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.

By ST Wong, CIO Prime Value Asset Management – April 2018

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