Lest you think I mock too much, I’ll point out that I dropped a packet on SHOE (Shoe Zone) recently, having bought in the day before the price plunge. Mr Market sure likes to maximise theatrical effects.
TUNG (Tungsten Corp) provides electronic invoicing. I had only heard of it vaguely before today. I bring it up because its price has dropped 18.6% to 80.20p today. Paul Scott picks up the story on Stockopedia (http://is.gd/MtIWdu):
the company has admitted it needs to raise fresh cash for operating purposes. The shares are in freefall, as you can see from the chart below. … this share is a good example of how management making large share purchases immediately after bad news, is actually an increasingly bearish signal. … Am I tempted to catch this falling knife? In a word, no.
TUNG has a stock rank of 13. Its quality score is 21. I find that the Q-score needs to be taken with a pinch of salt, but when it is low, it should possibly serve as a warning indicator.
TUNG has apparently been overpromising and underdelivering.
My view of AIM is becoming increasingly pessimistic. There’s just too much garbage floating about there. Whilst there are some very good companies listed on AIM, the odds are heavily weighted against you. I don’t necessarily say to avoid AIM /completely/, only to avoid AIM generally.
Really, a lot of heartache can be avoided by only betting on companies that have a long trading history, say at least 5 years, and have demonstrated profitability. I’m not saying avoid a company just because it has made a loss, as I think there will be some value opportunities out there. But the general rule is: don’t.
TUNG has never reported a profit, for example, and increased revenues have incurred increasing losses. Its Piotroski score is 2. So whatever the directors are saying, the numbers are saying that it’s crap. Maybe the company will be profitable in a few years, earning high returns on capital. Fine. Invest then. Remember the sage words of Lynch: it’s usually better to wait for a company to turn a profit before investing.
TUNG seems to have a lot of cash, which might give investors some assurance. I say: be careful. I have seen a lot of junk apparently have a lot of cash.
One of the easiest ways of getting a picture of the company’s activities is to look at the cashflow statement. Stockopedia provides a very useful year-by-year summary.
What you’ll see in TUNG’s case, for example, is that they’ve issued £149m of stock for p/e Apr 2014. On the other side, they’ve acquired businesses with £72m. It’s much better to see that the company has accumulated the cash through careful and scrupulous retention of earnings.
When you think about it, cash on the balance sheet doesn’t mean very much if it’s the shareholders who just gave them money. It’s a depressing tale, and TUNG seem to be doing the same-old same-old as other AIM companies: raise dough, and splash it out on acquisitions. That increases the EPS growth nicely, fuelling the cycle … until it doesn’t.
I am of the opinion that AIM companies should be the companies who are least in need of making acquisitions, as they should be the ones most able to grow organically.
I’m not really of the school that says “protect the downside and the upside will take care of itself” – I think the truth is more nuanced than that – but on the other hand, I think there is a great deal to be learned from studying investing disasters. I have definitely found I have built up a better picture of what to look for over the last year. For every investing disaster that you manage to avoid, the odds become better tilted in your favour. That’s one place you can gain an edge. And investing is all about edge. It doesn’t matter so much as the specific form of the edge, as long as you’ve got one.
Edit 02-Jun-2015: Added price then effective for future reference.