By Tom Winnifrith | Sunday 28 December 2014
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 general view on equities is mildly bearish as I explained in my macro calls piece HERE. As such I will be serving up 5 longs and five shorts as my tips of the year. The first long was HERE and the first short HERE. Now for Number 3, Globo (GBO), the sort of flim flam that will suffer badly in a bear market.
I have been bearish on Globo (GBO) since the mid-seventies and so its shares have almost halved since I weighed in. at 39p the market cap is £132 million and for 2015 I would expect the shares to halve again, or worse.
Globo throws up a series of red flags for any investor but I will leave the most serious to last. But in no particular order other than leaving the best/worst to last here goes:
1. A propensity to engage in corporate transactions with related parties – that is to say the complex spin off of a subsidiary just over a year ago.
2. Changing auditors more often than appear decent
3. An almost compulsive desire to bully journalists who do not folly the party line by sending of fascistic lawyers letters ( I have had two or three myself)
4. A propensity to issue RNS statements saying there is no reason for the share price to have fallen on a regular basis when the share price simply keeps falling because the stock is overvalued.
5. No serious evidence of market penetration in ultra competitive markets.
6. Too many tokenistic boardroom share purchases.
7. An obsession with IR/PR and the share price rather than just letting the business do the talking.
8. Too many operations in Greece which is a country I love more than any other and where I live for much of the year but where business practices are not always quite those we expect to see in this country.
9. Results statements which accentuate the good but give little transparency of future earnings.
10. One offs/grants etc. constantly distorting the underlying picture.
11. But the big red flag is free operating cashflow or rather the lack of it. The last published balance sheet showed net cash of c£21 million but no cashflow statement but the movement in net cash during the quarter suggests to me that free operational cashflow in 2014 is unlikely to be much more than £4-5 million. As such the current market cap is just a ludicrous multiple of cashflows.
Supporters of this stock as of all BB darlings insist that “it will be different this time” and that old valuation metrics are irrelevant I just need to understand the potential of the technology, feel the bandwidth blah blah blah. Let me tell you folks it will not be different this time.
I tech and telecoms there is rarely any long term earnings visibility. There sure aint for Globo. As such paying an ex-cash multiple of 22-23 times for such an enterprise – especially given all the red flags – is just crackers.
If the market is nervous, such overvalued hot air stocks will take more of a beating than most and as such Globo is my second short tip for 2015 at 39p with a target price of 18p (and that is generous because I am a nice guy in a good mood).
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