Yahoo Finance It has been difficult owning these two stocks. Here’s why we are sticking with them
This week we’ll take a break from tipping American shares to update readers on two London-listed stocks recommended here in the past, Kromek and Tirupati Graphite. Neither has produced gains for readers and we want to establish whether there is a case for holding on to them.
Both were tipped on the strength of their inclusion in portfolios run by Gervais Williams of Premier Miton Investors.
Williams is one of London’s most respected and experienced smaller companies specialists, so it is a surprise that neither of these tips has so far come good, although we should in fairness point out that he also put this column on to SafeCharge, an online payments business that gained 92pc in the space of less than five months in 2019.
“I am sorry that your readers haven’t done better from Kromek and Tirupati,” Williams tells Questor. “With the share prices of both so low – in part because smaller companies have fallen far further than blue chips in recent months – they continue to have recovery potential and hence we remain invested in both, although we have greatly scaled back the Kromek holding.”
He says he had expected Kromek, which Questor first tipped in March 2017, to win a series of major contracts for its advanced imaging systems. But he admits that, while the company has had “some modest success” in this area, it hasn’t achieved “anything like the sales we were expecting”, although it has received some orders for other products “and these are expected to scale up in the coming year”.
Williams says: “We did reduce our holdings given our frustration with the slow progress, but we haven’t sold entirely as we are still monitoring the company in the belief that its potential may be realised later than expected. But at present, Kromek hasn’t come close to generating the large cash surpluses we had anticipated, which is why we now have a much smaller weighting in the stock.”
When we tipped Tirupati in June last year, we said it had two strings to its bow: a conventional graphite mining business in Madagascar and a much more speculative venture involved in creating a new lightweight graphene-aluminium material with potentially limitless applications in cabling in aeroplanes, cars and elsewhere.
We said that this latter business was “inevitably a speculative bet”, but that “the rewards could be huge” and the shares were “worth a punt” as a result, especially as the stock’s valuation at the time was, in Williams’s view, well supported by the mining business alone.
Unfortunately it has not been plain sailing for either side of the investment case we set out last year.
“Tirupati is continuing to build its graphite volumes, although bad weather has held back progress by about three months,” Williams says. “As the graphite volumes build, the company will hopefully be in a position to generate surplus cash.”
Of the more speculative venture in low-weight graphene-aluminium wires he says: “While we understand that this is progressing, it has been via a business in India that was due to be acquired as soon as Tirupati received permission from the Indian government.
“But New Delhi has recently pushed back and said it is not sure that it wants ownership of this technology to move into a business incorporated in Britain. The company is contemplating alternative solutions but this does put something of a spoke in the potential upside that we originally anticipated.”
But he adds: “That said, the more immediate cash flow surpluses from the new graphite mines still appear to be forthcoming, so we continue to hold our investment, especially as the share price has fallen with markets to such low levels. One of the problems is that there aren’t any brokers’ forecasts of the potential cash flow surpluses, hence the very low share price.”
Many professional investors like to have such forecasts to support their investment case, especially as these forecasts allow valuation metrics such as price-to-earnings ratios to be calculated and thereby allow the stock in question to be compared more easily with others.
Williams concludes: “The whole point about this kind of stock is that when they come right, their share price can respond dramatically. They can rise by a multiple of their current price.”
We will therefore advise continued patience from readers and maintain our hold rating on both stocks.
Questor says: hold
Tickers: KMK, TGR
Share prices at close: 9.98p, 37.25p
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