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Sosandar – is Tom Winnifrith “nutso” to sell out? Possibly, but it is time to sell another slice

By Nigel Somerville | Sunday 26 August 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


My piece on AIM-listed Sosandar (SOS) Friday seems to have sparked a bit of interest. Noting that the shares had closed at an all-time high and with the date of the AGM just announced (and presumably another trading update), I reckoned it was a strong hold with a view to selling a portion at 40p. The shares duly put on another 10%, causing a smile at Deputy Sheriff Towers, but Tom Winnifrith sold all his Sosandar shares. Meanwhile Thirsty Paul Scott thinks it is a “hold forever” stock. Who is right?

Of course, in absolute terms we won’t know until Sosandar’s shares either shoot the lights out or they don’t. Paul Scott clearly thinks they will, but Tom Winnifrith thinks the share price has gone too far too fast. To be clear, Tom doesn’t think it is a bad company and has said he will be interested again if the shares come off or the shares flat-line for a time while trading continues to improve. So I think all three of us agree that Sosandar holds much promise.

I have commented before that this particular investment genius once had a stack of shares in fellow online retailer Asos (ASC) and I doubled my money from 5p to 10p or thereabouts. I was delighted with that – but not so pleased to watch the shares carry on ever higher, to peak not at a few more pence but at £75. That taught me a lesson.

On the other hand I have held on to shares and missed out on selling at a huge profit only to see the stock collapse back to earth. Toledo Mining (TMC) would be a fine example of that.

It does seem to me, in my very simplistic view, that Sosandar has quite a lot in common with Asos in that both are online retailers. Asos’s game was too reproduce chic styles, whereas Sosandar is aiming to provide for women who are no longer teeny-boppers. It might seem a bit narrow, but I reckon that is a pretty huge portion of the population. The question, for me, is just how big – and what portion of that market can Sosandar corner.

Sosandar is, essentially, an internet start-up – just as Asos was in its early days. And as with Asos in its early days, Sosandar’s shares have stormed ahead as sales growth has started to show through. A look at the share price chart of Asos in the early days may be instructive:

 

 

Now compare to the share price chart of Sosandar:

The Asos chart starts in October 2003 - two years after it floated - whereas the Sosandar chart is since it floated. But we can see that in both cases the shares drifted until they suddenly sparked into life. Asos put in a rise from about 5p to 90p in nine months or so. You would have been hard pressed to sell out and buy back in again during that period. There were wobbles along the way, but you would have had almost a 20-bagger before the first time to sell came up – and one wonders how perfectly one could have traded it (certainly, I couldn’t!)

Sosandar’s shares are up about three-fold from when they sparked to life – so I think there is still plenty to run in this first wave. But that ignores minor things, such as fundamentals. Currently, Sosandar is valued at about £41 million and was around £12 million before its shares rocketed northwards. We had encouraging trading news, but profits were on another continent and even sales were a tiny fraction of the valuation. It seems a bit bonkers, but we’ve seen it before.

Asos floated at 20p way back in 2001, valuing the company at £12 million, and the shares drifted (this was during the dot.com crash) to around 5p in 2003 before taking off in early 2004. The trigger seems to have been the trading statement issued on 20 January 2004 which reported a 53% increase in visitors and (more importantly) a 75% increase in like-for like sales. It also reported a move into profitability – all of which gave the stock a bit of a lift – to around 7 or 8p.

The FY results for calendar 2003, released 20 February 2004, showed £7 million of turnover and a maiden pre-tax profit of £120,000 and the shares were up at 10p. From then it was a journey north, helped along the way by another trading statement reporting pre-tax profits of £570,000 on 14 April 2004 and suddenly they hit 30p at the start of May. Then the audited results (for the extended period to the end of March) were released and the shares shot up again, hitting 40p in late June and all the way up to a shade over 65p in July.

All very exciting – but that was Asos, not Sosandar! My back-of-an-envelope suggests that Sosandar’s sales might hit £9 million in the current year if the last recorded rate of growth is continued (TW: you are talking utter shite, it will be nowhere near and it is the prevalance such insiane thinking among shareholders that makes me sure I was right to sell). That might be a bit of a stretch, but it is not impossible (TW, yes it is). Another big variable is how much cash the company ploughs into marketing, but if kept under control we could (and I stress could) see a pre-tax loss of perhaps £1 million. But by then the company would be trading profitably at the plc level and looking forwards it would be that which the market focussed on.

That’s all very rosy….but we are 9-12 months away from that, if Sosandar meets my expectations, and it still has to be delivered (or not!) On that measure, then, the comparison with Asos suggests that Sosandar shares are perhaps a year ahead of (perhaps best case) events. So Tom Winnifrith is right?

Well, not so fast. The dot.com bust will have had a big effect on Asos’ share price, something which currently is not affecting Sosandar. Indeed, the market seems to be deliriously happy so perhaps the comparison with Asos understates things somewhat.

But what happened next with Asos is worth a look too: the shares continued to climb over the next five years, finally clearing the £1 mark in late 2006 and climbing to over £4 in 2008 and hit £5 in 2009. More to the point, the stock never dipped below 50p after mid-2004. By 2011 they had hit £24 before collapsing down to £11 at the end of the year. This kind of share price performance will, I suspect, influence the market in perhaps looking a little further forward which might also explain why Sosandar’s shares are perhaps running a year ahead of events, when compared to Asos.

The above would suggest that Paul Scott is correct to hold on to all of his shares. But it depends on delivery, which right now is not a given. What we do know is that Paul Scott rates the management very highly indeed, and his record on retail suggests that he knows his stuff and thus far the company has blown forecasts out of the water. Indeed, the last quarterly update suggested to me that rather than show any signs of growth tailing off, it had actually accelerated.

I sound as though I have convinced myself to hold indefinitely, certain of massive riches in the years ahead. Well, no – not exactly:  I can see the potential, but there is plenty that can go wrong. Brexit might get in the way of expanding internationally, management could make some bad calls, with the current rate of expansion the company will have to recruit a lot more people which could cause problems if selection is wrong, the company’s styles could go out of fashion, the celebrity endorsements could dry up, the cash-pile could run out at a time when raising money has become difficult – perhaps a long overdue bear market, for example. And if we see the big recession forecast by the treasury in the event of a no-deal Brexit (or for any other reason) then growth will be hit. And, of course, growth could stall or reverse anyway. And although the company looks to me to have enough cash, an international expansion would need more cash – and the company may decide just out of prudence to rattle the tin.

I’m sure there is plenty more which can go wrong – this is, after all, not far from being a start-up outfit. But the potential is there.

It is for these reasons that my policy has been to take slices off the table. At 27p readers would have more or less doubled their money so offloading a tranche (around 25% for me) seemed sensible. It wasn’t enough to get all my investment back, but it did mean that even in the event of a share price collapse you would probably come out on top.

The next price target is 40p and we are almost there. At 38.4p to sell and 38.6p to buy as at Friday’s close I think we are close enough to the 40p mark to say it is time to sell a bit more: ever mindful of past history, missing the selling point by being about 5% too greedy with Ariana (AAU) still rankles. In my case, I shall probably offload about another quarter (so 33% of my current holding) although I may sell a bit more if the shares zoom up further. But for the fact that I didn’t buy enough in the first place, I would probably be selling a much larger chunk, but I want enough shares left over to enjoy any further rise as/when we get it in the longer term in decent quantity.

At that point I will have recovered all the cash invested – plus a cash profit – and still have a larger investment than I started with, effectively as a free play. I can hope for ever greater things, like Paul Scott, but will already have cashed in a decent return, like Tom Winnifrith.

With the AGM due in a couple of weeks, my hope is that anticipation of a decent trading update from the company will attract more buyers and lead to further strength in the share price. But at the current price, anything less than stellar may see the shares come off a little, so now looks a great time to be cashing some in ahead of the latest numbers.

After that, well Sosandar was a speculative investment at 13p – and then we got hard numbers which supported that price and then some. With my investment already recovered (assuming they don’t collapse this coming week) at around 40p it is once again a speculative investment – which may seem cheap or expensive after the AGM. But on a five year view I reckon there is a decent chance of an outstanding return and I don’t want to miss out. So I’ll be holding on to some shares for a good while yet.

In short, my take is that Tom Winnifrith is wrong to take all his cash off the table, and Paul Scott is wrong to leave it all on the table. But their circumstances are different to mine and their analysis will differ too. I guess that’s what makes a market. I can’t afford a wipe-out, could do with some cash but want exposure to what I believe will be a very large gain from here in the longer term.

For me, then, it is time to take some more money off the table but still leave a bit in for the (free) ride. I shall look again at the after the AGM, with an eye on the interims which will be due by Christmas but which, I suspect, will come much earlier if they are good.


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