You can pick up valuable investment lessons in the strangest of places…
- Ahead of submitting applications for exploration licenses, AIM-minnow, Faroe Petroleum (ticker: FPM), has pre-qualified as an operator for the Greenland 2010 Baffin Bay Licensing Round.
- With a little help from global warming, Greenland is opening up for resource exploration. The potential offshore West Greenland, which includes the Baffin Bay Licensing Round area, is estimated by the U.S. Geological Survey (USGS) to contain up to 18 billion barrels of oil equivalent.
- The share price of this exciting oil penny share has tripled in the last year.
Last Friday I was at the Christmas Craft Fair at Blenheim Palace, just outside Oxford. I had no idea there could ever be so much stuff assembled under one roof that I would never want to own if I lived to be a hundred.
We’re talking garish hand-knitted shawls, vile perfumed candles, ginger marmalade, hideous little pottery hedgehogs and ugly coloured glass mirrors.
My wife and I joked about it on the way home. I mean, just because you can crochet a hot-water bottle cover or make ear-rings out of bottle tops, doesn’t mean that you should do so. And it’s certainly no reason to think that you can make a business out of it.
And this has important implications for the world of business and investing, too.
Two has-been stocks that are best avoided
You see, wherever I look there are examples of business ventures that have no real reason to exist. Last week all the news was about Marks and Spencer and ITV. Both of these well known companies have acquired new chairmen. Both have the challenge of breathing new life into businesses that are going nowhere.
I cannot for the life of me understand why thousands of private investors have their money invested in these has-beens.
Let’s take M&S first. Retiring Executive Chairman, Sir Stuart Rose, with his knighthood and appearance on Desert Island Discs, is now officially one of the great and good. His tenure at Marks and Spencer, we are led to believe, has been a success.
Oh yes? Here are the facts. In the year that Rose joined M & S it made a profit of £552m. Last year it made £508m. The dividend has been cut once and may have to be cut again if earnings don’t buck up.
The share price is no higher today than when Rose took the reigns. That, in the world of big business, apparently counts as success…
The story from ITV is even worse. Five years ago it managed a profit of £168m. Last year this had become a hideous £2.7bn loss.
ITV’s share price is less than half what it was five years ago. And yet, like Marks and Spencer, it has a board of directors who screw millions out of the business each year. It has institutional investors who buy the shares just because they are part of some index that they must slavishly follow. And it has private shareholders who are either asleep at the wheel or live in a fantasy land where everything that goes down must inevitably come back up.
So what is the spin today? Forget the fact that new M&S chief Marc Bolland has no experience of clothes retailing. What he has instead, according to The Times, are ‘matinee idol looks and sharp dress sense’ and a belief that M&S is a ‘fantastic brand – and it can be developed internationally’.
Well, we’ve heard that one before, haven’t we? When I lived in Hong Kong I remember Marks & Spencer opening a store there amidst great fanfare. It went down like a lead balloon and was soon closed.
Overseas expansion has been a graveyard for British retailers. And if the M&S brand stands for anything overseas it is for a complete lack of any fashion flair.
As to the food side of M&S, the latest initiative here is to sell branded groceries ‘like Marmite and Kit-Kat.’ That will make it the fourth store selling Marmite and Kit-Kat on my local Oxfordshire small-town high street. If that is the best they can do…
For ITV the problem is even more serious. People are not watching as much telly and they are skimming through the commercial breaks.
Incoming chairman, Archie Norman, we are told, will ‘surround himself with great talent’. He will use his experience gained at Asda, because ‘TV is very like retail in the sense that we know the next morning how we did the previous day’. And he will use his political contacts.
If you want to make real money, look over here
This is just spin and none of it is likely to change ITV’s basic predicament. I wouldn’t want to own these shares.
Don’t get me wrong. M&S and ITV were great businesses – once. But their heyday is long past. Today, if they did not exist, nobody would invent them.
Like all of those craft sellers they are not meeting a real need. That is why they are destined to struggle.
If you want to make real money you need to be investing in the businesses that supply things that the world really needs. Businesses that can solve real problems. These businesses are small, innovative and ambitious.
Look-a-like clothing stores, advertising-funded TV stations are not more amongst them. And neither are makers of ginger marmalade and pottery hedgehogs.
You want a couple of areas to look for great profit potential? Two good places right now are commodities, especially oil. And second biotech and pharmaceuticals. We’ll always need these.
But don’t go for the lumbering giants… concentrate on the up and coming small caps and penny shares. These are where the real opportunities will be found.
And I’ve also got a specific “problem/solution” play for you. It’s not one that would spring to mind straight away. But it’s a problem that affects up to 300 million people a year. And there’s one tiny tech-firm that’s spent ten years trying to solve it.
Now it’s on the verge of revolutionizing a giant, billion dollar industry. I’ll tell you all about it in tomorrow’s Penny Sleuth.
Good investing,
Tom Bulford
For The Penny Sleuth
P.S. Just flipping back to the subject of oil, did you get a chance to read my recent Falkland Oil report? That describes exactly the sort of company you should be considering for real profit potential. The problem: high energy prices and a scarcity of oil. The solution: this tiny company holds the key to billions of barrels of the black stuff. It’s not the company you think it is – but the rewards for investing could be astonishing.
If you’ve not read this, I urge you to now. Click here for details.
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
