PAS in the news: Anthony Hilton: Healthy share price? The company could be a goner
I first met Richard Taffler in the Seventies when we were not only very much younger but were even then fascinated by what makes companies tick. What brought him to my attention was the concept of Z scores. He was working at that time with what is now EY, the accounting and consultancy firm.
What set him apart was that he had developed a formula for seeing whether firms were under stress at a time when no one else was doing that. The market had no inkling of trouble; the company’s numbers appeared respectable; the share price was high; but Taffler knew otherwise.
He used published data, and made adjustments. The results showed how the company fares, how the share price performs and the average solvency threshold, or risk, for the sector.
It was thought this would be a good way to see if companies were liable to go bust, in which case practitioners could short the shares or at least get safely out of the stock. Interestingly, however, this turned out to be much harder than thought. Companies were indeed stressed, but the directors, or at least some of them, realised things were heading for the rocks. From the perspective of the average investor, however, things were still going well.
Directors therefore got out while the going was good by organising a takeover bid for their company by a competitor. In those days there was much less due diligence, and the idea that a company would open its books to a potential buyer was unheard of. So the directors often not only got away with it, but did so at a good price. Those who had gone short on the shares would have had egg on their faces.
That was then but now, after many years of success below the radar, Taffler has decided to make his product, Performance Analysis Score (PAS), available to ordinary investors. He has teamed up with NGR Capital, the parent company of Equity Development, which is a city advisory boutique focusing on smaller companies. The plan is to develop a wide range of research tools for the market.
It seeks to exploit market ignorance of underlying company financials. It generates warnings where financial risk is not being accurately reflected in share prices.
A company’s share price is still strongly inclined to rise or fall over time depending on its financial strength as indicated by the PAS. Companies where the financial strength of the average company is above that of the PAS score for two years are rated as “at risk”.
The best way to illustrate this is in companies who have indeed gone bust. Carillion had a PAS score which was below the corporate average from at least 2013. But its share price remained high until early 2017.
Conviviality was another. In this case though, the company did well up until early 2016 and the PAS score reflected this. It was above the sector average. But then, from 2016 it fell below, although the share price kept on rising from around 150p to 425p. Then, again, it collapsed.
If you go back to the turn of the century telecoms equipment maker Marconi went bust in one of the most catastrophic of all bankruptcies, a company which represented 6% of the FTSE 100 at its peak.
The cash reserves were spent and the company geared up to do more deals. The PAS score went from good to bad in 1999 when the price was actually at its height. And that again collapsed in 2000 though it actually clung on a bit longer.
Nor was this a one-off. The fact is the PAS system has indicated all 20 LSE-listed failures since 2010.
But the system also gives good news, even if shareholders don’t always appreciate it.
Marks & Spencer is one of these. Shareholders see the risk as high what with store closures, competition from the internet and poor sales. But the PAS system indicates that the financials are quite sound and much lower than thought. It indicates that the shares should be bought.
Likewise Premier Foods. It really is a dog with huge challenges but in the past few months the PAS metric has overtaken the average solvency threshold for the sector. Even here things may be looking up.
Click here to see the full article from the Evening Standard.