Company Research

I'm sure many of you do what I do when researching a company: read the statements/results companies put out every so often.

ADVFN very kindly makes it easy for us to scour the last report.

Trouble is, they're not exactly easy to read. They seem to be written in some kind of strange English that takes an awful lot of unravelling.

And however badly a company is doing there will almost always be some kind of positive spin used on its results.

The statements are also usually quite long and often complicated. Especially when it gets down to the nitty-gritty of the accounts.

So how can us investors seek out the truth?

Let me be completely honest here.

I'm no accountant and I have no idea when it comes to reading the accounts. I have very little grasp of what the in-depth figures mean and I doubt whether most investors have either.

But over the years I've discovered an excellent and easy system to work out at least whether a company should be sold or certainly not bought!

This method is so simple anyone can do it.

It simply involves skimming the statement and looking for one key word.

"CHALLENGING"

In my opinion this word means the company is probably in some kind of trouble. At the very least there is some doubt over the future.

Another less charitable way of putting it is if a company mentions the word "challenging" what it's really saying is it's up a certain creek!

It doesn't matter to me how positive or fluffy the statement appears; one challenging and I'm out.

Two other words to look for are "difficult" and "volatile".

My simple method works rather well.

For example, in the statement produced by Henlys on December 12th 2003, the word "challenging" or "challenge" was there five times.

The shares went up after the statement but I would have sold - five challengings are more than enough for me. By January the shares tumbled 40% on a profits warning and by June the company was worth practically nothing and then suspended.

A statement from retailer Jacques Vert in July 2003 contained two challengings, two difficults and a volatile!

By May 2004 the shares were down 30%.

Surprisingly, the word challenging is often used in the same sentence within what seems a positive paragraph.

Take this from a statement put out by Regent Inns on September 3rd 2003.

"I am pleased to report on a strong financial performance from our branded operations during the year, despite the most challenging of conditions in our market place".

I held Regent shares at that time and the moment I saw that statement my finger was on the sell button double quick.

The statement also contained other phrases:

"In such a challenging trading environment."

And challenging then got replaced by "difficult".. twice!

Amazingly the shares rose after the report because on initial reading it seemed positive.

But my system told me two challengings and two difficults meant exit time. Just as well - I sold my shares at 90p - by June 2004 they were down to 40p - down in value by more than a half.

So, take a good look at the shares you own. Read the company's last report. If you see the word challenging you know what to do!