August Week 2: Part 2 Worse of the Worse - The Sequel - It Gets WORSE

IT CAN GET WORSE

Public Service:

This is none of my business and I am most definitely not giving advice, but looking at some stories on the boards (and 2nd hand), I think people should be aware of the risks they are taking (and those others are taking when they talk about their holdings).

When people talk about their largest holdings, we have no idea what portion of their wealth is in the portfolio, whether they run a Vanguard Lifestyle for 50% and only talk about the other 50%.

Their tax circumstances maybe completely different - if I had a generous final salary pension, assets above 500k & no debts - I wouldn't buy bonds in spite of my age - I would look for stocks that might mitigate inheritance tax - like Best of the Best (maybe).

Do Your Own Research is very important - I think it is BS disclaimer like past performance is not a guide to future returns - but all kinds of BS is very important.

You might even be able to outsource your research - you cannot outsource your risk - even if you have a financial advisor - they will advise based on your (perceived) risk tolerance & you will inform that risk tolerance, not the advisor.

DO YOUR OWN RISK

Best of the Best

I did not cover BOTB's update in my previous portfolio.

I believe it is worthy of it's own post not because the update is particularly interesting but for my learnings.

If you are interested in my thoughts on the update as opposed to my sob story, get scrolling.

Also, in this post there will be mentions of social media, no names, but prob not hard to figure out - certainly easier than deciphering the BOTB update.

I want to put on the record that I most certainly do not blame anybody for this nor am I asking for any sympathy. 

I am happy to live by my own decisions & take the good with the bad, so if I come across as a whiny child saying it is not fair & it is not my fault, please forgive me.

I found the Stockopedia (subscription needed) discussion board from the day very helpful on the whole. It is the only "bulletin board" I am registered with.

Also, this is going to be a tough write, so please allow me this moment:

My biggest holding is down from peak to trough approximately 75% - my portfolio year to date is above 10%.

If I stay flat from here, this will be one of my better years & meet my "required" return.

To be in that position with such bad stock picking / execution / (misfortune?) - there is something good too.

My portfolio & I live to fight another day - I appreciate with such cowardice, I won't have any books written about me, but the way I invest will make me (I hope):

Richer, Wiser & Happier!

I can't recommend that book strongly enough by the way.

100x better than 100 Baggers

What I have Done

I have sold approximately 2/3rds of my holding on Monday morning and there are many reasons.

Now it is a sub 1% holding, actually it meets the criteria of do something with it or get rid of it!

• As I alluded to in the prequel, there were additions I made in the hubris and these were mistakes and should have been reversed - well hindsight suggests this was true.
• At the time of the results, I didn't sell on ground of valuation/quality/mgt - i.e. historic performance and forecast - well those are all worthless.
• I made a mistake I deserve to be punished - selling none would not be accepting the punishment & selling all of it would be accepting & running away from it.
• By holding on to a position, it will serve as a reminder about the dangers of social media & illiquidity - and this is not a 100% loss style investment - there isn't the financial risk.
• Valuation - at £8 - we are looking at 15 & 13x forecast earnings & approx 5% free cash flow yield - not bad considering the quality but I think there are a lot of stale bulls & management are going to have a hard time earning the market's trust.
• If it gets to a sub £40m M/Cap - I'd argue it is cheap but I can't make that argument yet, especially because I don't think these revised forecasts are without risk.
• Quality - It is still high quality in many ways - capital light & cash generative but a 20% hit to gross margin suggests there is something about this quality that is not sustainable - even if that is your ability to pass on raw material cost rises.
• Mgt quality/trust is at best in doubt - they will need to start publishing more details about the "funnel & related good stuff"
• The effect of the actions puts me in a position where I think I expected to be when I made my first purchase, leaves me with enough interest to continue watching the story (attend the AGM maybe)
• And if it ever does become a 10 bagger from here, then it will return 10% of my portfolio - I will accept that with gratitude & humility.
• Management have lost my trust - if I feel even a little slighted by management actions, I am less forgiving (Venture Life was an excellent example) and to some extent I do feel holding on to the rump is perhaps my inability to accept facts and move on.
• To give some credit to management, they have decided to turn off growth when it is not as profitable as they anticipated - (delivers less cash to re-invest in growth) - this is perhaps the long term stewardship that you get from high levels of management ownership rather than a desperate attempt to hit the growth target at the expense of profitability.
• That said, if I see a spate of director buys - it may leave an even worse taste in the mouth.
• Is all of this the right decision - Who knows? Is it the right time, no idea, for all I know, there is a PI event planned where some big holder will say they have been backing the truck, either way -  it needs to be done.
• I will go through my portfolio (thinking about some of the above - I won't do it today - doesn't look like the best day to be selling) and I expect I will be selling - I hope I don't throw out the baby with the bathwater - but if I do, I can always buy back.
• Notwithstanding transaction costs - maybe with a big gain - selling it all & reassessing is a smart strategy - for my portfolio size it isn't an issue.
• As for 100 baggers - I still think it is a very useful book - it would be a lot more useful if it never mentioned the word 100 bagger - I want that term removed from memory.
• As of today, even Peter Lynch's 10 baggers are beyond my capability / ambition - if it happens great!
• I note that I had heard of Mr Lynch as a money manager first, not an author.

History & lessons

Excuse the artwork - Indian kids watch countdown when they get home from school, not Art Attack!

Also, I think the buy/sell is based on tax pools so individually the % will look odd, -40% is correct.

This does not reflect the sale I refer to.

In the context of the above:

The first purchase was a good one, but never did I know or think it would be anything close to a 6x when I bought - if I did I would have put in a lot more back then.

The second purchase - probably should have been bigger but the world was burning down.

The third was a buy/sell around the dividend date - for so long I thought why did I sell that at the time - now I worry less about that.

The mistakes on the purchases in my view were in 2021 & time to hold the hands up - some excuses will of course follow:

The growth was a lot higher than I had anticipated - there was clearly a lot of things that went with the business in the 2021 financial year.

I thought there was some one off benefit but I attributed at least some of this outperformance to management & marketing skill / something good about the competition.

Having re-read the reports, I am trying to see if I should have spotted how one off - I probably should have - but there was very little in the report (including the outlook statement) to suggest that they were experiencing higher levels of engagement than normal or higher LTV vs Customer Acquisition Cost.

If there was a sign on this, it was that the gross margin was coming down as revenues increased half on half. I will accept failings in my analysis at the time, but this time I was looking for it (and may well be wrong).

The fact is I didn't particularly want to find out why it was going up & try and assess how much of a one off it was - making the profits was enough fun for me.

2021

All of that said, why did I not add (i.e. accept my misgivings) until 2021 and I am sure I can come up with excuses but here goes:

• The big news - and when the market realised it got this one wrong (the first time) was in Jan 2021;
• There were comments from people on various investment forums suggested they knew management & their discussions with management suggested that engagement had never been higher (the story was not a one off);
• General hubris & as per the prequel, why was this not a bigger holding at the outset.
• With hindsight, there was a very good reason why it was not a bigger holding at the outset.
• Now in full defense of Mello, where this was talked about very bullishly - A BASH host said he was kicking himself but felt this was a one off & couldn't get away from that.
• Lessons from Mello 1 - not holding is a good way of being independent (if I can do that, while holding, that would be great)
• Lessons from Mello 2 - We can be persuaded to believe & do anything, just as long as we are willing to be persuaded - not sure which clever historic figure that is attributed to.

The long and the short of it though is far simpler than I make it.

I made a decision based on assessing the company and as I got more information, I updated that view and acted upon it.

However, when the 2021 half year results came out, I was disappointed that it was not a larger position (regretting the in out from 2020 for example).

The reason it was not a larger position was that I did not have the information that would have enabled it to be a larger position - I received that information (or at least confirmation of it) in January 2021, so making decisions in early 2020 on that basis is expecting a little too much from myself.

When the price action got crazy, I started feeling the FOMO - I might have the 10 bagger and it won't do enough for the portfolio & blah blah blah.

The error in business judgement was thinking this was believing that the shift / outperformance was mgt skill (good digital marketing vs perfect conditions serendipity) & sustainable.

I wanted to believe that I picked a stock where the 6x in a year was inevitable. 

I believed what I wanted to believe, I am sure I read I wanted to read & I heard what I wanted to hear.

The Director Sales & did Mgt screw investors

Then it was on various forums, directors sold (as indicated at Mello too) but Slater and a Director bought in, so it was obviously still good.

I figured Mark Slater was fallible, but MiserlyInvestor getting one wrong - I am sorry Miserly, but I do take some solace in that.

With respect to the Director sales, clearly this was a sign, but when I think back, I don't think it was the founder sale but the Marketing Officer that exercised and sold a fair number of options.

All very well looking at what the CEO, CFO & Chairman are doing, but if digital marketing is core to the business, maybe it is worth keeping an eye on what the Marketing director is doing.

I am not sure anyone could accuse Directors of screwing investors over here (at least in a court of law) and we had plenty of reasons and opportunities to sell at prices above those received by Directors.

They certainly didn't screw retail - I remember quite a few people annoyed that the PrimaryBid offer was so small.

On full year results, I called BOTB, I was directed to the PR Company (other Private Investors seem to have a direct line).

Some individuals with a direct line said how well management treat shareholders - I had no 1st hand evidence of this & no reason to "like" them like those who know them personally might.

I explained to PR that management have a lot of information on conversion/LTV (the usual good stuff) and they should have share some, even if they worry it is their secret sauce (which is probably the how, not the what).

If they had been more willing to share, that the share price move might not have been that significant.

I guess they tried to provide more information in this update, but if you read all the way to the end, the more I read it (and maybe this is just because I was irritated), the more I was found that there was quite a lot of obfuscation in this update.

They could have just told us how much revenue is from each cohort & what the modelled expectations were.

This is a business where growth can be turned on and turned off by varying marketing expenditure, so if management would like to sell some shares they maybe turn it up.

After having sold some shares, they decide to turn down growth (& the broker suggests buyback is more appropriate) - I am not sure they .

I wonder if there will be some generous share option scheme coming - where management have a generous LTIP based on EPS & revenue growth.

To be fair to management - if growth was not as profitable - they dialed it back - this is probably some of the stewardship you expect from Owner/Managed businesses.

However, I also expect transparency & honesty - reading the outlook comment from June 16th versus what they told us on August 13th (and how it was detailed) - not even kind of the same and not transparent.

InvestedGeordie wrote a blogpost about dumping his holding on the day of results (I think some 20 or 30% of his portfolio) - A very admirable action independent of hindsight - Kudos!

BOTB - Open Goal Missed

He spoke about management not sharing any information - either they didn't know or didn't share.

This update suggests to me they don't want to share.

Maybe management are all Apple Pie & Custard - they are going to have to prove that to me with more than hearsay!

Full Year Results

The events of 16th June took place - I did my analysis & I made my call - I was wrong.

It was a rash decision - one of the rules I implemented maybe only a week or so before this update - not transacting the announcement was broken.

Did I think the one statement was worthy of a 30% hit in the absence of any other information, No. Did I take the time to reach this conclusion in a calm and collected manner - No 

If I did & made the same conclusion, I could have purchased 20% cheaper (or maybe it would have been 20% higher) - regardless I think I would have made a better decision with a few hours as opposed to a few minutes.

One exchange I remember from Stockopedia - a member sold & I held - I was still in profit overall - I commented at the time and I am pretty sure the risk seeking for gains / risk averse for losses applied. Not good enough!

I get the logic of dumping on the bell in the event of  a warning - perhaps I should actually apply that - will take away some of the cognitive issues if you make it mechanical - like, oh but it is down 30% so is it worth selling, people overreact blah blah blah

You can always buy back - it is a pretty rare occurrence where a company drops 20% at the open and is up 40% in the two days that follow that drop.

The Influence of Others & Maybe even this Blog

I have talked about the effect that this stock being talked about had.

I don't know who the Patsys on social media are, which would suggest I am the Patsy. 

Maybe I don't notice because I have been lucky with the people I follow / follow me.

I often wonder what incentive people have to talk about their favourite stocks.

If I loved a company and it was hard to buy, I'd keep it to myself - so if I don't, I am probably no longer a buyer.

That said, some do come across more genuine / charming (British for shrewd) and I will have to be more conscious of this.

I knew this was a very popular stock but I didn't appreciate the impact illiquidity was having on the rally and this is something to be as conscious of.

Nobody owes me anything & I likewise - I can't speak for the intentions of others but in the interest of transparency, I encourage you to think that my motives are entirely selfish (whether they are or not).

As I said in an earlier blog, if I had that kind of power and influence, I might not use it but I know I'd be very tempted.

Over the last few years, I have made an active effort to see the good in people (or at least their intentions) - maybe I need to roll back to my Richard Dawkins/Machiavelli/Gengis Khan approach - FWIW, the seeing good in people is a much better way to live but everything needs balance.

I dare say patter recognition is an important skill when dealing with FinTwit as opposed to a wedded belief in the intrinsic good or bad of people.

But

People I don't know have sent me messages (I don't recall asking for a violin and am not asking for one now), so they did it of their own back. 

There is a reason I believe people are awesome and why even if I am the Patsy, I value my interactions. Ignorance is bliss after all (albeit somewhat irresponsible).

This blog is an interesting one - did my saying things publicly & expressing bullish views - hinder my ability to make decisions.

With Calnex reduction, I said manage risk not P&L - same should have been done with this.

Specifically, in light of the uncertainty around the outlook, it should not have been my largest position.

I thought multiple times about reducing this too but technically it found some support (not twitter my buddy who does this sort of thing) and the price action created more behavioural dramas.

If the blog did have an impact, it should not have done - and I don't think it did. 

I was trying to get over the behaviour issues not any statement I made in the blog - and my estimate was I would have approximately a month (AGM Update) to get over these issues.

If my research buddy (he covers the paper & packaging sector & had not heard of the company) had said to me - Yeh mate - read your post - blatant denial - I may well have sold on Friday itself.

I will employ a Stan Druckenmiller approach:

This is what I think, What I think may or may not have an impact on what I do.

In the interest of full disclosure, at the time of publishing I sold majority of BOTB - I may sell more in 5 minutes time, I may buy more in 5 minutes time and I may buy in 57 minutes time & sell in 62 minutes time.

For anyone on social media demonstrating humility & concerned about their credibility, may I suggest sharing the loss data - actions speak louder than words I find.

Notwithstanding that I can put whatever I want into SharePad!

The Update in short

• Disastrous profit warning. 
• Revenues forecast to be down 15% on prior year - versus a previous increase of 20% forecast.
• EPS to be 57% below April 2021 & 62% below current forecasts with commensurate impact in the following year.
• If I was a behavioural scientist (and I think online marketers are OK at this), I wonder why they said 57% & 62% below in stead of 43% & 38% of the previous or just provide the actual numbers.
• Being a more normal cynic, I question the use of C. before numbers like 57 & 62?
• Lots of words probably involves lots of reviewers - 12th was a high volume day - probably nothing.

The Longer Update

Indicated that trading had softened since lockdown ended on 12th April 2021 - what they actually said with respect to the trading softening:

I am not sure where in this update, they indicted anything along the lines of in two years time, our earnings in two years time are going to be less than they were this year, but this time they furnish some additional details.

Pre-Pandemic Customers before April 2020

• Revenues remain higher than year ended April 2020, 6% lower than 15 weeks to 30 April 2020
• Now represent 50% of revenues
• How much higher? Did they represent 50% of revenues on 30th April 2021?
• 17.79m in year ended 2020 - anything higher than 5% I expect they would have disclosed so put 18m as floor on revenue (if you trust)
• Suggests roughly 345k per week, versus 360k in 15 weeks end of April 2021 - 5.4m total in 16 weeks

Pandemic Customers May 2020 to April 2021

• Signed up in year to 2021, representing 40% of total revenue (now or in the year ended 30 April 2021??), have performed in line with "normal" models & expected behavior
• Churn???
• If 40% of total revenues in 15 week period - 4.32m, if now approx 275k per week

New Customers

• Customer acquisition cost - 66% of marketing budget, 60% higher than prior levels & reduced engagement - have not increased marketing in line with budget
• New customer revenues (registered within last 15 weeks) are 40% lower than 15 weeks to 30th April 2021 - 9% reduction in total revenue
• So last 15 week customers are 40% down, resulting in reduced revenues representing 10% fall in total revenue - is that 4.4m or 2.3m - or some other number?

At the risk of blowing my own trumpet, I am OK with numbers (all that Countdown) - I like them (usually preferred to people) and can make sense of them reasonably quickly.

To pull the update together into something meaningful within the cohorts wasn't as easy as I hoped.

Anyway, I get to maybe 700 - 750k per week - £650k + 75k. - which would put it 37 - 39m (vs 40m revised forecast)

They did provide one data point that maybe of use: 

Revenues 2.5x higher than in comp period to April 2020 which on a straight line basis would suggest weekly revenue of 292k (HY) or 342k (FY);

which would suggest current revenues between 730k per week to 855k per week - I expect the first half is the relevant period.

There was some fluff to go with this. 

Fully focused on growth strategy, exciting new growth initiatives and hopeful that customer acquisition costs will return to normal before too long and can adjust before too long.

One thing in the fluff that didn't stack up - cash balances in excess of 6m (versus 11.7m at year end and 4.7m special) - where is the cash generation?

I am not sure if the revised forecasts are commensurate with the hope & focus the talk about but whatever.

Another interesting point, if revenues are 15% behind & the reason earnings are so much worse is the high fixed cost base (I assume these fixed costs stay the same). 

Abracadabra suggests COGS are c. 19.5m and the 2022 gross margin to 50% (versus c. 60% in previous half / full years).

If a 15% fall in revenues results in a 30% fall in gross profit, that is not operating leverage going into reverse, that is just normal margins going into reverse.

The most prescient comment was perhaps on Stockopedia re changes in social media / apple rules, which were playing havoc with their marketing department's ROIs.

To those that warn about operating leverage, thank you - you are of course correct, it doesn't explain the gross margin. 

Operating leverage may work in your favour again, but gross margin will be harder to reverse (unless ad costs come down but those companies look like they are doing OK).

If I may share some advice for those that have had good runs on financial leverage or highly geared companies in the last 18 months, if financial leverage goes into reverse, it can be more permanent - ask the RBS shareholders!

And Finally

This next part is so true, I am going to say it again:

Annoying as it is, this unfortunate serendipity is one of the things I love about markets - the day you start feeling good (like in May/June 2021), the market comes and punches you in the mouth.

And sometimes it follows the punch in the mouth with a swift kick in the genitals a couple of months later (I attended a self defense class this week - I understand it hurts both sexes the same).

I would be lying if I said this last week didn't hurt, but at times like this I am reminded of my wife.

She lives with me, so I don't forget her, but:

She is an amazing person.

Her best quality is that she can (and does) tolerate me.

Number 2 is she will literally walk through hell with a smile - and I am glad because it helps me do so as well.

Adieu