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.
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.
An exclusive report from The Right Side
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.
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