Small Cap Value Report (23 Oct) - HOME, SPD, ASC, ZTF, AFN, PRES, BRY, OMG

23rd Oct '13 by Paul Scott

16 comments 26738 reads

Good morning! They are not small caps, but as regulars know I take a keen interest in retailers, having been FD for a ladieswear chain in the 1990s, so I shall briefly peruse the results from Home Retail (HOME), ASOS (ASC), and Sports Direct (SPD). Also, they are good barometers for the health of consumer spending/confidence, so of wider interest. Here's an instant reaction to each;

Home Retail (LON:HOME) - Interims to 31 Aug 2013 - "good first half" with positive LFL* sales growth (2.3% at Argos, and 5.9% at Homebase). Margins are wafer thin though, with only £27m profit on £2.6bn of turnover, although their financial year is weighted towards H2. Impressive growth in sales via mobile devices. Very strong Bal Sheet, including £412m net cash. £1.5bn market cap at 184p per share. Vague but positive-sounding outlook statement. Fwd PER is 19, so not cheap, but strip out net cash & storecard debtor book, and arguably it's still reasonable value, especially if they out-perform against forecasts.

Sports Direct International (LON:SPD) - Trading update. Good grief, I had no idea these shares had reached 714p, that's a market cap of £4.3bn! Also on a forecast PER of 20, so not cheap. They are trading very strongly, with group sales up 15.1% for the 9 weeks to 29 Sep 2013. Trading in October has "remained strong", and they are confident of meeting EBITDA target of £310m.

ASOS (LON:ASC) - Final results for the year ended 31 Aug 2013. We all surely know this is going to make a spectacular short at some point, but when? I'm very tempted to open a short in it now. At £53.83 the shares are on a fwd PER of 83.9 times earnings, according to Stockopedia. That's just ridiculous - a market cap of almost £4.5bn. Sales grew 39% to £769m, and Profit before tax & exceptionals was up 23% to £54.7m. Diluted underlying EPS was up 24% to 49.2p. So put that on a PER of say 25, and you would have a share price of £12.30, which would be reasonable. The actual share price is over 4 times that! It's the international sales that the market is so excited about, as…

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AstonGirl

23rd Oct '13

As a SPD shareholder for the last 2 years I am delighted with the share price. Historically it's PER has been higher than I'd normally invest in but the growth plans of Mike have made it worthwhile.
Given your mainly positive analysis of today's retail stocks Paul (excluding their PER's perhaps), do they suggest that the pendulum is swinging back in the right direction?

Paul Scott

Hi AstonGirl,

As mentioned in the article, my main concern over retail spending is that we have to see rising real incomes before that can happen in a sustained way, which isn't happening at the moment.

SPD has done a remarkable job in dominating its sector, due to very strong management, and heavily incentivising its key managers with a very generous bonus scheme - other companies please note!

The valuation looks warm to me now though. The shares have done extremely well, and personally I'd be selling, or at least top-slicing by now. Remember that the Olympics gave things a huge boost this year, so I'm not sure how much further the shares can go on a PER of 20. That is expensive. There comes a point when we all have to bank the gains, and move on, with our most successful investments. I can't see that much more upside on SPD in percentage terms from here, at this valuation. But it's your dosh, so your call! DYOR as usual.

Cheers, Paul.

Calalily

Paul, did you open that short ASC?

Funnymoney

Paul,

ASOS I commented on the 13 March in your column that "people have been saying this about ASOS for more years than I care to remember".

Price then 3186 (went to a low of 3076)
Price now 5182

Currently internet traffic is up by 30% on last October.

On the same day I commented that by like token FCCN wasn't going anywhere soon (27p then 31p now)

Just follow the numbers! Shorting anything too early is madness, you have to wait until the share price is breaking down and falling though the big areas of support.

3186 3076 13 March

SevenPillars

Very brave of you to short ASOS. I'm not saying that you are wrong and have no idea of your timeframe for such a short, but this one has defied bear raiders for some time. I think Evil Knievil is reported to have a lost a packet shorting it. He finally gave up. It will topple at some stage, but I think it will probably take a poorer than expected result or IMS to bring it down. Or a market crash. Both of which could take a long time to happen, and just might not happen. The chart gives some hope in that it is stretched on momentum, but there has been no real confirmation of a long term break in that trend yet.

Hi,

I think the key thing with short positions is to keep them fairly small, and in larger caps. There is then less chance of a catastrophic spike up (hundreds of percents) which was recently seen on people shorting CPP for example, a tiny market cap which multi-bagged & caused short sellers serious problems.

So with ASOS, I've sized my positions such that I can absorb a 20-30% drawdown on the position without it making much difference to my portfolio.
I'll run it for say 6 months & see what happens!

Just because ASOS has defied shorters in the past, doesn't mean it will do forever. Remember those bonkers 1999 valuations on growth stocks - they pretty much all dropped 90%+ in 2000-2002.

A few shorts on frothy stocks is good portfolio insurance at the moment too, in my opinion. Absolutely key to keep them small though. I'll probably end up with egg on my face, as shorting has never worked for me in the past LOL!

Regards, Paul.

hayashi22

Paul,
Can you tell us a bit more about the technicals of your ASOS short? Was it via CFD position?Tks

bsharman

OMG is a great ticker!

Hayashi22,

Yes, you can short stocks through CFD or Spread Bet accounts.

Regards, Paul.

cig

ASOS (LON:ASC) could easily do +30% in the next six months though. If you buy the growth story and assume they end up say half the size of Inditex (Zara) or H&M in a few years, they're still a multiple off their final valuation. For fun I just took a small long position with a take profit at 1/3 up (rounded to £70).

ASOS (LON:ASC) - think I might have just got a catalyst for a price fall - after hours announcement that mgt are selling 1.88m shares, so cashing in to the tune of £98m!
http://www.investegate.co.uk/asos-plc--asc-/rns/proposed-placing/201310231639152454R/

Will be interesting to see what the share price does tomorrow.

Cheers, Paul.

rhomboid1

Great well timed short Paul, I can't see the shares doing anything other than dropping heavily on the news

Cheers

jimjimjim

Oh great. I invested quite a bit thinking the price increase during Sep 20-24th was an indicator of future confidence, that and 2/3 brokers today reiterating 6000p. The CEO is entitled to some profit taking though, fortunately he still has quite a few left! I have no choice but to hold and hope for the best :-(. Maybe some day in 2014 or sooner!

24th Oct '13

It was a spectacular non-event in the end. Mind you, while it didn't seem bad enough to me to break the medium term momentum, I too thought some day action likely. I guess they just don't have any investors left who think in value terms, which just reinforces that momentum may continue for a while. Will you remain short or did you take the small profit?

25th Oct '13

Hi Cig,

As stated earlier this week, I've opened the short on ASOS with a tuck away & forget mentality. So I'll revisit in 6 months, when I expect it could be a lot lower. Gravity cannot be defied forever. They are now on a PER of over 100 times EPS, yet the EPS growth has now slowed considerably, as it's bound to when you reach £0.75bn turnover.

It's only a smallish short position, so I'm relaxed about it & happy to think medium term on it.
The valuation is bonkers, and is bound to correct, sooner or later. You have to be able to withstand a (say) 50% drawdown, which I can with this without any major pain.

It's not really my area shorting, but where I lost money in the past trying it, was that I massively over-sized the positions, so became a forced buyer when they went up 20% or more. That won't happen this time, as I've only done both ASOS and Ocado on a small scale (both put together are less than 10% of my long positions).

Cheers, Paul.

28th Oct '13

I still don't understand what is so gravity-defying about it. Next year's earning are irrelevant given that, if the growth story does work, you're buying considerably higher earnings a few years ahead. That they're positive at all is itself remarkable, growth companies often invest more than they earn -- it's good that they have that discipline, diminishing the risk they try to grow too fast and invest carelessly.

So to value it the question you need to answer, if you like the earnings route (I'd use market cap as a shortcut, but that's really equivalent) is what the earnings will be in say 10 years from now. Then you apply a discount for the probability of failure, possible dilutions and time value. What are broker estimates for FY2023? To keep my earlier "half Inditex" hypothesis, that would be £1 billion of earnings. PE of 5! Of course you need to discount that to know how much you want to pay for an hypothetical £1 billion in 2023. It's a wild guess, but playing with numbers here does not show anything implausible -- there's a relatively generous margin of error: the valuation does include a large probability of failure.

I mean I'm a universal skeptic who tends to find everything overpriced by default and I think that one is still reasonable at this point. It may not be a particularly stellar long term investment given the amount of growth already priced in, but it's not either in unrealistic territory (real bubble valuations imply that a company will get 500% world market share etc).

Besides, if we look back within your short term timeframe (6 months), you need current holders to sell en masse for the short to pay off. Why would they sell? It's improbable that the company has any "next year PE" value investor on their share register. To crash, you need news that kills the hope, like a major operational disaster or their international expansion attempts being a total flop. It's possible, but seems too low a probability to justify a short. Besides, it's got all the attributes of something that bubble lovers can like, so you have further downside risk here if it moves from the current plausible valuation to something really silly.

Ocado in comparison seems to have better odds, as it's harder to find a convincing growth story: the chance they become the next Tesco, or a supply chain kit major seem slimer.

Small Cap Value Report (23 Oct) - HOME, SPD, ASC, ZTF, AFN, PRES, BRY, OMG

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Paul Scott

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