SUN will keep shining until at least 2013 (apparently)

Well that was an interesting week in the run up to the Bank Holiday (UK)!

On Tuesday 21 April, Surgical Innovations (SUN) released there 2010 final results. You may recall that I bought shares in Surgical Innovations for less than 2p (See blog entitled "Will (the) SUN keep on shining?"). After the results, I think it's fair to say that (the) SUN is still shining, and will be for some considerable time to come.

"We remain confident about the future growth prospects of the business for the remainder of 2011 and further into 2012 and 2013 as new products are launched towards the end of this year and the increasing traction with OEM customers gains momentum. "

A great forward looking statement, and I continue to hold all of my shares in this company.

The 2010 results were impressive with a massive hike in profits and an EPS slightly above expectations at 0.48p, which puts the shares, currently at 8.65p, on a historic p/e of 18. Given the growth prospects I consider the current valuation to be cheap, in fact their broker has set an intial price target of 12p.

What excites me most about Surgical Innovations is the accelerating growth coupled with a rapid improvement in margins (set to improve further in 2011). It also appears that they are increasingly gaining traction in the US with a marked increase in enquires.

It was a very bullish report and I shall sit tight. Given the consolidation in this sector there is also the outside chance of a bid. Either way, it's looking increasingly like a very long term hold for me.

Elsewhere, I see ASOS continues its heady climb, and now stands at £24.10. In my very first article I mentioned that I saw ASOS at 15p, and thought about a £5000 investment. I didn't buy any shares though. If I had then the current value of that £5000 investment would be £803,333. I'll just go and weep into my coffee for a few minutes! Just joking, and well done to those that bought early and held on.

I also see that BLINKX leapt another 17% yesterday, taking Burst Media with it (now 29p). Both these companies shares have multibagged in recent months. BRST perhaps being the most spectacular when BLINKX bid for the company. BRST sat on a SP of 5p before the bid, and has become a six bagger in a matter of weeks. Don't you just love small cap companies when they behave like those mentioned above.

In my last article I wrote about why I never short shares. Events over the last few weeks certainly haven't caused me to change my mind. As I said in that article, companies like ASOS can remain on a very high multiple for some considerable time. ASOS continues to defy gravity.

I have also been watching Avanti Communications where there appeared to be a struggle going on between the bulls and the bears. An impressive trading statement has handed control back to the bulls, and the share price has recently shot back up above £5. As mentioned before, there had been heavy Director buying in this company recently. It's worth remembering that these are the guys with insider knowledge, so when they put their money where their mouth is, it shouldn't be ignored lightly.

Finally, a quick mention of Kenmare Resources. KMR released their final results recently, and after a small blip in the share price, I notice that it is still hovering around 50p. For those that place great store on chart patterns, from my less than expert interpretation, it appears to remain in an upward trajectory. I still think a bid will arrive for KMR well above its current valuation. However, I might add that I am not a holder of this stock, and haven't read the report in any detail other than a cursory glance.

As ever, good luck to all investors, good health and may you all prosper!

Shorting would give me the shivers

It’s been very quiet over recent days in regards to my own holdings, with little in the way of company news or share price activity. Remembering the Chinese curse “may you live in interesting times”, I shall not complain.

I did notice that Scapa (SCPA) released a positive trading statement yesterday, and that the share price rose by 11% as a consequence (currently 43p). I have mentioned Scapa in a previous blog as ‘one that got away’. Perhaps I should be kicking myself for not investing at 16p when the company first came to my attention. In a strange sort of way I never get too distressed by these situations because I take a great deal of comfort in the fact that at least my stock picking radar is still working. Anyway there are always plenty of opportunities out there if you keep your eyes open.

Kenmare resources also briefly moved back above 50p in recent days. I noticed in the press that, once again, there is talk of KMR being a possible takeover target. You might remember that I sold shares in Kenmare for over 50p a couple of years or so ago, and then watched as they fell back to 7p, but never bought back in. Curiously one of the reasons I never bought the shares again was that I suddenly got ‘cold feet’ because it is (certainly was) a company dependant on a single mining operation in Mozambique. However, it is this very feature that might make it attractive to potential suitors. Kenmare has been touted as a potential bid target for several years, and my gut feeling is that this will eventually happen at a premium to the current share price. I shall watch with interest and wish shareholders continued success.

One of the Directors at the Mission Marketing group has picked up a few more shares. After releasing its results 31 March, the shares fell back a little from their recent peak. As mentioned before, it’s not really the type of company that interests me for the long term, but if the shares were to fall back further then I would consider revisiting the accounts and outlook, and ponder upon a medium term investment.

Finally, I noticed into today’s Times that Simon Cawkell (Evil Knievel) has a short position in ASOS, a company that I mentioned in my very first blog ‘Magnificent micro-caps’. Over the past couple of days ASOS’s share price has continued to climb on the back of a positive trading update. At the close of play today the shares stood at £20.50. ASOS stands on a very high rating indeed, and I can understand the rationale behind SC’s short position. However, shorting shares has never been an option that I wish to pursue. It strikes me that whilst some shares can look very expensive, they can remain that way for some considerable time, and indeed get even more expensive. ASOS for example stands on a very high p/e ratio, but that hasn’t stopped the share price reaching an all time high in the last two days. Each to their own of course, but betting against a share doesn’t suit my temperament.

I believe SC was also short on Avanti communications. If true, then it appears he is having more success here as the share price continues to slide despite the recent bout of purchases by the Directors

Happy hunting.

Hidden value, hidden treasure?

Is it fair to compare the valuations of two companies whose respective businesses are unrelated? Visiting the DCD Media bulletin board (ADVFN) over the weekend, two posters have questioned my comparison between the current valuations of BURST Media and DCD Media. They argue that the two organizations are totally different, and hence a comparison between the two has no merit. I would agree that apart from both appearing in the same listings sector, they are essentially two very different animals, but does that mean we can’t compare their respective valuations? Both posters appear to be suggesting that BURST should command a higher premium than DCD because its business, internet advertising, is ‘sexier’. I already feel transported back a decade to the arguments about ‘old’ economy and ‘new’ economy stocks. Gulp!

When I invest in a business I want to know if that business is making a profit (or will make a profit in the future) and how cheap it is to buy. There are various valuation tools that can be used, but for me, two key tools are p/e ratio and net asset value. Quite frankly I don’t care what the business does, as long as it’s cheap to buy, makes a profit and will (hopefully) continue to grow profits.

Firstly, let’s consider Burst Media. It made an operating loss of $3.3m and indeed a loss of $1.4m at the EBITDA level. The net assets on the balance sheet were around $21m (including intangibles). In short, it may be a ‘new’ economy stock, but it isn’t making any money. BLINKX are paying about $30m for BURST which is about 1.5 times current net asset value. Paying 1.5 times net asset value for a company that is making a loss at the EBITDA level does appear generous.

DCD Media is essentially a production, distribution and publishing outfit. In its last report, fully diluted earnings were 2.82p per share; EBITDA was £2.1m and net assets stood at £21m (including goodwill and intangibles). At the current SP of just over 9p, the shares sit on a historic p/e of 3, a multiple of around 2.5 times last reported EBITDA  and about a quarter of net asset value.

In my view you can make a comparison. At £18.5m Burst looks fully valued (?), and at £5.5m DCD Media looks cheap.

Over time I’ve come across some weird and wonderful valuation calculations and projections. It does appear to me that some stock prices are once again getting well ahead of themselves, and that a bubble is forming amongst some ‘hot’ stocks. Mr Market has a short memory. Buyers beware!

Be particularly cautious when companies or pundits talk about ‘hidden value’. Anybody remember Planestation? (previously Wiggins). I remember pundits talked about ‘hidden value’ in Planestation, but a look at the balance sheet just indicated negative asset value (warning keep clear!). Unfortunately, the value of this company was so well hidden that nobody was ever able to find it, and it wasn’t long before the company went into administration.

Anyway, back to DCD Media. I noticed at the weekend that All3Media is up for sale. Apparently, their private equity backers are looking for 12 times forward EBITDA. Whether they get it or not, of course, is a different matter. However, it will be interesting to see DCD’s EBITDA figure for 2010. Using last year’s figure, at 12 times EBITDA we get a market valuation of £25.2m which is well above the current £5.5m market cap.

On a totally separate note, Indigovision have just announced a 3700+ camera project at Delhi airport on their website. Apparently it’s the largest IP installation in Asia. Indigovision continue to win prestigious contracts, and I believe that the company is modestly rated given the outstanding growth it has achieved over the last few years.

Be lucky.

A sudden BURST of activity

The title of the first article I wrote on my blog was ’magnificent micro-caps’, and aren’t they just! At close of play last night Burst Media was languishing at 5p, but early this morning the shares had risen almost 5-fold to just shy of 25p.

Why, because they received an offer for the company from BLINKX at around $30m (£18.5m) or the equivalent of 25p per share. I’d suggest a near 400% rise in the SP in 1 day isn’t bad. That’s the appeal of buying micro-caps!

At the same time they released the offer news, Burst also released their preliminary results. Having given them a once over, they make for interesting reading. BRST made an operating loss of about $3.3m and an EBITDA loss of $1.2m. They have about $21m in net assets (or around $18m if you strip out the goodwill and intangibles). Cash on the balance sheet is $0.4m. Given these figures, I would fully expect BRST shareholders to take up the offer. At $30m it would seem a very generous offer from BLINKX.

It has certainly given me cause to smile because I can’t help but think about BLINKX’s valuation of Burst media, and compare it to the current valuations of two media companies that I currently hold. If you care to look back at the blog entitled, ‘It’s fun to look at the E B I T D A’, then you can briefly compare BRST’s figures and balance sheet with those of DCD Media and Avesco; currently sitting on market capitalizations of around £5.5m and £25m respectively. 

My conclusion suggests that both DCD and Avesco are either in the order of 10 times undervalued or BLINKX are paying too much for BRST. Anyway, whatever you decide, I for one won’t be selling either DCD or Avesco in the foreseeable future. Although sometimes, as BRST shareholders have just discovered, you can suddenly receive an offer that you just can’t refuse.

Speaking of Avesco, I received a nice dividend payment from Avesco on Wednesday. I do like dividends for the following reasons:-

A chunky payout enables me to re-invest my money in the company or elsewhere without having to sell anything.

It tells me that management are confident going forward, and don’t need all the cash the company has just made.

It shows management care about and wish to reward loyal shareholders.

Avesco have just re-introduced a dividend payment, and I expect, given their forward looking statements, that this payout may increase in 2011. It certainly will in 2012.

If they eventually receive a payout from Disney, then investors may be able to look forward to the ultimate Special Dividend. When they won the jury case last year, a press report said that the Directors had no plans for the money other than to return it to shareholders. Now that would be a bonus!

Finally, shares in SUN keep on rising, but just like Avesco, although this one has already multibagged for me, I’ve absolutely no inclination to sell any. Results are due on Tuesday 19^th April, but the sudden sharp rise in the share price makes me wonder whether there is news in the offing. That said, with forecast earnings of about 0.6p for 2011, even at today’s close this year’s forward p/e is less than 14. For a profitable little growth company with a healthy balance sheet and exciting prospects, it’s hardly expensive. In fact, if you compare it to BRST (different sector I might add) then you could argue that the company is hugely undervalued.

It’s all great fun, happy hunting!

Watch out for the competition

Have you ever entered one of those investment competitions that they run in the newspapers or on internet bulletin boards? They can be quite fun, but I rarely get around to entering for a whole host of reasons. Even when I do, if it requires you to actively manage your fantasy portfolio then I just don’t have the time. However, about a year ago I did enter one of the newspaper competitions that required you to pick a choice of funds, and there were monthly prizes and an overall prize for the best performer(s). I certainly hadn’t the time or inclination to look at the funds in detail, and decided that on the information given I would select the funds that had underperformed over the previous year. It took about 10 minutes, and then I just left it alone, although it could have been actively managed for those who wished.

Guess what, I won first prize. Actually that’s not true. In fact I didn’t win anything at all (as you might expect with such little research). However, what is remarkable is that overall I did manage to finish reasonably high up the table, and was quite close to winning a monthly prize; during the final week of that particular month I briefly shared the top spot. Given that the competition attracted 25,000+ entrants, surely that’s not bad for 10 minutes effort.

So what’s my point? Well it’s really that this simple selection process probably works quite well because the stocks in the funds that have underperformed the previous year have, in some instances, become undervalued and hence perform better the next year.

This brings me on to Vodafone. Whilst I don’t invest in large cap. companies, I read in one of today’s newspapers that over the past 10 years Vodafone shares are down more than 17% whilst the FTSE 100 is up nearly 7%.  This is quite an underperformance. Cursory research shows that Vodafone pay a near 5% dividend, it has a modest p/e ratio (from ADVFN data) and a Chief Executive who appears to have a sensible approach to creating shareholder value.

It will be interesting to see if Vodafone moves from being the under-performer to the out-performer over the next few years.

I see that the Director buying at Avanti continues. HMV released a less than inspiring trading update, and 600 group have had to raise some cash with a placing (at 30.5p) (“My only concern would be that there appears to be less than £0.5m cash” on the balance sheet. See weekend blog). These are all companies I have mentioned in previous blogs.

It's fun to look at E B I T D A

I noticed in one of the Sunday newspapers that HIT entertainment (Thomas the Tank Engine – owner) are looking for a sale of the company for between $1bn and $1.5bn. This would be between a multiple of 12.5 and 18.7 times their 2010 EBITDA figure. Whilst this looks ambitious, media companies are often valued and bought on a multiple of earnings before interest, tax, depreciation and amortization.

This prompted me to take a little look again at the last full year’s accounts for two of the media companies that I currently hold.

DCD Media produced an EBITDA figure of £2.3m last year. If you applied the multiples above then you could argue that DCD is potentially worth between £28.75m and £43m. DCD’s current market cap. is around £5m.

Avesco produced an EBITDA figure of £19.7m. Again applying a multiple of 12.5 to 18.7 gives a potential value of £246m to £368m. Avesco’s current market cap is around £23.5m.

Of course EBITDA is only one value measure, and disliked by some investors. However, DCD is currently on a fully diluted p/e ratio of about 3, and had more cash on its balance sheet (£5.4m) than the company is currently worth. Avesco is also cheap on all sorts of value measures including it’s tangible NAV (£1.43 per share), a forward single digit p/e ratio for 2012 and a possible £1.79 payout per share from Disney. Hence, I don’t envisage selling either in the foreseeable future.

Note: I feel that it is important to point out that Warren Buffett is particularly unflattering about managers who continually stress the EBITDA figure. However, as I mention above, DCD and Avesco are attractively priced on a range of important measures.

600 up more than 200% since its low

As I mentioned last week, one of the columns I like to read in the FT weekend is ‘Trader’s Diary’ by David Schwartz. However, it is rare that Schwartz has ever mentioned a company that I also have an interest in. This week there was a connection though, apparently he holds shares in 600 group which is a company I briefly held in 2004. I remember at the time being attracted by an 8%+ dividend. I held the shares long enough to receive the juicy dividend, but either by luck or judgment I sold the shares shortly afterwards for a slender profit. I’d like to think that it was judgment, but it’s likely to have been a combination of the two! Anyway, the share price fell shortly afterwards and languished at low levels for some considerable time. Subsequently, I didn’t really take much interest in its fortunes.

However, the share price has been recovering from less than 10p in 2009, up to its present value of just over 30p. Schwartz believes that there is far more upside to come. His argument is very persuasive, so I’ve just had a quick look at the half-yearly results and balance sheet. From a cursory glance it does look to represent good value. It appears to be currently valued at about £16m with a net tangible asset value of £21m. The results at half way do look encouraging, as does the outlook statement. My only concern would be that there appears to be less than £0.5m cash.

When I visited the 600 Group BB, the last post was March 19^th. I like quiet BBs it often means that the shares have been overlooked, although of course it could be for good reason. Not in this case though I suspect, probably just unfashionable (another good sign).

What did make me laugh is that Cockney Rebel was amongst the last few posters. Over the years, it’s amazing how often CR and I end up looking at the same companies! We’re either making good choices or alternatively making the same mistakes. Touch wood, I think it’s been the former rather than the latter.

I would point out that it is not my intention to purchase shares in 600 Group, but I would research the company more thoroughly if I was looking for bargains at present.

The ‘My Portfolio’ section of the FT was written by John Lee this week. I would describe John Lee as a medium/long term value investor, and occasionally I have held one or two of the same stocks.

One of the stocks John Lee and I have both held is Clarkson the shipping company. I bought shares in Clarkson in 2002 for about £2 with a 7%+ dividend attached. The share price did initially fall back to £1.40ish I seem to remember, but Clarkson continued to pay the dividend, and I patiently held. I did eventually sell them for a very good profit, but in hindsight I should have held on further. Clarkson’s shares are now about £13, and I believe that they have had a progressive dividend policy. John Lee may still be a holder, although I have no idea since he hasn’t mentioned them in his column recently.

If any of you have read my blog on a regular basis (and many thanks if you have) then you will understand why I tend to hold shares for longer than I did when I first became interested in stock picking. One of my rules is buy as cheaply as you can then hold on tightly unless the story (big picture) changes. It’s incredible how many potential multi-baggers are out there if you just catch them at the right time.

Down and out?

As usual I picked up the FT Weekend today and had a glance through my favourite sections. Whilst the FT is a quality weekend paper, at £2.50 a copy, I suspect it's the most expensive. At the other end of the spectrum was the Daily and Sunday Sport. Notice the past tense. On Friday Sport Media's shares (the owner of the papers) had been suspended from trading on AIM, and by the end of the day it was announced that the company was going into administration. Obviously this is sad for all shareholders and employees. I might add that I am not a holder of these shares or indeed an employee.

Whilst I still like picking up a newspaper (not the Daily or Sunday Sport I hasten to add) from time to time, people like myself are getting rarer, and it is clear that all newspaper groups will need innovative ideas and restructuring to survive in the 21st century. Sadly it appears that Sports Media couldn't adapt quickly enough with the debt burden they were carrying. Before shares were suspended they traded at about 1p, a mere fraction of the value they once held.

I mention the demise of Sports Media for the following reason. At the moment I have HMV on my monitor, and it has been there for quite a while. Shares in HMV recently fell to a nadir of 10p, but have since recovered a little to 15p. Whilst I do keep an eye out for potential recovery stocks, it most unlikely that I'll risk purchasing shares in HMV.

Just like the newspaper groups, HMV has rapidly become a dinosaur where it was once a dominant player, and to survive it really does need to reinvent itself quickly. If it does, and does it successfully then investors at these levels will be hansomely rewarded.

In 2002/2003, a company called ASHTEAD looked in desperate trouble, and I saw its shares plunge to around 2p, in fact I remember at one point you could buy shares for 1.5p and I was very tempted to take a punt. ASHTEAD did recover and over the course of the next two/three years the share price reached well over £3. Whilst I did invest in ASHTEAD, and made a very healthy profit, I didn't have the nerve to risk a punt at 1.5p. If only I had. £1000 invested would have ballooned to over £200,000 within a very short time frame.

However, ASHTEAD's recovery didn't depend on the company reinventing itself, and hence when better times arrived the business thrived. HMV is a totally different kettle of fish. For it to survive it effectively needs to offer a different service. For this reason I'll probably never take the gamble.

On a different note, I see that China Shoto was one of the week's star performers. I don't know anything about the company, but according to the short article in the FT, they are delisting and offering shareholders £3.80 per share. This is exceedingly refreshing news since the offer is not far short of CHNS's all time high (from a brief look at the chart). Normally when companies decide to de-list shareholders either have to hold shares in an illiquid private company, sell out at very low prices before the company delists or are made a derisory offer. What a nice change to see shareholders getting a fair (even generous?) offer. However, surely this should be the norm and not an exception.

Happy hunting.

What's in a saying?

I do love some of Warren’s Buffett’s quotes which serve to illustrate his investing style.

However, there are some sayings linked with trading and investing that are rather less endearing.

When visiting the bulletin boards, one of the sayings that crops up frequently and does tend to grate is “Let the trend be your friend”. Now I am sure that this undoubtedly hails from a very successful trader, and perhaps somebody can enlighten me on the comments section, but what an absolute load of boll**ks! Perhaps it’s because it has been quoted out of context on the bulletin boards? I have no idea, but if you take this to its logical conclusion then share prices in an uptrend should continue to infinity and beyond, and conversely those in a downtrend will eventually reach zero. I can only assume that the phrase is linked with charting, and spotting an uptrend or downtrend early on, and then recognizing when the trend has reversed. It smacks of momentum trading, but it’s a bit unfortunate for those who jump on the trend just before it’s about to change direction!

I’m not a great fan of charts (just traces in the sand as far as I am concerned), but I do agree with Anthony Bolton that they can be useful in identifying entry points when buying. There do appear to be clear support and resistance points on most charts, and if you have done your research on a company, and its share price appears to be bouncing up and down in a range, then it can be worth trying to time your purchase at the bottom of the range. Of course this can be dangerous because the share price may not get back to its support point before breaking out. More often than not, I just buy at prices that I regard as cheap.

Another well worn adage is ‘sell in May then go away and don’t come back until St.Leger’s day’. I’ve often seen statistics that appear to bear this out, but as a stock picker in the UK market, I quite often find the summer months the ideal time to buy. The markets can be quite quiet and prices can drift down a little, making attractively priced stocks even more appealing.

The old chestnut, ‘Don’t keep all your eggs in one basket’ is used in many areas of life, but is often used to advise investors to keep a diversified portfolio. However, when it comes to buying stocks, I prefer Buffett’s stance. He said words to the effect that you can keep your eggs all in one basket, but keep your eye on the basket.

I don’t think I’ve ever held more than 10 stocks at any one time, and whilst some may consider this foolhardy, fortunately it has worked for me, and I’ve managed to survive and prosper through arguably one of the worst bear markets in recent history. Perhaps I’ll come a cropper in the future, but for now I think I’ll stick with it.

If anybody is invested in Avanti Communications then the trend is certainly not your friend at the moment. As mentioned in a previous blog, it’s a share that is on my monitor chiefly out of curiosity. I note that the Directors are still buying shares, and it will be fascinating to see whether it’s ‘the trend’ or the Directors that know best?

It’s pretty quiet where my investments are concerned, although a couple of news items on the DCD Media website give me confidence that the company is prospering. Both Prospect and September (two fully owned production companies) are hiring senior staff to help expansion in both the US and the UK.