No Pain, No Gain: Small may be beautiful, but it can also be risky

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The Independent Online

Small companies provide much of the stock market excitement. They can also, with a little luck, offer rich rewards. But only a foolish investor ignores the simple truth that playing among small-caps can be a risky occupation - after all, many of them lack the resources to withstand the trials and tribulations which can afflict even the best-run enterprise.

Small companies provide much of the stock market excitement. They can also, with a little luck, offer rich rewards. But only a foolish investor ignores the simple truth that playing among small-caps can be a risky occupation - after all, many of them lack the resources to withstand the trials and tribulations which can afflict even the best-run enterprise.

The No Pain, No Gain portfolio has had its share of misfortune. Profile Media has been a disaster; so, in the portfolio's early days, was the ERA retailing group. But generally our small-caps have served us well, illustrating that fortune often favours the brave.

However, last week two little'uns illustrated just how vulnerable they can be to sudden changes. Shareholders had hardly any warning that Wigmore, a facilities management business that seemed to be following in the footsteps of Bob Holt's highly successful Mears group, was running into trouble. Indeed, in April Wigmore's management was decidedly upbeat at a City presentation. And Landround, which provides a range of travel incentives, was also in fine form when it last met shareholders, offering no hint that profits were set to collapse.

I am not blaming the directors of these companies. I am merely pointing out that small players are less capable of shrugging off sudden changes in their trading environment. I have discussed the fallen twosome in past columns. Thankfully, I did not recruit either to the no pain, no gain portfolio although, I must admit, I did regard Wigmore as a possible candidate.

Major companies can also hit trouble: Marconi is a classic example. But they usually have the resources to overcome the sort of problems that devastated the shares of Wigmore and Landround. The setbacks at these two small-caps have occurred when the valuations of a number of high-flying blue-sky tiddlers are being questioned, such as Pursuit Dynamics - betting that steam can provide much of industry's energy needs. In the case of Pursuit some director-buying seems to have steadied the shares.

Wigmore shares suffered the embarrassment of slumping to 0.4p from around 2p. Two slow trading quarters, although it says its order book remained encouraging, attracted the attention of its bank. It threatened to withdraw its support and Wigmore and its stockbroker were forced into a frantic cash chase. They raised the necessary £2.2m, but at a terribly dilutive cost. New shares were sold at just 0.1p with Square Mile, an investment company based in the British Virgin Islands, coming to the rescue by picking up stock. Wigmore should survive but it has lost the ebullient image that once made it such a promising player on the small-cap stage.

Square Mile, run by Leo Knifton and Nigel Weller, is a relatively recent arrival. I first came across it when it took a seemingly supportive stake in Constellation, the recruitment business once known as Upton & Southern.

Landround has also lost its get-up-and-go image. I don't think there is any danger of its bankers threatening to pull the plug. But for a high flyer, with an impeccable record, to suffer such an unexpected setback will rankle with investors for years. The stock market was expecting another impressive profit display but the travel promotion group plunged into the red - to the tune of £26,000 at the halfway stage. The corresponding figure last year was an £896,000 profit.

Not surprisingly, the shares dived. At the start of the year they were comfortably above 400p. On the results they dropped 120p to a year's low of 222.5p. A miscalculated travel voucher promotion caused much of the damage, emphasising the impact a relatively modest misadventure can have on a small company. Landround will, I am sure, recover but it will have difficulty recapturing the support of small-cap followers.

Another small-cap I have featured is starting to move along the recovery road. Mind you, Hartford has taken a long time to get its act together. It suffered a hangover after it acquired, offering the no pain, no gain portfolio a handsome profit in the process, a restaurant company called Montana; and even the subsequent take-over of the Jamies wine bars chain failed to offer any immediate comfort. But the group, which has ditched its restaurants and is concentrating on bars, has just rolled out its first-ever profit. It was only £32,000 for six months but Investec, the company's stockbroker, has been sufficiently encouraged to raise its year's profit forecast to £400,000.

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