Margin of safety

“Yes I love it, in fact I use the site everyday, and it seems to be attracting lots of users worldwide. It’s a great growth story and appears to have much further to run. Yes of course I’ll buy it. How much did you say it was?”

“Oh – I don’t suppose you know if there will be a sale on in the near future?”

ADVFN released their interim results today. Good progress has already been made, and it’s an encouraging outlook statement. I do like the company, and full marks to them for what they have achieved so far. However, the current market cap is £37m, and for me that’s too expensive against my investment criteria.

I’m a great fan of Ben Graham, and I do try to apply his principles as far as I possibly can (although there is clearly compromise when selecting micro-caps).

Was it Graham or Buffet who said, “Don’t forget to ask, how much?”, and certainly I try to identify a “margin of safety” when buying.

As far as I can see, ADVFN have a net tangible asset value of  £1.8m    .

They are still loss-making. Given the market cap, on those two measures alone, I couldn’t justify buying shares at the current price.

We all have our own criteria for investing, and just because it’s too pricey for me, it certainly doesn’t mean that it won’t continue to prosper and command an ever higher market cap.

Good luck to ADVFN and all their investors, and may you all continue to flourish, it’s a great service.

Please also note that I haven’t researched ADVFN in any depth. I have merely taken a cursory glance at their interim accounts.

Note: In “margin of safety” calculations, I discount goodwill and intangibles. The clue is in the name for both.

 Although “Goodwill to all men” is my motto, I’ve never managed to sell any.

 Would this work? - “Dear Mr/Ms Bank Manager, I know I can’t pay my debts just at the moment, but if you could just let me explain the huge amount of intangible value in the accounts”.

Keep watching Indigovision

Keep your eye out for Indigovision’s interim results 10 March 2011 (also the date for Avesco’s AGM).

I bought shares in Indigovision several years ago for 62p and sold a third of my holding some time ago at just over £9 per share. Daft though it might sound, even though the share price has fallen well below those giddy heights, in the longer term I might regret selling any at all. We shall see.

Indigovision is a leading IP-CCTV company that has achieved outstanding growth over a relatively short period of time. When I bought into Indigovision, revenues were around the £2m mark with losses to match. I’d like to say that I could see the huge potential for the company, but that would be dishonest. I originally invested because its market capitalization was around two thirds of its current assets (which included a substantial cash element), and I thought that if it doesn’t make it then the chances are it will be taken over. One other swaying factor was that they had won the contract for the Athens Olympics. Not bad for a tiny loss-making Scottish technology company.

Indigovision has of course gone on to prosper and become a very profitable, debt free company with a hugely impressive global client list. Dividend payments have also been introduced.

It’s a terrific growth story and yet Indigovision’s p/e ratio is very modest indeed (compared with other growth companies), and I am hopeful that 2011 will see a marked increase in revenues and profits with a consequent re-rating and substantial uplift in the share price.

At the very least, if revenues and profits disappoint then I wouldn’t be surprised to see opportunists start sweet talking Oliver Vellacott and the board of directors, perhaps leading to an offer substantially above the current share price.

RCG Holdings - A Brief Encounter

I see RCG Holdings is de-listing from AIM and I can breathe a sigh of relief that my investment in this company was a short and fortunately profitable one.

RCG was a seductive company to invest in: profitable, decent balance sheet, low single digit p/e ratio and growing rapidly in a ‘sexy’ area. However, I resisted her obvious charms for a considerable time.

I don’t know whether it’s irrational but I do dislike very busy bulletin boards (maybe something to do with giving the herd a wide berth?) and RCG’s board was very busy. Neither was I very keen on their surprise fund raisings and I was certainly put off by an almost farcical court case involving a major shareholder. However, eventually I did succumb, despite these misgivings, when the share price was about 40p and a Hong Kong listing appeared very likely.

The Hong Kong listing duly arrived, and at one stage I’d more than doubled my money. Unfortunately I didn’t take profits, the share price began to drift downwards and nagging doubts came back to haunt me.

I can’t remember what the wording of the RNS was exactly, but I do remember it involved at least one Director and a search of their property, but no arrests. I decided to take my now 50%+ profit. Quite satisfying after a few short months, but I consider myself very lucky with this one.

I didn’t follow RCG after this point, but did from time to time glance at the ever diminishing share price.

Yesterday the company announced that it was de-listing from AIM and the shares plunged further. By the end of today they languish at 17.25p.

Au revoir RCG I just hope that you haven’t broken too many hearts along the way.

Buy into a profitable company for less than nothing?

Yesterday I wrote about 'the one that got away', so today I'll write a little bit about one that hasn't:
Avesco.

I picked up the majority of my holding in Avesco for prices between 20p-30p. The current share price is £1.05, and whilst it has "multibagged" already, I haven't sold a single share in the company.

In my opinion, the financial crisis and consequent fallout when some share prices fell to rock bottom, provided perhaps the opportunity of a lifetime for savvy investors.

Avesco has a global presence, a strong balance sheet with a tangible net asset value of £1.43 per share, it is now trading profitably and is highly cash generative. They also recently resumed dividend payments.

Whilst the company have indicated that 2011 will be a solid year, 2012 is the year in which they should excel (London Olympics, European Football Championships).

In the background is the possible payout from Disney which could amount to as much as £1.80ish per share.

Currently then at £1.05 per share, you would be buying a £1 worth of fixed assets for 73p and you might get £1.80 for every £1 you invest (if Disney lose their appeal).

Bizarre though it sounds, potentially you could get £1.43 of tangible assets and a profitable, cash-generative, dividend paying business for about minus 75p!!

I have to add that I didn't invest in Avesco because of the Disney case. In fact, I knew nothing about it until Simon Cawkwell brought it to the attention of investors via the ADVFN bulletin board.

My point here is that regardless of the eventual Disney outcome, I believe that the Avesco recovery has only just started, and you'd be hard pressed to find another company as cheap as this one, even after a 5-fold increase in the share price from it's nadir.

Magnificent micro-caps

£18.95. Friday's closing price of shares in ASOS, the online retailer. It's an incredible story, and is indicative of why I love investing in mico-caps. Of course ASOS is no longer a micro-cap, but it certainly was in the not too distant past.

ASOS first came to my attention when the company released a trading statement indicating that trading was significantly ahead of expectations. At the time the share price was 15p, and I vividly remember toying with the idea of investing £5000. However, for whatever reasons I didn't. If I had bought and held them then that £5000 investment would now be worth £631,667. Oh well, if my Aunt was my Uncle!

The point is that investing in micro-caps can be risky, but the rewards can be phenomenal.

ASOS is now trading on a very heady p/e ratio, and I certainly wouldn't entertain buying them now, but when you catch these companies as micro-caps it can be an exciting and hugely rewarding journey.

Whilst I am yet to buy and hold a company that manages to multiply my investment 126 fold, I am lucky enough to have picked a few "multibaggers", and I hope to pick a few more in the future.

Investing in micro-caps is great fun (as long as you do your research), and it can be magnificent.

I intend to use this blog to post my general thoughts about the market and shares that I own, don't own or currently interest me, alongside my regular posts on the ADVFN bulletin boards. All of the links will be pulled together on my twitter account.