Shedding light on the debt crisis

Despite being married for nearly 20 years, I still have a nasty habit of trying to answer my wife’s questions knowledgably even when I haven’t got a clue what I’m talking about. I think it started in our early courting days when sub-consciously I might I have made the decision that to utter the words, “I don’t really know”, might have been seen as a sign of weakness.

Anyway, on Friday I briefly caught a news item which suggested that the speed of light might not be the universal speed limit that Einstein thought it was.

I made the mistake of mentioning this discovery to my wife. Quite reasonably she asked me what exactly had travelled quicker than the speed of light. Now at this point I hadn’t got a clue, but not wishing to show my ignorance I started to mutter something about protons, neutrons, and electrons that I vaguely recalled from ‘A’ level Physics. My wife looked suitably unimpressed, could clearly sense my discomfort, and in a slightly mocking way asked me if I was sure that it wasn’t perhaps some piece of fruit that they had managed to catapult at an extraordinary speed. 

In a mild panic I considered a stab at Higgs Boson, but fortunately stopped short when a better idea came to mind.  “I remember”, I said, and knowing that my wife has a total disinterest in athletics added, “They’re not entirely sure, but they’ve called it the Usain Bolt”. Unbelievably this seemed to do the trick, and fortunately the conversation moved on.

I have since discovered that the “thing” that appears to have travelled faster than the speed of light is a subatomic particle called a neutrino. To be honest, I think I’ll stick with the “Usain Bolt”, since I’m sure I took a couple of neutrinos recently to cure a nasty headache.

Now you might be wondering what I’m going to say to my wife when Usain Bolt is all over the news in 2012.  Simples.  “Look darling, there’s a bloke running the 100m who’s changed his name to that “thing” which travels faster than the speed of light”. 

You may also be wondering why I’m relating this particular story at all.

Well it strikes me that there’s an awful lot of blaggin’ (http://onlineslangdictionary.com/meaning-of/blag) going on at the moment about the global debt/financial/economic problems that appear to be pushing the world towards another “great depression”.

I have a theory that nobody really fully understands what’s going on, and most worryingly that includes the politicians and financial experts that are supposedly attempting to come up with the solutions.

You see here’s what I don’t get. Since most countries appear to have huge debts, not least the US and ourselves, just who the bl**dy hell does everybody owe money to? Is it the banks and other institutions?

For arguments sake, let’s say it’s largely the banks, and assume that our government has borrowed money from say, Lloyd’s bank. Hang on, didn’t we bail out some of our banks including Lloyd’s. Does that mean we’ve borrowed money from ourselves?

Of course it doesn’t end there, because haven’t we lent Greece a sizeable amount of money that we clearly haven’t got?

Effectively, we might have borrowed money from ourselves to lend to someone else who can’t pay us back. Surely that can’t be right? Confused? Me too.

Anyway, all is not lost. Tim Geithner’s got a plan, although correct me if I’m wrong, doesn’t he represent the US which has just had to raise its debt ceiling for the first time in its history?

Never mind, perhaps Dave and George can sort it out in true Bruce Willis fashion; why do I get the impression that they’ve both been watching too many action movies? Dave believes “…we’re staring down the barrel….”, and George is issuing ultimatums to Eurozone leaders. Don’t be such a pair of drama queens!! Pssst…, I hate to remind you boys, but there are a few issues to sort out back home first of all.

“The blind leading the blind?”

Mind you, it’s either them or Mr Bean. By the way, would anybody care to ask Labour whatever happened to the “Goldilocks economy”? Not too hot, and not too cold.

Oh yes that’s right it didn’t actually exist, in fact the pot was bl**dy boiling over, it’s just that nobody even noticed.

I’d bet that if you took anybody and gave them a good grilling about what exactly is going on, they wouldn’t be able to tell you, so here’s my final theory. Everybody owes money to an internet based debt collection agency called “payusbackorwe’llbreakyoureffinglegs.com”. Hence the global panic.

If the world economy does manage to steer itself away from another great disaster then I’d guess it will be more by luck than judgement.

Anyway, whatever happens, “Bu da geçer”, and whılst world financial and economic systems are constantly changing, we’ve always got the certainty of E=MC².

Changing the subject totally, a month has passed since I started the FTSE-250 vs. “they can’t really be that bad surely” portfolio.

I have taken the mid-prices from Friday’s close, and here are the results so far:-

Firstly, the FTSE-250 stood at 9815.50, a drop of 2%.

Individually the porfolio shares have performed as follows:-

Cable and Wireless Comm.         39.54p   (+23%)

Man Group                                   231.4p   (+12%)

ITV                                                57.75p  (+3.4%)

Vodafone                                      161.6p   (-1%)

Game Group                                  21.75p  (-5.5%)

Aviva                                             277.3p   (-13%)

Cable and WW                               29.75p  (-14%)

Thomas Cook                                 36.09p  (-17%)

I’m not aware of any individual company news that may have caused the share price of Cable and Wireless Communications to increase by 23%, or indeed Thomas Cook’s share price to decline by a futher 17%. I have noted that one or two Directors at Aviva have been purchasing stock. If AV. hold the dividend then they’re offering a hugely attractive payout.

Assuming an equal amount was originally invested in each of these companies, the portfolio is showing a loss of 1.5%.

In other words it’s neck and neck at the moment, although it’s very early days.

I’ll try and update you on the relative performance of the porfolio on a monthly basis.

Great balance sheet, but little else to shout about.

Indigovision released their full year results today which show maintained revenues for the full year, but significantly lower profits. Given the earlier trading update in August, the results didn’t come as any surprise.

After the first profit warning, as previously mentioned, I sold the remainder of my holding in Indigovision to crystallize a 750% profit overall.

I commented at the time, both here and on the ADVFN bulletin board that I could see the SP falling below £2 in the short term, and that is exactly what has happened.

Whilst investors shouldn’t be surprised by the final figures, the outlook statement doesn’t instill any confidence in near term trading.

Whilst sales in the first seven weeks of their new financial year are comparable with last year, the order book is lower and concerns are expressed about economic conditions.

The shares took another hit today and dropped a further 14% to end at 182.5p by the close, putting them on a P/E ratio of 22.

On a P/E basis the shares look expensive, however Indigovision boasts a strong balance sheet, a 4% dividend yield, the company is cashflow positive, and has no debt.

On balance, I’m not tempted back in just yet though. Although I wouldn’t be entirely surprised by an opportunistic bid, the short term outlook isn’t encouraging, and with falling sales, higher overheads and continued margin pressure, it appears possible that they will record a loss in the first six months, and I can’t justify buying the shares purely on the possibility of a bid approach.

With a long term horizon, Indigovision may prove to be a bargain at below £2 and I will certainly keep monitoring the situation, but as I mentioned in a previous blog, it appears that Indigovision need to peddle faster just to keep still, and unfortunately this is proving difficult.

Surgical Innovations

Those of you who take a peek at my blog on a regular basis will be aware that until relatively recently I was a shareholder in a company called Surgical Innovations. I bought shares in SUN for just below 2p and sold them for over 10p, crystallizing a fivefold profit in just over a year.

Whilst I could and can see a very bright future for this company, I was more than happy with my gains, and stated at the time that whilst I could see potential upside in the SP over the medium to long term, I felt it unlikely that the SP would multi-bag again in such a short time period.

Surgical Innovations released their interim results today, and there is nothing in the report that would lead me to change my mind.

The shares took a hit today and are now trading below my sell price. On the face of it, the results are disappointing with both revenues and operating profits falling against the comparable period last year. However, a one-off industrial contract did flatter last year’s figures, and there has been a temporary reduction in OEM orders due to the phasing of larger orders. This largely masks an excellent 29% revenue increase in SI branded products, and an impressive 7% improvement in margins. Basic earnings per share at the interim stage are 0.12p.

The company is confident that growth prospects will be achieved in 2012 and 2013, and current trading is encouraging with strong customer demand.

Previous broker forecasts for 2011 are for an EPS of 0.6p. Given the improvement in margins, and the expected progress in the second half, this doesn’t look too outlandish. This gives a forward P/E ratio of 17.5 (SP 10.5p at time of writing). The market capitalization is about £40m with a NAV of approximately £11m. Revenues at the interims came in at £3.2m with a profit before tax of £474,000.

Great little company, great prospects for growth going forward, but at this stage in its development it looks fairly priced to me.

As I mentioned in a previous blog, Surgical Innovations will remain on my monitor, and I may reconsider buying again on any significant SP weakness.

Third quarter results for Avesco and other updates

Avesco released their third quarter results today, and they certainly didn’t disappoint. The underlying growth story remains firmly intact, and in my opinion this is still a hidden gem.

Whilst the final results will give a clearer and fairer picture of progress, the nine month comparatives point towards a company that is steadily growing organically and has a very bright future.

Trading profit for the nine month period virtually doubled from £1.7m in 2010 to £3.2m this year, whilst the operating profit of £2.8m has increased more than four-fold. Diluted EPS comes in at 6.1p with an adjusted figure of 7.9p.

The nine month figures also appear to indicate another slight improvement in margins to around 34% (about 33% last year).

Clearly, the company has achieved significant growth this year which is even more impressive given that last year they benefitted from the Shanghai Expo, the Football World Cup and the Winter Olympics.

If you dig a bit deeper into the report, you will see that all three divisions (Creative Technology, Full Service and Broadcast services) were profitable. CT and FS are the most indicative of the underlying progress since they are less dependant on the major events; both produced a significant uplift in profitability, with CT producing a 21% increase in revenues and a 120% increase in operating profits. Broadcast services benefits the most from the even year effect, and will almost certainly show a huge uplift in revenues and profitability next year.

Ian Martin the Chief Executive commented:-

 “The Avesco Group enjoyed another period of strong growth during the nine months ended 30^th June 2011, with further progression in revenue growth and profitability.

Looking towards 2012, we expect to benefit significantly from the “even year effect”, notably with the inclusion of business generated from the European Football Championships and the London Olympics. In addition, we have a full 12 months’ contribution from a number of multi-year projects that we have begun during 2011”

I have highlighted the last sentence since this appears to be something I wasn’t personally aware of, but which looks significant.

It is amazing to think that Avesco is still valued at a 24% discount to its tangible net asset value which currently stands at £1.50 per share. The possible payout from Disney is approximately £1.40 per share.

Essentially this profitable and growing business with revenues well in excess of £100m is being accredited with having no value (apart from its assets). It must still be one of the most undervalued companies on the market.

In other updates, Zetar’s Finance Director has bagged himself £20,000 worth of shares in the company at prices around the £2.50 mark.

DCD Media appear to have secured their short term future, with the help of one of their major shareholders, through the issue of convertible loan notes and Subscription Shares. Existing shareholders will see their holdings significantly diluted. Taya Investments, another major shareholder, are noticeable by their silence. Taya were once rumoured to be a possible bidder for DCD Media. They don’t strike me as a company that would be happy to see their 20% stake significantly diluted by this funding proposal. This story may yet have further to run?

Your m8 , my m8, TRAKM8

In one of my previous blogs, I wrote an article about the significance of Director buying entitled “Put your money where your mouth is”.

I do like Directors to own a fair chunk of their own businesses, and I’m always interested when they buy or sell.

This month I noticed that the Directors of a company called Trakm8 had bought 400,000 shares between them, which collectively takes their holding in the company to around 46%. Notably, the two Directors that purchased the lion’s share were the Finance Director and the Sales Director.

After some research, I decided to join them.

From their website, “Trakm8 designs, develops, manufactures, supplies and supports vehicle tracking, fleet tracking and GPRS/GPS tracking products and services. The company provides both hardware and software telematics solutions.”

I think that the market may be missing the underlying growth story here, and may have been mislead by what appears to be a drop in EPS from 3.1p (March 2010) to 1.1p (March 2011).

This is one of those instances where the EPS is not the most reliable indicator of the progress a company has made.

The difference in the EPS figures is accounted for by a substantial tax credit in 2010, as opposed to a tax charge in 2011. This masks the excellent underlying growth.

Revenues grew by 22% to £4,186,000 and operating profit 19% to £329,000. Profit before tax increased 23%.

What is also impressive is that they increased cash balances from £427,000 to £1,119,000, gross margins were 66.6% and the NAV increased to £2,236,000 (includes £1.2m of intangibles). The market capitalization, when I last looked, was around £2.7m. This certainly doesn’t look expensive given the growth prospects and balance sheet.

Further attractions include contracts secured with Jewson and the AA (over the past year or so), a significant jump in monthly recurring revenues from 49.9% to 61.7%, and relatively low borrowings at £184, 491 (reduced from £223,265 the previous year).

The Chairman’s outlook states that “The board is confident that the revenues and profitability growth of the group can be continued over the next 12 months”.

The current p/e ratio is about 13, and my conservative forecast puts the company on a forward p/e of around 10. This seems mean given the growth prospects.

A couple of bear points might include

1)       The Company not paying a dividend. They prefer to reinvest their growing cash resources into the business and look for suitable acquisition targets.

2)       The illiquidity of buying their shares.

Overall, it looks an interesting story, and if growth continues over the next two to three years then the share price has substantial upside potential.

As ever, time will tell.

Will you fall in love with Cupid's growth story?

For those of you who like growth companies, here's an interesting story. Cupid is essentially a global on-line dating company achieving rapid growth through acquisition. The company, which joined AIM in June 2010,  released it's half-year results today and exceeded market expectations. Revenues were up by 189% at £25.4m with 53% of the total achieved outside the UK.  EBITDA increased to £5.7m, a rise of 137% and they have £8.4m cash on the balance sheet and no debt.

Cupid are building a truly global presence, and establishing a strong foothold in the North American market.

Monthly revenues now exceed £4.5m per month, which projecting forward should produce a figure in excess of £52.4m for the full year. EPS at the interim stage was around 4p, and broker's forecast's come in at about 9p for the full year. However, I could easily see them achieving 10p+ for 2011 giving a forward p/e of around 24.

The Chief Exec's statement is very bullish:- "We are in a very strong position and remain confident that we will grow value for shareholders in 2011 and beyond. The market for our services is global and growing and we are well placed to take advantage of the numerous opportunities that exist".

It's a truly impressive growth story so far, and I will be keeping a careful eye on the SP and future developments. However, I shan't be buying at the current share price. 

At heart I 'm a value seeker, and my issue with growth companies is that forward p/e ratios of 20+ don't leave any room for mistakes. Essentially growth has to continue at the heady pace expected by the company and the market. Cupid currently has a market cap. of £200m which is about ten times its net asset value (including intangibles). Without a dividend and/or sufficient asset backing then any hint of slowing growth can have a catastrophic effect on the SP. I'm not that brave.

That said, if I was to have a punt on a growth company in the expectation that they could continue to produce impressive figures, then Cupid would certainly be of interest. The very nature of their business appears ripe for consolidation and rapid growth, and I can see the story running for many years to come.

In conclusion, and perverse though it may sound, whilst I can't justify buying Cupid's shares using my strict (largely value based) criteria , a gut feeling tells me that I might be missing out on the next ASOS like growth story here?

If any readers wish to make a comment about this or any other article I have written then  please go to the ADVFN bulletin board and use the thread "michaelmouse's blogspot. Any comments thread?" ticker MM. It appears too difficult to add comments on blogspot.

The very little research, but are these really hopeless cases? portfolio vs. FTSE250

Just for a bit of fun, I thought I'd pick a few companies whose share prices look a little battered and bruised and compare their performance against the FTSE 250 over the next two/three years. I haven't done any research on these companies, and all I'll do is make a few cursory observations in their favour. I don't currently hold any shares in the companies I shall mention. Those of you who do read the blog from time to time will know that I tend to concentrate my efforts on trying to find bargains in the small/micro cap sector (see previous blogs).

For simplicity, I am going to allocate an equal (but fictional) investment in each of the eight companies.

The companies and their respective share prices at the close of play today are as follows:-

Aviva                                                            318.8p
Cable and Wireless Worldwide                      34.44p
Cable and Wireless Communications              32.12p
Game Group                                                  23p
ITV                                                                55.85p
Man Group.                                                   206.1p
Thomas Cook                                                43.55p
Vodafone                                                       162.85p

The share prices are the mid-prices given on the ADVFN monitor at the time of posting (17:40 Thurs. 25 Aug 2011).

The FTSE-250 finished the day at 10,021.39.

Starting with Aviva. Well known Life Insurer that pays a dividend of over 8%. If it holds the dividend for the foreseeable future then that's a pretty good return when you compare it against other investments.

The two Cable and Wireless companies. Proof that performance after a demerger can be as unimpressive as it was before, so far investors have had the opportunity to be disappointed twice as often. However, the yields from both companies are quite high (again if they can maintain them), and aren't both companies possible takeover targets?

Game group. Is this company seen in the same light as HMV? Looks to have better prospects to me, and  a cursory glance seems to indicate that it is adapting and fighting back with a growing online presence.

ITV. Can still attract huge audiences for popular shows e.g. around 20m for the X-factor final and hence still attracts the advertisers. Apart from the BBC, does it really have any credible opposition in the UK? Just re-instated a dividend payment. Possible takeover target?

Man Group. Nice dividend. Possible takeover candidate.

Thomas Cook. Pessimists think TC could go bust or at the very least need to issue more equity. However, TC will be merging with the Co-op to make it the biggest UK tour operator. Despite the many issues facing TC, Russian acquistion looks promising, the Brits still love their package holidays and the chaos caused by the ash cloud should benefit companies like TC in the long run. At today's share price the yield is about 25%. Market obviously believes a cut is imminent, but if it isn't or it returns to the same levels in a year or two then what a fantastic return. Directors have been buying at current levels.

Finally, Vodafone. Dividend yield must be over 7% with the special dividend in January. Will the special dividend be a one off? Probably not.

You can clearly see that I haven't done much research, but I am interested to see how the performance of this portfolio pans out against the FTSE250 over the next two or three years. Just to stick my neck out, my guess is that this portfolio will out perform the FTSE250, but I'm not recommending it and I certainly haven't done this myself.

As I said at the beginning, it's just a bit of fun that fits in with my value and contrarian instincts, and on a monthly basis I shall return to compare performance.

A doubled dividend works wonders

A very encouraging set of interim results from Densitron this morning. Caught me a little bit by surprise, since I wasn't expecting anything until September.

Revenues have increased by 31% and operating profit by 260%. The Chairman's statement indicates that these results were ahead of internal forecasts and that they are confident of meeting market expectations for the full year (EPS 1.49p) which puts the shares on a forward p/e of less than 8 (share price currently 11.6p). Seems far too low to me. Significantly the interim dividend has been increased 100% to 0.2p. I expect a further payment of 0.3p following the finals giving a yield of 4.3% for the full year.

I like their current focus on organic growth and growing the operating margin. India looks like it might provide a further substantial growth opportunity.

All in all, despite the uncertain global economic outlook and market gyrations, I see no reason to alter my views on my investment in Densitron, and shall enjoy the dividend payments whilst patiently waiting for what I hope will prove to be substantial capital growth in the medium to long term.

Surgical Innovations' share price continues to rise, and the market cap. is now around £50m. As mentioned before I took healthy profits from my investment here, but did I take them too soon? Clearly in the short term the answer is yes, although part of my reason for selling was that I couldn't see it multibagging in such a short period of time again.

The present market cap. is currently more than 7 times last year's revenue with a forward p/e of over 20. The shares look pretty fully valued to me. However, it will be interesting to watch. There is always the possibility of a takeover approach or a huge contract win etc. Besides, as I have often mentioned before in this blog, valuations of growth companies can get very heady indeed. Time will tell.

Miserable Mr Market

I see Mr Market is still feeling depressed at the moment, and undoubtedly he will create some bargains. However, quite a few company share prices that I have on my monitor seem resilient despite the recent sell-off. Early days yet though and Mr Market may get even more depressed and start handing out cheap shares on a plate. You can never predict market tops or bottoms with any confidence, and subsequent rises and falls generally take you by surprise. There's a great quote from Peter Lynch that I've included at the end of this blog.

In my opinion trying to second guess the market is a sure way to lose money, and as a stock picker I think the best you can do is to time your buying activity when you believe that the stock is cheap. Of course in markets like these there is always the risk that the stock gets cheaper still, so if you have the cash and are confident in your valuation methods then why not just buy some more. If you've used all your cash then just wait patiently for the real value to be recognised by the market.

Here's just one personal example. In 2002 I bought shares in Clarkson for around £2. The price looked a snip for a  low p/e, debt free company with a healthy balance sheet paying what looked like a safe 7% dividend. However, Mr market got very depressed and decided that he would sell Clarkson for around £1.30 a few weeks later. If you take a look at Clarkson today you will see that the SP is around £11.35, and has been over £13. In other words the shares were cheap at £2, it's just that I didn't get in at the very bottom of the range, which is almost impossible to do on a regular basis due to the often irrational Mr Market and his moods.

At the time I was a relatively inexperienced investor, and I eventually sold my holding for around a 75% profit . Not bad, but given the capital appreciation and dividend rises over the years since, it would have been nice to just hold on for a while longer.

Anyway, here's Lynch's thought's about market timing (bear in mind that he's one of the best investors ever achieving a compound rate of 29.2% per annum.

"Every year I talk to the executives of a thousand companies, and I can't avoid hearing from the various gold bugs, interest-rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers. Thousands of experts study overbought indicators, oversold indicators, head-and-shoulders patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack......All the major advances and declines have been surprises to me"

All that glisters is not gold

http://www.londonstockexchange.com/news/focus-on/048-gold-to-hit-2000-dollars-within-12-months.htm

I spotted this on the London Stock Exchange website today. I see the experts are predicting the gold price will rise to infinity and beyond: $2000/ounce by this time next year and $5000/ounce by 2020. Wonderful news, I’ll just nip down to the Westfield shopping centre and use all my spare cash in the new gold dispenser machine that they’ve recently installed. What on earth is that all about?

It’s probably just me, but I don’t really get gold and its safe haven status. Come Armageddon how much use will a stock pile of relatively useless yellow metal really be? Stuck down inside my bunker I can’t really imagine exclaiming “Thank god I bought all those gold bars before everything kicked off”, although I can imagine saying “I’m glad I stockpiled all those Bailey’s chocolates”  ;o) (see Zetar)

On a slightly more serious note, it is beginning to look like gold is entering bubble territory, although predicting when the bubble will burst is a bit of a mug’s game. However, I did read somewhere that Anthony Bolton had already sold his gold investment.

That reminds me, I wonder when I’ll get my money for the golden pin I recently sent to “webuyanygold.com”.

Whilst I’m in a slightly frivolous frame of mind, if any of you are getting fed up of all the gloom, doom and despair that’s constantly in the news at the moment, here’s my all time favourite phrase:-

Bu da geçer

No prizes for translation.

The Great Investors

Has anything been happening whilst I’ve been away?

Actually my family and I have just returned from a wonderful holiday in sunnier climes, and I’m currently suffering from post holiday blues. Normally I feel ready to return a few days before our holiday is due to end. Not this time though, fabulous hotel with first class facilities and service and the whole family felt that we would have liked to have stayed longer. Not cheap admittedly, but excellent value for money.

During the holiday I did occasionally switch on the TV to catch the BBC world news only to witness our feckless, indolent, and dysfunctional members of society rioting and looting. I haven’t felt quite so ashamed to be British since we regularly had to endure scenes of our football hooligans causing havoc with their moronic drunken behaviour and mindless violence.

However, I did raise a wry smile when the riots appeared to fizzle out due to rain!!!! Probably didn’t want to get their newly acquired designer trainers wet.

I was also acutely aware of the global stock market gyrations. Whilst I am happy with all my current holdings (incidentally, I don’t check their prices or look for news whilst on holiday), I’d be surprised if Mr Market hasn’t thrown up a few bargains during his current negative state of mind. I shall be scouring the market avidly over the weeks and months ahead. Already one or two interesting candidates have made it on to my monitor.

Whilst I was on holiday, I did take a couple of books to read which included “Investing against the tide” by Anthony Bolton and “The Great Investors” by Glen Arnold. Both books provided a fascinating read. Whilst I am very familiar with the ideas of Ben Graham and Warren Buffett (“The intelligent investor” by Ben Graham is a must read), I was less familiar with the likes of Bolton, Soros, Neff, Templeton, Fisher and Lynch. Not surprisingly, although they have all adopted their own particular styles; you can easily pick out a great deal of commonality in their strategies. Although I am a huge fan of Graham and Buffett, it was the chapter about Peter Lynch that may me sit up. I’ve never read anything about Lynch before, but from the relatively brief details in the book I can see more parallels in my investment strategy with Lynch’s than any of the others.

The book “One up on Wall Street” by Peter Lynch has been mentioned before on the ADVFN bulletin boards (possibly by the poster called “Cockney Rebel”?) and it is certainly the next book on my reading list.

When we did return home, I did naturally check the share prices in my portfolio, and although each had suffered a minor retrace there was no new company news either good or bad. Some short term traders may find the thought of not checking share prices and company news for over two weeks unthinkable, but for long/medium term investors like me, I would be questioning my judgment about a share purchase that I was nervous about leaving alone for several days. In fact, before buying into a company I always ask myself: - “Would I be happy to invest and only look at the share price again in two years time?” If the answer is no then I wouldn’t buy it.

One company that did release some news not long before I went away was DCD Media. (Incidentally, my investment here has taught me some invaluable lessons in identifying companies to avoid in future). DCD Media released a trading statement which was quite unique in that the statement didn’t refer to current trading once. In fact it merely stated that the Finance Director had stepped down (not a great sign!), they were looking to recruit further members to the board of directors (for goodness sake please recruit somebody at least half-competent!!) and they are still exploring funding (£1m for working capital).

As mentioned before, DCD is priced to go bust. Whilst I am sure that they have some very talented employees on the creative side, it appears that their management/business skills are somewhat lacking and to be frank I suspect that they couldn’t run a p*ss up in a brewery. The main hope for investors is that TAYA provide the capital and install a team that can provide the necessary business acumen. It is just possible that this could then be a ten bagger or more from here, but I won’t hold my breath waiting.

There was a trading update from Indigovision (a company I no longer hold shares in). This followed on from their recent profit warning and added a bit more meat to the bones. It pretty much confirmed what I suspected, that the company appears to be encountering a difficult period in its evolution from a small scale operation to a far larger concern. As a consequence the SP has now fallen well below the price I sold my remaining holding for after the initial profit warning. Profits should come in at around £1.2m which on a diluted EPS basis gives a current P/E around 14 (share price 205p).

On a p/e basis alone it doesn’t look cheap, and given that margins, operating profit and cash balances have all fallen since the interim period the shares may have further to fall? The balance sheet is strong, but as I mentioned here and on the ADVFN bulletin board, the market may allocate a single digit P/E ratio to this one. Even at 10 times earnings (15p EPS) this gives a share price around 150p. Given the balance sheet I would say that the shares would be extremely cheap again at these levels, but market valuations are often wrong otherwise we’d never be able to find bargains. Indigovision will remain on my monitor, but I’m not in a hurry to repurchase.

Finally, returning to my recent holiday (now that would be nice!) it was interesting to note that the hotel was fully booked and that there were a very high percentage of Russian, Eastern European and Asian guests who were staying at this 5 star hotel. Despite all of the concern about the current state of the global economy, looking further ahead I strongly suspect that any hiccup in global growth will be temporary and that the full scale of growth in Eastern European and Asia is still yet to emerge. Anyway, as an ordinary “Joe Soap”, perhaps I should just leave it to the army of economic experts to get it wrong for me!

 

Sweet and healthy profits ahead?

On Friday I mentioned that I hadn’t added to my portfolio recently, but after some research over the weekend, I did identify an opportunity and bought shares in a company called Zetar early this (Monday) morning.

The idea came from a brief article in the FT weekend, and after some research I decided to take the plunge.

The first thing that caught my attention when researching this company was that it is currently trading on a historic P/E ratio of about 6, and yet results released last week suggest that the company has weathered a storm and is set fair for growth. Surely a P/E of 6 is far too stingy.

Zetar is essentially a producer of confectionary and healthy snacks. In their recent finals, it appears that confectionary grew very well (despite an unseasonably warm Easter), but the snacks division was hit by a very sharp rise in commodity costs in the first half of the year. The overall figures for the year were nevertheless encouraging, and in the second half of the year they have managed to pass the increased costs in their snacks division on to their customers and hence improve margins. In the first 11 weeks of the new financial year, revenues as a whole are some 6% ahead of the same period last year.

They have clearly identified a number of growth opportunities for the short, medium and long term, and have been awarded a “food gifting” license for the London Olympics 2012. They have also formed a strategic partnership with two unidentified major European companies.

The balance sheet looks pretty healthy with a net tangible asset value of about 118p per share, and a NAV of 350p (including intangibles and goodwill). They have over £4m cash on the balance sheet, and banking facilities in place with HSBC until 2014 (recently negotiated on relatively favourable terms). Free cashflow is healthy, and they have also introduced an inaugural dividend of 2.25p (about 1%) covered about 16 times by earnings.

It was a pretty upbeat forward looking statement, despite the headwinds still facing the retail environment, and surely the shares deserve a re-rating. If earnings come in around 40p next year then a P/E ratio of 10-12 gives a value of 400p-480p. This leaves a substantial amount of upside from this mornings opening price of 220.5p.

There is a nice piece written about the company on the Motley Fool where the CEO and FD gave a presentation around January (I think?). Interestingly the company seems to supply most of the major retail outlets, and the management team appear to have set ambitious but achievable targets (see article – there is a link on ADVFN).

There has been plenty of consolidation in this sector in recent times (think Cadbury’s and Uniq). In fact whilst Zetar are looking towards organic growth, they are keeping an eye out for small bolt on acquisitions, although will they inevitably become a target themselves?

All-in-all the investment case is compelling at these levels.

……………………………………………………………………………………………………………….

P.S. Actually the real reason that I’ve bought shares in this outfit is that last Christmas we pretty much depleted our local supermarket of Zetar’s -  Bailey’s chocolates and I’m secretly hoping that, in the future, shareholders may qualify for substantial discounts. They are absolutely delicious!!!!

P.P.S. There are two technical points of interest. Firstly, the shares have been trading in a range for some time, but after this mornings rise there appears to be a positive breakout. Secondly, UBS have been and are a seller of this stock; they have recently offloaded considerable volume, but are now down to their last 3.7%. They don’t seem to be having any trouble selling, and a bit like Zetar’s chocolates, the shares are quickly gobbled up by eager buyers. I expect once UBS have finished (which isn’t taking very long) I am hopeful that the shares will make an even sharper move upwards.

Underperfomer pays dividends

In my last blog at the end of June, I intimated that I am currently scouring the market to identify potential investments. Whilst I have added a number of companies to my watch list, I have yet to take the plunge and add to my current portfolio. Patience is the key.

Meanwhile I thought I’d revisit a couple of companies that I have mentioned in the past.

Firstly Vodafone. Vodafone released a trading statement today which basically stated that trading was in line with market expectations. Of particular interest is that free cash flow is healthy and dividend targets on track. Given that the dividend is currently over 5.5%, it looks an attractive share for income seekers. It’s interesting to note that since Vodafone introduced dividend payments they have increased the payment every year except one.

I have also noted that press speculation in recent months has talked about the possibility of a Special Dividend.

As I mentioned in a previous blog, Vodafone has been an underperformer in terms of capital growth over recent years. Perhaps it will become an outperformer in the next few years?

I tend not to invest in large companies (particularly FTSE-100 companies) simply because they have less potential to multi-bag over short time periods (although the recent recession temporarily threw up one or two opportunities. I seem to remember Barclays Bank was one) and armies of people are watching and analyzing these stocks. However, if I was looking for a relatively safe haven that would provide a nice income stream then Vodafone would certainly merit further research.

Another company that released a trading statement today was the Mission Marketing Group. Again trading is in line with expectations and given that broker forecasts come in at around 4p for 2011 and 5p for 2012, it does appear that the shares are undervalued. If they do hit targets for the year then I can easily imagine the shares doubling or more from here.

 As mentioned in a previous blog, I did notice these at around 10p-11p when they were hovering around my own personal ‘margin of safety’ criteria. Since I am essentially a long term investor, I probably won’t buy shares in TMMG because it’s not the type of business that particularly appeals to me. However, if I had allocated some trading money then it looks good for a short/medium term bet.

Finally, Surgical Innovations released a RNS regarding a 5-year $8m agreement with SI US. This is one that I did own and sold for a five fold profit. As I stated at the time, the future does look bright for this company and I am sure there is further upside in the share price in the short, medium and long term and good luck to shareholders. However, the decision to sell my holding here was the right one for me. Sometimes the right time to sell is a very personal decision which can depend on a whole variety of reasons.

When is a good time to sell?

Like many investors, I find selecting companies to invest in far easier than deciding when to sell a holding. I have clear criteria and rules that I try to follow when buying shares but I’m less certain about the right time to sell. This selling dilemma has cropped up a couple of times this month, as I shall explain below.

Firstly though, it’s a dilemma that hasn’t troubled me where Avesco is concerned. Avesco released their 2011 interim results in mid June, and my personal expectations have been exceeded for this six month period. Given that Avesco benefits from the even year effect (Olympics, World Cup etc.), I wasn’t expecting such a great improvement in overall and underlying performance compared to 2010. Whilst the third quarter results for 2011 will be up against the tough comparator of last year’s World Cup, the overall full year results are shaping up to be far stronger than 2010 which is extremely encouraging as they enter London Olympic year 2012.

When the interims were released, the shares initially dipped on the news that the Disney court case may take longer than some traders had hoped. However, two recent research notes have picked up on the fact that this company is worth £2+ even without any Disney windfall and the shares have risen again since. The two notes are posted on the ADVFN AVS thread.

Avesco is still undervalued on many valuation measures, and it’s an easy decision for me to continue holding.

The day after Avesco’s interims, I was faced with a dilemma when, totally out of the blue, Indigovision issued an unwelcome and unpleasant profits warning. Given their encouraging interim results, I was hoping that trading was still robust. The trading update gave few details other than to say that revenues would show some improvement on last year, but profits would be significantly below expectations. Given the terse nature of the update and the scant detail, my impulse was to sell the remainder of my holding, which I duly did.

The profit warning had been issued on Friday morning, and I did spend part of the weekend agonizing over my decision to sell. I can see both a bull and bear case for indigovision which I have mentioned on the ADVFN IND bulletin board. However, since buying in 2004 for around 60p and with subsequent sales at prices of £9+ and £6+ respectively, my investment returned 750% overall (annual compounded return of 36%) and I am more than happy.

Indigovision will remain on my monitor. Is the company now good value or a bit pricey? The full year results should paint a clearer picture, but we’ll have to wait until September for those. This will be the second year that earnings have disappointed despite a pick up in the global economy. Whilst world economic growth couldn’t be described as strong, I would have expected Indigovision’s performance to at least be improving. The bulls argue that it’s operational gearing in reverse (and temporary), but you can’t ignore the fact that, whilst margins are still excellent, they are falling and overheads are increasing. Indigovision may have to start ‘peddling faster’ just to stay still?

The biggest dilemma that I had was about three weeks (or so) ago.

In previous blogs you will see that I picked up a holding in Surgical Innovations for under 2p less than a year and a half ago. After their last set of results, I had decided that this company was almost certainly a long term hold. However, as the share price broke through 10p again and up towards 11p, I did sell.

Why did I sell? Two reasons really. Firstly, a five bagger in such a short period of time is an extremely healthy return, and secondly I believe (rightly or wrongly) that the chances of SUN multi-bagging again in such a short time frame have fallen quite considerably.

Surgical Innovations have done exceptionally well over the last year or so, and I can easily imagine that the business will continue to boom in the forthcoming years. The company is currently valued at around £40m on revenues of £7m and profits of £1.8m. The forecast EPS figure for 2011 is 0.6p giving a forward P/E of around 15.  SUN doesn’t look expensive given future growth prospects, and I can see further upside in the share price if they continue their momentum. However, I believe the potential upside in the near and medium term is now more limited and better opportunities may present themselves. I shall keep SUN on my monitor just in case any price weakness tempts me back in.

Densitron is a more recent purchase, and today they released a very upbeat trading statement. Given their broker forecasts (2011(E) EPS – 1.49p and 2012(E) EPS – 2.17p) and DSN’s confident statement about meeting 2011 estimates, a near term share price of around 20p looks entirely possible. Their forward looking statements look very promising, and there is a nice dividend. Just like Avesco, I am more than happy to keep all of my holding.

I’m currently scouring the market for further potential investments, and will update my blog when I make any new purchases.

P.S. I see that Indigovision’s broker (Brewin Dolphin) is predicting EPS for 2011 around 18p/19p. Forward P/E for 2011 is therefore about 15. Not expensive if growth resumes next year, but if the market isn’t convinced by IND’s forward looking statements then it could attract a single digit p/e ratio which will put the shares below £2 (2009 - EPS 34p, 2010 - EPS 26p, 2011(E) - 19p). They will stay on my monitor, but I’m not in any rush to leap back in.

Displaying all the right signs

It has been a while since I bought anything new to add to my portfolio, but recently I did decide to buy shares in a company called Densitron.

The company describe themselves as a world leading designer and manufacturer of information display systems.

I am hopeful that I have identified a pricing anomaly with this company whose current market capitalization is about £7.5m (share price currently 10.75p).

On first examination the company may not appear to be much of a bargain,  the share price graph shows a sudden and severe dip from 15p to its current level, and underlying earnings were 0.72p, putting the shares on a p/e ratio of 15.

However, when you dig deeper you can see that this is a company that grew revenues by 37% from £15.1m to £20.8m last year, with underlying profits increasing from £200,000 to £700,000

The sharp fall in the graph is entirely due to a 5p special dividend payout which was distributed to shareholders following an asset sale.

What really attracts me to this particular company is their bullish outlook for the next two/three years, the restoration of a dividend payment and the future earnings projections.

From the 2010 full year report:-

“Jan G Holmstrom, Chairman of Densitron, commented:

 "I am delighted with the progress that the business has made during the year. The work that has been done to develop new products and markets has put the Group in a position to be able to grow substantially over the next few years and this is demonstrated by the continuing growth in the order book that has been achieved during the first quarter of 2011. "”

The group intends to pay a dividend in July of 0.2p following an interim payment of 0.1p. The total 0.3p dividend for the full year is just under 3%.

Most encouraging are the projections going forward. Broker EPS estimates come in at around 1.49p for 2011, and 2.17p for 2012. This gives forward P/E ratios of 7 and 5 respectively. Given the expected growth and current indications from the company then the share price looks far too low.

Having run through some projected figures myself for 2011 and 2012, I think the broker forecasts may even underestimate potential earnings. I would be disappointed if the share price isn’t somewhere between 30p-50p over the next couple of years (e.g. 2.17p multiplied by 15 gives a share price of 32.5p).

Meanwhile I’ll sit tight and gladly accept the dividend payments which I anticipate will increase with earnings.

P.S. Worth noting that the Chief Exec bought about £20,000 worth of stock around the 9p mark in recent months.

P.P.S. Share price moved up a further 7% today.

The good, the bad and the ugly

Well I did say that this blog would include the good, the bad and the ugly. Whilst Surgical Innovations and Avesco are looking good, it got ugly at DCD Media.

Let’s start with the good. It appears that the market is once again waking up to the fact that Avesco is hugely undervalued. I have mentioned many times before that this company is undervalued on any number of measures, and if you want to know more then read some of my previous blogs.

Avesco’s share price rose by 13% today. I suspect that it is in anticipation of the interim results due in June and the impending Disney appeal case due to start towards the end of the same month.

One of the posters on ADVFN suggested that today’s rise in the price could be due to a tip that appeared on a trader’s blog. Does that imply that my thread on advfn and this blog are largely ignored? I’ll try not to take offence. It’s just as well that I’m not egotistical I suppose. However, I can take solace in the fact that I picked up the majority of my holding in Avesco at prices between 20p-30p.

In my opinion, the Avesco story still has some considerable way to go before I even contemplate taking any profits.

In my previous blog, I commented on the 12 month results for Surgical Innovations. After a brief retrace in the share price it has begun another assault on the 10p mark. I’m also quite happy to hold the shares in this company for the foreseeable future.

Anyway that’s the good. I can’t think of any bad, so let’s go straight to the ugly.

DCD Media. Where do I start with this company? What kind of management releases its full year results (18 month period) on its own website on a Saturday afternoon in the middle of a bank holiday weekend? Put your answers on a postcard please.

Needless to say, the results were not what were expected, or should I say not what I expected (understatement of the year). I could write a book about these results. Take a look at the contrast between the 12 month period and these results just 6 months later. Unbelievable!! Perhaps there’s another story here?

If you read my blog entitled ‘don’t bend the rules’ then you will see that this has been a very poor investment for me. I did truly believe that they had turned things around, and with Taya investments taking a 20% stake, DCD’s future looked considerably brighter.

The company appears determined to self-destruct and make me look stupid in the process. 

The results raised innumerable uneasy questions about this company and its management. Top of the list was their sudden and unexpected statement about needing £1m for working capital for the newly established factual division. Eh? Do explain how you intend to use it? Are you planning an extravagant party perhaps to keep up staff morale?

Apologies for the heavy sarcasm but I think I’m entitled to some with this one.

DCD did make an underlying profit and was cash generative. They managed to pay down a £1m of bank debt. However, the market has totally lost faith in the company and at a capitalization of just £3.28m DCD is priced to go bust. Given its capacity to spring nasty surprises, I cannot dismiss that this is a possibility.

With hindsight investing in DCD was an easily avoidable mistake. Their balance sheet has always been stuffed full of intangibles and goodwill and, as I said in a previous blog, these so called assets are totally worthless when the chips are down!

I also wrote a piece entitled ‘put your money where your mouth is’, expressing the significance of Director’s buying shares. Director buying at DCD has been noticeable by its absence.

It may seem contrary, but I do still hold shares in the company. It turns over more than £30m a year, and as I said it is still profitable. If it survives then it must surely be a potential bid target at a premium to its current value.

However, given my history with this company, I hold the shares more in hope than expectation!!

Some of you may be wondering why I don’t just cut and run.

Firstly it’s priced to go bust, however if they do get their funding, then parts of, if not all of the company may be attractive to either TAYA or another predator. September Films is a particularly successful operation and has a strong presence in the USA. This could be very attractive to some production companies wishing to make inroads into US television.

Secondly, if they’re not acquired then it’s just possible that TAYA will take an active role in managing the company and aim to restore DCD’s credibility.

I should point out that DCD have stated that their major shareholders have given strong indications of support in an equity or debt funding for the required £1m.

I shall hold, await further news and then take action as appropriate.