Stock in Focus: The quest to restore my faith in British small caps
It’s the last week of September which means we are knee deep in UK company reporting season. A hat-tip to Paul and Graham in the Small Cap Value report, who have done a stellar job at wading through many of the 214 companies which have published their results in the last five days. If you haven’t had a chance to read all of their analysis yet, you’ll find the links at the bottom of this newsletter.
I must admit that my own interest in this reporting season has been somewhat muted. The AIM All Share has fallen 13% in the year to date, the FTSE All Share is flat and UK corporate newsflow is heavily weighted towards the negative (delistings, profit warnings, emergency fundraising, you know the drill). And there are only so many times that I can talk about Games Workshop (the only British beacon of light in my own portfolio) without people starting to question whether or not I might be a bit obsessed.
But across the pond, markets remain as exciting as ever. There are innovations happening in new industries (Nvidia’s semiconductors are helping to support the artificial intelligence revolution) and old ones (John Deere now has combine harvesters which can programme themselves).
And so, when I joined David Stredder at this week’s mega-Mello event, my immediate response to his question about which company financial results had caught my eye was an American one - I am certainly not alone in being wooed by the 1200% increase in operating profit at in Nvidia.
But then, in hindsight, I felt a little guilty. I bemoan the lack of opportunity and excitement in British markets, but then have spent most of this financial reporting season being starstruck by US corporate news and dismissing the UK’s offering as “uninspiring”.
And so, I must express my gratitude to Warpaint - the budget make-up manufacturer and retailer whose steady growth, impressive shareholder returns and ambitious plans for further expansion have gone some way to restoring my faith in the UK small cap space. At Mello, I caught up with Warpaint’s chief executive Samuel Bazini, who strikes a good balance between enthusiastic and realistic - two traits which have combined to help help the company beat expectations repeatedly in the year to date. With revenue up 46% in the seasonally weaker first-half, it looks like another earnings beat could be on the cards before the end of the year, which would go some way to justifying the now relatively rich share price.
Just as Paul mentioned when he covered the company’s financial results last week, I am frustrated that I didn’t buy some shares myself when the company suffered through its Covid-blip. But then, it’s not as though the market is exactly lacking unloved stocks at the moment and there is ample opportunity to identify the ones which have scope for a Warpaint-like resurgence.
With that in mind, I am on the lookout for companies with:
A strong balance sheet: short-term blips are less of a going concern if the company is in a net cash position and has no inventory bottlenecks.
A good attitude to investment: companies which generate impressive cash flows from their profits should be reinvesting that cash back into the business through in-house development or acquisition.
A growing end market: short term challenges facing a specific company can be overcome if the markets in which the company is operating is growing at a decent pace.
And this is where the joy is in UK investing. British businesses might not be changing the world at the same sort of pace as their peers across the ponds, but the gems do exist and hunting for them is all part of the fun.