Making decisions on whether to Buy, Hold or Sell is never easy but it is a decision we have to make and we have to get used to making them and over time we learn from our mistakes and improve from there. So to avoid making a decision, sometimes we procrastinate and decide to do nothing i.e inaction.
So how can a lack of proactiveness cost us?
Not pulling the trigger to sell when we sense something isn’t right about the market direction or the prospect of the companies you are holding (Not listening to your inner voice);
Not selling when major technical support has breached and there appears to be more sellers wanting out than buyers wanting in
Not selling because you are hoping the price would bounce back- yes price could bounce back if the stock is a good one or if it has been oversold or momentarily when there is a good perceived announcement. But not if your stock has not delivered results and remain overvalued for what it has delivered.
I think today’s market environment requires investors to be vigilant (ears on the ground and understanding what is happening around the world and across the industries your company is in), nimble (quick footed to change position when called for), practising risk management like stop losses and appropriate allocation (e.g not $100k in a single specky stock).
I think it is important to feel the pulse of the market and the pulse of your companies. The pulse of the market at the start of the week suggested our local market has had it a bit too good and poised for a pullback. Stocks like APX and A2M and many others have been scaling new heights on good results but it had gone higher a bit too quickly and when profit taking sets in, many rush to unload and take profits. Feeling the pulse of the company is being totally honest with yourself on how you feel the company has progressed – and also understanding the marketplace the company is operating in. If your company has not delivered, you need to probably review the underlying reason(s) through deep dive into whatever information you can gather because management (especially in microcaps) is not going to be totally transparent with you. If you think your company has a great technology, don’t be lull into thinking that it is the only company pursuing the same market as usually there are more and can be a crowded space.
If you have been following my posts, I made market cap comparisons and concluded why some of the ‘falling knives’ stocks I have been cautioning on are still way over valued.
Valuation may not be a perfect science but can be put through a reasonableness test. As an example, I had previously compared the energy optimisation solution platform companies and updated the table from my previous post. In this example, only EOL has started making maiden profits and VIV, BIQ, EOL and to some degree BID are ones that demonstrated that their solutions have been validated in the marketplace. BUD is a clear standout as a stock trading at 66x revenues reflecting still considerable premium in its price despite having fallen sharply since the start of the year. What is it that BUD has that warrants such a premium? It is operating in the same space as BIQ but has no standout buildings that have adopted their platform while BIQ platform is at least used in Rockefeller building. BIQ is not performing well because it is still making losses but BUD losses are substantially higher – so there must be a reason you may say. The reason can’t be its technology either because BIQ platform not only performs energy monitoring function but also optimisation as well while BUD can only do the former so far. And the reality is that BIQ is having difficulty penetrating established large enterprise buildings and now having to get into new building projects. So that can’t portend well for BUD as a new entrant (BIQ has had a few years head start). So on a reasonableness test basis, one can conclude that BUD’s $138m market cap is still over the top for the relative progress it has made to its business- priced ahead of its realised fundamentals- for a business that is trying to penetrate a fairly crowded and saturated BEM global market that is already dominated by the likes of Honeywell, Siemens and other MNCs. BUD’s solution, unlike VIV and BIQ (CSIRO technology), has not won or being recognised for any product awards or proven to be capable of being deployed in major enterprises despite sales having been in progress for awhile now.
Generally speaking, it appears that retail shareholders who have bought into microcaps or smallcap stocks do not seem to think that reported financial information matters on the grounds that they are in early stages of development and often do not give as much weight to reported results. They claim that all that matters is management and how their offering performs in the market place. People should however note that management actions are more often than not reflected in the numbers as I am about to show you. They are early indicators on where management focus is and if they have the right mindset to always put shareholders ahead of them.
So to illustrate, I have compared numbers derived from annual accounts for Appen (APX), the known success tech story and 3 other stocks Yojee (YOJ), Buddy Platform (BUD) and LIvetiles (LVT) which are perceived as ‘promising growth stories’.
If you look at APX, shareholders had been handsomely rewarded over 3 years with its market cap growing almost 6 fold underpinned by revenue and profit growth of 2.75x and 3.4x respectively. With that staggering growth, its Market cap is just 5.39x revenues which is in line with typical SaaS/tech multiples (5-10x).
So what sets APX apart from the other 3 compared stocks? Let us look at 3 indicators
Market Cap/Revenue
APX Market Cap/Revenue has been consistently between 2.5-5.4x which suggest valuation is still very reasonable especially with growing profits as well. So if a success story like APX commands a multiple of 5, why should YOJ be at 222x and BUD at 66x and LVT at 57x their revenues? Is the market suggesting they should command a higher multiple as their prospects are better than APX? I think not, these stocks are still way overvalued. At its height, YOJ was at 2,527x and BUD at 329x reflecting the extreme exuberance tech stocks was experiencing in the second half of last year which would no longer be repeated.
Share Based Expenses (SBE)
If you have been following my posts, I had expressed caution about companies that issued excessive performance shares to their management and incurring large share based expenses which do not commensurate with their financial progress and position. And clearly YOJ, BUD and LVT have all been doing this at the expense of shareholders. Both YOJ and BUD’s SBE was contributing 25% of their losses and if you look at BUD, SBE was consistently high each financial year. This indicator demonstrate that management of these companies had looked after themselves first before shareholders. In contrast, APX’s SBE was incredibly small at less than 5% of profit each year. It tells you why APX exemplifies a success story.
Share Dilution
One of the main concerns of shareholders of microcaps is dilution from capital raisings (CR) or share placements that increase the company’s share base. If you look at APX share base, the number of shares issued to date is only 10% higher than two years ago while for YOJ, its share base ballooned 2.53x over the same period and BUD and LVT increased by 16% and 45% respectively. Impact of share dilution is the reduction of share price to maintain the same level of market cap valuation. The other thing people should find peculiar is the amount of capital raised- for example BUD raised $23m at 20c last October and LVT recently raised $25m from institutional investors. These are not amounts the companies require to make or pay for an acquisition but just working capital. These requirements as we now look back are way in excess of annual requirements. So why was a bigger raise made at the time? It suggest that management of BUD and LVT are not confident that they can bring enough revenues in the immediate 1-2 years to see them through. And the large raise cushions them and allows them to freely spend and burn cash as they have been.
