“Corporate Gravedigger: cleverest growth play of 2008?” Fleet Street

By Travis Johnson, Stock Gumshoe, April 18, 2008

I know that the UK represents a smallish portion of the mighty worldwide Gumshoe readership (about 10%, if my stats are to be believed) … but still, we love our “special relationship” friends across the pond.

Even if I have to slap myself for saying “across the pond.”

So every now and then I like to take a look at a UK teaser letter that comes my way — after all, there are a lot of interesting companies on the AIM and LSE, and most US investors can certainly trade over there if they’ve got the notion, either directly or via pink sheets tickers or ADRs.

And one of the leading letters across the Atlantic is the Fleet Street Letter — they’ve been around for ages in one form or another. I have no idea what their long term track record is, but maybe they’ve got something interesting for us today. Let’s look, shall we?

They’re basically selling the same fear that our stateside advisers like to pull out on occasion — it has certainly not gone unnoticed that almost every adviser, tout, and investing pundit is urging investors everywhere to short the Pound. The fear is, in a nutshell, that the UK is where the US was last year … consumer debt is even worse, home price inflation has been wild and the downside of that slope will be brutal, and the leverage that had City hedge fund managers dancing in the streets is coming back to bite.

I’m certainly no currency expert, but I can see the logic — the foundations of that argument are basically sound, it’s just that I don’t necessarily have faith that things will work out as they are “supposed to” … especially if everyone is betting on the same thing. It’s hard to argue that the dollar will fall that much further or that the euro can continue to rise, it’s also hard to argue that the Pound can remain this high … but that doesn’t mean that those things won’t happen.

But enough of my stumping … this teaser for the Fleet Street Letter (now 79 Pounds a year at the special “half price” offer — perhaps they’re throwing a bone to soon-to-suffer countrymen?) is telling us to buy a “corporate gravedigger”, an insolvency specialist whose business relies on handling bankruptcies and such.

“Big business is in big trouble. The number of British companies going bust this year will reach its highest level since the fall-out of the dot.com crash five years ago, according to accountant BDO Stoy Hayward.”

“Bad news for struggling businesses… But one AIM-listed UK company is rubbing its hands in glee.

“They’re a niche market corporate insolvency specialist.

“Like gravediggers and arms dealers, insolvency practitioners are a perverse bunch. They thrive on misfortune. The sector is still dominated by the ‘Big Four’ accountancy firms. But this upstart company put in an aggressive expansion drive in 2007, opening several new offices and acquiring small insolvency practises.

“They currently hold an 8% share of the market, but management says its recent expansion will push this to 15%.”

So … that’s about all we get by way of clues, what are we dealing with here?

The Thinkolatour chugs merrily along and can now inform us that this is …

Begbies Traynor Group (BEG on the AIM in London, no pink sheet symbol that I’m aware of)

This firm has been around for a while, but did indeed start building up in the last year or so with some acquisitions. They’ve tried to both expand their reach in the corporate and personal insolvency services, as well as to broaden their business by picking up some new services, like tax consulting.

The shares were last touted as big beneficiaries of rising insolvencies in 2006, and hit a high of about 200 pence, but have fallen since then, including a dramatic collapse at the end of last year, to the current price of about 117 pence (they dipped briefly below 100 in December and January on announcements of acquisitions, and before the last earnings were released at the end of January, but have been pretty stable since).

Even US-only investors might have heard of this one if you watch the financial news carefully, if only because this is the firm that was tapped to liquidate Carlyle Capital when they went belly-up earlier this year.

The shares are not terribly expensive going by the last full year’s earnings, but earnings look to be falling — and revenues not growing as much as might be liked. Valuations going forward will depend on how many insolvencies there really are in the next few years, how much of that business they get, and how they bring their acquisitions into the fold. I suppose we’ll learn more when they release their next results — sometime in the next month or so, I imagine, though I didn’t check to see if the date was announced. Their last result was an EPS of 1.7 pence for the first half of this fiscal year — the year ends this month, and the second half is seasonally stronger, but that was about half of the comparable period earnings last year. The last full fiscal year showed earnings of 8 pence, which would give a PE ratio of about 15, but there have been warnings that the earnings might fall by as much as 20%. They have committed to keeping the current dividend of 2p, which translates to less than 2% at the current price.
There are others who have opined on this in the British press: ThisIsMoney says you should buy, and Investors Chronicle covered it when they disappointed but still called it a speculative buy.

So … I don’t know much about this firm, but if you like the “story” of the stock, that a UK insolvency specialist ought to be a big winner if the British economy goes into a tailspin, maybe it’s worth a bit of time to look into it for yourself.

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Garry Cleverdon
Good Morning Gang, From a person who is ‘from across the pond,’ it is a perfectly good expression Gumshoe as we use it as well. Fleet Street Letter is no better or worse than American counterparts and will of course boast of incredible gains in some recommendations and being less than honest on losses. I let my subscription laps years ago following many losses based on their research. A complaint about buying/selling foreign stocks is that such as Schwab charge at least $100 for any instructions to buy or sell foreign stocks and ‘foreign’ includes those Canadien stocks not on… Read more »
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If you’re looking for both high yields and enormous capital gains, then you need to learn more about our “Income Security of the Month” for April 2008. This stable, diversified fund has paid an average dividend of 24.5% per year over the past five years — over 12X greater than the yield delivered by the S&P! It also gives investors exposure to one of the world’s fastest-growing foreign markets, helping it deliver total returns of +297.3% over the past five years. In order to gain access to the name of this security, you’ll need to subscribe to our High-Yield Investing… Read more »
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I used to subscribe to this loser newsletter and was so disappointed I wrote a review to help others make an informed decision of whether they ever want to subscribe to it too. Their tips are utter rubbish and the articles are pathetic. You normally get to read them in the Daily Reckoning for free a bit later anyway.