If you ask 65 City experts to pick their favourite share, you expect something pretty good. They have all the facts at their disposal... their analysts have crunched the numbers…. the directors of quoted companies have been hauled up in front of them for their bi-annual grilling… brainy economists have explained what the future holds.
So with this grasp of the general business environment and the particulars of each and every quoted company, it can hardly be too difficult to pick out a good share or two.
Twelve months ago this very question was posed. And the experts’ top choice was a company that seemed to be doing pretty well. It was offering an indispensable service that was seeing – and still is – a rapid growth of demand. The chief executive was waxing lyrical:
“The group operates in a market that doubled in size during 2005 and is widely predicted to grow at a similar rate in 2006….We have consistently outpaced the market growing three-fold in 2005…..Our market share has increased significantly…. The Board is confident that the Group will continue to meet market expectations.”
And the company was all set to buy two rivals, raising £18m in the process by selling new shares at 270p.
Stop the ball… freeze the frame. What happened next?
You have probably guessed it. The share price slid, and slithered, and tumbled and somersaulted all the way down the hill. They are now prices at 27p. And I think it is fair to say that they have no friends.
Rich people don’t understand poverty
The name of the company is Accuma Group. It is a provider of advice to the indebted, that ever swelling pool of financial wastrels and incompetents who are both greedy and foolish at the same time. Accuma offers IVAs, those seductive plans that can somehow melt away a man’s debt burden without him even feeling the pain.
Did it ever seem a little bit too good to be true? Did it ever occur to anyone in the City that Accuma might not be able to go on charging creditors £7,000 to retrieve some of what they were owed – especially when the debtors are all too inclined to give upon on the repayments half-way through?
How can the experts make such a mistake? I’ll tell you. They live in a rarified environment. An environment where analysts translate whatever they are told onto financial spreadsheets and never stop to wonder whether it is true or not. An environment where everyone is so tied up in figures and ratios that they can never see what is happening or what may happen in the real world. And what’s more, it is an environment that is so over-remunerated that personal knowledge of indebtedness hardly exists.
This is an environment in which you don’t have to be right. You can be wrong so long as everyone else is wrong. If all your rival fund managers are piling into shares at 270p, why be left out? If the share price rises you are a hero, if it falls you are no worse off than anyone else. There is safety in numbers.
Remember all this when you read of City share tips. Remember that no share is more vulnerable than when at the height of its popularity. Remember that valuation counts. Buy cheap shares and you might get lucky. But expensive ones – and Accuma had a dizzying PE ratio of 50 last year – and you might get badly hurt.
So what is the experts’ choice now? Thanks to the AIM Investor Survey of 2007 I can give you due warning. They like electric vehicle maker Tanfield, PE ratio 199 (yes! 199); Mecom a loss-making publisher of regional newspapers (who reads them any more?); and a company operating in a market of ferocious competition and price cutting, Majestic Wine (PE of 23).
Regards,
Tom Bulford
for The Penny Sleuth
P.S. Sign up to The Penny Sleuth absolutely FREE and you'll be privy to my inner most thoughts, stories, projections and opinion on the UK's most exciting share market each and every week. The Penny Sleuth bulletin goes out three times a week drawing on all my contacts, knowledge and experience from within the City. If you’re an experienced trader or simply thinking about dabbling in the markets for the first time, each issue reveals what every investor ought to know before taking the plunge. Simply enter your email address below to subscribe
