Last week's letter referred to the need for ongoing step change innovation to maintain the health of an economy and the fact that this activity frequently is best undertaken within small companies aspiring to become much larger companies. Software Radio Technology (LON:SRT) last week exemplified both the underlying wealth creating potential of such companies from the standpoints of shareholders and the overall UK economy, and also the fragility of the UK's capital market processes for supporting such companies. Incidentally, I have previously congratulated SRT on seeking to create a level playing field in terms of communicating with both private and institutional investors. Visit www.softwarerad.com and click on its webcast for a good illustration of how AIM companies can approach investor relations.
On 21st June, final results to March 2011 were announced showing sales of £9.2 million (2010: £3.6 million) and pre-tax profit of £1.9 million (2010: £386,000 loss).
On the morning of 24th June, the share price dropped 26% from 39p to 29p on the back of a sell recommendation from Tom Bulford, editor of Red Hot Penny Shares. He had built up a strong following during the past 18 months, based on an initial recommendation of SRT at 6p and accordingly a desire to take some profit at 38p was not surprising.
The reason that shareholders want their investments to be listed is so that they can easily trade shares at a reasonably predictable price range at a time of their choosing. At the heart of the UK's capital market process lies marketmaking. It is conducted in a way which is counterproductive to long term investing because of the inherent volatility of an activity undertaken with too little capital, too few people and inadequate knowledge about the underlying business of the stocks being traded. This is illustrated by the following:
- I know of one marketmaker where one employee is allocated £1 million of capital to service 100 smallcaps.
- the CEO of one very nice AIM listed engineering company, with sales at the time of our conversation of c.£40 million and operating profit of £3 million, saw the share price drop 20% on the back of a sale of 2,000 shares. The CEO offered to meet the various marketmakers to explain the business and was turned down by all of them!
The purpose of investment is to make a return…
