Small Cap Value Report (21 Feb 2014) - PTCM, RGD, AIEA

21st Feb '14 by Paul Scott

6 comments 13387 reads

Good morning! More fundraisings feature today, showing the remarkable appetite the market currently has for financing growth companies. I shall be watching for signs of this appetite being sated this year, but there's absolutely no sign of that yet. This is the hottest bull market in small caps I can recall since 2003, and reminds me most of the tech boom in 1998-99 - the similarities are uncanny. This is both exciting (as there's money to be made), and worrying, as the more frothy it gets, the more you know it's likely to end with some sort of crash - for over-priced stocks anyway, not necessarily for the market as a whole.

So in terms of strategy, I'm happy to get a little more speculative in terms of growth companies, but am keeping that to a limited part of my portfolio, and am keeping a close eye on valuations, and the exit. If the price gets too high, then I'll sell, and happily move on, even if (as usual) it turns out to be too soon to sell.

The key mistake to avoid repeating is falling in love with the stories such that we refuse to sell once the bubble has burst. Better to recognise this bull market for what it is - i.e. the start of the euphoria phase of a bull market, which presents big opportunities, and increasing risks the longer if goes on.

Porta Communications (LON:PTCM)

Regulars will already know that I recently turned bullish on this fast growing PR group. The reasons are firstly (and mainly) that its most recent trading update indicated considerable progress has been made on profitability, and that they reached annualised EBITDA of £4m in Q4 of 2013. By quoting annualised figures, and EBITDA, they are massaging the maximum positivity out of their performance, but that's what PR people are meant to do!!

Secondly, PR is a people business, so as an investor it's vital that we back the right people. I've not met them, but both Chairman and CEO at Porta have formidable reputations, having been there & done it before, in this sector. So I feel sure that their contact lists contain the right names for potential clients & staff.

Thirdly, the IPO and Placing area is booming right now, and hence that is a favourable…

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ValuableGrowth

21st Feb '14

Hi Paul,

I fear a bubble then crash will drag down the good quality stocks with it. Someone on twitter posted a saying “if you can’t sell what you want, you sell what you can” this is very true in a panic/crash scenario where people need to pay margin calls. Hopefully it doesn’t apply to your readers but it does apply to markets as a whole.

Your readers may find this macro article interesting. I have followed John Hampson for many years and he is a good reader of the bigger picture

http://solarcycles.net/2014/02/18/history-in-the-making/

Regards,

Kerry

Paul Scott

Hi ValuableGrowth,

If we have a general bear market, driven by some global crisis that drives economies back into Recession, then everything will drop, I agree. But how likely is that?

In my view we are more likely to see continued economic recovery, over potentially 5-7 years, so the outlook is probably more buoyant than it's been for a few years. So I foresee bubble growth stocks crashing at some point, but the rest of the market escaping largely unscathed maybe? Not sure why the two would be connected, as most investors stick to one strategy or the other.

In my view, as long as we keep focussed on not over-paying, then our portfolios should do OK even in a market correction.

Large caps actually look quite cheap as well. So that's supportive of the market as a whole.

Cheers, Paul.

HI Paul,

Interest rate rises will decimate the stock markets if they are not controlled, this is the key risk we face IMHO. I agree that this isn't very likely as Mark Carney et al are accutely aware of this and also inflation is falling (currently).

My concern is that the market is ridiculous at the moment, stocks jump because of tips & articles, investors are getting way too excited. I am struuggling to find good value stocks and when I do they have a tendancy to run away from me before I get in.

Have a great weekend,

Kerry

bsharman

There are some very good quality large cap stocks which are reasonable. Barclays is one which I rate as cheap, for example! In the small cap sphere - any company releasing a statement which does not match expectations will get hammered. This is good because with some of the 'blue sky-story' stocks expectations are inflated and therefore there is pressure for companies to exceed these expectations. I bought a blue sky stock today however..... Accumuli. I like the fact that they operate in a growing market - cyber crime and espionage and are on a reasonable and much lower rating than their peer NCC and NO DEBT!

Fangorn

I doubt we will see any interest rate rises until Spring 2015 at the earliest. US and UK economies are fragile still, the numbers often contradictory. QE in US will continue, albeit at steadily reduced clips $10bn each month.

The big question is China -just how vulnerable is the banking sector. GDP growth has held up well, circa 7-7.5%,and Peston, like many, believe that growth of 6% would be sufficient to prevent commodity markets falling off a cliff. But the Chinese banking sector is in a similar position,allegedly, to that of the US/Euro banks in 2007/2008 - they're that over leveraged and exposed.

This World -
How China Fooled the World - with Robert Peston
http://www.bbc.co.uk/iplayer/episode/b03w7gxt/This_World_How_China_Fooled_the_World_with_Robert_Peston/

Worth a watch imo.

Cleeve

Paul With regards to Real Good Food, I agree it has too much debt and is a minor commodity play, and has too many risks with little reward. I like Stockopedias traffic light system and when you look at the first block it shows green for this stock, low PE, low PEG etc, does this show that the system is not as good as it could be as if you looked at this without seeing the debt further down it could cause some investors problem.

On another issue you don't mention PEG's much is it not a ratio that you put a lot of store in. Enjoy your relaxing weekend
Steve

Small Cap Value Report (21 Feb 2014) - PTCM, RGD, AIEA

Porta Communications (LON:PTCM)

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Paul Scott

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