If you have not had the dubious pleasure of the first 2 bits of this Blog Series, then you should be able to locate them at the following Links:
This final Part of the Blogs is a bit different as it postulates (is that a word?) a technique for analysing a Stock and then has an example to show it in action.
When reading any News item and in particular when looking through Results on Recovery Situations, a great way to understand the true relevance of the information is to separate bits that are Historic from bits that will impact in the Future. To a large extent I do this in my head in the Mornings when working through the RNS Statements and this is easier to do on Stocks which I know extremely well because I have held them a while and the changes in the Business leap out at me. The logic being that bits that are in the past are irrelevant really (ok, they do give some context but 9 times out of 10 they are unlikely to be repeated), and it is things that are likely to impact in the Future that really should be concerning us and getting our attention. I think this is a huge mistake a lot of People make - it is so easy to focus on past problems and totally overlook a significant change that is happening within the Business. I know this because I make this cognitive error all the time myself.
When the situation is complex, for example when a Stock has been through a long period of problems and there have been countless changes like new Management, selling off of Business Units, Rights Issues, re-financing, Cost Cutting programmes, etc. etc. it is often a bit too much to store in your Brain and a good idea is to use a sheet of good old A4 Paper (ok, you technical millennial types can use some sort of computer thing to record it all) and to have 2 sections - one for Historic stuff and one for Future stuff - and then you work slowly and methodically through the Results or RNS Statement or whatever it is, and you write a short piece of descriptive text for each relevant element under the appropriate section. Obviously you need to be careful to work out what bits are important and what bits can be ignored - but over time you will get better at doing this. What you are really looking for is things that have an impact on the Performance of the Business and therefore are likely to have impacted, or to impact, the Value of the Company and hence the Share Price.
OK, probably the best way for me to explain this is to do an example so I will work through the recent Results from MPAC plc MPAC which you can see here:
I will have 2 Sections which appear below and I will have put each bit I consider relevant into the appropriate Section as I suggested above, and the simple process is to just work slowly through the Results Statement in a methodical and thorough way. Of course once you have done this exercise you need to weigh up which of the Sections is most relevant to a possible decision to invest or to continue holding etc., and more weight must always be given to the future bit.
Note how some bits in both the Past and the Future Sections are good and bad. Further analysis could be done by splitting these - for example put a ‘G’ or a ‘B’ next to each bit as I have done. However, there is an element of subjectivity in whether or not a particular bit is Good or Bad - for example, in the ‘GMP Pension equalisation charge’ below I have decided it is Good because it resolves a problem and complies with legal requirements - you could easily say this is Bad because Cash has flowed out of the Company - you have to make your decision (and in this case a shortage of Cash is really not a problem for MPAC as will become clear).
Note, if something is Bad but it is in the Past, then it is less of a problem than something which is Bad but is likely to continue in the Future (especially if the Management have changed and much was screwed-up by the previous incumbents). You could create a Scoring System - for example, you could say a Bad thing in the Past scores Minus 1 and a Good thing in the Past scores 1 and a Bad thing in the Future scores Minus 2 and a Good thing in the Future scores 2 - you would need to figure this out yourself. Once you have a Scoring System you could apply it across various Stocks and with time and experience you perhaps could figure out what level of Total tends to predict good Share Price Returns and what low Total level is a sign of poor Share Price performance (but of course this would be a difficult exercise to perfect).
Past Information for MPAC
Future Information for MPAC
Note that working systematically through the Company Results in this way is not always entirely complete. In this case, I have stopped once I got to the Profit and Loss Account and Balance Sheet and stuff because of time constraints and as a result for example, there is no mention of the Property in High Wycombe which has considerable value (perhaps £4m or so).
With regards to what jumps out quickly to me here, the obvious thing is that many of the ‘B’s for Bad things are in the Past bit and the Future bit contains a lot of ‘G’s for Good things. Another way of thinking about this in terms of the Future is that where there are Bad things these are ‘Risks’ and where there are Good things, these are ‘Opportunities’.
Anyway, hopefully this exercise will have given you some ideas on how to analyse Company Statements and the entire Blog Series should give you a good view on how I go about working through such Statements every morning.
With regards to MPAC, it strikes me as one of the cheapest Stocks around and at the time of typing this, the Share Price is 136p mid and the Market Capitalisation is £27.4m which notably is pretty much the same as the Net Cash the Company holds and this takes no notice of the High Wycombe Property or the actual Business which looks to me like it is on the mend. The Pension is the big issue here but it needs to be realised that firstly this is a weird form of ‘Debt’ in that it is a Liability which spreads over an extremely long period of time and it is also an extremely volatile situation because tiny changes in ‘Input Factors’ like Life Expectancy, Discount Rates, Investment Performance etc. can have a disproportionate effect on the Deficit or Surplus situation. A minor change could swing a big Deficit into a big Surplus simply by changing an input on an Actuary’s Spreadsheet. I have put a link to a Blog I wrote on this subject at the bottom of this Blog.
I have had to be extremely patient with MPAC but I am very confident that my stance will pay off hugely. Potential catalysts to get the Price moving will be a very good Trading Update (that’s possible but some months away now) but more likely the announcement of an Acquisition. It is also extremely likely that MPAC itself receives a takeover bid. News on the High Wycombe Property could also get it moving. With the Market Cap pretty much the same as the Net Cash the Company holds, it strikes me the ‘Margin of Safety’ on this investment is extremely big and therefore the Risk/Reward is one of the best around and I can see MPAC being worth perhaps as much as 100% more in time.
Analysing the Analysts:
Beware of Opinion:
Justin Scarborough did the following Blogs and they are great because they give a simple overview of the important bits of Accounting (the link is to Part 2 and at the top of it you can find Part 1):
This one covers my ‘Triage’ process - you can find more on this on the ‘Little Black Book’ page on WD2:
This one is on a similar subject area:
This one is about Pension Deficits and funnily enough I wrote it back in the days when MPAC was MLIN:
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