Thursday, 3 April 2014

Sweett and Sour

Sweett crashes 25 per cent

Yesterday, Sweett (CSG) dropped by over 25 per cent (to 36p) following an announcement that the company was launching an investigation into allegations that former employees were involved in "material deception".

As hard as one may try to remain emotionally detached in such situations, its difficult to avoid that sinking feeling. As well as being one of the 15 stocks in the Mechanical Bull (MB) portfolio, I had around £4000 worth of stock in real life, which is now worth less than £3000. This has turned a lackluster month or so into one I would like to forget.

Second Thoughts

Further, as someone who has recently embraced strategic ignorance, one can't help starting to have second thoughts.

But the question is, would due diligence have made any difference? As someone who is no expert in due diligence, I am not really able to make that call, but I decided to have a bit of dig and see what others have been saying.

No Red Flags Spotted

A quick search on Stockopedia, found none other than Paul Scott informing us that he was dumping Sweett as it was now "uninvestable". He argued that they are a small company and could easily get wiped out.

Despite the negative prognosis, I immediately felt much better. If the master of spotting 'red flags' didn't see this coming, then what chance did I have?

Back in December last year, I see Paul Scott did have some major concerns around the presentation of their results. In fact he initially slated the company for what he took to be a lack of  clarity. However, he later moderated his stance following a conversation with a company advisor. He concluded by saying:

Overall I'm reasonably happy with those shares now. The true underlying EPS forecast for this year (ignoring the one-off derivative gain) is 4.8p. Therefore at about 62p the shares look sensibly priced to me, at a PER of just under 13. 

But in any case, the initial concerns raised by Mr Scott had  nothing to do with yesterday's dramatic fall.

Brokers and Boards

Yesterday, Westhouse Securities reiterated their buy rating (target 91p) although I assume they didn't factor in the events that were announced the same day.

Meanwhile, over on the iii boards, the sentiment was generally sanguine and the consensus was that they would bounce back. One person even claimed this was a good buying opportunity. While I don't stake too much on what is said on these boards, there was no one saying "I told you so", which is the most common refrain when things turn sour.

At the close of play today Sweett bounced back by around 8 per cent.

Standing Firm

In conclusion, I reckon that no one saw this going and any due diligence on my behalf wouldn't have made a blind bit of difference. This is just one of these things. Paul Scott may well be right, but the Mechanical Bull will stand firm. The MB numbers will tell me when to sell-up not movements in the share price.

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