Why Researching Companies (DYOR) Is A Fallacy
Within two years Aston Martin shares went from having a target price set by professional analysts of 2,000p and trading at 1,800p to being traded at 35p.
Do Your Own Research, Understanding The Limits Of DYOR
Go onto any of the share forums and you will see "DYOR" or Do You Own Research, realistically I believe that this is in fact impossible.
Think Finablr, Enron, Worldcom, Freddie Mac, Fannie May, American Insurance Group, Parmalat, Lehman Brothers.....
After a certain amount of research you get to the point where you are collecting data that is purporting to be information, that is to say it may be true but you can not reliably attach any meaning to it.
.. and of course you are relying on that information to be complete and accurate, most recently there was Patisserie Valerie (CAKE).
None of these hold a candle to the FTSE 100 traded company NMC which appears to have had over three billion dollars of debt not reported on its accounts
Why Can't I Research A Company?
I was chatting with someone in the pub who had bought shares, he bought £3K worth, lost most of his money and was insistent that he had "researched" the company properly.
As a small investor it is impossible to research companies beyond the superficial as you simply don't have enough access to the people in the business to know the truth behind the accounts.
There are some common absurdities in accounts that you learn to ignore, for example most companies include Goodwill in their assets. Goodwill does have a value, if you wanted to start a burger restaurant, then you are more likely to succeed as a McDonalds than you are as an independent. Commons sense tells you that the McDonalds name has value or Goodwill.
However the accountants get involved and Goodwill ends up with astronomical values. Looking at the accounts of real company;
Property, Plant & Equipment:£2,191M (about 2 billion pounds)
Goodwill:£729M (about seven hundred million pounds)
Properly drawn up and fully audited accounts are allowed to say that value of people liking the business is a bit over seven hundred million pounds. This is about a third of the value of the real things that they own, like the buildings and machines.
Whilst this is a well known area to check, it does highlight how hard accounts are to read.
Imagine a company that makes high value items such as oil rigs, which has £200M of Work In Progress.
- The management may have slipped up and the initial profit estimates are wrong,
- Or it won't be finished on time incurring penalties,
- Or one of the clients is suspected of being in trouble so will not complete the purchase.
Or what about pub groups such as Punch (LON:PUB) or (LON:ETI) Enterprise Inns, a huge part of their assets are the pub buildings, but there is no way that you can know how accurately these are valued.
Given that many business have loans which are restricted to a percentage of the value of their assets or earning an accidental or overly optimistic valuation could lead to violations of the covenants forcing a refinancing of the debt.
Then you get to plain incompetence, look at Conviviality and an overlooked £30million tax bill!
Finally you get to plain and simple dishonesty, do an Internet search on Parmalat and see how they invented a bank account with $4.9 billion dollars in it!
I Researched Provident Financial plc
Provident Financial are the doorstep lending company that has been around "forever".
Although they have expended to offer on line loans and credit cards they are the sort of company that you would expect to be very predictable with a consistent share price and any changes well known the market.
Yet their share price went from 3,000p which it had been trading at for a couple of years to 589p to then stabilise at around 900p
The reason is that they changed their sales model from self employed agents to employees and the FCA having concerns about an optional service on their credit card.
They first announced (Jul 2017) the credit card issue and significant reduction in profits as there were issues with the new collection model. The price dropped from about 3,000p to about 2,000p
They then announced (Aug 2017) that reduction in profits was much greater than was reported in July and on the day the share price dropped down to about 450p before recovering a bit.
I Researched Aston Martin
You may think that you can supplement your understanding by looking at analysts target share prices, yet they often show a 20% or 30% upside from the current market price and within a few weeks of these prices being set the company does a rights issue halving the shares value!
This happens a lot more often that you might expect and occurs because like the private investor, the analyst doesn't have access to sufficient information.
Aston Martin have been making luxury cars since 1913 and frequently went broke and resurfaced with another new ambitious owner.
In their current form they were floated in Oct 2018 at 1,700p and shown below are various broker recommendations and target share prices.
It is noticeable just how much the experts covering the company have reduced their target price over such a short period.
By June 2020 it had dropped as low as 30p and has recovered to around 80p
Old Target New target
Date Broker Rec Price Price Status
26 May 2020 Peel Hunt Reduce 30 - Reiterates
21 May 2020 Peel Hunt Reduce 30 - Reiterates
19 May 2020 Deutsche Bank Hold 45 40 Retains
15 May 2020 Goldman Sachs Sell 40 23 Reiterates
14 May 2020 Deutsche Bank Hold 45 - Retains
13 May 2020 Peel Hunt Reduce 30 - Reiterates
12 May 2020 Peel Hunt Reduce 133 30 Downgrades
07 May 2020 HSBC Hold 177 52 Downgrades
28 Apr 2020 Goldman Sachs Sell 125 40 Downgrades
27 Apr 2020 Deutsche Bank Hold - 45 Initiates/Starts
24 Apr 2020 Peel Hunt Hold 133 - Reiterates
31 Mar 2020 Peel Hunt Hold 190 - Resumes
16 Mar 2020 Peel Hunt Review - - Under Review
28 Feb 2020 Kepler Cheuvreux Reduce 300 250 Retains
28 Feb 2020 Citigroup Buy 600 500 Reiterates
27 Feb 2020 Peel Hunt Hold 445 - Reiterates
24 Feb 2020 Peel Hunt Hold 445 - Reiterates
21 Feb 2020 Kepler Cheuvreux Reduce 300 - Retains
19 Feb 2020 Peel Hunt Hold - 445 Initiates
03 Feb 2020 Goldman Sachs Neutral 520 390 Reiterates
03 Feb 2020 Citigroup Buy 600 - Reiterates
23 Jan 2020 Citigroup Buy - 600 Initiates
17 Jan 2020 Kepler Cheuvreux Reduce 300 - Retains
16 Jan 2020 Jefferies International Hold 475 - Reiterates
10 Jan 2020 Kepler Cheuvreux Reduce 300 - Retains
09 Jan 2020 Evercore Underperf - 350 Initiates
09 Jan 2020 Deutsche Bank Hold 560 400 Reiterates
08 Jan 2020 Panmure Gordon Sell 288 199 Reiterates
08 Jan 2020 Kepler Cheuvreux Reduce 400 300 Downgrades
08 Jan 2020 Deutsche Bank Hold 560 - Reiterates
08 Jan 2020 Goldman Sachs Neutral 520 - Reiterates
08 Jan 2020 JP Morgan Cazenove Neutral 500 - Reiterates
06 Jan 2020 JP Morgan Cazenove Neutral 570 500 Reiterates
03 Dec 2019 Goldman Sachs Neutral 620 520 Downgrades
19 Nov 2019 Deutsche Bank Hold 600 560 Reiterates
11 Nov 2019 HSBC Buy 533 550 Upgrades
08 Nov 2019 Jefferies International Hold 600 475 Reiterates
08 Nov 2019 Kepler Cheuvreux Hold 450 400 Reiterates
08 Nov 2019 Deutsche Bank Hold 600 - Reiterates
29 Oct 2019 Merrill Lynch Underperf 550 400 Downgrades
23 Oct 2019 Goldman Sachs Buy 670 620 Reiterates
10 Oct 2019 JP Morgan Cazenove Neutral 1500 - Downgrades
09 Sep 2019 HSBC Hold 1032 533 Reiterates
14 Aug 2019 Credit Suisse Neutral 1630 529 Downgrades
16 Jul 2019 Jefferies International Hold 1050 1000 Upgrades
16 Jul 2019 Goldman Sachs Buy 2080 1500 Reiterates
21 Jun 2019 Deutsche Bank Hold - - Reiterates
20 Jun 2019 Panmure Gordon Sell - 802 Initiates
17 Jun 2019 JP Morgan Cazenove Overweight 1500 - Reiterates
20 May 2019 Bernstein Outperform 1200 - Upgrades
16 Apr 2019 JP Morgan Cazenove Overweight 1800 1500 Reiterates
15 Apr 2019 Deutsche Bank Hold 1000 - Reiterates
08 Apr 2019 Deutsche Bank Hold 2000 1000 Downgrades
27 Mar 2019 Kepler Cheuvreux Hold 1450 1200 Reiterates
01 Mar 2019 JP Morgan Cazenove Overweight 2000 1800 Reiterates
26 Feb 2019 HSBC Hold 1550 1400 Reiterates
19 Feb 2019 Deutsche Bank Buy 2000 - Reiterates
11 Jan 2019 Kepler Cheuvreux Hold 1750 1450 Reiterates
16 Nov 2018 Deutsche Bank Buy - 2000 Initiates
New target
Date Broker Price
09 Jan 2020 Deutsche Bank 400
08 Jan 2020 Panmure Gordon 199
08 Jan 2020 Kepler Cheuvreux 300
08 Jan 2020 Deutsche Bank -
08 Jan 2020 Goldman Sachs -
08 Jan 2020 JP Morgan Cazenove -
06 Jan 2020 JP Morgan Cazenove 500
03 Dec 2019 Goldman Sachs 520
19 Nov 2019 Deutsche Bank 560
11 Nov 2019 HSBC 550
08 Nov 2019 Jefferies International 475
08 Nov 2019 Kepler Cheuvreux 400
08 Nov 2019 Deutsche Bank -
29 Oct 2019 Merrill Lynch 400
23 Oct 2019 Goldman Sachs 620
10 Oct 2019 JP Morgan Cazenove -
09 Sep 2019 HSBC 533
14 Aug 2019 Credit Suisse 529
16 Jul 2019 Jefferies International 1000
16 Jul 2019 Goldman Sachs 1500
21 Jun 2019 Deutsche Bank -
20 Jun 2019 Panmure Gordon 802
17 Jun 2019 JP Morgan Cazenove -
20 May 2019 Bernstein -
16 Apr 2019 JP Morgan Cazenove 1500
15 Apr 2019 Deutsche Bank -
08 Apr 2019 Deutsche Bank 1000
27 Mar 2019 Kepler Cheuvreux 1200
01 Mar 2019 JP Morgan Cazenove 1800
26 Feb 2019 HSBC 1400
19 Feb 2019 Deutsche Bank -
11 Jan 2019 Kepler Cheuvreux 1450
16 Nov 2018 Deutsche Bank 2000
To be fair by Jan 2020 it was clear that sales were down and debt was out of control and that a share issue was coming.
It did come and at the huge cost of new shares issued at discounted prices, as low as 35p