by Malcolm Williams, WhatBusiness software inventor
Monday 24th April 2006
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From 1997-1999 brokers were predicting this as a growth stock, since 2002 the share price has eroded to its most recent level at 1-2 cents, a penny dreadful. Intelligent investors could have used tools in Whatbusiness to predict a correction and have bailed out in time, or better still have “shorted” shares in GDC to make a profit.
Fine to make a statement in retrospect, you may say, but are there any similar companies that now seem to be overvalued and could serve as a suitable “short position”? This seems a more relevant question to investors than simply to label something the “dog of the month”.
If you haven’t already downloaded the free demo version of Whatbusiness from www.whatbusiness.co.nz, now is your chance to do so and run the following company through the program:
Does the company have a consistent History?
The following screenshot taken from within the Whatbusiness program shows that the company consistently produces the same kind of materials, but its earnings are far from consistent. You would find it difficult to predict that the earnings next year would be any better than the year before going on historical records.
Looking at the Conservatively Financed and Equity Base pages, we see that the company is financially sound and not likely to be going into receivership soon, this encourages us that there is time enough to make an investment play.
Next have a look at the Return on Equity, here we don’t see such a good picture, declining returns from previously high levels:
Now take a look at Retained Earnings to reflect on the Historical Price Earnings Ratios for the company:
There was a share price decline in 2001. The PE ratio of 80 suggested then that the company was somewhat overvalued, although profits recovered and the share price recovered accordingly. Now look at the very high PE value, investors are confident that the company will recover and be back on track.
Just how confident they are as gauged by the PE ratio suggests that for the PE ratio to fall back to say a value of even as high as 25 means that they expect the company to be making 10x the last financial year’s profit.
I am not so confident and would argue that SCT represents a reasonable “short position” play to take – ie expect the share price to fall further during 2006 before the company has chance to recover.
The information and services provided by the WhatBusiness does not constitute financial, investment or tax advice. Use of the WhatBusines software can be a helpful aid when making investment decisions however you are advised to seek further financial advice if required.
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