QUALIPORT
Shares That Could Lose You Money

By Maynard Paton (TMFMayn)
January 7, 2002

Carburton Street, London -- All too often, investors try and focus on companies that will become future winners. However, an important part of the stock market learning curve is to sense businesses that are set for shareholder heartache. This time last year, I presented an anti-Qualiport; the companies involved having at least one attribute that this portfolio tries to avoid.

The investment characteristics and shares were:

* Overvaluation: Telecity (LSE: TCY) and Fibernet (LSE: FIB);
* Unpredictability: Ted Baker (LSE: TBK) and Coats (LSE: CO.);
* Complexity: Cambridge Mineral Resource (LSE: CMR) and KS Biomedix (LSE: KSB), and;
* Dubious management: Photo-Me International (LSE: PHTM) and Wiggins (LSE: WGG).

Here's how the eight shares have performed over the past twelve months:

Company                    Share Price        Share Price        Change
                             22/01/2001         07/01/2002         (%)
                               (p)                (p)

Telecity                       603                12             -98.0
Fibernet                       880               482.5           -45.2
Ted Baker                      320               310.5            -3.0
Coats                           47                49.75           +5.9
Cambridge Mineral Resource      27                23.25          -13.9
KS Biomedix                    601                116.5          -80.6
Photo-Me International          77                34.5           -55.2
Wiggins                         30                18.4           -38.7

Excluding dividends, the portfolio is down some 40%. With the FTSE 100 falling 16% during 2001, only two companies made any significant headway. The shares of textile firm Coats were the only ones to rise in the year, no doubt due to the company's 'value' characteristics (Coats has a dividend yield of 6% and a price to book ratio of 0.6). Elsewhere, fashion group Ted Baker had a volatile twelve months. Early last year, its shares plunged to under 200p after the group issued a profit warning. And the rest? Well apart from Cambridge Mineral, 2001 was truly a year to forget.

If you're a long-term investor, the one characteristic every company in your portfolio ought to have is a 'sustainable competitive advantage'. Far too many companies exhibit high rates of growth for a few years, only to succumb to the competition at some point down the line. "Competition is hazardous to your wealth", as Peter Lynch once said.

In this respect, small, highly-rated, fast-growing companies -- whose competitive barriers are questionable -- are always prime candidates for portfolio despondency. Here are three shares that seem to lie in this dangerous category.

Merchant Retail

Year to March        1997    1998    1999    2000    2001

Turnover (£m)          61      67      75     100     112
Pre-tax profit (£m)   1.8     3.0     4.0     6.3     8.1
Earnings per share    1.4     2.3     3.0      4.2    5.7

Worth £140m, Merchant Retail (LSE: MRT) operates The Perfume Shop, a fast growing chain of specialist perfume stores. The company had 67 Perfume outlets at the end of its last financial year, with another 11 stores scheduled for opening in the current period. The chain is the UK's third largest retailer of fragrances, with expansion into Europe also on the cards.

Although just 50% of Merchant's profits are generated by the perfume chain (the rest is produced by the group's more traditional department stores), competitive dangers lurk. The High Street is a cut-throat environment at the best of times. There are few barriers to stop copycat operators, or the likes of Boots (LSE: BOOT) or the supermarket chains, from damaging Merchant's growth programme. With earnings per share (EPS) expected to grow by 22% this year, Merchant shares, at 129p, currently trade on a price to earnings (P/E) ratio of 19. The rating is not tremendously high, but it's high enough given the competitive and expansion risks.

Unite

Year to December     1996    1997    1998    1999    2000

Turnover (£m)         0.5     1.8     5.5    11.1    30.0
Pre-tax profit (£m)   0.1     0.6     0.2     0.9     2.7
Earnings per share    0.3     1.5     0.9     3.5     6.6

Valued at £235m, Unite (LSE: UTG) develops and lets student and NHS worker residential accommodation. At the end of June, the company had 70 different properties around the UK and planned to triple the number of 'bedspaces' to 60,000 by the end of next year.

While progress is fuelled by the growing outsourcing trend and Private Finance Initiatives, Unite is not alone in its industry. For instance, facilities management stalwart Jarvis (LSE: JRVS) has a notable, growing presence in the provision of university and healthcare accommodation. While such activities may provide stable revenues, those all-important barriers to entry and competitive strengths remain somewhat unproven in this fledgling sector.

Indeed, at 347p, Unite shares currently offer no margin of safety. By the end of this year, Unite EPS is expected to have risen to 11.1p. Those forecasts put Unite on a forward P/E of 31. Furthermore, the company is also saddled with a relatively large amount of debt. The latest full-year results showed operating profits less than twice the size of net interest payments.

Liontrust Asset Management

Year to March        1997    1998    1999    2000    2001

Pre-tax profit (£m)  -0.4     0.4     1.1     3.8     5.5
Earnings per share   -2.0     0.7     3.0    10.0    11.4

While all of Liontrust's funds have beaten their respective benchmarks in the past, only one has been in operation for more than four years. And although there are signs of some refreshing honesty by the fund managers in question (one annual review starts: "My apologies -- I didn't do a terribly good job last year."), an investment in Liontrust is essentially a bet on the company growing its investment assets through consistently superior stock picking skills.

At 438p per share, Liontrust shares presently stand on a forward P/E of 42, a figure based on estimates that excludes performance-related income. Given the generally poor record of professional money managers, there appears to be plenty of investment downside should Liontrust's managers go off the boil and performance-related fees are not forthcoming.

More: Share That (Mostly) Lost You Money In 2001 | Merchant Retail disucssion board | Unite discussion board