Small Cap Value Report (24 Jun 2016) - Brexit Day!

24th Jun '16 by Paul Scott

54 comments 23999 reads

Good afternoon!

There's nothing of interest in results or trading updates today, so I'll do a summary of the Brexit situation & points arising instead.

What an exciting, and chaotic 24 hours! I've only had 2 hours sleep, so am not sure how much I'll be able to write today before I flake out. Last night was undoubtedly the most exciting election I've ever experienced. Everyone seemed convinced that Remain would win, with 52:48, but it quickly became apparent that Leave were doing unexpectedly well.

Luckily, I spotted the opportunity to have a wager, and did some nifty trades which paid off very well. Good thing too, because today has been carnage - with small caps marked down 10-15% across the board pre-opening, and then further falls if anyone tried to sell.

I can still barely believe that the British people overall (principally non-London England, and Wales) have voted to leave the EU. It's simply staggering. Although I voted Remain (a last minute change of heart), I'm perfectly happy with the Leave outcome. In any case, we all have to accept the democratic outcome of the Referendum, and get on with it. I've got no time for people who whinge about the outcome. It's done, and let's all now come together and make the UK outside of the EU a great success.

A few further comments;

A 52:48 Leave win is not exactly a landslide. I wonder if Cameron & EU might try to cobble together a compromise - e.g. a new associate status for the UK, rather than full withdrawal?

Nothing much happens in the immediate future anyway - apart from the introduction of massive uncertainty into many areas of life. Plus a 2-year negotiated withdrawal process (which has not yet begun).

PM Cameron resigning, but not for 3 months. Osborne must go too.

Polls & betting odds were (once again) completely wrong, throughout the campaign. How can this be? Are polls any use at all?

FTSE 100 - I shorted this, but after a big initial drop, wondered why it was recovering strongly back up to over 6,000. The reason is of course that c.70% of FTSE 100 earnings are overseas. So with sterling having sold off considerably, that actually enhances the sterling value of earnings.

Sterling - amazingly, this apparently both a 6 month high, and a 6 month low, on the same day! The range today has been between £1 = $1.32 and £1 = $1.50. Mind-boggling!…

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narp

24th Jun '16

Reassuring RNS from Easyjet:

http://www.investegate.co.uk/easyjet-plc--ezj-/rns/response-to-result-of-eu-referendum/201606240811351709C/

Fangorn

PP, Taylor Wimpey was off 40% early doors, recovered substantially but then closed down 30% odd.
Couldn't for the life of me buy jack this morning - tried TW, LLoyds, CLLN, but TD online page kept crashing at the buy point..Not overly amused.

It certainly was a day of unnecessary mass panic.Great buying opportunities if you can get filled!

Rusty2

Yes if I had know the prices and could trade. Seem to be about 1 hour delay on HL system, amny complaints about it by HL says everything was working as usual. I had 1 trade go through 3 times how is that usual, should be impossible.

biloseli

Most likely the trade you queued made it to their execution system but that was so overloaded that it didn't process it for an extended period of time, so the queuing system told the execution system about it again, thinking something had gone wrong, and then again after another time-out. The execution system actually received all three and did eventually get round to processing them. It didn't recognize them as duplicates because the programmers assumed they could rely on the queuing system to never send a duplicate unless an earlier attempt to execute had failed.

I think the UK gave our brokers' technologies a pretty thorough load test today, and many of them didn't do too well.

Well done Stockopedia today, by the way. It actually felt *faster* to me today than usual.

Sounds like the reason, HL have not contacted me but its seems the duplicate trades have disappeared, I hope there will not be any problems.

Yes testing day for brokers systems but why not admit there are problems, it does annoy me saying there was nothing wrong when there is clearly was.

PhilHofGrowYourDough

"A testing day" ... they would have made millions! More fool them if their systems weren't robust enough.

jonesj

I think the other popular country for Eastern Europeans to work in is Germany. The Poles & Czechs can just drive there, so it is not as good for Wizz.
Besides, Wizz air customer service is much worse than Ryan Air ever was. Examples I have encountered:
1 They charge you for front row seats with speedy boarding, then fail to provide the speedy boarding.
2 Or herd everyone onto the airport bus and go & park it out in the sun before the plane is ready to board (for an abnormal time).

But if routes are not popular they will just change the routes? Air Asia do it all the time. So do Ryanair and Easyjet. I see Wizz has a lot of airports it uses in Italy and Spain so its not just the UK, I don't know what proportion of their profits come from UK routes, even so they will still be some demand.

There are a finite number of routes that attract enough customers to be profitable.
Finding them is not easy & when they do, they might get beaten to it by EasyJet, Ryan Air, Norwegian or others.

Of course but Wizz seem more focussed on Eastern Europe, I suspect Ryan Air and Easyjet are not but its an interesting point, we will see how this pans out, anyway we are not out of the EU for 2 years yet. Not even sure immigration will reduce that much from the EU.

Paul Scott

26th Jun '16

Hi,

For anyone interested, I had some spare time on my hands today, in between tidying up the flat, and cycling along the seafront here in Hove, terrorising pedestrians that do not recognise cycle lanes (or psycho lanes as they are called here), with my bell.

Anyway, I gave some thought to Brexit, and what bargains might be appearing, and did a video of a stock screen. Apologies for the technical problems at the end - my screen froze.

https://youtu.be/U5_ifmaxnsk

Regards, Paul.

gus 1065

Thanks Paul.

Nice and simple screen filter but highlights just how overdone Friday's sell off might have been to sectors like house builders and banks. "Might" being the operative word. Now, more than ever since 2008, the emotions of fear and greed are kicking seven bells out of investors and the market could go either way in large swings in my opinion.

What has surprised me is how sharply non UK markets reacted. I can understand DAX and CAC taking a hit as Europe has as much to fear from Brexit disruption as the UK does but the US and Japan (possibly just because of timing the Japanese market was the first in line to react to the result) saw similar or worse drops on Friday. Interesting times ....

Best,

Gus.

Carcosa

Good to see these videos make a come back. The nuances of a live recording add colour to the presentation.

Can agree that the shares being filtered/mentioned may indeed provide some good upside in the very near term but filtering for shares which may provide good medium term upside is more problematical because I would like to filter on those companies which are more likely to do well with sterling falling over the next few months; which many pundits seems to suggest is likely. I do not think there is a way of identifying such shares via a mechanical filter and so finding them will be more likely to be based on prior knowledge. Hence Software Radio Technology (LON:SRT) Photo-Me International (LON:PHTM) Avation (LON:AVAP) Character (LON:CCT) are perhaps worthy of examination. Special circumstances such as Leaf Clean Energy Co (LON:LEAF) are also worth re-examining IMO

You mentioned Matchtech (LON:MTEC) in your video. Even before Brexit, this share seemed to be fundamentally mispriced and I would not be surprised if this continues for quite some time as the market may well shun any recruitment company for quite some time. This is the one share I may well consider selling in the near future.

Airlines were also mentioned. Whilst I would find it remarkable for the EU to impose flight restrictions (as closed sky policies around the world are largely a thing of the past and it's not a EU 'thing per se) I do see that pax will have less cash to spend on holidays and airlines have large US$ expenses e.g. fuel, capital costs and $ debt to service). That's not a great combination in a thin margin business. Probably take a couple of years before things start to go wrong for airlines though. Not something that I would want to be holding.

Other possibilities may well be the potential for Management Buyouts or Take-over's from American based companies; especially where such companies have $ revenues.

simoan

Hi Paul,

Interesting thoughts as always. I assumed you were probably searching for short-term trading opportunities, but then that's not really consistent with looking at dividend yield i.e. who cares about dividends if you're only going to hold something for a few weeks or months at most?

As it happens, I was not surprised by Brexit and sat down and went through my portfolio a month ago and chucked out all my £BKG and retailers of high ticket items. In reality I should've pruned harder but I was happy with any companies with good balance sheets and US dollar revenue and these all held up pretty well on Friday. In particular I have a large holding in Fundsmith Equity that was up 5.5%. I expect there could well be more currency based gains as sterling weakens further in coming months, so solid companies with dollar exposure are top of my own list.

Personally, I don't see the attraction of Galliford Try (LON:GFRD) - it's not a pure housebuilder and has a large general construction arm, it's got heavy exposure to Scotland and Northern England, and if you Google for 10 seconds you will find there are some problem contracts etc. Add to that the chart was awful before Friday and I'm not sure why you'd touch it? I know sometimes on days like Friday you feel like you're shooting fish in a barrel but it's still possible to make some very bad decisions. Housebuilders will need to get substantially cheaper before I touch them again and I would not trust those yields because many include discretionary "capital returns" rather than a true long term dividend. You also need to take into account that they were all complaining about the shortage of labour only a year ago, and if East Europeans decide to leave en masse they won't be able to build any houses even if they wanted to.

I come from a working class background and so understood very well the depth of feeling about immigration; don't let anyone fool you this is about sovereignty, it's purely about distrust of foreigners be that EU bureaucrats or immigrants. White-van man has stuck two fingers up to the rest of the world and I'm sure will have a few more beers to celebrate as he fights his drunken way through France in support of the England football team.

God help us all.

All the best, Si

Funderstruck

There are so many negative factors hanging over all markets(except India) that investors were expecting a correction & not just a few % so Brexit is seen as one more weight to affect the balance scales, hence running for cover. What we have to be careful of is yet another factor coming out of the blue which would send all mkts down again. Caution.

If you have not seen the TV program 'Paxman in Brussels', which is now available on the web, you will begin to understand the Machiavellian structure of this Gravy Train of upside down Democracy, and why they are so isolated from the very peoples they claim to represent. Well worth an hour of any ones time.

timarr

27th Jun '16

London property, hmm ... Foxtons (LON:FOXT) warns:

http://www.investegate.co.uk/foxtons-group-plc--fo...

However financial companies are in a much better place than a few years ago - Aviva reassures:

http://www.investegate.co.uk/aviva-plc--av--/rns/a...

Deep breath, keep bargain hunting ...

rhomboid1

Hi Si

Re Galliford Try (LON:GFRD) the attraction is precisely what you describe as a weakness , it has a major construction business with a great reputation and substantial order book and improving margins. The Scottish schools issue is non material and was associated with the Miller construction acquisition so is old old news. It's pure housing business is mid to low market and its Social housing partnership business is inherently defensive . Roughly the business turnover is 20% housing, 20% Partnership/Social and 60% construction with margins naturally lowest in the latter.

All in all I like it and hold a lot of it as an income stock.

Cheers

I see easyJet (LON:EZJ). are down again, 8%, another airline profit warning and Brexit will cause problems, fuel costs are up. Banks and builders hit again.

Hi rhomboid1,

Thanks for providing a few more details. I can see the possible attraction of £GFRD as an income stock but not as something to buy for a quick bounce which I thought was Paul's intention? I didn't dig that far into the construction side but don't like this kind of low margin business. I believe the housebuilders have fallen for a very good reason and it's not an overreaction by the market. Of course, they will be helped by a reduction in interest rates and property being cheaper to overseas investors as the pound falls but to counter that the banks will have less money to lend.

What I particularly don't like is that people will put off buying and selling whilst the economic landscape is unknown and this could go on for several months. If I was looking to move house right now I'd be extremely nervous as the whole process is asymmetric - you only need one buyer to pull out and a whole chain of transactions will collapse. It does not take much imagination to see a significantly different housing market by the end of the year. Add to this that the FT350 housebuilders are the footballs of choice for the big hedge funds to short the property market and their prices could end up anywhere. Of course there's money to be made but in the short term you could end up nursing a significant loss if you go long.

Small Cap Value Report (24 Jun 2016) - Brexit Day!

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Paul Scott

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