Avoid unique businesses

Reading through Paul Scott’s small-cap value report (http://is.gd/iWoObP), I see that CAP (Clean Air Power) is down nearly 30% today. He says:

it’s a micro cap which had promising sounding technology, but it just hasn’t worked commercially to date. The company was struggling before the plunge in oil price, but with much cheaper oil, one of the key cost advantages of its technology (to allow trucks to run on a mixture of diesel and natural gas) has gone … it [is] fairly clear that the existing shares might end up being worth nothing.

Its business is:

Clean Air Power Ltd is a United-Kingdom based manufacturer of natural gas powered trucks. The Company’s Dual Fuel technology works by allowing heavy duty diesel engines to run primarily on natural gas, with diesel acting like a liquid spark plug. Minimal changes are required to the standard diesel power plant. Efficiency comes as standard with Dual-Fuel, with trucks running on up to 90 percent natural gas. This technology has been applied on DAF and Mercedes-Benz engines and will form the core of any Dual-Fuel application to an engine with Original Equipment Manufacturer cooperation.

Stockopedia notes that it has been listed publicly since February 2006 (this information is a very useful recent addition to Stockopedia!), so it has had a long trading history. That is good to see. Unfortunately, it seems never to have made a profit, which is atrocious. The number of shares in issue seems to have ballooned from around 42m to 257m. The company is AIM-listed, naturally.

CAP has a stock rank of 23, which isn’t exactly high. It is frightening to think that around a quarter of the companies on the stock market are worse than this. The stock rank looks like it may be receiving a boost from its Value score (78). Its Momentum score is 19: a sign that something is wrong. Its Quality score is an abysmal 4.

If the quality score is low – let’s say below 20 – then you should definitely take that as a severe red warning.

Investors could have avoided becoming entangled with this nightmare stock easily:

  • it has never made a profit. Preferably, companies should have a proven ability to pay dividends
  • it is AIM-listed, with a lot of shares being issued every, or nearly every, year
  • It has a low Stockopedia stock rank. Whilst some may debate how much their Quality rank picks up in terms of actual quality, a rank of 4 makes this company almost certainly uninvestable

Most of the comments about the stock on ADVFN look pretty sensible, although you’ll always find some deluded/deluding soul:

A gamechanger in a sizzling hot market should attract at least 2 if not more players interested to invest and or partner; I am hoping CAP can then achieve a fair deal for existing and future investors

What I would like to add about companies to avoid is this: never invest in an unusual businesses. Converting diesel engines to use natural gas counts as unusual. As far as I am aware, you will not find any other listed company that does this as their main business activity.

As Peter Lynch reminds us: “long shots almost always miss their mark”, and “it’s usually better to wait until a company turns a profit before investing”. You will save yourself a lot of money if you follow those two principles!

Update 03-Aug-2015: I learned that on 28-Jul-2015 the company issued a statement saying: “in the event of an offer, and partly due to the short term financial constraints that the Group is operating under, the Board can provide no assurance that significant value will be returned to shareholders.” Translation: this company is dead. Sell!

About mcturra2000

Computer programmer living in Scotland.
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