My favourite contrary indicator for avoiding stocks like Globo and Plus500

soPaul was able to flag Globo as suspicious a while ago. Perhaps it would be of value to Stockopedia to add a new indicator that would raise a red flag for the mere mortals like myself that are not accountants.. Even looking at the stock report and stck rank today one would be forgiven for believing it was a stock worth purchasing . Globo still shows a stock rank of over 80 and passes 6 screens.. I know it's upto the investor to due due diligence , but if the auditors grant Thornton could not elicit the truth what chance have we got .
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Or just buy an FT.com subscription. Excellent work by Dan Mccrum on Plus500 and Quindell.

Thanks pka - I had read that article by Paul – I think he was at his best!

HI Ed - you have four periods for the Beneish M Score. I look at the Beneish M Score, Last Yr as from the Stockopedia glossary this seemed to be the best one to use. (I do not actually screen stocks out using this measure as many companies do not have this data but try to remember to look before I buy).

mgallear wrote: "I would like to know why the Benish M score and the Montier C score frequently do not detect shares with very strange balance sheets but they are obvious to an accountant like Paul?"

The following article doesn't fully answer your question, but it explains why Paul thinks Globo's accounts are full of red flags:

http://www.stockopedia.com/content/small-cap-value-report-gbo-koov-107216/

From the given graph it would appear that you need a QV Rank over 50 to avoid the majority of the iffy shares that are being honest about their figures. (This is cutting the investable universe down by a considerable amount.)

I have to admit that I have not analysed my portfolio in the past using the bubble tool but have started to go through my stock screens to catch any in the red sector and they have not done that badly so far.
Not sure that looking at a ranking of activity on advfn to find dishonest shares is really all that rigorous for a true fundamental quantitative investor. (But it is certainly an interesting exercise.) I suspect that most true technical investors do not care as long as they go up.

It might be wise to avoid investing in Chinese shares but if you avoided all foreign shares than you missing out on a lot of the point in using Stockopedia and having an international stock market such as the LSE and AIM

The ideas by Mark Carter are very helpful and I do look at director dealings but these are not available for European shares. I have come across comments on a company changing its auditors perhaps rather ironically on advfn, but I have never rigorously looked as this aspect to check the shares in my portfolio. Does anybody know of an easy way to do it?

I do not think it is at all easy to find out if a company is cooking it books or lying about its products by just doing a 5 minute google search - well not until it is far too late. (Have a think about Volkswagen and BP.)
I would like to know why the Benish M score and the Montier C score frequently do not detect shares with very strange balance sheets but they are obvious to an accountant like Paul? (I know it is not a good time to ask Paul a question and nothing I can say will help.)

Actually Ed there is a interesting little bug in the bubble charts which you may want to look at. You probably wouldn't want me to write it here so I will use the green feedback button.

Lets wait and see what GLOBO says in response to the article and subsequently what the market says when the shares return from suspension. Discussion about BS is nothing to do with a website like this and should be moderated out.

Where can we see the stocks that are in the bubble chart?

Sorry but we don't want this site to turn into an unruly mob, so I've nuked a few posts. Let's keep this place a space for sensible investors and sensible discussion.

Alanh, have you read the full report by QCM?. In what aspect is it fatally flawed?. I like to think contributors here are open minded to both sides of an(y) argument, both bull and bear without getting emotional (our own worst enemy (from experience!)).

You got a thumbs down for "You would do well to do your own research before re-publishing BS." Additionally in your subsequent post "..you must have led a very sheltered life in a fundamentalist community that doesnt even watch the BBC after the water shed." That doesn't go down well and is more reminiscent of the posts I read on the bulletin boards usually reserved for the highly speculative high risk shares after a poor day.

" "You would do well to do your own research,,,,,,,,,,,,,,,,", and then you are asking folk here to help you in your research?!.

"Any help will get an unequivocal thumbs up and a recco for something HUGE which will require you load the truck up or shovel it out short.". Can't wait, but sorry, I am too busy............doing my own research!.

I am not wanting this to become anything like a slanging match on here or anywhere so will just wish you good luck. Good luck

CM

Is there any option to use Benford's law to spot made up data sets? https://en.wikipedia.org/wiki/Benford%27s_law

Arnie
You asked about how to see Paul's blog. Ed has given the link at the top of this page. In Ed's article, where he says "Paul is a legend - you can get his reports by email daily here". Just go through Ed's article and click on the link. Or you can just hover your mouse over the HOME button at the top of Stockopedia. Under regular columns, click on Small Cap Value Report. That's Paul Scott's daily report. Invaluable!
Julian

Another red flag is complex director dealings. If you see "Equity First", or a sale and repurchase with non-recourse financing, then you are definitely in trouble. It's non-recourse financing for a reason!

A comment on the FT article is very telling: outgoing auditor BDO said "inability to agree a mutually acceptable audit scope in relation to our involvement in the work of component auditors needed to obtain sufficient evidence on which to base the audit opinion on the group financial statements". Auditors generally don't stir things up, so if they feel it necessary to comment on their departure, you know you're in trouble.

If this thing goes belly up, then the incoming auditor, Grant Thronton, may have some answering to do.

Frequent changes of auditors is a red flag in any event, regardless of what directors say.

I only joined (and unsubscribed ) today. What a fabulous site this is ! It is doing a fantastic job of keeping the mentally challenged off the more sensible investing blogs. Here's todays challenge for you morons....do you give a thumbs up for my leaving or a thumbs down for my comment ? Go figure.. Goodbye.

Perhaps a warning sign with Globo is that the reported net profit figures each year have been growing so smoothly as to be scarcely believable for a small company. Here are the annual figures for the years ending 31st December from 1999 to 2014 taken from Globo's StockReport: :

Net Profit €m 2.82 4.35 8.80 17.8 25.3 35.0

There wasn't a single year over that period in which the net profits didn't increase significantly over the previous year. That sort of smooth growth reminds me of how the capital values of Madoff's fund were reported to grow from year to year!

The link that you posted "by email daily here" for Paul Scott's reports just load source code for me in Google Chrome.

Please can someone tell me how to use this link, as I'd like to sign up for daily emails?

Plus 500 was in that green part of the bubble chart for quite a while and with a high rating too. Now a year later things have changed and the company has been bought out.
There are still opportunities in the AIM market as long as you are careful and check the companies out. I have just checked out REDD & TRAK which I am holding, & do check out OK in the bubble test. I do like the idea with TRAK that can save up to 20% on fuel costs with big fleets of transport with a special gadget on the dashboard that checks out how efficiently you are driving, but they do not seem interested in selling individual units!
Thanks for this simple check, now I can fine tune my portfolio until another bubble bursts. Cheers
Lightningtiger

Thanks for this Ed. The QCM report provides very interesting and to my mind convincing reading.
The difficulty for Stockopedia is that the screens and ranks are based on reported results. If the reported results are a fabrication then the screens and ranks are likely to be fooled. As far as I can see, the Stockopedia short screens are a good attempt to identify companies that are likely to fail - also on the assumption that the source data is genuine.
So how about working with Paul on a couple of Paul Scott screens:
1. to identify balance sheet weaknesses that increase the risk of investing with companies that present honest sets of accounts
2. to identify "too good to be true" companies. Checks might include e.g. high levels of borrowing despite reported high cash balances. A short skim through Paul's excellent reports on Globo, Camkids, etc. should provide some of the criteria for this screen
These won't catch everything, but they will be a start and might make Paul's daily task just that little bit easier.
It's sad but understandable to see investors rushing to the defence of Globo. It is, unfortunately, human nature to be attracted by a high growth, high profitability, low p/e business. And it is human nature to reject any arguments that tell us we have got it wrong. The humiliation is too much to bear - even worse than the financial loss. So we stick to our arguments, shoot the messenger and watch our investments go down in smoke.
My investment performance is so much better since I started my Stockopedia subscription and started reading Paul's daily update.
Thank you
Julian (for the record - I owned Globo briefly a couple of years ago. I bought on the great metrics and sold a few weeks later when further analysis made those great metrics hard to believe

These companies are normally easy to avoid as most don't pass basic smell tests or a 5 min Google search...ie Globo's product not working / Naibu's phantom stores etc

Have to remember as well that there is an element of manipulation in forums as well. It is not limited to news articles and company reports.

It is interesting that the comment about the report being "fatally flawed" is made by a new user.

Excellent idea re 'chat indicator'.
Never been invested in GBO but whether bull or bear there are needless backstabbing comments on the BBs.
Let's not forget no matter how clever some investors think they may be we have all made mistakes including the likes of PS, TW, SC, LM.

Just so that everyone knows - Paul Scott has told me he is amping up for the "Small Cap Value Report of the Century". So stay tuned.

Why are you pouring fuel on an arsonists fire ? The Quintessential Capital Management report is fatally flawed.....google others' comments elsewhere. Its a clear attempt to create a shorting opportunity by badmouthing a decent company. You would do well to do your own research before re-publishing BS.

Thanks for the article Ed.

I am pleased that GBO has been mentioned here today, I was expecting something.

Paul has indeed given warning after warning about GBO over some considerable time. I managed to read the full report late last night which is very damning.

Trouble is that folk "fall in love" with their holdings and refuse to believe or even contemplate that there may be trouble brewing. Instead of cutting their losses they average down just making a bad situation worse, totally blinkered to the real world. I know because I have been there myself on more than one occasion. You would think there were no other companies worth of investing in but the one(s) they hold!. And of course it doesn't relate just to GBO. We all make mistakes, and there is nothing wrong per se with making a mistake, providing we learn from it and stop repeating it.. Thankfully I sold out of GBO some time ago, after losing 40% of my decent profit. I have had to learn to divorce myself of any feeling of investing again. It is a share for goodness sake not a human being and it holds absolutely NO feeling for the investor regardless of how much the investor may love it.

I do look at the stockrankings, although back them up with my own research. The bubble chart is one which I should look at more often.

Good work Ed. regards

Catsty

It's a really interesting question and comes down to whether you can trust the numbers presented. It also shows why qualitative analysis alongside quantitative analysis is so important.

Removing foreign owned companies from consideration in untrustworthy regions is an effecitve way to remove most companies that could go to zero due to fraud. I also like to see a dividend paid and I remove companies that look too good to be true based on valuation ratios. A hype indicator would be a really useful metric.

As a secondary qualitative assessment, I use a number of the trade magazines and google for articles on a company I am interested in investing in. I am looking for negative comments to try and bottom out a worst case scenario.

Listen up folks,

There is another type of 'most discussed problem.' Shell after the BG deal. Not only were the bulletin boards full of it but the respected commentors too. Oil analysts, Technical analysts, Journalists. 'The dividend has never been cut' etc. However the Stockopedia metrics were not that good. RDS.B sunk over the summer from 20 to 15!

This is a great example of how good the Stockopedia stock ranks system is, but it also highlights that it should be combined with added analyst intelligence. Paul Scott has done a great job here and hopefully has saved this community a great deal of money. (I speak as a ashamed former holder of £Naibu and £Camkids - so I know Pauls warning do work for least some people).

I think it is also a credit to Stockopedia that pump and dumpers are kept off this discussion area- if you are claiming something you should back it up (a recently African Potash (LON:AFPO) post comes to mind which was thankfully removed).

Keep up the good work.

A number of points;

First, never tread on mud even if it looks frozen, second, never by shares in a company in a country with green in its flag, never buy shares on a company emerging from a country with "Stan" in its name; never buy companies listed in India, or Russia, never buy mining exploratory stocks; take good management into account particularly where the directors have substantial holdings (Cineworld for example, or Luke Johnson's Patisserie Valerie), and stick to companies where there is rigorous financial authority discipline.

Quality scores are susceptible to frauds. I'm not knocking Ed's work; no system is perfect.

I would say this: AIM companies require additonal checks by investors. There are a number of red flags with this company that stick out pretty much straight away:
* AIM
* poor momentum
* absurdly low PE which just doesn't jibe with its status as a growth company
* seeming unnecessary cash balances (there may be exceptions, like £FCCN)
* foreign directors (if AIM company)
* no dividends, or scrip dividends (on AIM)
* operating margins which are too good to be true
* lots of criticisms about their accounting practices
* taking on debt, esp junk debt, when they apparently have lots of cash already
* rapid growth in turnover, esp if they are fuelled by acqusitions
* acquisitions - not an automatic red flag, plenty of companies do them - but it's a special problem if it's an AIM company.
* issuance of a lot of equity
* pattern of persistent negative free cashflow
* lots of activity on ADVFN

Does that include shares discussed at Stockopedia?

Just another quick thought. Has Stockopedia thought of running a bulletin board 100 index (BB100)? This would be a helpful tool and allow investors to see whats "hot" and whats not.

Fraud is something very difficult to root out as a private investor. You are often the last to know, as public information points out a rosy picture. Even bulletin boards are a poor measure (think of many of the Chinese frauds that never gained much of a BB following) in many instances. However, some of the worst examples have been big BB favourites.

Professional shorting activity is often the best measure but not cast iron. Perhaps some stock rank system that measures the level of stock on loan (Markit - Data Explorer) or notifiable short interest (FCA disclosure) would be useful as a rank or a traffic light system.

Hi Ed what level do you think you have to put the quality rank to avoid such companies? Would the bottom 20% cut them out or do you need more than that? I do not recall what level Globo and Plus 500 was?

Great work Ed. I like this idea a lot and something I have been using to good effect over the years. The main poster boards i use are interactive investor and London South East. These three firms Beximco ( Stock rank 99) DX PLX (97) and Waterman ( 97) are hardly mentioned but looks well placed to gather momentum and when the hurds arrive I will be top slicing.

Perhaps some kind of shorters index. In my experience they appear to understand companies far more than the ordinary retail investor.
Certainly red flag indicators of some description would be enormously beneficial.

Nice article, Paul is indeed a legend.

I held Plus500 (LON:PLUS) but sold out for a nice profit, my selling was actually triggered by a blind devotion by some forum users and I did my own research on what users were saying about the site (I also tried it myself).

When people stop being rational and considering both sides, it is a massive warning sign in my eyes.

So Ed, the question here is.... should you have a new measure? Hype index?

Hi
I can agree most strongly with Edward's comments regarding the excellent article that Paul Scott wrote recently. On the basis of that sound analysis I sold my Globo holding and fortunately also my Plus500 holding. Whilst taking a 10% hit on Globo it has saved me significant £££ seeing the shares have been suspended.
The comment about blogs ramping up AIM shares ( usually without any real analysis) is sound advice. I often read the articles but unless they are supported by some good evidence I then take their views with caution!

Ed, do you apply the contrary - i.e. if a company appears in the top quartile and has hardly any comments on BBs, does it make it to your 'to analyse further' list?

Ed, Perhaps bulletin board activity should be included in Stockopedia's Stock Reports. According to today's Stock Report on Globo, it has a StockRank of 86, a Quality Rank of 80, qualifies for 6 Stockopedia screens, a 'safe' bankruptcy risk and a 'low' earnings manipulation risk!