Things do sometimes go wrong, as WANdisco (LON: WAND) and Alphawave (LON: AWE) have just shown – with an able little assist from Altyngold (LON: ALTN). More specifically things sometimes go wrong with the accounting within a company. As is the case with all three of these. However, sometimes – just the sometimes – there’s an opportunity in such problems. Because the market reaction is always the same at the first hint of bad news here.
Don’t forget Polly Peck
This is logical enough, there have been horrors stories and disasters enough over the years. Possibly the biggest was Polly Peck. One day it simply announced it was out of money. Which was weird because it had been reporting vast profits. The trick had been that it borrowed in Swiss Francs, low inflation, low interest rate currency. Then it lent (to farmers, but that’s near irrelevant) in Turkish Lira, a high inflation, high interest rate currency. It borrowed at perhaps 4% and lent at 50% and more – vast profits which it duly reported. It also reported the currency losses – high inflation currencies will fall over time with respect to low inflation ones. But it reported those on the balance sheet, not the profit and loss. So, it was making vast profits and also running out of money at the same time. All of which was in the accounts, no one was paying attention and it went to being worth nothing almost overnight.
Accounting problems matter
The problems at the current three are all different – from each other and from Polly Peck. But given the precedent everyone panics at the merest hint of accounting problems. With WANdiso they’re right to as well. As the company has reported to the stock exchange someone was just making up the sales numbers: “last year’s turnover should have been recorded in a trading update as $9.7 million, rather than its guidance of “no less than $24 million”, and that bookings should have been $11.4 million, not the $127 million the market was told.” Which is pretty impressive when you think about it.
WANdisco shares were suspended before they crashed and they’re going to be relisted real soon now – and boy are they going to crash when they do. Well, OK – but think through how that’s going to prime people to worry about other accounting problem announcements.
There’s also Alphawave
Which is what happened at Alphawave. It doesn’t help that this is also a go-go tech stock, same as WANdisco. The actual announcement is that the results are great, no, really, but the auditors just need a little more time. Ad, well, maybe, OK. Except not everyone believes that, and the shares dropped 15%. The thing being that the shares will be suspended starting at the next open so everyone has to act now – right now. Which some portion do and they decide to get the heck out. Rationally or not rationally, that’s a different matter. But accounting problems do lead to share price drops.
Then there’s Altyngold. This has exactly the same problem – the auditors need some more time. But, as with Alphawave, if the accounts aren’t filed on time then the listing gets paused – the shares are suspended. Altyngold also insists results are just great, and it really is just a bit more time. The shares drop 18% on the same basis – the suspension starts at the beginning of the next session. We’ve seen at least one suggestion that the Altyngold results really are very good and that they’ll rise strongly after the suspension ends. So, this should be thought of as a buying opportunity. That 18% fall will be reversed and more that is.
Sometimes not panicking about accounting can work
Which is where we get to the real point of this. Any and every announcement of an accounting problem or delay is going to be met by a crash in the share price. Simply because that’s on average the correct response. But might – as some are saying – those crashed prices actually be an opportunity? Obviously, we’ll only find out in these cases when the suspensions are lifted – and the answer for WANdisco is equally obviously no.
Shorting into a suspension is a very risky idea because there’s no way to know how long the position will remain open for. But sometimes a bull position from the post announcement crashed price but before the suspension takes effect could be worthwhile.
Just to note that we’ve deliberately chosen shares that are all suspended as our examples, we are not recommending these as actual trades. Rather, using them as examples of the position. So, there’s a corporate announcement that kills the share price – great, is that now an opportunity or not? That depends upon our views of what the announcement was of course but sometimes these really are opportunities, not problems.
