge runs they get massively over-rated - their valuations become extreme. Both were on Value Ranks of under 5 on our rating scale. For the benefits of combining both approaches - see this piece I wrote on value and momentum.

Buying these pure momentum stocks becomes a game of the greater fool... buying in the hope of finding a greater fool to pass the shares on to - best to avoid playing that game altogether !

Leven

intuitive - here! http://www.amazon.com/exec/obidos/ASIN/0470919000/financialsenseon

wisley

The most interesting thing about TEG is that it's balance sheet is dominated by £15m of fixed assets (representing the written down value of its composting/digesting/generation plants) but it's market cap is only half that. The company has no debt to speak of. This is a fragmented industry and TEG appears to me to be an attractive consolidation target with long term contracts underpinning revenue and plant utilisation.

Small Cap Value Report (31 Jan 2014) - BLNX, NXR, BVM, SKP, TEG

Blinkx (LON:BLNX)

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Paul Scott

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