Lakehouse, Stock Spirits and Sprue Aegis

I commented on the affairs of Lakehouse and Stock Spirits in the last ShareSoc newsletter. Both companies had been attacked by unhappy shareholders who had submitted requisitions to change certain directors, a process that seems to be becoming more common of late. Both situations have now to been resolved to a great extent.

At Lakehouse the Chairman Chris Geoghegan is departing forthwith, with the three new directors proposed by the requistioners being appointed to the board as non-executive directors including founder Steve Rawlings. This is clearly a victory for Steve Rawlings and Slater Investments and a climb down by the company. Let us hope that the latter did not waste too much money on fighting the proposals which did not seem unreasonable to this writer.

At Stock Spirits, investment company Western Gate wished to remove the CEO, Chris Heath, and appoint some new non-executive directors. On the 18th April it was announced that Mr Heath was retiring “with immediate effect”. Was that a defeat conceded? Not quite. It’s not yet concluded because the board is still fighting the other resolutions put forward by Western Gate.

Another company in the news is Sprue Aegis, a maker of fire/smoke alarms. On the 18th April the share price fell by 54% after the company announced that it has had to make large provisions for warranty claims as a result of faulty batteries in its alarms. In essence what should have been “lifetime” batteries have failed after a few years and started “chirping” that the battery needs replacing. They also reported challenging trading conditions in France and weaker sales in Germany so that results will be much below expectations.

These kinds of events really annoy investors and tend to undermine confidence in stock market investment. Was all this bad news a surprise to management? And did all this became known at the same time? Or perhaps more to the point, how does one avoid such disasters?

Now I have to admit to holding this stock in the past but I sold in January of this year. Did I know anything specifically that worried me? I was certainly not a party to any inside information if you were thinking that. There was a trading statement in January which was negative in parts, but it would not likely have prompted an immediate sale in most readers. But it did become apparent to me that this former market shooting star was falling to earth with future profits forecasts being reduced. There also seemed to be a lot of uncertainty about future sales as this is a company where there is little “repeat” business, i.e. there is only short term order visibility. This seems to be true generally of electronic device manufacturers and distributors which I am becoming very wary about. So although the company had shown a high return on capital in the past, I rather concluded that it might be a somewhat “unreliable ” business and hence not the kind of “quality” stock I prefer to hold.

But the key message for investors is that trust in the management of a company is very important, and the directors of Sprue Aegis have certainly managed to instil a great deal of distrust in their investors from these events. It may take a long time to recover from these problems. and when you lose confidence in the management it’s time to sell regardless of whether you have made or lost money on the investment.

Roger Lawson

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