Derek Pain: If it's not silence, it's lead pipe cruelty from the analysts

No Pain, No Gain

Saturday 27 February 2010 01:00

An old City joke claims analysts know more and more about less and less. There is, perhaps, a grain of truth in what is a pretty brutal put-down. In years gone by it was not unusual for a researcher to be enmeshed in just one or two companies. These days I get the impression that examples of such exaggerated concentration are decidedly rare.

Certainly analysts make a useful contribution to the maelstrom that is the stock market. They are, of course, not always right. Indeed there have been incidents when they have been completely wrongfooted – either by accident or design.

Blue chips attract the greater weight of analytical attention. Footsie stocks have a veritable army of followers. But as capitalisations decrease, so does the volume of research. AIM companies are delighted if they can attract half-a-dozen analysts to a presentation. Some obtain little – if any – coverage. Others rely on the "house" stockbroker to offer some guidance or resort to paying for research.

Most constituents of the no pain, no gain portfolio generate only modest coverage. Only one, Whitbread, is a Footsie stock. Still in the past month or so there have been examples of analyst interest. And there is not a "sell" recommendation in sight. Five constituents have enjoyed "honourable" mentions and the recent results from two other members, Hargreaves Services and Patsystems, drew supportive comments.

A quick look, then, at what has been written. First, Mears, the outsourcing group that is fully listed and so commands more attention than many constituents. Recent share weakness has offered a buying opportunity, maintains the stockbroker Arbuthnot. The restrained performance probably stems from Mears' share-exchange takeover of its rival Supporta. Arbuthnot has a 340p target price. As I write the shares are 264p.

The same investment house is again backing Clarity Commerce Solutions following another contract win. The stockbroker Brewin Dolphin, as well as the internet tipster, retain buy recommendations on The printer this week produced a solid trading statement, prompting Brewin to reiterate its 40p target price (now 33p).

Private & Commercial, the hire purchase group that is one of the portfolio's worst performers, has again attracted the stockbroker Daniel Stewart. The shares appea to be stuck at 7.75p, but the stockbroker maintains its 15p target price and asserts there is a "compelling" case for buying.

Finally Nighthawk Energy. The portfolio descended on the shares at 44p and watched them hit 116p. Then consternation. The price slumped to around 20p and is now near the 25p mark. Last year some heady target prices appeared with, for example, the researcher GE&CR suggesting 227p. Others were around the same level. The latest crop is rather more subdued. Stewart, which says the group's shares have been "treated with lead pipe cruelty", is looking for 45p and Edison Research for 95p estimate.

Both believe that Nighthawk, which is focused on the United States, will produce maiden profits this year. Stewart estimates £1m, while Edison is on £600,000.

There is no doubt that Nighthawk has some intriguing operations. Only this week it said it expected to ramp up production this year at its Jolly Ranch site, in Colorado, from 150 to an initial 1,000 barrels a day. It has concentrated on regenerating abandoned oil and gas areas. The modern exploration methods used – and the higher oil price – make these old workings viable. Nighthawk will never be a one-hit wonder; it relies on a spread of relatively low-producing wells.

I suppose Nighthawk has not developed at the pace many expected. The shares were particularly weak this week following the latest update. Still, as Stewart's new oil analyst, Richard Nolan, rather succinctly puts it: "Nighthawk has all the ingredients; it just has to bake them."

The discrepancies in target prices is not easily explained. One reason is that not all targets are accompanied by any time frame. Six months, one year, two or even five? Such an essential detail is often missing.

In the past few years Nighthawk has attracted an array of target prices. I will be happy if the shares climb above 44p.

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