Falling in love again
Posted on September 18, 2007 by Richard Beddard
Filed Under Companies |
A drawback of using the historic price earnings ratio to value a company is it’s future profits, not last years that matter. That explains why Fonebak’s PE ratio of 6 is so low. This year the price has more than halved because the mobile phone repairer and recycler is making a loss.
It’s a shame. When I met them in 2005, its managers were as friendly as you’re likely to meet with an infectious enthusiasm for the environment and the potential for mobile phones to change the lives of people in developing countries, where Fonebak sold most of them.
Since then everything’s changed. The chief executive and financial director resigned and executives from CRC, which Fonebak acquired recently, moved in. Scanning the company’s announcements it looks as though Fonebak took on too much. While it was growing and acquiring new businesses, its own profitability collapsed.
Because of it’s low price earnings ratio, Fonebak is high in my list of good companies going cheap. But I’m not sure it really is a good company. Its a very different company to the one that earned last years profits and, CRC was in trouble when Fonebak bought it.
But in July its chairman and visionary founder bought 425,000 shares at 52p. He bought 650,000 in June for the same price, when the new chief executive and the new chief financial officer also bought shares. Those big buys may well have precipitated the rally in Fonebak’s shares back to 73p, but I think the company could still be worth a look.
You’re not supposed to fall in love with shares, but Fonebak’s business is one of those you want to succeed. I didn’t buy it in 2005, so hopefully I won’t let desire cloud my judgement this time.
A short break from Northern Rock
Markets are not rational, they are complex adaptive systems, that break when agents (investors) stop behaving diversely and start acting together. Michael Mauboussin calls it diversity breakdown. You might call it following the herd.
Alan Greenspan, former chairman of the US Federal Reserve, says the tools of economics don’t describe markets well:
“the best of models don’t work all that well [because] the underlying structure that we’re endeavoring to model [human nature] is continuing to morph into something else all the time.”
Fun:
As someone struggling with to understand the maths of portfolio performance (more on that soon), don’t expect me to explain this to you:
According to Alphaville, it’s a model that claims 83.4 per cent accuracy in predicting which companies will go private even if you apply it when the company first floats on the stock market. They can’t explain it either, and don’t say whether it predicts the buyout price…
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I can assure you. If you knew the guys running the show. You would not want them to succeed.
Recycling is the front. Buying phones and selling phones is the truth.
Dodgy dodgy dodgy dealings is what goes on there.