No Pain, No Gain: A sad demise that shows risk of small companies

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The Independent Online

Only one share has had the temerity to go belly-up, leaving investors high and dry, while a constituent of the No Pain, No Gain portfolio. After a desperate struggle for survival, Profile Media, a contract publisher, went under early last year and a £5,000 investment was wiped out. Others have crashed. But they at least had the decency to die after I had sold.

Insolvency is not a laughing matter. It is a traumatic experience for all those involved. Cash is lost and jobs can disappear. For some directors of a busted company – but not all – it is a deeply humiliating experience. And, of course, the fallout hits firms and individuals that had trading links with the departed.

I was particularly saddened to see that a former constituent, the cake and pie maker Inter Link Foods, went into administration last week. Most of the 500 workers are to be kept on by McCambridge, a family-owned Irish baker that has purchased the assets, but investors are unlikely to salvage much, if anything, from the troubled company that once promised so much.

The shares were suspended at 106.5p last month. At one time they touched 775p and seemed set to march past 1,000p, until a surprise profit warning set alarm bells ringing and unhinged the stock market. The price crashed to 284p before staging what transpired to be a modest and short-lived recovery.

The fate of Inter Link shares is a stark illustration of the risks inherent in investing in smaller companies. Mind you, commercial giants are not immune from disaster – witness the collapse of Marconi.

In the year ended April last year, Inter Link baked an impressive record profit of £8.6m, up from £7.3m. It was then the nation's second-largest cake maker supplying own-label brands, mainly to major supermarket chains.

RHM, the Mr Kipling group since taken over by Premier Foods, found its position as market leader was under acute threat. But RHM did not meekly accept Inter Link's assault. It fought back, determined to remain leader of the pack. Suddenly, Inter Link, already unsettled by boardroom changes, looked vulnerable.

The group was created 13 years ago when it acquired a struggling bakery. The idea was to bring together a host of local operations. Other deals quickly followed as Inter Link sought to establish a size and spread that would impress its supermarket clients. But it seemed reluctant to integrate its various components, causing, it is said, increasing unhappiness among some of its more substantial customers. Then the whole edifice started to crumble.

In the financial year that ended in May, however, sales hit £120m and its chairman, Jeremy Hamer, was moved to declare: "I am optimistic that we can get the business back on track." Last month, the shares were suspended "pending clarification of the company's financial position"; then the administrators arrived.

So Inter Link could join Era and Springwood as a failed former constituent. The portfolio picked up the shares at 196p, unloading at 365p.

Although director selling influenced me, my departure was largely prompted by a desire to lock in a handsome profit before I embarked, at a time when the stock market was looking unsettled, on an extended holiday. I sold Mears, the support services group, at the same time.

With both shares scoring spectacular gains after I bailed out, the disposals cost the portfolio rather a lot of money. Whether I would have been wise enough to sell Inter Link at or near its peak is unanswerable. Naturally, I like to think I would have done so, although my tendency to hang on when trading deteriorates and hope for better days could have been my undoing. Indeed, I was tempted to buy back in to the shares after last year's shock profit warning. Still, I reckon all investors need the occasional slice of luck.

Now to a constituent that is thriving. Hargreaves Services, with interests spread over transport, waste disposal and coal mining, has produced an upbeat statement after the chief executive Gordon Banham reported that trading was running at record levels. He expects this year's figures, due in September, to be in line with expectations (the stock market is looking for around £8.5m against £5.5m last time).

The shares are riding high, near their peak at 644p. The portfolio paid 417p in April last year.

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