I smell a rat here

By Bengt Saelensminde Oct 05, 2012

Bengt Saelensminde

Share with
friends:

Comments (10) Print this article

Sometimes markets just don't make any sense. This week I watched a share I've followed for years announce some fantastic news. This is a company previously worth some £50m. And it turns out that the company is about to receive a one-off payment of between £20m and £25m. And there could be another £10m more to come.

What would you expect to happen to the stock price? Should go up right?

Well, as what appeared to be fantastic news was released, the share price actually fell. And now, the stock is worth about the same as the cash windfall heading its way. How did that happen?

Well I'll tell you today. Because after years of investing, I've come to recognise when a little bit of shenanigans are going on behind the scenes. And I reckon there could be an opportunity here to buy a great company at a great price. Here's why…

The real reason this stock is selling off

I discussed African food producer Agriterra (LSE: AGTA) back in February. And having suggested that this stock could be a great play on the rising African foods industry, I went on to write another issue – explaining the other side to the stock – the potential for big money through a legacy oil asset.

Agriterra share price

And wouldn't you know it, I was bang on. News of the oil asset gradually worked its way into the public eye. And as it did, a load of new shareholders came onto the scene – guys wanting a fantastically cheap way into what could be a great oil find in Ethiopia. The shares went up from around 3p to over 5p.

So what happened this week?

Well it turns out that AGTA has sold its 20% stake in a potentially exciting oil block in Ethiopia. This was an asset that they had on the balance sheet from its previous incarnation as an oil explorer. And the company got a pretty penny for these exploration rights. In fact, the cash payment is worth about the same as the whole company was worth when I tipped it.

So the fact that the company has now got a load of cash coming its way is surely fantastic news right?

Well, not entirely.

Special report

An exclusive report from The Right Side
"Bankrupt Britain?"

You see, the thing you've got to remember about the stock market is that prices are set by supply and demand. They are NOT set by the fundamentals of the company – for example by the company's prospects, or its net asset value (NAV).

The harsh reality of it is that the market is full of clever people (not least of which are market makers) that set share prices to suit current circumstances – irrespective of the fundamentals for the company.

And for AGTA, the current circumstances are that there are a lot of sellers in the market. You see, all the guys that jumped aboard in the hopes of making it rich on the oil-carry are now disappointed. The company has taken the decision to cash out the oil asset early. This company is focused on the agri-business. They decided to take a $50m payment now, rather than let the money ride on a potential oil discovery.

So all the oilers are cashing out. In short, they don't give a fig about what could be a very promising agri-business.

And financial markets smell a seller a mile off. They drop the price immediately. You wouldn't expect any serious player in the market to take the stock off their hands at a reasonable price, would you?

This African food producer is flush with cash

So that's where it is today. The price of this stock is nearly back down to where it was in February when I first discussed it (about 3.5p as I write). And yet the company's prospects and cash position are incredible.

In fact, there's the potential for another £10m windfall next year as a result of another legacy oil asset in Sudan – I won't get into that now. But I'll be sure to fill you in when I next write about the stock, which should be the end of the month when they've released the full-year results.

As soon as the market has liquidated the stakes built up by the oil brigade, I expect the shares to be re-rated.

I'll stick my neck out here. I reckon back to 4.5, or 5p this time next year. Doesn't sound too exciting? Heck – that's 30% or 40%... come on, give me a break!

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do

Comments (10)

Published in Share tips | More articles by Bengt Saelensminde

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. DEREK

    (05 October 2012, 08:47PM)  Complain about this comment

    WHY I SOLD MT SHARE IN AGTA WAS OVER SELLING THERE RIGHTS TO THE OIL IT WAS YOU WHO TOLD THEY US IT COULD BE A GOOD INVESTMENT OVER THE OIL IM SO GLAD I SOLD I WOULD HAVE LOST OVER 1400.00 POUND I WAS SO LUCKY I DID OK THAT OK THEY MIGHT PICK UP GAIN IN A YEARS TIME I CANT SEE I WOULD MAKE A LOT OF MONEY OUT OF THEM AND THATS WHAT WE ARE ALL TRYING TO DO

  • 2. Jan T

    (05 October 2012, 08:51PM)  Complain about this comment

    Bengt,

    I also watched with disbelief as the price sank this week. Then I remembered the words of JM Keynes, that : "Markets can remain irrational a lot longer than you and I can remain solvent."

    As I've recently started to be a bit more pro-active in my investments, I found this share to be particularly educational. Back in Feb, when you featured it, I bought a block of shares, as I liked what you said about them, and I felt drawn towards what the company was doing in Africa. At the end of August the price started to rise, and then I have to confess I got greedy - I bought some more, at a price well above todays. I thought the price was headed for double digits - at least. But now I reckon that I am in for the long haul. And I don't regret it. I'll tuck these shares away in my portfolio, and watch them with interest, because like you, I think that the prospects are really positive.

    So what did I learn? Trust your instincts, but don't get greedy!

  • 3. colin burn

    (05 October 2012, 09:21PM)  Complain about this comment

    I bought originally at 3.5p. The price spiked to 5.3p a little before the announcement . I got suckered in and bought more. The oil has been sold a far too low a price. If the oil forecasts came good, then the shares were worth at least £1.50.
    But even today, with 50m cash that is the same as the market capitalisation, and the agriculture is free. Yes, there will be a slow recovery. But did Ben actually buy any?

  • 4. Lennie Dawson

    (05 October 2012, 09:35PM)  Complain about this comment

    I don't know about the oil spectulators but I agree the Market Makers aren't entirely responding to supply and demand. That's fine by me, If they want to play I'll go along with it. I really love cyclical shares.

    Since March I've twice bought 100,000 shares at near 3.5p and sold for 4.75p. That made me around 35% twice, with the same chunk of money.

  • 5. Steve

    (06 October 2012, 01:41AM)  Complain about this comment

    According to Sharescope the market cap today is only £36.8m. Sounds good

  • 6. dave

    (06 October 2012, 09:24AM)  Complain about this comment

    this stock has been good for me since Bengt first tipped it, I bought and sold a couple of times, taking about 20% each time, on last weeks price plummet I bought at about 3.6, This was always an agriculture play to me.

  • 7. TM

    (15 October 2012, 03:40PM)  Complain about this comment

    The shares have continued to be sold off relentlessly and are now at 3.1p mid. Surely this isn't just the oil brigade selling out? If so then the shares seem way oversold and it's surprising that more people aren't snapping them up. Could something else be amiss or are the sellers selling here after such an extreme drop just plain crazy?

  • 8. Bengt

    (18 October 2012, 09:31PM)  Complain about this comment

    Still the oilers in my opinion

    This could take months to shift

    Bengt

  • 9. dlp6666

    (22 October 2012, 09:34AM)  Complain about this comment

    Great minds think alike - see David Stevenson's column at ft.com on Friday 19th October here:
    http://www.ft.com/cms/s/0/5f9c80ae-16f8-11e2-8989-00144feabdc0.html#axzz2A0xMZY3q

  • 10. dave K

    (25 October 2012, 06:06PM)  Complain about this comment

    Great tip Ben , bought @ 3.05 , now up 8% already

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>