Playing the long game!

Those of you who follow my blog will know that I am truly a long term investor. I love to spot and buy shares in small/micro cap companies which the market has either overlooked, discarded or simply fallen out of love with. Often these companies offer exceptional potential.

Avesco is one of those companies that I spotted back in 2009 which has produced superb capital gains and generous dividends, not least the £1.10 pay out to shareholders last year following the successful outcome of the Disney litigation.

The company released it's full year results this week, and despite significant share price appreciation since 2009, the company still remains considerably undervalued. As ever, I would recommend reading the results in full before coming to your own conclusions, but I'm more than comfortable with their performance last year and their forward looking statements. Richard Murray, Chairman stated,

"The first quarter of the current financial year has continued the positive momentum from last year. We expect to see further benefits flow from the cost savings generated by the Group's restructuring programme, so that any "odd year" dip in profitability is minimised. With the restructuring programme now completed and substantial forward momentum in the businesses, we are able to continue our focus on increasing profitability, generating cash and growing dividends."

I don't think you can ask for too much more than that? Total dividends for 2014 were 6p, representing a yield of around 4.8%, with a forecast of 7p this year and 8p in 2016 (5.7%, 6.5% respectively). The current share price represents a 28% discount to net tangible assets, and the market cap. is less than it's EBITDA. Does this sound familiar? It does to me. Post 2 and 75 back in 2009 when I initiated the ADVFN thread:-

http://uk.advfn.com/cmn/fbb/thread.php3?id=20681152&from=2

http://uk.advfn.com/cmn/fbb/thread.php3?id=20681152&from=75

Of course, since then investors have 10-bagged their initial investment (including dividends) and are currently taking a 25% yield on that initial investment which is set to become 32% by 2016.

As an aside and before I continue, I just want to briefly explode one or two pieces of absolute claptrap that I hear on bulletin boards and elsewhere:-

1) It's illiquid and you can't buy in size. Avesco shares are purportedly illiquid, but I've never had a problem buying substantial quantities. Neither did Taya, and neither did Richard Murray, the Chairman who currently owns close to 30%. In fact, his most recent purchase was £136,000 worth on Friday.

2) It's risen ten fold it's expensive, it's fallen by ninety five percent it's cheap. Total rubbish. Avesco is a great example of the former, it's still cheap and there are numerous examples of the latter, just because a company's shares have fallen 95% doesn't mean they won't fall another 95% or worse still lose all their value.

3) The AIM market is too risky. No it isn't. Some companies listed on AIM are risky and some aren't. Basically don't buy overvalued companies of any sort wherever they're listed or companies that are overloaded with debt etc. In 2009 do you choose AIM listed Avesco or main market listed HMV?

Anyway, I digress.

Playing the long game has worked well for me and Avesco is just one such example. I will continue to hold for the foreseeable future.

Some further food for thought before I conclude though. Firstly, there is considerable intangible value not recognised in Avesco's balance sheet. Not least "Fountain Studios" (Wembley)  that is listed at book value, but must be worth considerably more, and their long list of prestigious clients that return year after year because of Avesco's quality service.

Finally, Murray holds near 30% of the company and is 65 years old or thereabouts. When he eventually chooses to retire (of course he may decide to continue for some time yet), he might well wish to cash in his holding. If I was him, I'd be looking at far more than EBITDA for my holding. How does 3 or 4 times EBITDA sound?

My 2015 stock choice - will it double in share price and make three in a row?

I do enjoy adding my contribution to the stock doubler thread on Advfn at this time of the year, and I'm hopeful that I will continue with the successes I had in 2013 and 2014. In both of these years my selections have more than doubled, although with three more trading days to go I hope I'm not being a little too premature with my 2014 choice. Please note that these are the only two years I have contributed.

In 2013 Angle plc rose by a very healthy 194%, and this year Trakm8 is currently up 105%. Incidentally, I believe that either of these two companies could double again from their current share prices, and indeed I believe that all of my current holdings have this potential. In fact I wouldn't own the shares if I didn't believe that they could multi-bag given a long term horizon.

One of my Christmas presents this year is John Lee's book, "Making a Million Slowly". I like John Lee, he has a very sensible approach to investing that clearly mirrors many of the great stock market investors, all of whom despite their nuances, adhere to the key basic principles of successful investing which I have discussed many times on this blog.

It's an enjoyable read, although I confess that I haven't picked up anything particularly new which is perhaps in itself a comforting thought. One thing that he does point out that is worth remembering though is that investors often try to over complicate the process of stock picking when a few simple ratios and a huge sprinkling of common sense is all that is needed. However, don't mistake that for implying that investing in shares is easy, it still takes considerable time and effort.

Anyway before I lose track of the task in hand, the reason I mention John Lee's book is because my pick this year is a company that I'd guess John Lee would certainly wish to cast his eye over. Firstly, it's profitable, it boasts a rising dividend yield (prospective hike of 20% this year), much improved earnings, it's borrowings are very low and the company is cash generative. EPS is forecast at 0.5p this year (confirmed by a recent trading update) and 0.6p in 2015 which at the current share price implies a forward p/e of 8 falling to 6.5 the year after. The company is on such miserly ratings because this year's figures fall short of market expectations even though the miss appears to be because of a solitary contract which should now fall into the 2015 figures.
This just illustrates market stupidity since the shares have been punished despite the fact that earnings growth will still be 25% ahead of the previous year.

Add in to the mix a recent acquisition that is expected to be "significantly earnings enhancing in the first year" and that they recently turned down a takeover offer from Trakm8, and the valuation becomes even more compelling.

The company in question is Belgravium Technologies currently priced at 4p per share (mid) with a market capitalisation of around £4m. The Group designs, installs and maintains software applications and solutions for the airline, rail, retail and logistics industries, but please visit their website to learn more:- http://www.belgravium-technologies.com/

As with Angle and Trakm8, it should be noted that I do hold shares in this company.

2500 times revenues, an accident waiting to happen?

Who on earth wouldn't short the shares of a company that has just reported revenues of £24,000 and is valued at over £60m? A ridiculous valuation surely, and such an easy target. In fact, those figures can't be right can they? The company is valued at 2500 times revenues. Bonkers. Welcome to the world of social media. The figures are correct, and the company is the only LSE listed social media company, Audioboom.

I have written about Audioboo(m) several times in the past and I own a 20% stake through my holding in 7digital. You can follow my history of blogs about this company through the links below:-

http://michae1mouse.blogspot.co.uk/2014_03_01_archive.html

http://michae1mouse.blogspot.co.uk/2014/05/boom-one-delta-rises-more-than-100-on.html

http://michae1mouse.blogspot.co.uk/2014/05/7digital-reverses-into-ubc.html

http://michae1mouse.blogspot.co.uk/2014/06/billion-dollar-boom.html

It makes sense to open a spread bet on Monday on the SP collapsing, and sit back patiently and watch. After all look what happened to Monitise this week.  In my opinion, Monitise was grossly overvalued, and I did comment on Monitise back in December last year:-

http://michae1mouse.blogspot.co.uk/2013/12/monitise-home-retail-group-and.html

However, I'm not going to short Audioboom shares despite their silly valuation or sell my shares in 7digital. Why? Firstly, if Audioboom retains it's current valuation (or rises even further) this implies that 7digital's own business is viewed by the market as having next to zero value. 7digital should achieve revenues of £14m this year, and whilst it is likely to be loss making in the short term, it is potentially a very exciting growth story on it's own merits.

Secondly, since listing Audioboom has announced content partnerships with CBS, Sky Sports and Essel Group (Essel is one of India's leading conglomerates, with a portfolio of entertainment and news channels) and a deal with talkSPORT to take on Audioboom's UK sports network sales.

This is terrific progress alongside it's 100% hike in registered users in 12 months from 1.4m to 2.8m at 25 August 2014. However, what would really put me off going short on the shares are the two following snippets from recent RNS releases. In July Rob Proctor CEO of Audioboom said this,

"The Company has recently been approached by certain investors who have expressed interest in investing capital into the business. The Board considered these approaches, as the Company is growing very rapidly and additional personnel are required in new offices and in content management to direct this expansion. The Board has, however, decided that the number of initiatives in progress mean that this is not an appropriate time to raise further capital."

Followed by this paragraph in the interim results:-

"Alongside our own development, the world of social media continues to flourish; strategic acquisitions by global players, both Western and Asian, continue with regularity and at high valuations. Audioboom is operating in a global market, if we continue to develop our platform and technology, the future will look very interesting for shareholders. I intend to make the most of these opportunities."

It would appear to me that the company is looking to build quickly and sell quickly. In the present climate it's not too difficult to see Audioboom being sold for well in excess of it's current valuation, and possibly in the not too distant future.

I certainly won't be shorting the shares. Something I never do anyway.

However, just one final thing to add. Audioboom and 7digital are highly speculative, and there is no margin of safety with either company. In other words, the shares are not for widows or orphans, and whilst fortunes could be made, they could equally be lost.

For the record, I currently hold 7digital shares with their 20% holding in Audioboom.

Everything needs crossing, it's that type of punt.