All Change at Superdry and Intercede – Perhaps

Readers are probably aware that founder Julian Dunkerton managed to win the votes yesterday at the EGM that he requisitioned at Superdry (SDRY). The votes to appoint him and Peter Williams were won by the narrowest of margins despite proxy advisors such as ISS recommending opposition. My previous comments on events at Superdry are here: https://roliscon.blog/2019/03/12/superdry-does-it-need-a-revolution/ . It did not seem clear cut to me how shareholders should vote, but I did suggest there was a need for change.

There will certainly be that because the incumbent directors (including the CEO and CFO although that does not necessarily mean they have quit their executive positions) have all resigned from the board although some of the non-executive directors are serving out their notice. Dunkerton has been appointed interim CEO.

Perhaps the most apposite comment on the outcome was by Paul Scott in his Stockopedia blog. He said “To my mind, the suits have made a mess of running this company, so bringing back the founder seems eminently sensible to me”. However, I suggest there is still some uncertainty as to whether the Superdry fashion brand can be revived – perhaps the world has moved on and it has gone out of fashion. But Dunkerton should be able to fix some of the operational problems at least. Retailing is still a difficult sector at present so I won’t personally be rushing in to buy the stock.

Another momentous change took place at Intercede (IGP) yesterday. This company provides secure digital identities and has some very interesting technology. But for many years it has failed to turn that into profits and revenue has been also remained flat. But yesterday the company announced a large US Government order and hence they expect a “return to profitability”. This certainly surprised the market as another loss was forecast. The share price jumped 60% yesterday after it had been in long decline for several years.

I have held a small holding in the stock since 2010 (very small prior to yesterday) but I was never convinced that the company knew how to sell its technology – a common failing in UK IT companies. The former CEO and founder Richard Parris who was there for 26 years was surely part of the problem but he departed in 2018. Has the company actually learned how to make money under the new management? Perhaps, but one deal does not totally convince. One swallow does not make a spring as the old saying goes.

Even after the jump yesterday, the market cap is still not much more than one times revenue which is a lowly valuation for such a company. But investors need to be aware that the company has £4.6 million of convertible loan notes which would substantially dilute shareholders if they were converted. A company to keep an eye on I suggest, to see if it has really changed its spots.

Another surprising change yesterday was the abrupt departure of Richard Kellett-Clarke from the boards of both DotDigital (DOTD) and IDOX (IDOX) “due to private matters in his other directorships” according to the announcement from DOTD. DOTD is looking for a new Chairman. I wonder what that is about? We may find out in due course.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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CEO Quits, Should I Sell Tracsis?

It is always disturbing when the CEO of a successful investment quits out of the blue. That’s what has happened at Tracsis (TRCS) today. John McArthur is departing in the “first half of 2019 to focus on family and other non-business matters outside the Group”. That’s after 14 years of growing the company. I have held the shares since January 2013 with a compound total return of 21.8% per annum. Thanks John.

A replacement CEO has already been lined up in Christopher Barnes, previously with Ricardo. The Tracsis share price is down slightly today, at the time of writing.

In such circumstances I tend to wait and see if there is any impact. Good companies can survive a change of management and 14 years is a long time for anyone to stick in the same job. Boredom and desire to do something else are the symptoms and as companies grow the bureaucracy becomes more onerous.

A change of CEO can actually be a positive move if well executed as it helps to bring new experience and ideas into a company. Will just have to keep our fingers crossed on this one.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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The Signs Were There – Corporate Disasters and How to Avoid Them

This is a review of the recently published book entitled “The Signs Were There” by Tim Steer. It’s worth reading by any investor who invests directly in stock market shares, but particularly by those new to the game. Experienced investors will know about many of the causes of companies collapsing, and how accounts can deceive, from their own past experiences. But it’s best to learn what to look for in other ways.

The book covers many UK examples of corporate disasters – not all of them went bust but many did. It profiles Connaught, NCC Group, Sports Direct, Hewlett-Packard/Autonomy, Cedar Group, iSoft, Utilitywise, Slater & Gordon/Quindell, Mitie, Guardian IT, Tribal Group, Conviviality, Amey, Capita, Carillion, Northern Rock, Cattles, Healthcare Locums, Erinaceous, Findel, AO World and Toshiba; and explains why investors were fooled. I have been involved in a few of those as an investor or trying to help those who were caught out, and have written about some of them in the past to try and educate investors on how to spot the dogs.

The author shows how many of the problems in these companies could have been identified in advance by reading the Annual Reports, or looking at some financial ratios. One comment I saw on the book was that few investors have the time to read Annual Reports – if they don’t they should not be investing in my view. Perhaps one criticism is that the author is an accountant and hence is more used to reading the accounts of companies than the average investor. But that is surely a capability that all investors should acquire. The fact that so many of the above companies had professional fund managers as investors in them, or were acquired by supposedly experienced managers (e.g. Hewlett-Packard/Autonomy) tells you that there is a lack of education on such matters.

Reasons given for disappearing profits are frequently revenue recognition problems, accruals misstated, assets wrongly valued, goodwill unreasonably inflated or not written down, capitalisation of operating costs and unexplainable related party transactions. The author also warns about companies that grow via acquisitions when the acquisitions do not help but enable “exceptional” costs to be buried.

You won’t pick up all the future corporate black holes after reading this book. For example, anyone can be fooled by false accounts where even the cash on the balance sheet simply is not there (e.g. at Globo and Patisserie). Simple frauds can conceal many ills, but most of the examples covered in the book were more down to management incompetence and a desire to present profits rather than losses. As is pointed out, accounting rules permit a lot of interpretation and flexibility which is why published accounts cannot always be relied upon. The book will help you avoid a lot of those errors.

The last chapter covers more general issues about why the “System isn’t working”, i.e. the failings of auditors to identify such problems and what to do about it. The author’s comments on the FRC are similar to those in the recent Kingman review. To quote: “The trouble with the FRC is that, rather like the Keystone Cops, who always arrived late to the scene of a crime, their important investigations often commence some time after the damage has been done”.

One suggestion made is that the FRC could take a proactive role in identifying companies that were at risk. Either by reviewing those shares that were being shorted, or a “specially tailored financial screening tool”. The latter might identify those companies where there was a widening gap between reported profits and cash flows, or other declining financial ratios. That seems an eminently sound idea that should be pursued. A public report of such ratios would be an even better idea.

As the author points out, the amount and quality of published research on companies is declining because of the impact of MIFID rules and market dynamics. So investors need to do more of their own research. This book tells you some of the things to look out for.

I have suggested to ShareSoc that they put this book on their “Recommended Reading List”. Let us hope that it does not get lost like the innumerable cookery books that all cooks who pretend to aspire to be good cooks keep in their libraries but never use. Investors have the same tendency to read numerous books on how to pick stocks but then either forget what they have read or get confused by too many answers. They buy more such books while looking for the one simple answer to their quest for the holy grail of a finding a share on which they can make a fortune. There is of course no one simple answer which is why stock market investment is still an art rather than a science. It is just as important to avoid the real dogs in addition to picking winners if your overall portfolio performance is to be better than average. The book “The Signs Were There” is certainly a book that can contribute to your knowledge of how to avoid the worst investments.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Bad Blood and a Hymn for Christmas

One of my books for Christmas reading is “Bad Blood” by John Carreyrou. This is the story of Theranos who developed a novel way of testing blood samples. It has won the FT Business Book of the Year award, perhaps because it was written by a Wall Street Journal reporter and is a good example of investigative financial reporting.

Theranos was set up by the very young and physically attractive Elizabeth Holmes who apparently proceeded to attract many elderly males to her cause. She even had Henry Kissinger and George Shultz (former US Secretary of State) on her board. Her pitch to investors was that she had developed a blood testing method that would remove the need for drawing blood from a vein via a trained phlebotomist. Just a pin-prick on a finger would suffice and anyone could do it so home testing by patients could be done – exceedingly useful for those with on-going medical conditions. It could also avoid the “needle-phobia” that some people suffer from – I know at least one person who would regularly faint when a needle was presented.

There are about 300 million blood tests taken each year in the UK now at very significant cost to the NHS as they cost several pounds each. So you can see how attractive a business would be that could reduce the cost of blood tests worldwide.

Elizabeth Holmes was also a very good sales person in promoting the gospel of reducing and simplifying the process of blood testing. She raised many millions of dollars from investors such as Larry Ellison, Rupert Murdoch and west coast venture capital firms. Later rounds valued the company at $9 billion!

But the only problem was that the product produced unreliable results, i.e. the reports produced were not accurate. This could be potentially life threatening as patients could think they were perfectly healthy when they were not or patients could be referred for emergency investigations when they were perfectly normal. Not only that but the company was faking some demonstrations of the product and actually using a full-size blood-testing machine from Siemens to produce results from such small blood samples by simply diluting the samples to increase the volume – not a sound practice.

Business wise, the book is an interesting insight into the milieu of the venture capital world in the USA and how investigative reporting can get around problems of what was a very secretive company where all employees signed confidentiality agreements. But it is also an example of how vibrant is the US venture capital world when hundreds of millions of dollars can be sunk into a business with a great concept but ultimately unproven product.

In summary, the book is an amusing read in parts about the gullibility of investors and the peculiarities of doing business on the west coast of the USA, but I would not rate it as one of my favourite business books. That’s probably because I prefer happy endings. Elizabeth Holmes was charged with criminal fraud in 2018.

A Hymn for Christmas 2018 (after Christina Rossetti)

In the bleak midwinter, frosty wind made moan,

but earth stood soft and wet due to global warming,

markets had fallen, down and down,

in the bleak midwinter, only yesterday.

Our god mammon cannot hold, nor Governments sustain,

stock prices will flee away despite his reign,

in the bleak midwinter no stable place can be found

when market confidence freezes.

 

What can I give, poor as I am?

if I were a shepherd, I would bring a lamb;

if I were a wise man, I would do better;

yet what can I give, but my hopes for a better year.

 

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Book Publication – How to Manage a Technology Business

Roliscon has published a revised edition of the book “Beware the Zombies – How to Manage a Technology Business”. The author is well known investor Roger Lawson. It’s been brought up to date and expanded to 246 pages.

Have you ever been faced by these questions:

  • What makes a good new product?
  • Whether to sell directly or indirectly?
  • How do you avoid channel disputes?
  • What makes a good sales commission package?
  • How to you avoid over-optimistic sales forecasts?
  • How do you create good brand names?
  • How to measure the success of marketing?
  • How to make a success of acquisitions?

If so this book will be helpful. For technology company managers, practical answers to these and many other questions are contained in this book. It teaches you how to be successful in the jungle of business life, and avoid becoming one of the walking dead.

For Investors

For those who invest in early stage technology companies, whether public or private, this book can help you identify whether the management have got the basics right and whether they are on the road to success.

More Information

For more information go here: https://www.roliscon.com/books.html . For a limited period you can purchase the book at a discount of 25% by quoting coupon “INTRO99” when purchasing.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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