$BLNX.L – the case against it as a Magic Formula stock

I notice that BLNX (Blinkx) has appeared on Stockopedia’s Greenblatt Magic Formula screen, with a ROC of 52.6% and an EY of 27.1%. It also has a QV rank of 93.

BLNX has net cash of £75m, a market cap of £118m, a PE of 7.18. Revenues have increased more than sixfold over the last four years. Its one-year relative strength is -79%. So, OK, how comes a company that’s grown revenues sixfold has a PE of 7 and massively underperformed the indices?

Here is some commentary over at Stockopedia:
* Paul Scott, 30 Jan 2014: calls BLNX’s website an inferior copy of YouTube.
* Paul Scott, 6 May 2014: neutral on Blinkx. Results look impressive. Raised cash. Profits look real. Debtors are modest relative to turnover, Balance Sheet excellent.
* Paul Scott, 2 Jul 2014: suspicious where a share price does not rebound when it should. Trading update is a clear profit warning
* Edmund Shing, 28 Aug 2014: posted a bullish article, highlighting its value. Points to Bloomerg Businessweek article of 7 Feb 2014, alledging that BLNX inflated its traffic stats to boost commissions.
* Paul Scott, 1 Oct 2014: reports profit warning, as he expected. Says he doesn’t really understand the business model. Calls H1 a disaster.

I’ll add my own observations below.

Firstly, as soon as I hear that there are accounting shenanigans from sources I have no particular reason to doubt, it’s Shields Up time. From then on, a company is guilty until proven innocent.

Secondly, look at all that cash. You would think that I would be bullish about that, but I actually take it as a warning sign. If you look at many foreign stocks , you will find that they are awash with cash. Why? Scam after scam Chinese company seems to have plenty of cash. There will be some legitimate exceptions of course. FCCN (French Connection), for example.

Next, I took a look at the cashflow statements. They issued $30m of stock in 2011, $15m in in 2012, and $66m in 2014. That’s a massive amount of equity for a company that is worth only £118m. Clearly, all that money did not translate into shareholder value. The company made acquisitions of £33m in 2012, and £25m in 2014. This is another huge warning sign.

Next, look at Stockopedia’s calculations of Return on Capital: a paltry 6.52%. It’s ROE is 5.98%, a wholly inadequate figure. If a company is growing rapidly, always check these figures. It can alert you as to whether the company is investing sensibly, or not.

Conclusion: despite the PE of 7, this one’s going down. Avoid. IMO, DYOR, yada yada.

BLNX 29.5p. ASX 3369

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About mcturra2000

Computer programmer living in Scotland.
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