No Pain, No Gain: No cut and run as the minnows are looking good
Saturday 17 March 2007
Deciding when to pocket a profit - or accept a loss - can be one of the most difficult exercises facing an investor. I have been wondering just how much longer my two star performers, Myhome International, a franchise group, and Prezzo, a restaurant chain, can continue to deliver.
Both have contributed lavishly to the No Pain, No Gain portfolio. Myhome was picked up at 15.5p and stood at 78.5p at the time of writing. Prezzo has gone from 17.25p to 77.75p.
In the eight years of the portfolio's existence I have made some daft sell decisions. For example I dumped Mears at 71.5p, congratulating myself at the time because the shares had more than trebled the portfolio's money. They have since hit 380p. Anglo Pacific is another I allowed to escape. I sold at 15p; imagine my dismay as the price topped 160p.
So my hesitation over selling high flyers is, perhaps, understandable. But it is impossible to win them all and as stock market professionals are fond of saying: "It is never wrong to take a profit."
Still, Mears and Anglo Pacific haunt me. Particularly as I regard the portfolio as a buy and hold exercise. Consequently I will hang on to Prezzo at least until I digest next month's profit statement. It should make appetising reading; I do not anticipate having to sell. And I have decided to stick with Myhome, following an intriguing piece of research on the company.
Equity Development suggests pre-tax profits in the 12 months to the end of September should nudge £1.9m, against £734,000 last time. For next year a figure approaching £4m is predicted. The shares are, therefore, selling at 25.5 times this year's projected earnings and 12.5 times next. Quite a high rating but one, I feel, that does not fully reflect the explosive growth Myhome is expected to generate. Equity's analyst Andy Edmond reckons the shares should hit 100p.
Myhome paid Equity to undertake the research. Paid-for coverage is an established feature of the small-cap world. Many brokers shun stock market tiddlers when undertaking research. They feel the small fry do not produce enough share trading to justify the cost of conducting a detailed probe. So investors in junior companies are often denied any analytical study. So firms such as Equity perform a much-needed service.
However, it is not difficult to see the dangers that could lurk in paid-for studies. The temptation to produce a blue-sky offering just to please a demanding client company is obvious. I have frequently been impressed by the quality of sponsored research and I am not aware of any attempted abuse. Equity has researched Myhome in the past and its forecasts have proved reliable and perceptive.
Myhome was created by the Unilever detergent behemoth. After developing an expensive computer infrastructure it decided home cleaning did not fit with its other operations and sold to a rival residential cleaning business run by Russell O'Connell.
For a couple of years the enlarged company - aiming for the "cash rich, time poor" fraternity - jogged along fairly quietly. But in the past few years O'Connell, underpinned by Unilever's computers, has expanded, spreading into gardening, car and oven cleaning and bathroom and kitchen refurbishment. Other activities, such as carpet cleaning or plumbing, are likely to be added,
Franchising is the name of the O'Connell game. The group now has around 300 franchisees and is actively recruiting. It is now developing ventures in Australia, Ireland and Spain.
At the turn of the year Myhome shares were elevated from Plus to the Alternative Investment Market (AIM). The price has since touched 86p, helped no doubt by a meeting with private client stockbrokers.
My decision not to cut and run has also been influenced by the presence of Nigel Wray and Stephen Hemsley on the shareholder register. They took part in a £7m cash-raising exercise with serial investor Wray collecting 15.4 per cent and Hemsley 5.6 per cent.
Both are also involved in the highly successful Domino's Pizza franchise spread, where Hemsley is chief executive. Wray and Hemsley are already sitting on handsome profits; they paid 40p a share. The cash injection and the duo's franchising know-how should be of immense benefit to the highly ambitious and talented Myhome management.
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