LM >I notice Heat Exchangers(HEI) is trading on a low PE with a huge
LM >franked dividend. Also the Fin. Review says interim dividends are
LM >actually higher.
LM > 
LM > 
LM >So what's wrong with it?

PEs are usually quoted for _historical_ earnings and tell you little 
about future earnings prospects.  The market sets prices based on its 
view of _future_ earnings.  So, a low PE tells you that the market 
(rightly or wrongly, usually rightly) expects the company to perform 
poorly in future.  The big dividend yield tells you the same thing, 
because yields are usually based on historical dividends as well, not 
future dividends.

Interim dividends may not be a good guide because Boards sometimes do 
odd things with interims and there is not enough history with this 
company (floated 93 0r 94) to see what the form is.

This is a good example of the dangers of accepting common ratios (PE, 
Div Yield) at face value.  In extreme cases, spectacular ratios probably
mean the company is about to go belly up.  I am not saying that Heat 
Exchangers is in that category - I don't follow the company.

At this stage of the market cycle I would not touch individual small 
companies like Heat Exchangers with a barge pole (not a punter I am 
afraid).  It is in a very narrow business that is heavily dependent on 
the fortunes of its clients, which are largely very cyclical processing 
industries.

The only exception is if you are an experienced business manager and 
know the key executives personally, in which case you may be able to 
judge the quality of the people and hence the future prospects for the 
business.  The success of most small companies is almost totally 
dependent on the quality of their key people - not the actual nature of 
the business (although even the best managers will go bust making buggy 
whips).

If you want to get into small companies, go for a fund like Rothschild 
Smaller Companies which allows you to spread your risk over many small 
companies and still earn excellent returns in bull markets.  Of course, 
in bear markets they underperform badly, but that it is the nature of 
small companies (ie high volatility).  You have to be prepared to accept 
volatility if you invest in this sector.

That's what I do any way, with good success.

Rgds

Bob
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