When Stocks Go Bad: Grim Tales from the SCVR

2nd Mar '19 by timarr

22 comments 5297 reads

Following up my question about popular stocks from the SCVR that had performed badly (https://www.stockopedia.com/content/small-cap-value-report-fri-1-march-2019-duke-rbg-rmv-453208/) I went and did a bit of digging. It's a thoroughly unscientific study which has cherrypicked its examples, and no doubt I've missed a few but I'm really just interested to see if there are any principles we can dig out. So, let's have a look:

Revolution Bars (LON:RBG) – essentially this is just a car crash of a stock with poor management combining with an awful environment for restaurants. The lousy situation on the High Street is well known, so investing in this at any time over the past year has looked like a bet on someone buying it. You could have paid 167p for this in January last year and would now be nursing a loss of over 60%. There was a break point – the trading update on June 14th was a warning, and that would have allowed an exit at around 136p.

Verdict: just an awful sector of the market, looks like a lot of investors anchored on the 200p bid price from Stonegate in 2017 and have failed to adjust their mental models.

Keywords Studios (LON:KWS) – I held this until the middle of last summer (no skill in selling, I just dumped everything before I went on a long holiday). I viewed it as a pure momentum play, buoyed up by uninformed investors bidding up the stock. It reached 2000p at its peak – but that gave you a PE of 40 and P/FCF of 147 on some distinctly average quality metrics! Since then anyone holding has lost 40% of their investment. All momentum based investments are prone to corrections when the market moves against you, and that’s what happened in October – anyone acting smartly might have got out at about 1500p. But it was also inherently risky – it could have run into issues with one of its many acquisitions and is in a rapidly changing sector where trends such as Fortnite can completely change the market economics.

Verdict: it was overpriced and therefore subject to a market correction. If you believe cashflow is king (I do) it still looks expensive.

Purplebricks …

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AnonymousUser605348

2nd Mar '19

Great article. Plus 500 is a dog. How can price go down so much and p/b, p/tb still be so high? All of that and the books might be cooked anyway.

If one were to play the "regs won't hurt too bad" trade, maybe CMC (LON:CMCX)?

Albertos

3rd Mar '19

Thanks for your efforts Timarr - very thought provoking.

Amino Technologies (LON:AMO) fell into the serial disappointer classification for me - continually promising a better H2 or an uptick in the next year. I think this might have been a warning prior to the actual profit warning(s) - personally haven't thought it was good value for a couple of years due to falling turnover on a six monthly basis.

Having been caught up in a couple of the ones you mention I would wholeheartedly agree with sell on first profit warning.
1) It has definitely saved me money.
2) I feel better after doing it - don't have to worry about that anymore, what opportunities have I got to get my money back. (OK the cat is in severe danger for the first couple of hours after).

"Difficult to implement due to real loss (instead of paper loss)." I've never understood the concept of a paper loss which many still seem to cling to. Paper losses are actually real losses - shares are a millimeter away from cash in liquidity terms so why differentiate. (I'm just as annoyed with myself when I don't take profits when logically I should have done.) Finally as Timarr's article indicates life events happen which force liquidation - even the pleasant ones like taking a long holiday.

Thanks again Timarr

Phil

(PS I agree Flowtech Fluidpower (LON:FLO) and XP Power (LON:XPP) are potentially interesting, but am awaiting next set of figures in both cases before jumping. I'd like clarification on the net outflow of cash from XP Power (LON:XPP) I note Y/E net debt of £53m per the TU. Flowtech Fluidpower (LON:FLO) needs to demonstrate cost synergies are being realised. )

LongValue

4th Mar '19

A really useful survey of stocks that have performed poorly in recent times. What I found striking was the range of sectors and business models. And they have been impacted by a variety of factors from possible fraud to accounting irregularities and even the macro-economic environment. Two of those covered, XP Power (LON:XPP) and Air Partner (LON:AIR), are companies that I have invested in and profited from in the past. But I had no idea that their stocks would be at the levels they are today. It does drive home the unpredictability of corporate performance.

As you point out, diversification and not investing more than one can afford to lose in a single stock seems to be the way to go. Unless, of course, you truly believe that you are a Warren Buffett.

GrahamF

It is frightening looking at ADVFN and reading comments from posters describing how exposed they are to some of these story stocks with often a high percentage of their holding in just one or two of these.

I think that it is a case of win big lose big with these stocks and so diversification is absolutely necessary unless you really have a talent for identifying those stocks that are going to soar and getting out before they fall back down to earth.

I think many investors some how believe they have the talent to run a highly concentrated portfolio like Paul’s BMUS portfolio, when there are few who manage it successfully. Even then I hope Paul would agree that if Sosandar goes wrong the BMUS portfolio is in for a very rough time. He has the confidence to have an enormous amount of Sosandar in there because he is a specialist in that sector and knows the management very well. But for the rest of us perhaps it is worth remembering the old saying.......”Don’t try this at home folks!”

Confession time: still holding a fair bit of IQE (5G and shorts closing are now bringing the price back up), and a very small amount of Taptica and XP Power.

back2value

Great commentary - thanks. I would comment, though, the variety and quality of the companies listed demonstrates that the sell-off has been fairly indiscriminate. XPP and Air Partner were great performers for me but are now both back close to the prices at which I bought, but I still hold them because I don't believe that their fundamentals have really changed. I managed to buy Flowtech just before its SP got - in my view, unreasonably - smashed on what was a pretty mild profit warning, and IQE is the only one of these I've ditched.

The only share that I own which has really held its value though all of this has been Watkin Jones. A great performer.

B2V

timarr

Hi B2V

I would comment, though, the variety and quality of the companies listed demonstrates that the sell-off has been fairly indiscriminate.

I get that, but the selections are cherrypicked and I don't think they necessarily prove that point. After all you can find popular companies that haven't been seriously impacted by the selloff - Burford Capital (LON:BUR) or Ab Dynamics (LON:ABDP) or Bioventix (LON:BVXP) or (as you point out) Watkin Jones (LON:WJG) - all of which I also sold last summer. If the selloff was entirely indiscriminate then they would be struggling as well.

Having mulled it over a few themes occur to me:

Cashflow is critical: as Phil points out even XP Power (LON:XPP) has some issues and Flowtech Fluidpower (LON:FLO) looks weak. Air Partner (LON:AIR) is better, but accounting concerns should rightly depress the price for some time to come;
Governance matters: it's very easy to ignore worries about the reliability of management when markets are rising, but worrying about whether they're mainly out for self enrichment is always sensible;
Customers are key: no matter how good the company is, you can't make money if you can't exert pricing pressure: I think a lot of blue sky stock investors miss this point;
Valuation will ultimately determine returns: buying a growth stock at 40x earnings will usually turn out to be a worse decision than buying a value stock at 8x earnings.

Perhaps the main lesson is that when the market turns then momentum driven stocks get hammered if they put a foot wrong. True momentum investors would bail when the market turns down but pseudo momentum followers - including people like myself who are simply following the trend - are likely to get caught out.

I suppose the joy of investing is that you never stop learning ...

AnonymousUser192020

Couldn't agree more! Though I sense that in many cases their 'portfolio' is only a small part of their overall financial assets which are more conservatively invested. That said, there's one guy who says the recent rise in IQE has covered 7x his annual pension contribution. He sounds well switched-on though.

Part of the blame I feel is the focus on stocks in the 'AIM casino' as TW calls it. Over the past 12 months the AIM indices are down around 11% compared with near-flat performance for the FT100-AllShare. I don't understand this bias when all the professional websites promote the benefits of decent diversification (including having well under 50% in one's home country market). Possibly it's because people think AIM stocks are simple to understand relative to 'complex' bigger stocks? Also there's a horrible tendency, even on Stockopedia, to think that because we, as a consumer, can sample a specific B2C outlet for example, we somehow acquire a higher insight into its investment merits.

Possibly there's a case for an updated thoughtpiece on diversification? I heard a US podcast (Meb Faber?) last week which again made the point that if you see a 25% idiosyncratic and unforeseen fall as quite plausible you really don't shouldn't hold more than 4% of your portfolio in one share.

Also, it would be useful to shares thoughts on what's a sensible upper limit for a public shareholding. For my part, going above 1.5x annual regular expenditure gives me the heebeegeebies. (I've held more in private companies but there at least you can't check the shareprice daily! Also some employers might expect you to hold a significant amount in company stock, especially US-owned entities.)

It would also be instructive if the major retail brokers could be persuaded to release analyses on the level of diversification etc of their significant clients' holdings. Perhaps they do?

5th Mar '19

Part of the blame I feel is the focus on stocks in the 'AIM casino' as TW calls it.

I suspect that there are three reasons - IHT relief, a preference for lottery-like returns among naive investors and a preponderance of growth stocks on AIM.

On IHT relief there are a few articles around suggesting that some of the inflated prices achieved by quality AIM stocks are the result of a crowded trade. There are quite a few AIM Business Property Relief funds around and if they're all chasing the same relatively small pool of AIM companies that'll push the prices up. For instance, XLMedia (LON:XLM) is in the AIM 100 and only has a market cap of just of £100 million so a bit of concentrated fund buying could make a noticeable difference.

People also tend to be attracted to lottery-like returns. It's actually the other side of the low-volatility anomaly, the finding that low-beta portfolios outperform. Lottery-like stocks, where there's a small chance of a huge win, have the opposite characteristics. As to why people buy these things, I guess that's the same question as to why do people buy lottery tickets?

And finally, AIM is really an early stage market for potentially high growth stocks. In a momentum market driven by stories about growth it's perhaps unsurprising that private investors disproportionately focus on it.

Also there's a horrible tendency, even on Stockopedia, to think that because we, as a consumer, can sample a specific B2C outlet for example, we somehow acquire a higher insight into its investment merits.

Completely agree. It's absurd, but it's very hard to convince people that their personal experience doesn't outweigh the data. And sometimes it does. Just not very often.

Guess we could've added Bilby (LON:BILB) - now on its second profit warning.

?? Lesson: a founder selling up is a big potential red flag, even if those shares are bought by quite highly respected institutions. What they paid for those shares is close to the entire MV of Bilby (LON:BILB) now.

I would also add that you never knew when Bilby (LON:BILB) were going to produce their results (one set coming out at about 3pm going from memory) . They also missed opportunities to communicate with the market when perhaps this could have been expected, for example an AGM statement following the founder sale.

Phil

No holding

jonno

Hi Timarr

Great post and some really interesting and informed contributions from Stocko members.

My only recent faux pas (fingers crossed) was the purchase of Walker Greenbank (LON:WGB) post the initial profit warning last summer. However the company then issued a statement that trading had picked up which prompted my purchase Unfortunately trading continued to decline thereafter.

My view was and still is that there is value in the company's brands that is not reflected in the share price. Walker Greenbank (LON:WGB) is debt free and ROCE and free cash flow are currently more that acceptable, however with declining earnings and challenging markets it is difficult to see any upside for the share price, excepting a bid, which wouldn't surprise me. So I sold after the interims at a 20% loss on the basis that I could put the money to better use elsewhere.

Other confessions are that I continue to hold Flowtech Fluidpower (LON:FLO) as I view it as undervalued, although the increased debt is a concern. I also have long term holdings in Elegant Hotels (LON:EHG) and ITV (LON:ITV) (my only large cap), both of which I view as undervalued and financially robust. Both pay good dividends and are potential bid candidates (thrown in for free). I am down between 20% and 30% on these three holdings, but fortunately the rest of the portfolio has pulled its weight.

I avoid Israeli tech companies as from my viewpoint they fall pretty much in the same ball park as UK listed Chinese stocks in terms of corporate governance, robustness of accounting etc.

All the best

psin

6th Mar '19

Timarr
Governance matters: Skin in the game every time.

Excellent article. How we DO learn from each other and such a high standard.

On a similar line, I recommend the ongoing thread on MM started by unwise2.

https://www.stockopedia.com/content/trading-uk-stock-market-using-mark-minervini-strategy-427488/?page=1#comments

ISAallowance

Another one that has come off a lot is K3 Capital (K3C), that has halved from ~400p to ~200p in the last year after running up over 100% in the 6 months prior to that. I'm keeping an eye on that one for a possible entry since it has fantastic quality metrics and unlike some in this thread backs up its earning with free cash and a decent dividend.

I haven't bought yet since I think it could possibly have a profit warning in it if corporate transactions grind to a halt during brexit uncertainty, but it's certainly on my watchlist.

unwise2

All of the mentioned companies highlight the fact that regardless of your chosen method, fundamental/technical, investor/trader you need to know 5 things from the very beginning:

What to buy
When to buy
How much to buy
When to sell at a loss
When to sell at a profit

I learnt number 4 the hard way, the biggest ever loss I took showed a 35% profit before nose diving. Unfortunately share prices can tank long before official news confirms something has gone wrong.

Merlotman

11th Mar '19

Tmarr thanks for a great post. Looking at your 4 factors I would rank cash flow at the top of the red flags not only due to its importance in my view but also it is probably the easiest to assess using our usual analytical tools. Of your original list I hold XP Power (LON:XPP) as I believe the cashflow blip caused by tactical build of basic inventory should disipate in due course.

XP Power (LON:XPP) is a company that I have held in the past and is still on my watchlist. However, I was a little concerned when its recent annual results revealed a spike in debtors when compared to the increase in revenue. The former was up by around 38% while the latter only increased by some 17%. Stock was also up by almost 50%. My understanding is that it has had supply chain issues. However, that seems to be feeding into its cash flow situation.

andrea34

There are some valuable lessons to be learnt from the stocks listed and some of the comments made, both in the original post and in replies. I've been a victim with Bilby (LON:BILB) and couldn't understand why the price dropped from 135ish to around 100p even before the huge director sale. I think there is another valuable lesson to be learned with many of these stocks - USE STOP LOSSES!! I feel that the stop loss should ideally be relative to overall movements in the markets, so if for example the overall AIM or FTSE-All-Share indices are down 5% and stocks one hold are similarly down that percentage then there is nothing in principle to worry about... but when losses are mounting when the markets are moving in the other direction then to me this is an indicator to sell.

Another thing I can't understand is why people top up when the price drops on a profit/trading warning?? It just doesn't make sense, why buy shares in any company that is performing below expectations?

I don't suppose anyone can please advise an easy way to calculate free cashflow? This is mentioned a number of times in relation to stocks on this post.

p.s. I looked at Watkin Jones (LON:WJG) and the figures in the last results look good.... but a director has recently sold almost 568k shares at around 225-226p, with no explanation why :-/

barnetpeter

Can you perhaps add stuff like Quiz .....floated at a crazy price and nearly 90 per cent down since IPO. Outrageous really.....

Also on Aim there are so many mineral / oil stocks that seem to be lifestyle companies for directors who make dubious and doubtful promises that they can never deliver on. Huge salaries and bonus payments.....all funded by multiple share issues. More rubbish than I can ever remember in 30 years.

Timarr
Two more I think would be worth adding to your list. Bonmarche Holdings (LON:BON) where OCF has been in steady decline for 6 years with FCF turning negative in 2017 and a definite story share, Wey Education (LON:WEY) where the cashflow speaks for itself.

MichaelFBS

Timarr

What a brilliant and thought provoking piece.

I am (4 are current holdings) or have been invested in 10 of the stocks you review. Overall I am ahead (the timings and amounts are too varied to give an idea of percentage returns).

If I had stayed away from Israeli companies (XLMedia (LON:XLM), Taptica International (LON:TAP) and Plus500 (LON:PLUS) ) the gain would have been 2.5 times greater. So that is certainly a take away for me. I will think twice before buying an overseas AIM company or maybe Israeli AIM companies. I own Somero Enterprises Inc (LON:SOM) and XP Power (LON:XPP) both of which I think are great companies and long term holds for me.

I still hold XLMedia (LON:XLM) and Taptica International (LON:TAP). The former because the price has been so decimated that I might as well wait and see where it goes and the latter because I think the sell off has been over done.

I think in the end one is always going to invest in losers if one also wants to invest in winners that will substantially outperform the market. One just has to try and ensure (as Leon Boros points out in is talk at Mello Derby https://www.youtube.com/watch?v=xGj3pF3r1bo) that you have more winners than losers.

Thank you once again for the research and insight..

Kind regards
Michael

Barnetpeter, that was a good point about the resource sector and lifestyle companies. Not wishing to sound like a broken record but most private investors appear to labour under the assumption that the companies they invest in are run by full-time CEOs. That may not be the case. And it appears to be a chronic problem in the resource sector. The Boards are often composed of people with a myriad of interests some of which may be conflicting. Before investing in a small cap resource company, it may be worthwhile ascertaining how much time the person running the enterprise will actually spend on company business. Incidentally, someone with international business interests could well spend a lot of time travelling (At investors' expense) and very little time dealing with the nuts and bolts of running an organisation.

When Stocks Go Bad: Grim Tales from the SCVR

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Timarr

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