Money Morning | 29 June, 2011
In this issue
- Decode the secret language that directors of companies use to pull the wool over our eyes
- A wealth research expert reveals how it's possible to turn R10k into more than R2.8mn in less than two years
- The profit-exploding investment brokers hide from clients
From Francois Joubert, Chief Investment Strategist, Red Hot Penny Shares
It’s no secret that directors use misleading and confusing statements. Whether it’s in the media or in company reports, they say things to make themselves look good, make their companies look good or make a shocking set of results seem acceptable.
And if you’re not careful, you’ll be sucked into the world of half-truths and subtle lies. Your judgment will be impaired and your investments will go down the drain…
That’s why I’ve compiled this checklist of things to watch out for when directors or management of the companies you invest in make public comments. Keep your eyes peeled and soon you’ll see how the truth gets twisted.
Using this checklist you’ll be able to make better-informed decisions and you might even get the inside scoop on big happenings at companies by just reading through the lines!
5 "warning sign" phrases directors use
1. “Once-off expenses” / “Goodwill impairments”
Once you read or hear that the company is using “once-off expenses” and “goodwill impairments”, your warning lights should flicker! It’s fine when the company really only does this once or so in a decade but a certain small cap airline I’ve looked at recently used this creative accounting technique to turn an actual profit of 0.55c (EPS) into a profit of 22c (HEPS).
2. “Earnings are depressed due to difficult market conditions”
You’ll definitely hear this one a lot… This is what management says when it’s too lazy to explain why it isn’t making the profits it should. Watch out for statements like these, unless management is willing to explain how it will try to correct the situation in the next year.
For example there’s a small cap construction share I’m eyeing that used this line in its last statement to the public. But it was at least willing to also say that it planned expansion into a niche market, which will help it remain competitive - even in bad conditions for the year to come. The global debt crisis has become a convenient scapegoat for embarassed directors.
3. Special Dividends
This is a once-off dividend, usually much larger than normal yearly dividends. Sometimes companies fund this by the sale of a big asset or because they have accumulated cash. I feel this is a bad thing… It means the company doesn't have anything better to do with its money.
You could argue that having cash in your pocket is better than putting it into a failed project, but the companies I like to invest in tend to have innovative ideas to grow profits with cash like this!
4. “The coming year will be a difficult one”
If ever you hear a company director say something slightly negative like this, admitting that his company’s profits may fall in the year to come, you should stay miles away from the company. You see, if the directors don’t even have faith in their company doing well you definitely shouldn’t!
5. “We are the market leader in xxx”
Whenever you hear a director of a company saying this, look the other way and quietly have a chuckle. This reminds me of parents who believe their kid is the smartest, fastest and strongest kid on the block, despite evidence to the contrary.
Almost all directors believe their company is the best at what it does. But the truth is there can only be one top company in a sector. So don’t pay too much attention when this claim is made!
Always make sure to check the integrity of management. You can easily do this. Merely look at the past letters from the director/CEO and see whether they delivered on their word concerning growth?
Did they man up when the company didn’t deliver or did they try to explain it away with mumbo jumbo like: “We had a very difficult trading environment,” or “We made a great profit if you exclude once-off items like foreign exchange losses.”
I hope this helps you to decipher the language used by the people who run the companies you invest in. Watch out for these phrases and you’ll certainly shield yourself from losses in the future.
Here’s to unleashing the value!
Chief Investment Strategist, Red Hot Penny Shares