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Monday, 20 October 2014

“There is nothing cheap about penny stocks, when you lose your money on it”; telephone conversation with a reader

This weekend I had the pleasure of having a telephone conversation with one of my latest readers, who had recently discovered my website and the information on it. Let’s call him ‘John’ (not his real name).

Without disclosing much about his background, it suffices to say that John became one of the ‘victims’ of the Dutch technical service provider Imtech. He lost quite a lot of his own savings’ money on this tech fund under jeopardy.

While his personal background, as well as his shareholders ‘comfort zone’ lay in the oil and gas industry, he was attracted both by the extremely low price of Imtech stock and the earlier reputation of this technical service provider. He decided to give it a shot and invested heavily in Imtech stock, without doing proper research into this company. It was a choice John would deeply regret soon.

As so many other people, John thought that Imtech’s drawbacks, with respect to its loss-bearing subsidiaries in Poland and Germany, would be of a temporary nature.

The good reputation and specialized knowledge of the company with respect to their different service areas, as well as the healthy order portfolio, would deliver the necessary cash-flows to pay back most of the enormous debt position of Imtech. The sale of a few company parts would smooth down the remaining edges and supply the necessary working capital.

Eventually, the remaining parts of Imtech would become a healthy and mostly debt-free company again, he thought, with a good order portfolio and sufficient new opportunities. In that case, he would have hit the jackpot, as the stock rate could have exploded then. And hey, how much money can you lose on a stock of less than €1 per share, right?!

Unfortunately, this was not going to happen. When John would have checked the balance sheet and P&L of Imtech and would have followed the news, he would have found out that the enormous debt of well over €1 billion, in combination with the skyhigh interest rates of more than 8%, made debt reduction almost a ‘mission impossible’.

And then we are not even speaking about the obligation of the company to gather a working capital of €400 million in 2014, in order to meet the bank covenants to this respect.

Other worrisome factors were the large amounts of goodwill on the balance sheet of Imtech and the circumstance, that it is very hard to sell parts of a company for a decent price, of which the people and the knowledge base are the main (and almost only) asset.

In such companies, the net worth is almost equal to the reputation of the company. And Imtech’s reputation lay in tatters at that very moment.

What happened with Imtech, since my March 2014 article (see the aforementioned link), is history. Imtech had indeed mounting liquidity problems, due to the heavy debt burden, the huge 8+% interest and the ‘impossible’ goals in the bank covenants.

And after every presentation of quarterly data since March, the investors and shareholders felt that “the worst had yet to come” with Imtech: problems got bigger, losses increased and there seemed to be no light at the end of the tunnel, in spite of the soothing words of CEO Gerard van der Aast at every presentation.

Royal Imtech's year-to-date price development
Chart courtesy of
Click to enlarge
In order to stay afloat, the company tried to sell some company parts, but it nevertheless had to turn to its shareholders repeatedly. These took a few heavy blows on the chin, in spite of the recent news that Imtech got slightly more favourable interest rates from its syndicated lenders.

One month ago, the company created total confusion when it offered 60 billion additional shares, at €0.01 a piece, in a limited access primary offering (called a “claim emissie” in Dutch).

Shareholders had to decide between cutting their losses, while their share in Imtech would vaporize under this tsunami of new stock, and buying many more shares in it, in order to keep their interest in the company intact. It was truly like ‘being stuck between a rock and a hard place’. You could also justifiably call it a lose-lose situation.

Royal Imtech's last month's chart
Chart courtesy of
Click to enlarge
A trading day like a roller coaster ride followed, in which the price for Imtech shares and claims seemed to go through the roof. This was a consequence of the complicated price calculations, which nobody understood properly.

That trading day brought a mixture of old stock, new stock and tradeable claims for sale and it was virtually impossible to set the correct prices; for traders as well as for the stock exchange itself. However, in the end – when the gunsmoke had lifted – the shareholders ended with virtually nothing in hand.

The lessons that many people and especially John learned with Imtech, are also very much applicable to other penny stocks:
  • A penny stock with a rate of less than €1 can still go down 99 times: one cent at the time. And please don’t think that this won’t happen, because the stock price is already very low;
  • The circumstances that turned a company into a penny stock, are the same circumstances that could kill the company eventually;
  • Throwing good money at bad money – with Imtech this happened during the claim emission – is the worst thing that can happen for an investor. So sometimes it is better to cut one’s losses, than to endure the full ride down the drain;
  • When someone invests heavily in a losing penny stock, he doesn’t lose pennies, but loads of hard-earned pounds.

So the next time when you want to invest in a penny stock for the sake of it, without doing your homework properly, please think about John. Then his losses could save you some serious heartache.


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