If you have not had the dubious pleasure of reading the first part of this Blog Series, then you should be able to locate it at the following Link:
Debt and Cash are arguably the most important Numbers you can find in the Headlines - and you would be amazed how often the Debt Number is conveniently not included. I have even had Results Statements in recent Days where I have found no mention of the Debt level in the first few bits of the Results Update and I have had to scroll and scroll and scroll right down to the actual ‘Financial Review’ bit to find any mention of Debt - and of course you can be 100% certain that if I have had to do this then the Debt Mountain is chunky and the Debt has probably increased (if the Debt had improved, you can guarantee they would be bragging about it up front !!).
With Debt you want to see the total Debt amount going down and at least you want to see the Debt to EBITDA Ratio improving or something along those lines. If the Earnings are growing fast enough, then a Company can get away with a Debt mountain as the Ratio reduces - although ideally you want to see the actual Level of Debt reducing. Something to be particularly wary of is if Debt is increasing rapidly - and this is especially the case if it is not because of acquisitions or other investments but is simply down to a lack of Cash generation within the Business and/or increases in Working Capital or suchlike.
With a Net Cash position you want to see that going up (Net Cash is the Cash and/or ‘Equivalents‘ that the Company has minus the Debt the Company has) and if the Cash is down you want to dig through and find a reason for it. Usually it is an Acquisition or a Special Dividend that was paid out or something like a new Factory etc., but it is vital to understand this. If you are really lucky then the amount spent on an Acquisition added to the new Cash position will be higher than the original Cash position which shows that the Company is still generating Cash and adding to the pile - this last bit is worth checking as an Acquisition could be hiding problems in the existing Business.
On really Junky AIM Stocks (go to the ‘WheelieBin’ page on my Website to get more details on what I mean here) which are losing Money hand over fist, very quickly when starting to read through Results or a Trading Update etc. I scroll through and look to see if the Cash is going up or down or, if the Debt is going up or down. If the Company has Cash then you need to figure out the rate at which that Cash is being burnt by the Losses (and it is critical not to look at the reported Loss figures but to go to the Cash situation in the previous period and to subtract the Cash now to see what the real burn rate is), and to make a rough estimate on how long the Cash can last and whether or not they will need another Placing of new Shares (which will dilute your Holding) before they start generating Cash from their Business Operations. The reported Loss is nearly always massaged in the best possible light to make it look better than it really is - the change in the Cash can give away the reality.
So for example, if a Company has £4m now and it had £6m six Months ago then it is burning through it at about £2m every half year. On that basis the current Cash pile will last a Year if you are lucky and things are probably tight. If the Company is not selling anything to generate Revenue then it is pretty obvious a Placing will be coming soon. Stocks like this are best avoided and if you must muck about with them then it is best to treat them as ‘Trades‘ not ‘Investments‘ - buy Low and ‘Sell the Spike‘.
It is also worth appreciating that a Net Cash figure or Debt figure is often highly manipulated and presented in the best possible light. So when looking at a Cash Burn rate, it is worth bearing in mind that this is most likely a false picture and the true situation is worse.
You can get things like Customer Numbers in the headline figures but this tends to vary. It can help give some ‘colour’ to Results but I guess on most occasions I don’t really need to see it. For newer growth Companies perhaps seeing fast growth in the number of Customers served is a good thing but don’t be fooled by impressive Customer Numbers if the actual Revenues, Profits, EBITDA, etc. are going the wrong way. Customer Numbers are probably more relevant on a Consumer-facing Business rather than a ‘Business to Business’ operation which is more project-based and has a small number of Customers but with big Orders.
Big FTSE100 Companies
I find most Companies of varying sizes put out pretty decent and readable Results and Trading Updates etc., but I do find FTSE100 Companies a bit of a pain quite often and this is particularly the case with the huge Megacaps like Shell RDSB, Glaxosmithkline GSK, Vodafone VOD etc., where the Results might as well be chucked in the bin. The trouble is that they are so huge and have so many Divisions and layers of Management that the Results you get are perhaps as much as 6 Months out of date anyway and they are always full of buckets and buckets of mostly useless ‘Information’. I often find the Narrative stuff and whether or not the Dividend is up and what has happened to the Debt and Cash is probably going to tell me everything I need. Luckily most of the FTSE100 Stocks I hold are in my Income Portfolio which is very much Long-term and boring and I don’t need to worry so much.
Usually quite soon after all the Headline Numbers you get a Quote from the CEO or Chairman or something which can often be a repeat of the Outlook Statement which appears further down or just a part of it. You need to be extremely careful here because I have seen a few paragraphs here that read very well but when you go down to the full Outlook Statement you find that there are more paragraphs and some negative stuff !! That is pretty outrageous and when I see that it really gives me a bad impression of the Management as they are trying to be devious.
The Outlook Statement is probably one of the most important bits of any Company News of whatever form and you can find them in all sorts of things. The other day I saw one for KCOM I think it was which was announcing that their ‘Strategy Review’ had been delayed which is obviously not good but included with this very short Statement was about one sentence which said “trading is in line with expectations” which could easily have been missed.
The Outlook Statement is particular important because it is very much forward-looking stuff and it is this which will drive the Share Price. This is something many people don’t seem to understand and I often see people obsessing about historic Results when in truth that is almost totally irrelevant if you have big changes in the Business which are likely to mean a very different future. I will cover this more in Part 3.
You then tend to get loads and loads and loads of words and if it is a Company I hold then I tend to read all of it and sometimes I struggle to keep awake !! The text can really vary and a lot of it can be extremely useful and I usually find some interesting and important snippets that have not been mentioned before that are really good or really bad !! It is well worth reading slowly and carefully and re-reading bits where you didn’t quite understand it or if you want to confirm your interpretation. There are often bits in Results Statements etc. where I will go back to a previous Statement and do a comparison of a particular aspect - this is more often on Stocks I hold where I know the Companies very well and have a pretty detailed understanding of what is going on.
It is worth thinking about what I have just said. As time goes on I get more and more convinced that the best approach for me is to be very fussy about what Companies I buy Shares in and then to hold them for the long term and whenever I get the urge to sell my default is now just to TopChop a bit off the top - that satisfies my mental angst to Sell and also keeps me in the game. A huge part of my thinking here is that when we sell out of a Stock which we have held for perhaps 3 years or something, we are ditching a Company we know extremely well and we are moving on to a Company that we have perhaps not long been acquainted with and this has to bring a lot of risk. However much research I do in advance of buying a Stock, I have no doubt that the true knowledge about a Company comes over time when you have read Update after Update after Update and have really got to understand the ins and outs of the Business to a low level of detail.
You usually get a short chunk from the Chairman and then a load from the CEO and then the CFO does his or her bit. The Chairman’s stuff is perhaps more ‘high level’ (I sometimes get the impression that the Chairman has utterly no clue about the Company and his/her only involvement is to every now and again put their name to a pre-prepared Statement !!) and then the CEO goes into a bit more detail about Business Operations and then the CFO does the Finance bit and this will mainly be Numbers and suchlike. Every bit is useful in one way or another. I do find some bits (especially in the bigger Companies like the FTSE100 ones) where I can skim through them or just ignore completely. There are no hard and fast rules here - I think it takes experience and understanding to know what is important and what isn’t and you just need to read everything when you start out and after a while you start to learn. When it comes to the Financial Statements, I don’t look too closely at them or to the Notes that go along underneath unless there is a particular aspect that I want to look into - again this comes with knowledge and experience of the Business.
Share Price reaction
After reading an Update I can think it is pretty good but then I look at the Share Price and it is down 10% or something. This is helpful because quite often it gets me to look again and I can then spot something I missed or it can be an opportunity because these is actually not much wrong and the Market has just freaked out for nothing. I tend not to jump fast on such opportunities and would rather see how it goes for a few days or so but I know many People do buy on such moves and do well out of it. It can work the other way as well where the Shares jump and I have no idea why - this is particularly useful when you are new to the game because it teaches you what things can be seen as positive for a Share and what things the Market really doesn’t like. Often the move is because a Broker/Analyst has upgraded or downgraded a Stock and I find a lot of this is Noise and I take much more notice of what I think about the Results than what they come out with. On pretty much every Stock for each Buy Recommendation you can find a Sell Recommendation - it is just opinion and noise and the Analyst is very often just out of College and knows utterly nothing about business.
My Normal Mode of Attack
My usual approach in the mornings is to look through the RNS List for my Stocks first and as I am going through I am mentally logging Companies that I know are decent and some which I know are rubbish and I will come back to those RNS Updates later. Sometimes there is a very short bit of news like a ‘Holdings in Company’ for a particular Stock that interests me and I might quickly open it and figure out what it means and if it is relevant I will tweet it out. But normally I concentrate on the Stocks I hold first.
On the subject of ‘Holdings in Company’ forms, these things are horrific and the only way I can ever make sense of them is by trying to compare the ‘Situation after the Transaction’ with the ‘Situation previous to the Transaction’ and figuring out the difference - but this is not foolproof and I often interpret them wrongly. Nasty and useless forms !!!
Once I have dealt with my Stocks I then start at the earliest RNS for the Day and slowly work up the list and open things that interest me both in terms of Quality Stocks I don’t hold and ones that I suspect are utter trash and I can warn people about them and also there are usually a few where I have no idea what they do or perhaps I have simply forgotten what their Business is. With experience and a generally pretty good memory I find this quite easy to do and usually it is Stocks that are recent IPOs that I might have missed or simply forgotten about as there are so many. Sometimes a Company has changed its name and I forget what it is but to be honest if a Company has changed its name then 9 times out of 10 this is a bad sign and the Stock is a pile of junk (the Management rename them to fool the gullible).
Quite often I will open a Results Statement or something and almost instantly see some unpleasant words like ‘Russia’, ‘Georgia’, ‘China’, various African states and Asian states etc. and then things like ‘Crypto-Currencies’, ‘Graphene’, ‘Stem-Cells’ you know the sort of stuff - mostly utter toilet and I promptly close the item and move up the list.
On AIM Trash I am particularly interested in what kind of Cash Burn they have and how much Cash they have left - these things are terrible for Placing after Placing and this erodes the ‘Investment’ of the unwary and such stuff is really for Traders and highly experienced Investors only. The best way for Newbies to do this game is to learn on Quality stuff first and then after a few years you can take more risk on the cr*ppy AIM junk - and the key thing is that these Stocks are not Long Term Investments - they should be treated as ‘Trading Chips’ and you buy when they are low and you sell on the Spike up (I realise I have said pretty much the same thing twice but this really cannot be said too many times, particularly for the benefit of Newbies - in fact, I will add that whenever someone who is new to Investing contacts me because they are not doing very well, I can almost guarantee 98% of the time it is because they are buying AIM sh*te).
If the Stock in question is not something I hold or one I suspect might be good Value or something, I very quickly flip to the ADVFN App on my Fone and I slide my finger across the screen to look at the Candle Charts for all the timescales it shows up to 3 years. I am a big fan of Charts holding a lot of information and giving good insights into what the Market thinks of a particular Stock and this can be extremely helpful. I also poke at the ‘More Financials’ bit so that I get the summary numbers which gives me the Historic P/E and Historic Dividend etc. For Forecast information I would use ‘Digital Look’ via my Fone or in the Evening I will look on SharePad or if it is something I am quite excited about then I would do this as soon as I am near my 10 inch Tablet which is great for accessing SharePad quickly.
Other bits to look out for
When reading through all the text I am also keeping alert to things that might cause future problems and things that might be useful for future growth. On the problem side things like Gross Margins reducing or Working Capital needs rising can be a sign to be careful and weaker trading in particular Products or Regions can signal trouble. There are also particular things that are specific to a particular Industry - for example, with Airlines the Load Factor is very important and if this percentage is falling, that can mean trouble. Regulatory concerns can cause trouble right across the board and there are very few Businesses which are immune to this although certain Industries like Utilities, Gambling, Health, Loans, Banking etc. are perhaps more vulnerable than some others. While I am on that subject, I notice that you occasionally get Statements from Regulators like OFWAT or OFGEM etc. - these are worth reading if you have exposure to the relevant sectors (Water and Electricity/Gas in these examples).
On the plus side I like to see things like new Products and expansion with new Factories or Distribution Centres etc. Such Investments are not taken on lightly and if the Company is ploughing a huge amount of resources into such expansion, then they must be very confident that they can sell the extra Products or Services that the additional capacity enables - so this is a very good sign. For example, I recently noticed that Treatt TET are expanding both their Facilities in the UK and in the US - that will enable them to serve a lot more Customers. New Products are particularly good if they are a pretty close relationship to what the Company does already and if they are small and measured and don’t take a whole shed-load of additional investment. For example, I hold Telecom Plus TEP and in recent times they have put a lot of effort into expanding their Product Range with things like Boiler Insurance, Boiler Replacement and Installation, Home Insurance and Smart Meter Installations and Reading etc. - all these things are incremental and take advantage of TEP’s existing loyal Customer base.
It is very important to keep a sense of balance with potential problems and potential sources of growth. There is no such thing as the ‘Perfect’ Company and I know many Investors who are so finicky and fussy about Stocks that they end up buying nothing and selling everything they have because they are almost paranoid. It is normal for even the best Companies to have occasional hiccups and problems in a particular area and it is important to keep things in perspective and not to just cast it aside because of some Bad News. You can take any example of Companies like Amazon, Apple, Paypal etc. etc. and you can guarantee that many times in their history they disappointed the Markets yet they went on to became massive Businesses and Investors who were able to stay calm and see the Bigger Picture were rewarded in mountainous ways (ok, that is much easier said than done but please bear in mind what I have written here when considering a particular Stock and/or thinking of selling something you already hold).
Some other things that can crop up include Director Changes and these are important to keep on top of; annoyingly it is often the case that a Company will put out a Trading Update and then there will be a separate RNS Statement about a Director leaving or joining or something - it is so easy to miss this. To be fair, most times the Company does mention in the Results RNS that there is another RNS coming out.
Other more obvious things can be Special Dividends (or if you see a Company which is building up Cash at each Results Update then perhaps it might be likely that a Special Dividend happens in the future) and/or Share Buybacks and these are things that are generally good - although Buybacks do have a questionable reputation (in simple terms they tend to be a positive). Disposals of a Business Unit or something like that can be very good and this is particularly the case if the Unit was performing poorly or perhaps it had much lower Margins and was dragging down the rest of the overall Business. Likewise Acquisitions can be good but if they are huge that can be dangerous and the best sort are the small ‘Add-ons’ which are much easier for the Company to integrate into existing operations and which bring much less risk along with them. It pays to be wary of Businesses which are continually doing Acquisitions - some like Keywords Studios KWS can get away with it but the more this goes on the more the risk of a screw-up increases and the Valuation should fall back - this has certainly not happened with KWS (yet !!).
However, much of the things I have mentioned here will appear in separate RNS Statements over time as they occur - in fact, this is no surprise because there is a Regulatory onus on the Companies to release Information to the Market straight away if it is likely to be something that can move the Market.
Another obvious thing to take notice of (in fact, so obvious I actually forgot to include it until I was uploading the Blog to the Website and realised that I had left something crucial out !!) is how New Products or particular Business Units are doing. For example, I hold a chunk of Entertainment One ETO and one of the big shocks for me on that one recently has been the success of the new Cartoon Series, ‘PJ Masks’. Everyone things that Peppa Pig is the real story here and that is undoubtedly true, but when you consider that Peppa accounts for something like 36% of Sales in the Kids Properties division but in almost no time at all PJ Masks has managed to get something like 26% - the growth is astonishing.
With regard to the Tweets I send out every morning (these usually start to appear soon after 8am), I tend to put out at least a couple of Tweets on Stocks I hold and quite often I will put out a string of Tweets if there is a lot going on (I did this on TEP earlier this Week) and if you read these you will get a good idea of what things particularly get my attention. On Stocks I don’t hold I generally just whizz out one Tweet but sometimes I will say more; I usually give a view on whether or not I think a Stock is any good but this is just my opinion and I get a lot of things wrong. If you don’t follow me on Twitter then it is worth opening an Account and hunting down @WheelieDealer and of course I also have a Twitter Feed on the Main Homepage of my Website and also there is a Page on WD2 dedicated to it.
Right, I think that covers most of what I am looking at every morning and in Part 3 I will do something a lot more practical which looks at a framework for how to consider Recovery Stocks in particular and to separate out the Future from the Past.
Here is the ADVFN App one:
Here is a blog on how best to muck around with AIM Trash:
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