Derek Pain: Sometimes you need a little luck when investing
No Pain, No Gain
Saturday 19 November 2011
Every investor needs a little luck. I suspect all of us have unwittingly enlisted dud shares. But there must have been occasions when, for one reason or another, we have drawn back from embarking on what appeared to be a promising purchase and subsequently found ourselves counting our blessings.
A company called Fuse8, which this week lost its AIM presence, represents my most recent good fortune. In the summer of last year I seriously contemplated adding the shares to the no pain, no gain portfolio. I was looking for another possibly rewarding share traded on the fringe Plus market and Fuse8 seemed to fit the bill. With an enterprising record and the shares on the verge of elevation to AIM there seemed to be much going for the digital marketing business. It was clearly going to use the junior market as the avenue for expansion. For some reason I dillied and dallied and a few months later descended, instead, on Rivington Street Holdings, which is due to arrive on AIM early next year.
My lucky stars must have been shinning brightly because Fuse8 would have been a disastrous investment. Last year the shares hit a 34p peak. They disappeared from AIM at a mere 4p, offering a £450,000 capitalisation. Just what went so wrong is something of a mystery. Some encouraging trading statements about revenues and profits had duly appeared. A modest £400,000 share exchange takeover was achieved and even the London Stock Exchange was enrolled as a customer. Chief executive Nigel Hunter at one stage declared: "We believe that AIM will be a great platform for us to achieve the company's growth plans". The first sign of trouble emerged in September.
Then, in an astonishing statement, the board revealed that Mr Hunter had failed to produce, as requested, an updated review of the company's performance and an estimate of progress. It added that profits were expected to fall below expectations. The chief executive had offered his resignation which had not been accepted. A month later Mr Hunter's departure was announced.
From then on things moved quickly. A delisting was presented to shareholders and approved. The company felt the cost of an AIM presence could no longer be justified. With the shares in the doldrums there was little, if any, chance of using them for capital raising and takeover ammunition.
Fuse8 was started by chairman Mark Walton and another director Andy Hutchinson in 2000. Now it has returned to the unquoted ranks it plans to rebuild and has assured shareholders their interests will be protected. Perhaps one day it will reappear on the stock market. But I am glad I avoided the Fuse experience.
However, with Patsystems and now Mears producing profit warnings, the portfolio seems to be gathering problems. Mears shares have crashed from around 260p to 210p as the support services group posted a profits warning. It was not a particularly vicious one but in these volatile days, when the stock market refuses to take any prisoners, the result was humiliation.
The Government's about turn on solar subsidies did the damage. With payments being cut by more than half, Mears, a social housing and home care group, has withdrawn from its fledgling solar adventure. After axing its solar installation operation it warned that this year's operating profits will be hit to the tune of £2.8m. There will also be a £2m write off. The cut backs have prompted stockbroker Investec to reduce its profits estimate from £34.8m to £29.5m. Next year's forecast is down from £39m to £35m.
It's been a rotten year for once high-flying Mears. The shares earlier peaked at 385p and were 326p in January. Then its yearly results failed to gain widespread approval. Voices were raised that growth had slowed and, in some quarters, deep anxiety materialised about the treatment of pensions cash. Worries about the impact of threatened Government cuts also inflicted damage. Now it finds curbs a reality.
Still the solar reaction seems rather harsh. After all the group continues to win new housing and care contracts. Its order book stands at £2.7bn. This is Mears second participation in the portfolio. The first time produced a handsome profit with the shares more than trebling; this time around I don't think I will be so lucky.
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