Dramatic rise and fall of the Mr Blobbies

Investing in much-hyped companies can be a cautionary tale. But you would be wise to consider putting your money in the once-despised construction and building materials sector. The times they are achangin'
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The Independent Online

TAKE A look at this recent statement by our mystery company's chief executive: "We have an excellent base to drive the company forward. We are ambitious. We have a clear focus on where we want to go, the growth markets we want to be in and the manner and style of our getting there." And here ís an announcement by the chairman of the same com-pany: "We expect to report another set of good results for 2000 and remain optimistic about our longer-term prospects."

TAKE A look at this recent statement by our mystery company's chief executive: "We have an excellent base to drive the company forward. We are ambitious. We have a clear focus on where we want to go, the growth markets we want to be in and the manner and style of our getting there." And here ís an announcement by the chairman of the same com-pany: "We expect to report another set of good results for 2000 and remain optimistic about our longer-term prospects."

Now consider the company's track record. It's a big outfit, in the FTSE 250. In the last five years turnover has climbed steadily from £1.15bn to £1.5bn. Pre-tax profits have risen from £50m to £120m and informed estimates put the figure for the year 2000 in the region of £150m. During the five-year period the earnings per share (eps) figure has increased, steadily and reassuringly, from 8.46p to 19.8p and again the pundits are forecasting that last year's figures are good enough to boost the eps to 26.7p.

The good news continues, and remember these are hard facts, real achievements over five years. Operating margin up from 5 per cent to over 9 per cent. Return on capital employed up from 8 per cent to 13 per cent. Return on equity up from 6 per cent to well over 10 per cent. Different investors put varying importance on such figures but there's no denying they are mightily impressive. Two more plus points: the basic raw material necessary for this company to function effectively increases in value all the time and the company has stockpiled enough for the foreseeable future. Seven of Britain's leading stockbrokers recommend the share as a Buy, predicting that the company will continue to go from strength to strength.

So where's the puzzle? Take a look at the historic share price. In 1996 the company's highest price was 176p and its lowest was 115p. Five years later, in 2000, the high was 181p and the low 113p. This week the price hovered around 173p to 186p. So, despite five years of great results, increasing prosperity and security for the company and its shareholders the price has completely stagnated. That's the puzzle.

When I tell you that the company concerned is Taylor Woodrow, who on Wednesday made a bid for fellow housebuilder Bryant, I can hear you say: "Ah well, we understand why now. It's the sector. Construction and Building Materials. Notoriously unfashionable." And you are right, the sector has been a no-no for as long as I can remember. But, with respect, you don't understand why and neither do I. We are just repeating parrot-fashion what we have heard, read and observed. There's no denying that building shares have been out of favour with investors for years. Way back when, the City decided that the construction business was cyclical, land was expensive, people were into do-it-yourself so they would postpone their climb up the housing ladder. Poor results were just around the corner and the sector was best avoided. The reputation was built on rumour and speculation and, as so often happens in the share business, it was ill-founded. But we know that mud sticks and for years now mention of investment and builders has been met with a sharp intake of breath.

However, dare I predict a sea change in investor attitudes? I firmly believe this is the Year of the Sensible Investor, the time when realism takes over from mumbo-jumbo. The hype and hysteria of late 1999 and early 2000 lured hundreds of thousands of new investors to the equity honeypot. Brokers' telephone lines were jammed in a jamboree of buying and selling. We wallowed in our own version of Who Wants to be a Millionaire as fat cats materialised and led us towards a communications wonderland.

Television soaps round the clock, everyone working from home and communicating via video conferencing, groceries ordered on the internet and delivered through a hole in the wall of your home. The new investor was offered a chance to share in the spoils of this communications revolution and even the strongest of us couldn't resist. It was a bubble, we all knew that, but like chocolate and pancakes it was irresistible. I well remember on the eve of the new millennium realising with a profound sense of shock that I had made a paper profit of £1m on just one share (needless to say, my greed got the better of me and as I write I still hold two-thirds of the stock and if I sold today I would get less than £100,000).

And then the bubble burst. The fat cats caught anorexia, the high-flying internet giants were exposed for what they were - Mr Blobbies composed of a lot of hot air and not much substance. Those very wise few who had not been led into temptation laughed. The majority of us wept a little but then philosophised that they had only been paper profits anyway and in reality we were just back to Square One. We vowed to learn our lessons and hopefully we did.

One piece of homespun wisdom I recall is: "If you spot a bandwagon, you've missed it." The trick is to listen carefully for the wheels before the bandwagon hoves into view, that way you can be ready for it before everyone else.

So here is my prediction: In the immediate future, when we are all looking for companies with an impressive track record and a continuing demand for their products, building shares will become fashionable. And here is my first recommendation, share tip, call it what you will, for 2001: Taylor Woodrow.

During my researches into the company this week, I trawled through the opposition and found a number of undervalued nuggets in the same sector. Check for yourself, start with the price-earnings-ratio because it is easy to spot a low figure and then look at the current status and prospects of the company concerned.

Here's a further point of interest. In the Diary eight months ago I recommended another builder, Wimpey, which I felt was considerably undervalued at 114p. As I write today Wimpey is at 157p, an improvement of around 25 per cent, and in my opinion it still has a way to go.

The progress of BioProgress

Talking of former share tips I have received an e-mail this week from reader Ted Colman of Oxford about a share tiddler called BioProgress which, although it is based in Cambridge, is presently quoted on the over-the-counter NASDAQ market in America. The company has developed a process to produce biodegradable film, called Xgel, which can replace gelatin in soft capsules.

Ted writes: "I was interested enough to read everything I could about the company and ended up speaking to the financial director and the managing director at some length before deciding to take a stake via the convertible preference shares which were being offered. The ordinary share price was enjoying something of a price spike caused, I think, by the execution of an evaluation agreement with an unnamed Fortune 500 company.

"Since then the share price has come back to earth, but the newsflow from the company has been excellent and all indications are that matters are progressing as well as could possibly be expected. The agreement with the Fortune 500 company, strongly rumoured to be Procter and Gamble, has been completed, and a new agreement is now effective. An exclusive agreement with Boots for an "innovative application", thought to concern a more effective formulation for Strepsils, has been signed. News of record Q3 contracts and the appointment of Close Brothers as advisers was followed by a product development agreement with Nestlé, rumoured to concern a new kind of sweet which exploits Xgel's timed release capability to explode in the mouth. I understand there are also possibilities of deals with pharma major Bristol-Myers Squibb, and with McNeil, the manufacturers of the world's largest-selling painkiller, Tylenol.

"The main risk with an investment in Bioprogress has always been that capital invested in the installed base of machinery would prove too great a barrier to uptake of a competitor technology. Current signs are that large companies are prepared or are preparing to make that leap. Bioprogress claim that Xgel is cheaper, stronger (less prone to tearing), quicker to manufacture (no long-curing process) and dimensionally stable (gelatin gets sticky at high temperatures, and goes out of shape).

"More importantly, Xgel boasts characteristics which should enable manufacture of entirely new classes of products. It can be used for timed release of drugs or agrochemicals, timed and staggered release of a number of drugs (important for certain drug regimes), and encapsulation of unmixable compounds. Should BioProgress be successful then the potential revenues from sales and licensing are huge in relation to current and projected cashburn. I'm sure that other investors without web access to company announcements would appreciate an update."

I too am a shareholder in BioProgress and I have also been watching its activities. The involvement with such international giants as Procter and Gamble and Nestlé is encouraging. The appointment of Close Brothers as advisers is significant because I believe it is the prelude to the company's shares being offered on a British-based market.

Expert advice

The seminar season kicks off with a two-day event at the Islington Design Centre, London, on Friday 2 February and Saturday 3 February. The organisers, HS Financial Pub-lishing, the people who produce the monthly REFS (Really Essential Financial Statistics) have assembled an excellent line-up of speakers.

Gurus such as Jim Slater and Alpesh Patel will be there with financial writers Ross Greenwood and Nigel Milton. Investment technology expert David Linton is speaking, as is Jeremy King, a director of ProShare.

Specialists include Peter Webb of Eaglet Investment Trust, John Alexander of Henderson Investors, Andy Crossley of Invesco Fund Management, and Ben Rohgoff of Aberdeen Technology. And guess who's the chairman? Me. Admission price is £25 for two days, £15 for one day, and there are concessions for REFS subscribers.

For details ring 0870 4294366 or contact me.

* terry.bond@hemscott.net

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