CHAR – Chariot Oil & Gas – and impossible share prices

My investing process.

My investing process.

The problem with investing is that when your results are good, it’s sometimes difficult to distinguish between genius and being the luckiest idiot in the world …

In April, I had reported that I help shares in CHAR (Chariot Oil & Gas) (http://is.gd/BMVanD). I knew that it was a share I could end up looking foolish for owning. Here’s what I said at the time:

Bought this one earlier in the year because it’s a net-net. It’s not done anything yet, but we’ll see. It qualifies for 3 Stockopedia screens, all of them bargain screens. That shouldn’t be too surprising considering how cheap it is. Actually, Stockopedia’s Negative Enterprise Value Screen has shown a pretty dismal performance, being down 30.8% over 2 years, underperforming the Footsie by about 40%. Maybe it’s a strategy that works best after a market crash, when there are plenty of bargains available.

I bought in Feb 2015, having noted that it was a net-net and had a significant directors purchase in Oct 2014 by a director at 10.5p. Come May, the shares were up over 25%, so I decided to sell at 11.06p. I figured that this was a good gain for 3 months, the shares were overbought anyway, and, well, the company never made a profit.

If I were to play with net-nets again, I would probably stick to companies that had at least demonstrated some ability to generate a profit, and that I thought were not scams (I’m not saying that I thought CHAR was a scam) or Chinese companies. That is a nigh-on impossible trick to pull off in this market. I know, because I checked recently. Net-nets will almost certainly be AIM companies in any event. I wouldn’t rule them out just because of that, though. Net-nets are unlikely to be the mainstay of an investing portfolio, simply due to the lack of candidates.

I set a share price alert of 8.5p on CHAR to see if it would be triggered. The shares were trading at this level for much of mid-December 2014, and I was curious to see if they would go down to those levels. Clearly, they did.

I haven’t bought any more, though. I really don’t like the fact that CHAR has never been profitable. I have set a new price alert of 5.95p, at which I may consider buying again.

Why 5.95p? Because it’s a 30% reduction of the current “impossible” price of 8.5p. I had read that a famous investor said that when you see a share trading at an impossily cheap valuation, try to buy it for 30% less. Perhaps a knowledgeable reader will be able to place the name. You may be surprised.

One such surprise happened a couple of days ago: LMI (Lonmin). I am an unhappy holder of these shares, and noted later, after further falls, that the shares were “impossibly cheap”. I set an alert for them when it was 30% below this figure, to 80p. On the 13th, the shares hit 74p, setting off the trigger. I had decided not to buy – I wasn’t prepared to risk it – which in hindsight was a pity, because the shares have bounced back sharply, standing at 81.5p now.

According to Stockopedia, the company has a PBV of 0.23. Although the company has many problems (what would you expect at current valuations?), we have to remember that it’s a “real” company, not some AIM nonsense. I heard that Barron’s reported that LMI was a top pick at the London Value Investing Conference. I think it was picked by Schroders. If anyone can confirm or deny that, I would be grateful.

So there we have it: when trying to buy value shares, set a target 30% below the impossibly cheap valuation level.

Now all I have to do is practise what I preach.

May you all be well.

Edit 15-Jul-2015: Fixed errors. “I’m saying that I thought CHAR was a scam” now reads “I’m not saying that I thought CHAR was a scam”. One word can make all the difference!

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About mcturra2000

Computer programmer living in Scotland.
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