from
lemming investor.com
Buoyancy
the sharp effect on share price of recovery from a
reversible situation from accident, outside events,
or uncovering a rogue executive
Multi-baggers
The 'buoyancy effect' in a recovery is a much stronger upward driver of the
share price than good results in a stable and well managed company where
the visible future is already in the price.
A share price, which has fallen by 95% (it happens) and acquires 'dog status'
as the result of a reversible condition, has the potential of an eighteen
bagger- if and when the original status can be restored. It is rare to see share
price improvement of this size from a profitable and stable company because
future growth is usually closely monitored and already built into the market
price. That is why we are particularly keen at Lemming Investor to find 'dogs'
arising from reversible situations, which good management can restore to their
original level of performance and respect.
It is common knowledge that the market exaggerates the effect of good and
bad news. The 'dog' reputation is difficult to remove. It hangs on much longer
than the actual effect of the original fault or misadventure. So where a 'dog'
company retains high sales momentum, IP, know how, or other intangible or
tangible assets, the share price eventually offers a very cheap way in, long
after most of the downside risk has cleared..
A high level of sales can always be turned into an acceptable profit by cutting
overheads; and large assets can usually be 're-sweated' (to coin a word) to
produce a conventional return. Once the burned down buildings have been
restored, or the crooked FD sacked and replaced, or the price of spiked up
raw materials returns to average, the high sales level or the undamaged asset
can be brought back to normal yields and the share price eventually returns to
the status ante quo. In the process it becomes a multi-bagger.
We have seen this with Ashtead (AHT), and a few years ago at Powerscreen.
In both cases a senior executive had been falsifying the books in a subsidiary
without affecting sales or earning power, and these quickly regenerated profits
after the miscreant was fired.
Emerald Energy, (EEN)recovering from a drilling explosion, is, with oil
reserves relatively unharmed, currently in transition from 'dog' to hero, and
therefore severely under-priced.
BioProgress, (BPRG)damaged superficially by a particular CEO now
replaced, but with IP intact, is in recovery and the share price has doubled in
ten weeks.
An accident like the factory fire at Luton which damaged ASOS, (ASC)or the
spike in world copper prices which has mopped up profits at AFC (the former
Oystertec) until the competition raises prices or the spike subsides, are clearly
reversible And so is the mis-management now cleared up at MinorPlanet
(MPS), where the dog status is still set to linger for a while.
Note that in both cases there is, or previously was, a high sales level. A
professional Marketing Director will know that it costs a few tens of millions in
cash and ten or twenty years to build 100m sales. Find a dog with that level
of production and sales,, and competent management can restore profits to
somewhere between 5 and 20m. That will lead to a market cap of 50
-300m depending on market sector. For AFC (sales 105m) or MPS ( sales
once 100m now 20m - but still the market leader) that means multi-bagging
in each case.