Turn £10,000 into £1.3m. It's easy?

The Mission Marketing Group has been on my monitor for a while, and unfortunately it’s now got away from me.

The price was about 9p when I noticed it, and I hoped that it might fall back a bit. That said, I consider myself a long term investor, and whilst the company looked (looks?) to be good value in the short to medium term, I am not very keen on this type of business as a long term investment.

The price has climbed to around 17p-18p over the last few weeks, but I’ll leave it now rather than chase it.

Another fairly recent miss was Scapa which has also doubled since it made it onto my monitor.

Perhaps I ought to allocate a pot of money for trading purposes?

Question: If you have £10000 to invest, and can keep picking stocks which increase your investment by 50% (i.e. compounding your money by 50%). How many trades would you need to make before you turned that £10000 into over £1,000,000?

Answer: Just 12 would turn your £10,000 into £1,297,463. It’s such a simple bit of mathematics, but even now I find it staggering how quickly relatively small amounts of money can turn into far larger sums through compounding.

In theory then if you put aside £10,000, and invest it in a single company which nets you a 50% profit and then take your £15000 and put it all into another company whose share price accrues by 50% etc and repeat the trick 12 times, you’ll now have a cool £1.3m. In other words, just enough to buy a studio flat in Central London (That bit is supposed to be a joke, but then thinking about it………)

If only it was that easy!!!!!!!!!!!

Was this the investing opportunity of a lifetime?

Here is a conversation that I will never have with my wife:-

“Darling, there is a sale on at your favourite department store, many prices have been reduced by 50%, and others are just a fraction of their original cost, would you like me to take you?”

“No thanks. I’d prefer to wait until prices start to rise again.”

Nobody in their right mind wants to pay full price or worse, too much, when they are buying any goods.

However, statistics show that many investors start buying shares when they are getting more expensive.

The stock market is like any other market. You wouldn’t turn up at your local fruit and market stall and say, “Gosh, they look incredibly cheap can you let me know when they’re more expensive and I’ll come back then”.

As the financial crisis began to unravel, and the FTSE-100 lost about half of its value, a fantastic buying opportunity was created. I wonder how many people dived in and started picking up the bargains or even a simple tracker fund?

It’s a sad fact, but statistics over many years show that generally most investors don’t take these opportunities, and many will only start investing in the stock market again when it’s back to or above its pre-crash levels.

One of Buffet’s many excellent one liners is something to the effect, “Be greedy when others are fearful and fearful when others are greedy”.

In my opinion, the crash will prove to be one of the great investing opportunities of a lifetime (or if not a lifetime then certainly a decade or two), particularly for the selective stock picker.

The thing about stock market corrections or crashes, or whatever you wish to call them, is that they bring down the good, the bad and the ugly.

Of course, it’s ensuring that you have enough knowledge to sift the wheat from the chaff, although even some of the less attractive companies get battered far too much during general market mayhem and panic, and present very attractive buying opportunities.

Since the market nadir, a huge number of stocks have gone on to multi-bag, and for astute investors who were able to seize some of these opportunities, the rewards have been huge.

As you already know, one of my particular favourites was Avesco, which has risen from a low of 20p ish to its current value of 96p and, in my opinion, is still hugely undervalued. There are of course many, many more examples and far too numerous to mention here, but 4 examples that made it onto my monitor were:-

Hogg Robinson which fell to around 4p and is now 59.5p, Johnson Service Group which fell to around 5p and is now 33.75p, TT Electronics which hit 20p and is currently 174.5p and finally Pendragon which reached about 1.5p and is currently 23p (although I do remember that it rose well above 30p at one stage).

Happy hunting and I hope you were able to take advantage of Mr Market's generosity.

Don't bend the rules!

DCD Media.

How long have I held shares in this media company? Too bloody long is probably the correct answer. Certainly from when its name was Digital Classics, and the shares were about £1. I’ve topped up all the way down to its relatively recent nadir of 7p. Ouch!

What’s the expression? “A man who never made mistakes, never made anything”.  I have certainly made many errors of judgment here. What is slightly irritating is that I shouldn’t have.

 I’d had some very early successes with applying my criteria for ‘value’ investing. In short, I got ‘cocky’ and thought that I could keep bending those criteria, even when it was clear that they didn’t fit. It was at this time that I also started posting on the ADVFN bulletin boards, and arrogantly dismissed and argued with the skeptics out of pure bloody mindedness. Blindly I ignored my own misgivings, and even argued in defence of ludicrous management decisions which proved to be disastrous, and could have led to DCD’s complete collapse.

When I originally invested, Digital Classics was a small company that had a decent looking balance sheet, but assets were largely intangibles and goodwill. When valuing a company I always strip these out. I did with this company, it didn’t look great value for money, but I ignored it because I liked the outlook statement.

Next came their growth through acquisition strategy, great if you are getting a bargain, but not when you’re paying over the odds for loss making companies with little tangible value, particularly when you’re diluting shareholder value with hefty share issues and destroying the balance sheet with significant debt. DCD did both.

Along came the financial crisis, and this was a company in trouble.

As an aside, also beware the company that changes its name. If you have a good reputation and a strong brand then why would you jeopardize future business by changing your name?  In most instances name changes simply imply a wish to dissociate yourself with your past. It doesn’t really instill confidence does it?

Finally, and significantly the company had never made a profit. It was the ultimate ‘jam tomorrow’ company.

What the bloody hell was I thinking?

Anyway let’s fast forward.

It should be no surprise that in 2009 (I think!) the company looked like it might go under.

However, something remarkable happened. I don’t know how they pulled it off, but DCD managed to agree a re-financing deal that totally changed the face of the balance sheet.

In short, the debt was slashed for relatively little equity, and the Chief Exec was ousted. As a consequence, over the last couple of years DCD is now a profitable company trying to grow organically and with the comfort of a very respectable looking balance sheet. Currently, it trades on a miserly single digit p/e ratio. What is most encouraging is that they are making great strides into the US market, and the sum of the parts is surely far greater than the current market capitalization.

Probably for the first time in its history, DCD Media is genuinely very cheap.

Of course this hasn’t gone entirely unnoticed, and recently TAYA Investments (see Avesco), an activist investor, have taken a near 20% stake in the company.

Hopefully DCD can produce a glittering set of results when they are released at the end of April, and an optimistic outlook statement.

I am at last genuinely excited that they have turned a corner, and if they haven’t then I expect them to be acquired sooner rather than later.

A leisurely weekend read

Every weekend I treat myself to a copy of the Financial Times and make time for a leisurely read. One of the attractions is that the 'Money' section always prints a list of the week's Director transactions (see an earlier blog). Whilst I know the information can be found from any number of sources these days, I also enjoy reading the 'MyPortfolio' and 'Trader's Diary' sections. One of the reasons I am writing this blog is that I do find it interesting reading other people's investing stories. From today's paper, I see that Nick Louth is a holder of Kenmare shares which I have held in the past and commented on previously. Basically, he sees them as a takeover target. I would tend to agree, although I no longer hold.

A recent addition to the weekend FT is the inclusion of a column in the main section of the paper called 'small-cap week', tapping in to Private Investors enthusiasm for smaller companies. Details of the top ten risers and fallers (small caps) over a week and a year are given (or sometimes a month etc.). Parkmead topping the yearly list with a rise of 2400% through to Triple Plate at 632.4%. Don't you just love small and micro-caps (see very first blog). Whilst I recognise many of the company names in the top ten, only two briefly caught my attention, although sadly I bought neither. Those two were BLINX up 643.6% and @UK up 1150%. Can't remember much about @UK, but I remember thinking that whilst BLINX looked exciting, it already had a hefty market cap. (at about 15p). Since the shares are now over £1, clearly others thought and think differently, and very well done to them.

Will (the) SUN keep shining?

One of my current holdings at the moment is Surgical Innovations (SUN). I bought shares in SUN for under 2p just over a year ago. At today’s close the shares are priced at 7.3p. When I purchased the shares, they were valued around or below tangible net asset value; the company was profitable with an un-demanding p/e ratio. The outlook statement read very positively, clearly suggesting that this was a company that could grow quite rapidly. These are the type of companies that really interest me, a growth stock that you can buy below the value of the tangible assets on its balance sheet.

So why could you buy the shares at rock bottom prices. Three reasons (I think) at the time:-

1)       The company was under the radar of most professional and private investors.

2)       They had missed broker forecasts because of a delayed contract payment.

3)       The SP performance had disappointed in the past, and consequently investor sentiment was a little negative.

The second reason shows just how ludicrous stock market reaction can be at times. The company had emphasized that payment had been delayed, not cancelled. As a Private Investor these are the opportunities to pounce upon, where there is clearly a mismatch between a company’s true worth, and its market capitalisation.

Now don’t get me wrong, I had no idea that the share price would multi-bag from under 2p to over 7p in little over a year, but when you can buy a profitable, cash-generative company with clear growth prospects for less than its wind-up value, then the balance of probabilities are on your side. Whilst there is no guarantee the share price will multi-bag, it’s unlikely you are going to lose money (unless of course the management team are completely reckless and useless).

Surgical Innovations have already indicated that trading for 2010 was in line with current expectations (results are published on Tuesday 19^th April) which put the shares on a current p/e of around 18. Broker forecasts for 2011 are for an EPS of 0.6p, and hence a forward p/e of around 12. If SUN can continue the level of growth they are achieving then the shares still look cheap.

I shall continue to hold and will read the results and outlook statements with interest.

The Oracle

I upset an anonymous poster on the ADVFN (AVN bulletin board) today by posting a link to this blog. The exchange of views runs from post 4762 to 4791 on the link below:-
http://www.advfn.com/cmn/fbb/thread.php3?id=22947823&from=4778
Have a quick read if you fancy a giggle.

Just for the record I'm not trying to pass myself off as some Warren Buffett like oracle or a minor celebrity. I just like sharing my thoughts in a blog which people can read or ignore as they like. I've had over 10 years experience now as a Private Investor, and I've posted on ADVFN for many of those years. This is something just a little bit different. I did promise myself when I started stock picking that if I couldn't outperform the main market indices consistenly then I'd give up and buy a tracker fund. Fortunately (so far) I have managed to do just that. Of course things could change, and I do make errors from time to time.
Anyway the blog enables any readers to make their own mind up over time and I've always used the same username (Michaelmouse) on ADVFN, so I do already have a recorded history of investing.

I see Premier Oil's results were out today, I haven't really read them, but the headlines look good and the SP increased by 4%. I bought shares in Premier Oil back in 2001/2002 for 26p (after consolidation 260p) and since then they have nearly 10 bagged. Unfortunately I sold them some considerable time ago for a 50% profit. Well done to those investors who have held on! The reason I sold was that just like Avanti I also find it difficult to value oil and mining companies, particularly when they are at an early stage of development. Kenmare Resources has been the only mining company that I have invested in, at about the same time as Premier Oil. I managed to make a 250% profit in Kenmare (buying around 16p and selling in the mid 50s), and was lucky enough to sell just before the financial crisis got into full swing and the shares fell back to around 7p. Probably should have bought them again, since the last time I looked the SP had climbed back up to the high 30s.

I am sure that both Premier and Kenmare will continue to prosper.

Whilst clearly there are great opportunities and fortunes to be made in oil and mining companies, I don't think I'll be tempted back, experience has told me to stick with what I know and feel comfortable valuing. Chiefly those companies with easy to understand balance sheets and where I can clearly identify a margin of safety.

Now I'm going to post the link on the PMO and KMR bulletin boards. It is nice to know that some investors read the blog, but others can't read it if they don't know it exists.

Wish me luck and I hope I don't upset too many people :).

Will this share price fly into orbit?

Directors in Avanti Communications are clearly confident about the company's future prospects. Over recent weeks they've been piling in and picking up large tranches of the company's shares.

It's not a company that I'll invest in though, despite their enthusiasm. I wouldn't know where to start in making a sensible valuation. Opinion seems to be divided about whether Avanti is currently overvalued or undervalued. A bit like their satellites, the share price will either fly into orbit or come crashing to earth.

I have put them on my monitor, but only out of curiosity. It's funny how some situations capture your interest even when you don't have a pecuniary interest.

Put your money where your mouth is

The old saying that "actions speak louder than words" is so true. In fact didn't a great philosopher suggest that actions meant everything and words nothing? Was it Aristotle?

Over recent days the Chief Exec and Finance Director of Avesco have been purchasing shares in the company. About £16000-£17000 worth between them. Not a massive sum, but a vote of confidence nevertheless, particularly when they have just released impressive quarterly results with an optimistic outlook statement. Directors were also buying large tranches of shares at lower prices.

It's great to see Directors back up their optimism with their own hard earned cash.

In fact I make it a rule never to invest in companies where the Directors can always see a bright future, but don't own many shares in their own company. "Never mind the b***sh*t, just put your money where your mouth is".

When Directors start selling shares it is also a good time to review your own position and the company's prospects. Whilst there are many reasons why a Director may want to sell e.g. needing the money for a property purchase, just needs some quick cash etc.  I always ask myself, why don't they find the money from elsewhere? If you truly think that your company's prospects for the near and longer term are looking great, and that the share price will rise as a consequence, then surely you'd make every effort to hold on until you felt they were fairly valued or overpriced?

Alarm bells should certainly be ringing when a Director tells you that the future is rosy, and then suddenly sells his/her shares into a rising share price. Surely this doesn't happen! Unfortunately it does. In fact a couple of years ago I held shares in a company that I considered to have recovery potential. At the interim results the Chief Exec clearly indicated that recovery was just around the corner. The shares began to rise and he sold most of his holding into the rise almost immediately. You can probably guess the rest. Yes that's right, recovery wasn't just around the corner, and in fact it probably never will be. I did sell at a loss, but a great lesson was learned.

Anyway, good news at Avesco. Directors buying, robust trading and at the moment Disney owe them $60m (and rising). Also EPS forecasts for 2012 give a single digit forward p/e ratio. Given the current growth, the share price looks very miserly, and gut feeling tells me that they may outperform in 2011 and 2012.

Indigo interims and board changes at Avesco

Investors are a funny old lot at times. Indigovision released their interims today with revenues up 25%, EPS up 26% and cash balances up 39% (and 22% in the last 6 months). Indigovision are also introducing their first maiden dividend at 4p per share, and Grossart states "We therefore continue to be confident about the immediate and long term future". What happens? The share price drops 11%.

Indigovision was not overvalued and certainly isn't now. Yes it is true that margins have fallen from 62% to 58%, but the "bigger" picture remains in tact. These are "record sales, operating profit and earnings per share." The client list continues to impress, and only yesterday they announced a contract with the BBC to add to their glittering portfolio. It should also be noted that they achieved double digit growth in all regions.

Indigovision have achieved very pleasing growth over the past three years despite the economic and political backdrop.

The shares finished today at £4.95. On historic earnings the p/e ratio is about 18.5. Not cheap, but certainly not expensive given the excellent growth they have achieved in the last few years.

When world economies do eventually gather full momentum (and they will), I fully expect indigovision to take advantage. I'm watching the share price with great interest.

Avesco had their AGM today, and I see that there have been three board changes with Richard Murray replacing Michael Gibbons as Chairman and TAYA installing Ami Giniger as a non-exec. The first quarterly report is due on Tuesday.

I expect TAYA to take a similar interest in DCD Media where they hold a 20% stake.