Too little…
Armour exits the Thrifty 30
Armour was a company I should never have added to the Thrifty 30 but before the recriminations start, I need to do the deed: Eject it.
I added Armour shares in January 2011 at 8.5p a share and today they’re little more than 3p. But that’s only half the horror. I’d previously added Armour shares in February 2010 at 14.75p. In total I allocated almost £2,250 of the portfolio to Armour and I’ve realised just £683. The company didn’t pay any dividends, so the Thrifty 30 lost £1,567 or 70% as a result of these decisions.
Just to remind you, when I added the shares I used the actual price quoted by my broker, and not the mid-price, and I charged the portfolio £10 in fees and 0.5% stamp duty. When I removed them, I used the mid price minus 25% of the spread to simulate a sale price, and deducted a £10 fee. I believe my virtual trades do not flatter performance by ignoring costs.
Normally, I wait until a company publishes its annual report before reviewing its position in the portfolio so I have all the facts, but when events are as extreme as those Armour investors have experienced this year the preliminary results contain all the information I need.
Here’s the F_Score calculation, which gives an impression of current trading and the company’s financial strength:
An F_Score of one out of nine means with one exception every performance signal, profitability in cash and accounting terms, liquidity, profit margins and asset turnover, worsened or, in the case of profitability and cash flow, turned negative. Even the single point earned by the eradication of a small amount of long-term borrowings is no comfort. The money was not repaid from the company’s operations but by raising more money from investors. Total borrowings, including short term debt, rose.
Although the share price has fallen to below tangible book value, I wouldn’t invest in Armour anew unless there were strong signs of recovery in the larger of its two divisions which makes audio equipment and entertainment systems for the home. The key indicator would be profits, and a convincing F_Score, as high as eight or nine. I might hold, if there were modest signs of recovery, but there’s really no sign. Not in the stats, or in the explanations of management.
That’s not to say Armour will fail. The company says its actions, redundancies and the closure of a manufacturing facility in China in May, will save it £2.5m in annual costs, which might well put it back into profit if trading doesn’t deteriorate even further.
But this portfolio is supposed to put safety first, and Armour is in an unpredictable state. It’s entered that twilight zone where companies delist at a fraction of their former value, or run out of finance, and those are risks I should not be taking.
The sad thing is, the losses are no surprise, the company forecast them. And the fact that Armour has been forced to raise cash, increasing overall levels of debt and diluting shareholders, is old news too. It begs the question: Why didn’t I sell earlier?
I’ll try to answer that one shortly, along with an equally difficult question: Why did I buy Armour in the first place?
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This was one of the companies I owned as part of my short lived trial of a purely quantitative system. I sold out a month or two ago at a big loss. I had spent a while playing that most stupid of games, the ‘wait to get back to par’ game. It didn’t.
Then I remembered the quote by Keynes I think, of changing facts and changing positions. I realised I wasn’t comfortable trialing my real money on an untested system over years and so took the decision to get out of all of those companies (Luminar beat me to it by going bust).
However, on the upside it’s an excellent opportunity for learning.
Hi John. Rightly it’s made me rethink things although at the risk of trailing tomorrow’s blog, the big mistake I made was buying Armour in the first place. Though statistically it was in the sweet spot, reading my notes at the time showed those statistics were not reliable.
If an investment works out badly, but I had applied my selection principles adequately, that’s just inevitable sometimes.
However, if I didn’t apply them adequately, then I’ve cocked up. And that’s worth agonising about (or learning from
).
Happy Christmas mate.
On selling at a loss, one of my favourite quotes I have read this year is:
“A share that is down 90% is a share that fell 80% and then halved”.
If you’re not confident, you’ve done the right thing getting rid of it.
Good one
. Though one of the frustrations I have is that while that quote is right, the significance of the Armour holding has decreased (it’s only worth 70% of what it was and therefore is a much smaller proportion of the portfolio – the absolute losses I face from this point on are pretty trivial). I’ve spent a lot of time thinking about the least significant holding when I should perhaps be examining those that are trundling along quite nicely in an attempt to anticipate the next blow up.
I think you are too hard on yourself. I have stuck with Armour, increasing my holding as the price dropped to 4p and then 2p, and have been pleasantly rewarded as the price went back up to 8p recently (now down to 7p). I think the basic story is still pretty good with a profitable history, sound finances and a good product offering. However, I take your point about safety first for the portfolio.
Thanks Terry. You’re not the only investor I know of who’s stuck with Armour and of course I hope you’re right. I haven’t lost all faith in it, I just think it’s more speculative than I intend for the Thrifty 30. The reason I’m being hard on myself is I think it was always that way!