Apologies, but I'm running late today, so please refresh this page every now and then, as I'll be adding sections to this article all afternoon.
Clean Air Power (LON:CAP)
Share price: 0.33p (down 22% today)
No. shares: 257.3m
Market cap: £0.8m
Just a post-script on this one, 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 ts technology (to allow trucks to run on a mixture of diesel and natural gas) has gone.
Personally, I threw in the towel at 4p per share last year, when it became clear that things were not going to happen, and my thinking here on Sep 2014, was that the shares were probably worth nothing.
Update - this was issued yesterday, and makes it fairly clear that the existing shares might end up being worth nothing. Once a company gets to the end of the road, and can't raise any more equity from the stock market, then at that stage its only options are usually deals whereby a new financier ends up owning the whole company, or almost all of it - massive dilution since the only alternative would be Administration.
Every now and then I get sucked into a jam tomorrow stock, and it nearly always ends badly. That's why it's so important to avoid them altogether, if you have the willpower, or if not then to avoid forming an emotional attachment to the share/story, and be willing to pull out once it becomes clear that the future is grim,
Even though I lost about a third of my original investment (in at c.6p, out at c.4p), it could have been a lot worse if I'd hung on, hoping for the best, which is what most people do with jam tomorrow stocks.
As ever, cash is king with jam tomorrow stocks. Another test I usually apply before buying, is to be sure that the company has at least two years' of cash on the balance sheet, at the current rate of cash burn. If it doesn't, then you're running a big risk that the company will come back to the market for more cash, and it's a lottery whether, and at what price, fundraisings can be done.
Overall though, I've found it's just far best to avoid blue sky stocks altogether. Better to wait and see if the technology reaches a commercially viable point, and then pay more if need be. At least that approach should avoid the 90%+ losses which are the final outcome on so many blue sky shares.
Rightster (LON:RSTR)
Share price: 15p
No. shares: 223.5m
Market cap: £33.5m
Trading update - this is yet another blue sky stock which has gone disastrously wrong for shareholders. I got into a bit of trouble at Mello Derby last year, as I criticised the company in my report of 7 Nov 2014 (delivered live on stage!) when the shares were 40.5p.
Comments were made that I had undermined the CEO's talk later that day, by pre-warning the audience that the shares were best avoided, so apparently the attendance for his talk was poor. Anyway, my allegiance is to my readers, not to the companies being reported on, so if I helped steer anyone away from a 63% loss that they would by now have suffered on this share, then job done! The CEO who spoke at Mello, is now the former CEO, which is a pity as he seemed a nice chap, but business is business.
The latest update indicates good growth, and deep cost cutting, so perhaps they are turning the corner, although brokers are still forecasting a thumping £7.6m loss this calendar year, and breakeven in 2016. In my experience breakeven forecasts are often based on wishful thinking - i.e. the analyst sometimes has worked backwards from the desired result (breakeven) to the assumptions necessary to achieve that.
(insert quote)
Base70 earn-out - one of Rightster's legacy problems is that its balance sheet is dominated by a large creditor (£22.2m) for deferred consideration relating to previous acquisitions, and put simply Rightster doesn't have the cash to pay this liability (even after another Placing for £5m in May 2015). So it was obviously reckless to have done those deals in the first place, without having the cash available to make those payments.
A solution has been found, in that the recipients have accepted shares instead of cash, as follows;
As reported previously, the deferred element of consideration payable for the acquisition of Base79 is due to be paid in H2 2015. As a result of certain earn-out conditions being satisfied, the Company has agreed to a total consideration of £24.3m. The first portion of this consideration of £20.7m will be settled by way of an issue of new ordinary shares by the Company to the vendors on or around 4 August 2015. The remainder of £3.6m (net of certain required deductions for PAYE income tax and National Insurance Contributions) will be settled in Q4 2014 by a further issue of new ordinary shares by the Company. The price at which new ordinary shares will be issued to satisfy the earn-out will be a price per ordinary share equal to the average closing mid-price for ordinary shares (as shown in the Daily Official List of the London Stock Exchange) for the five trading days prior to the date of payment of the first portion of the earn-out. All former Base79 shareholders who are issued new ordinary shares to satisfy the earn-out will be subject to lock-up agreements pursuant to which they will not be able to sell such shares (subject to customary carve-outs) during the period from the date of issue of such shares until 12 November 2015. Any sale of earn-out ordinary shares between 12 November 2015 and 1 June 2016 will be subject to an orderly market arrangement and may only be made with the consent of Cenkos, the Company's NOMAD (subject to customary carve-outs).
Therefore, this is going to create a battle royale for the share price over the next few days! Existing shareholders would obviously like to see the share price as high as possible, to minimise their dilution.
Whereas recipients of the earn-out shares will want to see the share price as low as possible, so they get a greater share of the business.
My opinion - there could be significant volatility in the share price over the next few days, as a massive amount of new shares are going to be priced on the average price.
However, I feel the likely direction of travel is downwards, as a large number of new shares is about to be issued - the number of shares in issue is going to rise by almost 73%. Whilst there is a formal lock-in, these are easy to get round - people can open short positions in the share through CFD or Spread Bets, to lock in a sale at the current price. Then settle the short position using the newly issued shares once the lock-in expires. So for that reason a lock-in should be seen as a porous, temporary barrier to selling only.
On the upside, the company mentions some interesting contract wins & big name clients, such as Spotify, GlaxoSmithKlein, Heineken, etc. Although whether any of those deals are going to result in profits is another matter - looking again at the 2014 results, the company has a mountain to climb to get anywhere near breakeven, and has only limited cash remaining.
Overall it's potentially interesting, but looks much too high risk to me. The way I look at things, the company has not as yet demonstrated that it has a commercially viable business model. An interesting one to watch though, but with a very large overhang of shares having been created, and the cash position remaining tight, so another Placing probably necessary, it seems to me these shares could easily halve again from the current level, into single digits of pence.
Note that the Stockopedia computers have thrown a bucket of cold water over me, as my finger hovered (fleetingly!) over the buy button, as it has a very low StockRank of only 6. Remember that low StockRank shares are proven to collectively badly under-perform.
Globo (LON:GBO)
Share price: 40.5p (up 5.9% today)
No. shares: 373.7m
Market cap: £151.3m
(for the avoidance of doubt, I am neither long nor short of this share)
Statement re share price movement - we have yet another clarification statement from Globo, which in itself is another red flag - clearly the market thinks there is something wrong, if the company has to repeatedly issue statements intended to calm the market.
As regulars will know, I've been a long term bear of this share, as there are numerous red flags with the accounts, changes of auditor, taking out large new borrowings when it supposedly already holds substantial net cash, aggressively capitalising intangibles to create (IMO artificial) profits, debtors piling up on the balance sheet, the inexplicable disposal of 51% of a subsidiary in order to get its figures off the balance sheet, never having paid divis, repeated fundraisings despite claiming to be cashflow positive, the list just goes on and on with this company.
I set out in more detail the specifics here in Apr 2015.
It should be emphasised that red flags are not necessarily a sign that things are definitely wrong, but an alert that something might be wrong, hence more research is needed, or in my case I've already seen enough to make me walk away. One of the worst things you can do is go to the company and ask for reassurances - as you will always get them!
Where you have multiple red flags, as with Globo, the probability that something is wrong increases, compared with a company that has only one red flag.
It will be very interesting to see how Globo eventually pans out, as I'm firmly in the something is badly wrong camp, whereas others, and the Stockopedia system, like it - the StockRank is currently very high, at 92.
To my mind, risk:reward is such that I will happily run the risk of missing out on a profit by not buying this share. There are plenty of other profitable trades/investments out there, and walking away from something that might be dangerous is a sensible thing to do.
The latest thing to rattle the market, is that Globo is apparently seeking to raise more debt (despite having large net cash), from a junk bond, with interest at 10%, which the company says is "mainly" for acquisitions totaling $150m+ over the next two years. So it doesn't sound as if the money is immediately required - therefore why on earth would they be happy to raise fresh debt on a 10% coupon, unless it was going to be used immediately, especially as they claim to already hold net cash.
The way it looks to me, this company is behaving as if it is financially stressed, and not like a company which has net cash in the bank at all. Which makes you wonder if it really does actually have net cash? We've seen with Chinese companies that the huge cash piles were fictitious, so there is a precedent here. Cash only ever goes into Globo, it never comes out.
Bulls in the stock just ignore all the above, and concentrate on the bullish updates being put out by the company, claiming ever-increasing user numbers for its software. I would definitely like to see some watertight, detailed, third party proof that their software really is growing profitably, as the company suggests. It seems to have left a very light, almost non-existent impression on the internet so far, which is another cause for concern.
The valuation scores on Stockopedia look good, amazing even. Too good! This was how Quindell and the Chinese AIM stocks looked a while ago too:
(see StockRank page for Globo - I had to delete picture, as it corrupted the article)
When the valuation scores look too good to be true, that in itself is a red flag - because the market is saying that it doesn't believe the accounts/forecasts!
Quintain Estates And Development (LON:QED)
Recommended bid - at 131p in cash, from Lone Star Real Estate Fund IV.
A post-script here as well, as we will probably be waving a tearful goodbye to Quintain, with a proposed takeover deal to take it private at 131p per share. The buyer is a huge property investment firm.
I once had the pleasure of attending a Quintain AGM, as David Stredder's sidekick, where I played a minor supporting role in his demolition of the (large) Board of Directors, over unsatisfactory corporate governance issues such as excessive remuneration, bonuses, failure to change auditors for many years, etc.
I don't think the QED Board had been challenged so directly on these issues before, and after the initial horror, and body language which was clearly saying "who the hell do these upstarts think they are?!", the Board gradually became more conciliatory as it became increasingly clear that David had done his homework well, and was raising valid concerns.
Anyway, after that AGM, and drilling into detail into their numbers, it became obvious to me that Quintain was a company which mainly exists for the benefit of its staff and Directors, so I sold my shares.
Anyway, the booming property market in London, combined with a takeover bid, mean that shareholders are now being offered an attractive exit, which I expect they will grab with both hands.
4imprint (LON:FOUR)
Share price: 1175p (up 2.4% today)
No. shares: 28.0m
Market cap: £329.0m
Interims to 27 Jun 2015 - smashing figures from this company are out today, as usual, it really is a class act.
Underlying profit before tax is up 25% to $12.19m - remember the company now reports in US dollars, as it is basically an American business, doing 96% of its turnover there. Underlying basic EPS is up a smaller amount, 17%, to 31.25 cents.
I like the way the company has been honest in its presentation of the results - by flagging up underlying profit, even though it's lower than reported profit. Often companies only headline the underlying figures if they are better than normal, but hide them if they are worse! So top marks here for clarity, and giving investors an honest evaluation on the numbers.
Outlook - comments are non-specific, but talk about a good outcome for the year. Broker consensus is for 24.5% EPS growth this full year, which is in line with the profit growth, but is more than the EPS growth in H1. This note in today's accounts is worth bearing in mind;
Underlying basic earnings per share was 31.25c, (H1 2014: 26.69c), an increase of 17%. This reflects an increase of 22% in underlying profit after tax offset by an increased undiluted weighted average number of shares in issue resulting principally from shares issued to satisfy options exercised under the PSP in May 2014.
So it sounds as if a material amount of new shares have been issued under share option schemes, which would need checking out, as that could cause the company to fall short of full year EPS forecasts perhaps? (EDIT: please see updated comments below at the end of this section, clarifying this point)
Also investors would need to decide whether share options are excessive or not? I've checked the 2014 Annual Report, and it seems that 1.43m shares (about 5% of the whole company!) were exercised under share option schemes last year, and nearly all of these were nil priced options - something I'm very much against. Share options should be given at the current share price, so that Directors and employees only gain from the additional value they create from today.
However, at the end of 2014 there were only about 343k remaining share options outstanding, so this looks to have been a one-off splurge of options being exercised.
My opinion - this is a smashing company, that consistently performs well. However it's also cyclical, so to be prepared to pay a PER of 21 times forecast earnings, you have to be very sure that there's not going to be a recession in the US any time soon.
The share count rising by 5% last year from share options is also a little worrying, although shareholders have done so well here that they probably don't begrudge giving away 5% of the company to Directors/employees. Although note how it has clipped EPS in H1 this year noticeably.
Given the additional shares in issue, the full year EPS target might be more of a stretch than the company is used to? Overall it's one of my favourite companies, but the price looks fully up with events for now.
EDIT: I've had three broker notes emailed to me today, all of which are upbeat on performance, and include small upgrades to 2015 forecast EPS. So it looks as if my concern above, about the EPS growth rate in 2015, is nothing to worry about.
Although my point about 5% of the company having been given to employees/Directors, thus meaning EPS will rise more slowly than profits this year, is valid. Brokers also point out that the H2 2014 comparatives are tough, so the business will have to keep firing on all cylinders if momentum is to be maintained.
Looking at the forecast EPS growth rates, they are slowing down considerably - e.g. one broker has adjusted EPS growth of 15.7% this year, falling to 11.8% in 2016, and 9.8% in 2017, so I think the company really needs to significantly beat those forecasts to justify remaining on a PER of over 20.
Overall then, a smashing company, but the price is looking a bit stretched to me. There again, it has looked expensive for ages, but keeps beating broker forecasts, so if that pattern repeats, then who knows, we could be looking back in a few years' time and saying that it was cheap!
Twitter Inc (NYQ:TWTR)
How not to do a conference call - yes I know it's not a small cap, but I am a big fan of Twitter as a service, and think they have created something unique, but haven't yet worked out how to make the most of it.
So I took a fairly large long position in the stock, with stop losses in case of bad news, ahead of the Q2 results. Anyway, I was delighted with the numbers, announced at about 9pm last night, as it was a beat against expectations on both revenue and profit. The shares shot up after hours (having been strong all day yesterday as people piled in ahead of the numbers), and peaked at $40 per share, before settling at $38 per share. Great, I was nicely in profit, as I bought in around $33 a few days ago.
Then the conference call began. I can't include the chart, as the graphics are playing up today, but literally from the moment Directors began talking, the shares (which continue trading after hours remember) started to fall, and fall, until one of the Directors explained how there were lots of things they needed to fix, and it was going to take a very long time!
By this stage, I was screaming at my PC, "Just STOP talking!" (that's the clean version).
It was the most inept conference call I've ever heard. Dull uninspiring, and focusing on the negatives, despite the fact that they had just beaten expectations! By the time the dreary (and mumbling) presentation had ended, the shares had plummeted almost 25% from the peak less than an hour earlier!
All I can say is that Twitter needs to find itself a CEO asap, and hopefully he or she will clear out the halfwits who did last night's presentation, as their first remedial action.
Isn't it sad when you see a great company, but run by idiots?
The worst thing of all, is that IG's dealing platform was playing up last night, so I couldn't put through any sell trades quickly enough, so I'd lost a packet by the time I could react.
It's not really relevant to today's report, but I just wanted to have a moan about it.
Right, I'll sign off now, before readers lose the will to live! (sorry it's all been rather negative today).
Tomorrow's report should be earlier, by the way.
Regards, Paul.
(of the companies mentioned today, Paul has no long or short positions. A fund management company with which Paul is associated may hold positions in companies mentioned.
NB. These reports are just Paul's personal opinions, and are never recommendations, nor financial advice. Please DYOR).
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