BATM profit warning - the dangers of swimming with the smaller company tiddlers

A while back I had a small position on tech company BATM Advanced Communications. It was a blue sky option, quite risky, but the news flow had been good and the trend was up, good things were expected. I actually closed that trade, in part out of the boredom of waiting, for a small profit.

Today, BATM reported to the market a profit warning and like all bad news, perhaps even more so when it comes from a smaller company, you can expect fireworks on the share price.

Networked telecoms group BATM Advanced Communications warned it expects first half revenue and profit to be materially below management expectations.

The group, which provides technologies for the networked telecoms and medical laboratory equipment markets, said components supplied by third parties failed to arrive during May as scheduled, and consequently it was unable to fulfil orders and was forced to postpone deliveries.

"However, the backlog remains substantial and, with certain components required to complete some orders having been received, the group is working towards clearing this in the second half of 2013," it explained.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=11175&action=news&story_id=20945622

Another smaller company that had been going well until recently was IDOX. It's recent report also disappointed and fell below expectations.

The Company is encouraged by the underlying progress made in all of its businesses during the first half and continues to be excited by the multiple growth opportunities available to it. However, in light of a slower than expected first half of the year, the Board now thinks it is prudent to anticipate full year EBITDA is likely to be no less than £18 million, which reflects uncertainty of timing as to when those opportunities will crystallise.

http://www.digitallook.com/news/rns/20926283-30992/IDOX-Trading_Statement_html

Both companies seem to be suggesting positive times ahead, that these failures may simply be a blip, but the lesson to investors is clear, the unexpected announcement will hit your shares hard and fast. So fast that if you are in and without a stop loss there is almost no chance of getting out quickly when the bad stuff hits the fan. Even if you have a stop loss, it would need to be guaranteed, otherwise the fall would go straight through it. The same can be true of the bigger companies of course, but smaller companies, especially those with stretched valuations on the back of momentum, can dive a lot quicker when things go wrong, or don't work out  as the market expects.

Charts below;

Buying shares in companies that have a good story.

Back during the heady days of the tech boom it seemed to be quite easy to buy into the latest blue sky company that in no time at all would take off. If a company wanted to boost its share price all it needed to do was say it was setting up a website offering, or going into some area of "blue sky" technology and often the share price would be off to the races.

Those days of more or less putting your money into anything that sounded good and getting a great return in a short space of time are probably long gone, but there is something to be said for buying into a company that has a good story behind it. Even if the fundamentals may be stretched in the present, the hope of delivering something big in the years to come and enjoying the returns of a ten bagger or more is something that most investors perhaps can only dream about.

In one sense this explains the popularity of smaller companies and the traditional "penny shares". In another, the chances of finding a big winner in the FTSE100 is remote and only slightly higher in the FTSE250. It's not that it can't be done, but in the big cap indices you are often looking for something that has collapsed in a market panic and crash, which is still fundamentally sound and then comes back big time.

Back in the financial crash days of 2008 I recall the collapse in price of FTSE100 silver and gold miner Fresnillo. It's IPO price was a little over 500p in 2008, but fell all the way to around 100p in the market crash, today it stands at a little under 1800p. Trouble is, few probably had the bottle to buy when it was 100p, even though it was about as cheap as it is ever likely to get.

So, leaving aside recovery stories in the big cap shares, it is the smaller companies that are more likely to deliver the investing equivalent of a lottery win, although your entry fee in buying the shares will be a lot higher. A few potential blue sky stories that I like in the smaller company sector are IDOX and Monitise which have been mentioned before. Others worth investigating are IQE, Blinkx and Vislink. All have a good story behind them, all have an element of risk and can be quite volatile, they could be big or could fade away if things don't work out. They may not be 10 baggers, but if the good story works out they could be priced a lot higher in a few years time.

IDOX delivers

Mentioned IDOX about a month ago, the results from which came in today and they did not disappoint (Public Sector watch, IDOX).

AIM-listed software and services provider IDOX posted a 50 per cent rise in its revenue to 58m pounds in the year ending October 31st, according to annual results published on Wednesday morning.

Adjusted profit before tax was up 36% to £14.8m from £11.6m a year earlier and earnings before goodwill, impairment, amortisation, depreciation, restructuring, corporate finance and share option costs rose 44% to £16.7m. 

http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=20560559

And despite the rise in share price over the last month or so longer term there could be more to come. The shares were up 4.8% today.

 

Public Sector Watch, IDOX

So many companies today do business in one form or another with the public sector. Some may rely too heavily on Government contracts while for others it is part of their business. Given the austerity measures that Government is taking right now, it is probably better to find companies that do the latter than the former. Those that rely totally on contracts with the public sector have little to fall back on if the money dries up.

IDOX is an AIM company that reported today in positive terms about its business with the public sector.

The Group's three key metrics being revenue, EBITDA and adjusted* pre-tax profit, are all expected to be comfortably ahead of consensus market expectations for the full year. Like-for-like organic growth has also been particularly encouraging in both the public sector and engineering software divisions which, together with our active acquisition programme, will deliver significant top line revenue growth for the year.

The Public Sector division continues to benefit from assisting local councils to achieve their cost savings and is expected to perform better than forecast, together with organic growth at a higher level than anticipated, due to the successful implementation within UK councils of our managed services and hosting products. The Group has been awarded a framework agreement by the Government Procurement Service for G-Cloud Services following an application and review of its Cloud offerings.

The CEO gives a good description of what is now expected from those companies doing business with the public sector.

"We continue to develop new and innovative methods to drive productivity within the Public Sector, a market which is now focused on managing costs and efficiency. Our strategy to differentiate within the Engineering Information Management sector, by being the only provider to offer a cross platform interoperable solution, is now beginning to show results and, in 2013 this division will continue the process of adding new markets to its North American core. "

The shares are up around 10% today on the expectation that the company looks forward to being comfortably ahead of consensus market expectations for the full year when it reports on 12th December. Looks like one to watch out for.

http://www.digitallook.com/news/rns/20490361-30992/IDOX-Trading_Update_html

IDOX to beat expectations in 2012