Small Cap Value Report (24 Oct) - CSG, TRCS, GBO, BMY, MLIN

24th Oct '13 by Paul Scott

24 comments 27036 reads

Good morning! Some companies seem to constantly deliver bad news, and your heart sinks before you've even started reading their latest trading update. Whereas others just deliver a steady flow of good news, and the shares are a pleasure to own, as you wait for the re-rating. If you can find the latter still at a reasonable price, then that is the proverbial needle in the investing haystack.

Sweett (LON:CSG) is, in my opinion, just such a share. I've written about this share five times so far this year, but hesitated too long, and only bought shares in it after they had already doubled, which is always very difficult to do. I belatedly pushed the buy button on 30 Aug, at 42p, and explained why here.

Today's trading upate, in advance of its half year results to 30 Sep 2013, follows the usual pattern of out-performance. Sweett indicate that all their international operations are trading well. This is the key part of today's statement (my bolding);

As a result, the Board anticipates that the Group's results for the year ending 31 March 2014 will be slightly ahead of management's expectations. Furthermore, the full year profit before taxation will also be increased by the £1m referred to above. Our efforts to achieve the objectives of our 3 year plan of turnover growth and margin improvement remain firmly on track.

Incidentally, the £1m referred to is a one-off gain on the unwinding of a currency hedge.

Here is the usual Stockopedia graphic that I like so much, as so much information on trends can be gleaned from these five simple performance graphs. In my opinion, access to these graphics alone is worth the annual subscription, as it saves me so much time when researching & gives me excellent insights;

So what can we tell from these graphs? That turnover is trending upwards, that profit margins are fairly slim. Apart from a bad year in 2012, the company has been fairly steadily profitable - not bad considering their markets have generally been depressed over this period (they are a construction consultancy, quantity surveyor). The PER has generally been low over this period, and it has consistently paid dividends.

Given the steady stream…

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loudenr

24th Oct '13

Paul,

I have dabbled with spreadbetting and whilst I have made some good gains I have also had my fingers burnt meany times. I find with spreadbetting that I am always tempted to put a stop in place which as your rightly point out, often gets triggered. I prefer to buy the actual shares now and only use a SB where I cannot get access to a market or what to open a short position.

Separately Paul you are excellent pointing out pension deficits - is there an easy way to pick these up from the Stockopedia reports / info or do you get these from the actual accounts of the companies you cover?

Cheers
Ric

rick

I agree "guaranteed stops" are a good idea that allow you to control risk on leveraged bets (very important IMO). Whilst we all WANT to be correct about our investments it often is not the case, and a serious profits warning can kill you if you have a big leveraged position. Easiest way for a newbie to blow their SB account IMO. Money management is by far the most important but one of the least talked about aspects of successful investment. You can do it one of two ways.
- keep your bets small initially until proven correct then add further equity as the position goes in your favour. This way your bets are small if you are wrong but you can use very wide stops.
- use stop losses and bet a %age of total equity (no more than 1-2%) per bet.
Both work in my experience. What does not work is betting too big without a guaranteed stop, its only a matter of time before you blow your account.

Gostevie

Hi Paul,

Purely as a matter of possible interest to some, Globo (LON:GBO) are presenting to private investors in London this evening. http://www.proactiveinvestors.co.uk/register/event_details/207

Steve

AlanJenkins2

Hi,Paul.Please forgive my ignorance here if I'm wrong,but isn't spread betting on shares done exclusively through the medium of contracts for difference ? Don't CFDs carry a high annualised cost for running a position long term ?
I recently got scared out of what would otherwise have been a profitable long term position in a volatile instrument by bad news [okay,it was bitcoin - not a share ! ].. I believe that what had been nagging at me were the continuous drip-drip of charges [Libor plus 5%] which had turned me into a weak holder - I just couldn't live with it psychologically.

bsharman

Hi Paul, Thanks again for your daily report. I would be very interested in your opinion of Quercus Publishing v Bloomsbury. I have had Quercus on my watchlist for a while now because of it's value (its on a forward PE of 4.6) and doesn't have much debt. It's much smaller than Bloomsbury and is currently launching in the US. Probably see you tomorrow.

Paul Scott

Hi Alan,

Spread bets are similar to CFDs, but are tax exempt, hence their popularity with private investors/speculators.

LIBOR+5% is outrageously expensive. I'm paying about LIBOR+2.25%, so under 3% p.a. in total at the moment on my long positions. I see that as being the cost for having a tax free wrapper, so if I make a 50% gain, which is tax-free, then having to pay a 3% p.a. funding charge is insignificant. Also, for the stocks I hold, the dividends usually cover all the funding cost, so I'm just making a pure play on the share price. In practice my spread bets tend to be open for relatively short periods usually, so 3-6 months is typical for me. I like to hold for a re-rating, then bank the profit & move on. By recyling the money like that in a bull market, you can make spectacular % returns if you get it right.

P.

Hi CliverBorg,

You asked;
"Please could you offer us your opinion on the news from Deltex Medical today? (US regulatory approval for their cardiac monitoring equipment)"

I think that was yesterday? Anyway it looked like good news, but I've dropped coverage of Deltex because it's too difficult to value. I mentioned it a while back as a possible short term trade (which worked, I made a nice profit on it), but got so much abuse from people on another bulletin board, that I thought why bother? So I don't normally mention my short term trades now.

Regards, Paul.

Hi Ric,

You asked:
"Separately Paul you are excellent pointing out pension deficits - is there an easy way to pick these up from the Stockopedia reports / info or do you get these from the actual accounts of the companies you cover?"

I've not found any quick way to look up pension deficits. It's on my wish list for things that I'd like Stockopedia to add to the site, not sure on the status of that.

Personally I check the Balance Sheet, and that should reveal a pension fund, although it's worth skimming the narrative too, often they have a section titled "pension deficit" which gives all the detail.

The crucial thing is that the Bal Sheet entry can often just be the tip of the iceberg, so it's very important to also check the last Annual Report from each company's website, to see the detail of the pension deficit.

However, now we have almost a year of history from my reports, you can check to see if I've flagged a pension deficit. I usually mention it when I find one, especially if it's a material amount.

Cheers, Paul.

Edward Croft

They are also presenting at the London Investor Show tomorrow I believe. There is an AIM Auditorium.

MichaelFBS

Hi Paul

Thanks for another great article. I bought CSG at 25.45p (March 2013) and sold at 21p (the had fallen over 15% in 6 weeks). I still think it is important to cut losses but this sale was to my eternal regret and nags me every time I see CSG mentioned and I have not known whether to get back in. I will definitely re-visit.

Globo I got into at 30p, 40p, 53p and 70p and have been prompted to do some more research by your comments. Finding time is the issue but as I have a 50% profit cushion I keep putting it off.

Finally I wrote to Ed Croft agreeing with his idea that people should post under their real name.

Thanks again for a great blog.

Michael F Broom Smith

maillotàpoisrouges

Hi Paul
are all your positions via spread bet or do u hold actual shares? One thing i have wondered is how does the spread vary on a SB versus the physical share price. The spread is all over the place with CSG - as wide as 10% since i have held, and the price swings between the buy and sell. Does a SB avoid this, or is the spread wider as i guess thats how the SB companies make their £? Does the spread move in real time with the real price? Does taking out a SB avoid poor liquidity with smaller companies?
Keep up the good work sir!
Hederz

cig

While the funding charge is usually ruinous, they have a point on Bitcoins: they are ferociously illiquid and hard to trade so much harder to hedge, so high charges are more justified than for spread bets on Vodafone. If you want a long term BTC position, buy the real thing (actually true of most things).

A default spread bet will get you the wrong side of the public bid/ask, on which the broker may or may not make a profit (in the worst case for them they hedge in full at the quote price). Some SB brokers give you "direct market access" where they just pass through your order and charge you commission or a fixed spread on top of the execution price, in which case it's like using a normal broker and the disadvantage is only in the "funding" costs.

So no, it's not a way to avoid poor liquidity.

Funnymoney

25th Oct '13

Paul,

Well my strategy is very close to Canslim, so it is one that is proven to work for the last 18 years for me. The only thing I would say that the author of that book is considerably richer than you! If you remember that the BIG winner over the last year is Xaar, it was a canslim stock and broke out at 3.00 and I sold at 7.60. I had a 50 point spread and the stock never looked back. The trouble is if you buy rubbish like Iofina which has no earnings and or a high PSR then that will result in misery.
I believe your issue is that you don't trade stocks based on price as much as you do based on fundamentals - it is the combination of both which brings rewards and gets you out when the price goes the wrong way. The reality is that the kind of stocks I like don't appear in sideways markets to any great extent - if I was betting on a value stock I would probably not use any leverage because one is waiting for the market to catch up with the perceived value. A growth stock should not be retracing below 10% of the buy price so it should be sold, which is always difficult and one of the reasons people gravitate towards value investing as they can use the old excuse that their losing stock is an investment.

Hi Funnymoney,

There are many ways to skin a cat.
If that strategy works for you, then stick with it! :-)

The main focus in my reports here is Value/GARP.

Cheers, Paul.

Monty9

26th Oct '13

Paul, On the subject of stop losses I agree you are strictly speaking correct not to use them on single stocks provided the position is not oversized and you have the opportunity to keep a close eye on newsflow. I do tend to use for the latter reason but recently found I was stopped out of GBO at 19p - It had been a great fun SB trading stock up to that point! I also hear rumours from good sources that the SB companies sometimes move their prices to catch the stops near the touch. They are all FCA registered so there must be a limit to this but its an uncomfortable thought nonetheless.
On the other hand I often use a short index SB to hedge long single stock equity holdings and I always use stops on these, but try to set it far enough from the normal trading range, maybe 100 points for the FTSE100.
As far as using SBs for long term holdings it partly depends on your personal financial position. If you can borrow at 3.5% (e.g. on an offset mortgage) then you don't want to pay 6% to finance a position and it might therefore be better to hold real stock (but take account of stamp).

Paul, thanks for your note on GBO above. I am long but utterly accept your reasoned view is different to mine. Indeed I am grateful for it - I have learned that ignoring the bear tack is one of the most fundamental errors in investing. I did think Evil Knievil's statement that he did not understand GBO then offer your analysis to suggest it will collapse rather tacky. Normally I find his opinions challenging and full of intellectual insight - not this time.

27th Oct '13

Hi.In reply to CIG's post,yes,I agree,LIBOR plus 5% was justified in the case of Bitcoin.However,while buying the real thing is indeed the right answer if you want to take a long position in most things,buying and storing Bitcoins presents certain problems and risks - especially for the technologically challenged.

Interesting research here on the relative outperformance of small caps over the last 13 years (in US Markets) ... http://bit.ly/HpM8cU

28th Oct '13

It's unlikely the major UK SB brokers cheat that way, it's too easy to get caught -- you have a price and timestamp on your statement that you can compare with historical exchange price feeds -- so it's unlikely to be worth risking being closed down by the FCA. Moreover, the market does that for them naturally: you only need a small temporary spike, e.g. a big trade causing a book sweep, or the main market maker rebooting their quoting software letting briefly stub quotes become the market for a few hundred milliseconds to get caught with a stop loss at a funny price in a fully regulations-compliant way.

Small Cap Value Report (24 Oct) - CSG, TRCS, GBO, BMY, MLIN

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Paul Scott

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