No Pain, No Gain: Myhome looks sure to ride the Stagecoach route

Has the stock market got its wires crossed over Myhome International? Judging by the way its shares have behaved the franchise group is deep in the doldrums. They have slumped spectacularly from 106p to a mere 15p in less than a year. Yet signals from the group's Esher (Surrey) headquarters indicate the shares could be among the most oversold in the smallcap community.

It is often foolish to bet against the market. So often it seems to get a whiff of disaster – or, indeed, achievement – long before any formal announcement. But it can also hopelessly misjudge a situation.

There are countless examples of shares being pushed to unjustified levels – highs and lows. The madcap dot.com boom that sent many into the stratosphere and the resultant excessive burn-out are classic examples. And what happens across the entire investment spectrum can be repeated on an individual basis.

Remember Stagecoach? I do. After the shares were recruited to the No Pain, No Gain portfolio at 80p, they slumped to a miserable 10p as a succession of doom-and-gloom stories frightened investors. I am not suggesting the bus and train group had not encountered serious problems. It had over expanded in the United States and was experiencing difficulties elsewhere. The fall, however, was a dramatic over-reaction.

With its problems containable, it was not long before recovery was underway. This year the shares hit 294.5p. Share buybacks, producing 81p a share, complicate the gain calculation. Even so, not a bad display for what was once regarded as a busted flush.

Myhome's fall from grace is even more brutal. I realise the decline has occurred at a time when the stock market has fallen out of love with smallcaps. Yet, its slide is much steeper than its compatriots.

True, profits did not hit expectations. Against hopes of £1.9m, the company produced £1.5m. In the previous year it made £734,000. And researcher Equity Development has cut this year's forecasts from £5.9m to £3.6m.

The unfulfilled profit expectations occurred as the group gorged on acquisitions. It started life as a franchised residential cleaning operation, supported by a sophisticated, highly expensive computer system developed by the Unilever foods to soaps behemoth. Russell O'Connell, Myhome's creator, had the bright idea of putting other franchised operations through the Unilever system. So it ventured into such areas as gardening, car valeting, plumbing and window cleaning.

It, perhaps, could be argued that Myhome bit off more than it could chew. Shares were tossed around like confetti. Certainly its last – and biggest – takeover, the £16m acquisition of ChipsAway, carrying out minor car repairs, was largely responsible for ED reducing current year predictions. The deal took longer than anticipated, prompting management to take its eye off the existing businesses in the first quarter. So interim results, due this month, could be rather subdued.

But there is every chance Myhome will reach the reduced year's forecast. Trading is going well, franchisees are being recruited at an encouraging rate, there has, as yet, been no impact from consumer spending cuts, overheads have been reduced and cross-selling the franchise offerings is underway. Chairman Jon Pither even tried – if unsuccessfully – to spread a little cheer at March's yearly meeting.

At 15p the group is valued at less than £10m – some £6m less than what it paid for the successful ChipsAway concern. And the shares, selling at not much more than three times this year's expected earnings, look as cheap as chips. Even if ED's forecast is not met – one researcher has a £2.5m estimate – the shares are still deep in the bargain basement.

Myhome's misfortune is a stark illustration of how brutal the market can be when one of its favourites disappoints. Issuing shares at 85p and 72p last year merely added to the disappointment of City followers.

O'Connell says the share price is a "blooming joke". He accepts responsibility. "I've got to take it on the chin; we were bad at communicating with the City," he said.

My guess is that Myhome will do a Stagecoach. The portfolio first climbed on board at 15.5p, selling at 50p. It returned at 27p. The subsequent performance has been as painful as catching a falling knife. Still, I am bloodied but unbowed. The portfolio is hanging on, hoping – eventually –for another profit.

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