- Key reasons why Aussie investors are facing an interest rate dilemma
- Looking beyond the share price – a key lesson from CBL’s capitulation
- Rotation to large caps ‘uncomfortable’ but creating opportunities
- 30 years after 1987 – how stock market crashes can make you a better investor
- Avoiding the next Vocation: Five “watch outs” for selecting stocks
- Is the market expensive? Four reasons this is the wrong question to be asking
- What makes the table-topping Prime Value Cash Plus Fund tick?
- Stocks to watch in an uncertain market: CSL
- Two big takeouts for investors from 2016
- Five reasons why absolute return investing is less volatile than index investing
- Six keys to finding value in the market
- Brexit: Implications for investors
- Difficult start to 2016 for share market – opportunities exist for high conviction stock pickers
- Prime Value’s views on current market volatility
- Short-term cycles to continue into 2015
- Some stocks cope with volatility better than others
- Reporting Season Underlines Need For Strong Fundamentals
- In the world of finance, the most dangerous thing is the thing that never moves
- 2014 shaping as a stockpickers market
- Dark Clouds On The Horizon – Risk Or Opportunity?
- Three Chances at Getting it Right
- Keeping on top of the RORO markets
- Notes from China
- Spring Cleaning The Investment Pantry
- Does Corporate Memory Have A Role In Stockpicking?
- How Do You Harvest Your Returns?
- Why Avoiding the Herd is More Important than Ever
- Safe Bets In Turbulent Times
- History: First Multinational Renaissance Business
- How Bees Invest
Looking beyond the share price: a key lesson from CBL’s capitulation
By ST Wong – April 2018
Stocks can switch from triumph to disappointment in myriad ways – CBL recently demonstrated how an irresistible stock may crash and burn, reminding investors about prioritising capital protection over soaring share prices. Yet there was always one key reason why CBL was a riskier stock than first appeared when it was flying high.
CBL is an insurance company which listed in New Zealand during October 2015, soon becoming a market darling.
After opening on New Zealand’s exchange at NZ$1.73 the company’s share price climbed to NZ$3.00 over two years. There aren’t too many investments which nearly double your money in that time frame – investors who bought in at the IPO would have been feeling extremely good about CBL, while others clamoured to ride the price upward. What could go wrong?
Anyone looking solely at price would have experienced a huge shock when CBL went into administration during February 2018. From success story to bust, what went wrong?
This is a pattern which repeats on share markets. In Australia, we saw high flying stocks like Babcock and Brown, and ABC Learning eventually delisted from the exchange, leaving investors with nothing.
The reason for each failure is different, but some of the lessons are the same. Babcock and Brown and ABC Learning reflected over-leveraged investments pre-GFC. The reason for CBL’s collapse is different again. But in all these cases the warning signs for investors were there early on.
Investors will only find the warnings signs when they are committed to minimising risk and protecting capital. There are many indicators to consider, including company management, balance sheet, competition, regulatory risk and more.
Because CBL’s share price was doing extremely well it was worth considering for investment. But share price is only one indicator, and we needed to dig deeper.
CBS displayed good prospects, yet one key aspect didn’t sit too well: CBL was a monoline. In other words, it’s an insurance business with only one line of business – builders insurance.
CBL was writing builders insurance in France and other markets – investors might now wonder how a New Zealand firm could have a competitive advantage in these markets. It’s an interesting question but may not explain everything. We don’t know the full story behind CBL’s problems. But there is an acute lesson on the risks involved investing in a single-product company.
Any monoline business has an extra risk: if the single business line is ever in trouble, there is no place to hide. That’s the story of CBL.