Anyone new to Twitter must feel like they have made a remarkable discovery: that there exists in Fintwit a group of enlightened cognoscenti who against all odds pick only winning stocks.
Or rather, that is what we usually get to hear about. I thus feel it is incumbent upon me to act as a sort of Fintwit counterpoise and regale you of my biggest investing mistake this year; or rather the last three years.
It was in a stock which I must have looked at through rose-tinted glasses, heard about with rose-tinted ears, and then thought about with rose-tinted logic. I was far too sanguine about its post pandemic prospects, and being a cynical sort of fellow, sanguineness isn't something I usually suffer from. In fact, it is so uncharacteristic of me that I can only assume some unscrupulous ramper spiked my afternoon tea with a mind-bending philtre in a cunning attempt to make this a coup de foudre.
(I apologise in advance if this blog includes the occasional foreign or Latin word, but sometimes they just happen to be the mot juste.)
The company in question was Best of the Best (LON:BOTB) in which I first bought a position in May of this year. BOTB runs online 'spot the ball' competitions which offer punters the chance to win their dream car. Before the pandemic, the business began to display impressive economics, combining growth with exceptionally high margins, returns on capital and cash generation as the business benefitted from completing its online transition.
In June 2021 BOTB announced its final results for the year ended 30 April 2021. Unsurprisingly, the results showed phenomenal growth in sales and profits as it benefitted from a lockdown surge, but they also warned on the outlook:
“We are excited about the opportunities that the year ahead holds for BOTB, with a recovering economy and hopefully a return to normality. However, in contrast to the summer 2020 period, we have experienced somewhat of a reduction in customer engagement since the latest easing of lockdown restrictions on April 12, 2021, specifically relating to the understandably long-awaited re-opening of hospitality and non-essential retail. We are closely monitoring this, but with our flexible model, growth strategy and plans for the year ahead, we expect customer engagement to return to normal levels before too long. I look forward to updating shareholders in due course.”
The share price fell by 28% on the day.
It was at this point when Sanguineness teamed up with Indolence, who together make a particularly lethal duo, and conspired to ensure I did the wrong thing again. I didn't sell.
Then in August the company went on to extrude the full horror of its problems in a trading update. Lockdown had ended, and after months of domestic immurement its customers were ready for more sociable pastimes than the spotting of balls. The problem was made worse by BOTB also experiencing a much higher cost of acquiring new customers on social media. The result was a material decline in sales, with operating leverage amplifying the effect on earnings:
“In combination, these factors have resulted in a c.15% reduction in average weekly sales for the first 15 weeks of the new financial year, compared to the final 15 weeks of the prior financial year ended 30 April 2021.”
“With our substantially fixed cost model, this will have a disproportionate impact on margins, profitability and earnings for the financial year ending 30 April 2022. Whilst still substantially higher than the pre-COVID comparative and the results delivered in FY 2020, these are now anticipated to be c.57% lower than what was reported for FY 2021. The new guidance the Board is providing today for the year ending 30 April 2022 is c.62% below current market forecasts with a commensurate impact on the following financial year.”
The share price fell another 46%.
It was at this point the philtre finally wore off, leaving me with a splitting headache and the soberingly unpleasant sight of what I was left holding, nose warts and all. A hideous looking hag of a share. I made my excuses and left by the back door.
My overall loss on the position was a torturous 60%, leaving me stretched on a rack of lament over my own idiocy. A quick look at my portfolio attribution analysis confirms that this unfortunate little dalliance has scythed 3.5% off my 2021 return.
The moral of the story is a familiar one: that the golden goose of growth and high returns on capital is easily killed. The key to long term compounding is the sustainability of both factors, but BOTB relies on a transient and fickle customer base and no economic moat of which to speak. I got it badly wrong on this occasion.
And so Best of the Best turned out to be anything but the best. It is arguably the least apt name since Pope Paul VI dealt a blow to nominative determinism by making Jaime Sin a cardinal. The double superlative doth protest too much, methinks.
We all get it wrong at times and will continue to get it wrong in the future, keeping those to a minimum is key.
Thank you for writing this. Very helpful.