Well respected stock picker Simon Thompson had to admit defeat with Naibu in the Investors Chronicle on Friday (19/9/2014). This Chinese maker of sportswear has, on an earnings basis, been ridiculously cheap for a long time, but some investors liked the high dividend yield. Simon picked the company for his share pick of 2014 in the Investors Chronicle – he tipped it at 58p in February with these words: “It’s not often you have the chance to buy shares in a company trading below cash on its balance sheet and at a third of its book value. It’s even rarer to find a company offering a near 10 per cent dividend yield and where net earnings for just one financial year equate to almost all of its market value. However, this is the tantalising investment opportunity in the shares of Naibu Global International (NBU), a Chinese maker and supplier of branded sportswear and shoes“.
There were glowing mentions of how cheap this company was in subsequent editions of Investors Chronicle since then, but on the 12th September in its Interim Results the company declared it was passing its dividend. Simon has noted how odd this is bearing in mind the stated cash position of the company and the profits it is generating. He said in the latest edition that this “makes it an even greater outrage that the company should treat minority shareholders in this way“. More followed in the same vein. There is clearly nothing like a share tipster defeated in his analysis, particularly after he had “averaged down” at 45p when the share price is at the time of writing 26p. He now recommends investors sell.
What can be learned from this debacle? One that share tips are dangerous both for tipsters and investors. That is particularly the case when one is making investment decisions primarily using financial analysis in a business in far away country and where it is not easy to talk to the management. Dangers were not difficult to spot – the company has an Executive Chairman, Mr Lin, who holds 52% of the shares – so in essence he can pretty well do what he wants. With a short track record as a public company, this is the kind of company this writer avoids. It would also undoubtedly score lowly on the “AIM Scorecard” we published last year (available on our web site).
Another lesson to be learned is surely that one should not “average down”, or go against the share price trend. To do so, as happened in this case, is surely a mistake. You have to be absolutely, absolutely sure there is nothing that other investors know that you do not before doing so.
Incidentally Simon Thompson also tipped Avation in his latest column. This company is presenting at our ShareSoc Growth Company Seminar on November 26th so it will be interesting to see whether what they have to say backs up his analysis (it’s not yet listed in our Events page – check in late October for details).
Another tip in the edition of Investors Chronicle issued last Friday was Monitise. This payments company was noted as “growing fast” – revenue is but losses are also growing – as much as £51.8m “adjusted” losses this year are forecast. The writer signed off with the words “Now’s not the time to back out” after noting recent share price declines.
Unfortunately the day before that edition of the magazine was on the streets (and hence too late to incorporate), the company announced that Visa (who are both a business partner and significant investor with a representative on the board) were assessing their stake in the business. There were hints that Visa, a key partner, want out. The share price promptly collapsed 33% on the day.
Now this writer has that well known German feeling of “Schadenfreude” – the pleasure that one has avoided damage while others have not. I sold my holdings in this company in April having become disillusioned with the business strategy, the continual fund raising required to support it, and the management approach. Dilution of investors share stakes can seriously damage your wealth, and the date when profitability was forecast continually moved forward. One might say that the management lost this investor’s confidence over a period of some months.
But my experience of running software companies also told me that it is possible to grow revenues by spending large amounts of money because some of our competitors used to do that. But whether you can ever turn those revenues into a profitable business is doubtful. The other problem with Monitise is that it is operating in a rapidly evolving sector. The landscape for payment systems is changing as new entrants move in (such as Apple), and although it is a growing market some of the valuations are plain daft (typically 10 times revenue, regardless of profits). By the time a business has conquered the market with heavy expenditure, it might simply find the battle has moved on to another country so it never achieves profitability.
Now Simon Thompson, and no doubt the writer of the article on Monitise, have had their past successes with share tips. But the moral for readers of any publication that tips shares is that you should never follow them blindly. You should do your own research to discover whether the story is credible or not, and be willing to change your mind as you learn more about the business.
Also this year’s wonder stock can be next year’s dog. When the valuation depends on future sales growth and earnings (as is certainly the case with Monitise), the share price can collapse at the slightest change in their prospects. High multiples of revenue, or earnings, in companies are ones to avoid because they are very sensitive to changing circumstances unless the business model is strong and they are generating cash rather than consuming it!
Note that I am not trying to deter folks from reading Investors Chronicle or looking at their share tips. It’s a very informative and educational publication in all respects. But one can certainly learn lessons from their occasional mistakes.