Diary: SHFT

Sheesh, value investing is tough. On 08-Oct-2011 I mentioned SHFT (Shaft Sinkers), which sinks shafts for the mining sector. It was picked up originally by Stephen Bland (aka Pyad) on The Motley Fool at 139p. It had a PTBV of 1.4 and a historical PE of 4.7. His conclusion:

Shaft looks interesting, but it's not without particular risk from a value viewpoint, arising from both to its geographical operational areas and on the numbers, a lack of trading below tangible book. If you can live with that and, as always with value have the patience to hang on for as long as it takes, this share may have some worthwhile mileage in it.

When I picked up the story in October, I had noticed that  the share price had slumped 23%, putting it on a PER of 5.1 (rolling basis) and ROE of 26%. I noted it was a potential "magic formula" company, and cautioned against potentially buying at a cyclical high, and that I had no plans to buy the share.

I mention this now because I have just seen that the stock slumped 32% today, alone. The share price now stands at 57.50p. That's a drop of 59% since Mr. Bland first highlighted it. Ouch! It just goes to show how risky the value game can be. There is, of course, a reason behind the decline. It reported:

Shaft Sinkers Holdings, the international shaft sinking and underground construction group, has confirmed that due to the continued slow progress resulting from extremely difficult ground conditions, it has entered into discussions with its client EuroChem with a view to amend or terminate the contract. Sinking works have now been suspended and the parties are in negotiation on the way forward.

There was no great insight into my scepticism on the share at the time, just a sense that there was something "up". My caution on the possible cyclicity of earnings was not the cause of further downfall, for instance. So I was right, but for the wrong reason. So it doesn't count.

Just goes to show - the magic formula is no panacea. What is very interesting to note is that the share has been in steady decline late April. It's one of those cases where the market "knew" that there were going to be problems. Whilst we did experience market turbulence - a lot of turbulence! - over that period, the markets had staged something of a recovery. This one kept going down.

It'll be interesting to see how this one fares 6 months down the line.

In the meantime, "but for the grace go God go I", and a happy and a prosperous new year to you all. Be careful out there!