'Unusually' high number of private investors held Connaught

Rob

Part of the explanation is in the cause of the collapse. Connaught's P/L is OK; unhappily its balance sheet was ruined by the twin sins of overpaying to acquire companies that had originally held the council contracts and paying these excesssive prices in cash. The debt became a black hole from which it could not have escaped as maintenance is essentially a low margin business.

Retail investors are ill equipped to analyse balance sheets.

There was a lot of BB activity (esp ADVFN) where some nimble people may have doubled their money on one particular day.

This of course drags in others and 'pump-and-dump' ruled.

Agreed, Rob, about balance sheet, though P&L was flattered by profit recognition.

over a year ago a friend suggested that I bought Connaught, I checked it out with my brokers who told me not to, so I didn't, thankfully.

Surely there couldn'r possibly be some sort of special knowledge employed in this "failure"? Failure for whom, might be a relevant question.

So how did the institutions know to pull out?

This is a classic case of private investors getting it wrong through inexperience. I'm not saying that ALL private investors are inexperienced, but the majority are and most often get sucked into buying a falling stock price.

The mentality is driven by thoughts of "missing out" and also underestimating the extent of falls in most instances. Add to that the oft repeated stories of how one investor or another doubled their money by taking a gamble .. and there you have it. I will also add that for every private investor who doubled money there are 10 who lost out and never told the tale!

Professional investors have a quite different set of risk rules and rarely buy into falling prices until a very favourable signal that the stock is recovering... And then most likely they will take a very modest stake with tight stop loss levels. If the stock merely bounces, professionals will take quick profits... If the stock recovers they will hold and if stopped out..... Then their exposure is carefully measured.

Rob, is there any particular part of the balance sheet private investors are neglecting? I generally look at cash, too high receivables & inventory, etc. Then if it's a small cap with a good story but still getting going, I'll buy anyway as they are likely to raise finance and most investors (I hope) will be aware of that.

I'm a little woozy due to drinking half my paper (or electronic) profit on Herencia (a small cap miner), where I didn't dwell on the balance sheet much as they looked good and seem to have some investment company backing them. If you have the appetite for the risk (and that's an individual matter) you then weigh the risk and reward (gosh that sounds sober).

If Herencia is back down on Monday I might have to throw up to be consistent (if my stomach holds out that long).

My last post should have included looking at debt on a balance sheet, I'll rely on my 'etc' for absoluion from futher gaffes.

If any newbies land here, this might be hepful if the link works:

http://www.moneyweek.com/investment-advice/how-to-invest/five-danger-signs-on-the-balance-sheet.aspx

It's got a link to a spreadsheet for calculating the Z-score.

I don't know if any scores would have helped with Connaught.

There's also the Piotroski Score, but avoid Yahooing mis-spellings such as 'Potrosky Scores'.

Victor - a quick look at the last half-year accounts:

• They consistently made profits (bottom line, income statement) but absorbed cash (cash used in operating activities),

• net assets were £192m but these included £194m of intangibles.

Thanks John W.

Connaught PLC,

Its the old story i'm afraid Guys,

Intangibles are always disregarded to a large degree by the lenders, when the pressure is on.

Always look at Net Worth, not Nett Assets when apparising with a sceptic head on.

ie, disregard the Intangibles, this is what the banks did. when considering supporting Connaught further.

P&L wise, they looked fine really retained profits up 13% Operating profit up 20%, , however, interest payments from 2007 to 2009, incresed from £3.7m to £8.8m.

I rest my case.

So who fixes the houses now , If the roofs leaking then the ceiling comes down?