Small Cap Value Report (31 Dec 2015) - SMXX

31st Dec '15 by Paul Scott

32 comments 16082 reads

Good morning!

Well, here's my last SCVR of the year - making it a grand total of 251 reports in 2015!

I did a year-end recap on my own portfolio(s) results this year here, in my 24 Dec report, for anyone who hasn't already seen that.

2016 Charity Challenge

I like to do something worthwhile for charity each year, so have come up with a dual-purpose challenge for 2016.

1) Total abstention from alcohol for the whole month of January 2016. I usually do this anyway, so thought I'd add a twist this year, namely;

2) Instead of having fun nights out at the weekends, I will spend my weekends in Jan 2016 writing a report analysing small cap profit warnings from 2015. I've been meaning to do this for years, but never had time, as it's a big project, so have decided to make some time in 2016.

The idea is this - as I already report on most (nearly all) significant profit warnings in small caps in my SCVRs, then I'm going to re-read all 251 SCVRs from 2015, pick out the profit warnings, and prepare both some data, and summarised commentary on each one, then analyse what happened next.

The key themes will be - what percentage of shares recovered from profit warnings, over what timescale? Do profit warnings really come in threes? Is there an optimum time to buy x days/weeks after a profit warning? Are there any patterns from various sectors? Could profit warnings have been foreseen & therefore avoided? If so, what were the best signals in advance that something was going wrong? Should we sell on the opening bell when a profit warning occurs, or sit tight and ride it out? Should we average down on a profit warning?

It might prove too much work to cover all 2015 profit warnings, but I'll make a good stab at it anyway, and will aim to complete my report by the end of Feb 2016.

Ed mentioned that he would allocate me some time from a researcher to do more statistical analysis of profit warnings over the summer of 2016, so we might then be able to use my report as the starting point for a deeper mathematical approach, mining the data properly (whereas my approach will be more high level, as I'm not a statistician).

So the charity sponsorship will be to help motivate me to have a boring month with no boozing,…

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Jack Hughes

31st Dec '15

Paul - thanks for your excellent and consistent analysis throughout the year.....just wish I'd found your website before investing in Quindell which looked like a sure-fire winner on so many counts....I didn't realise that companies were allowed to lie through their teeth in a "regulated" environment.....

danchamp

Hi Paul. Thanks for sharing your insight and experience - I'm a fairly new PI who found you in 2015, and for whom everyday's a school day - it's great to have found a tremendous teacher! You've definitely saved me from a few mistakes, and pointed me in the right direction for some successes.

All the best for 2016,

Dan

Richard Goodwin

I think that your choice of benchmark should depend upon what it is you are measuring. I use the FTSE 100 as using an index tracker is the default option for me. Everything else (overseas funds, small cap etc) is a matter of choice designed to (hopefully) improve performance. So the test for me is not just stock picking but also allocation. These are strategic decisions about where to put your money - in reality the bulk goes in to small caps, but this is my strategic choice so I just need to know how I am doing against the main alternative use for my money. (If the main alternative is a bank deposit then of course the bank rate would be the appropriate benchmark).

If on the other hand you want to measure your small cap stock picking skills then clearly AXX or SMXX is most appropriate as it has the same investment universe.

The most sophisticated (complex) option is to a] measure the overall performance against the broad strategic benchmark (eg FTSE 100, bank account interest, FTSE All-World etc) and then b] measure each component asset class against the appropriate benchmark (eg SMXX for UK small cap). In fact now I've thought it through I might just do that later today!

grb

To echo what others have said, thank you Paul for your articles throughout the year - I started looking at them about a year ago. Reading them has I hope made me a wiser investor.
Looking back on my own investments, it's been an interesting year. My top performing holding by far has been 32Red (LON:TTR), whereas I took most profit from Amur Minerals (LON:AMC). But the real lesson is not to hold on to the lemons - I've had too many serial disappointers where I failed to cut my losses in good time. Good luck with your research - I think there's a lot in the "do something" motto...

coombe

Hi Paul,
Many thank you's for all reports during 2016.
All best wishes for 2016
all the best
Richard

brileen

Paul
I do not have a lot of time and I find your insights and pointers most helpful. After reading your reports and doing a little research I bought both Avesco and Boo Hoo ( among others) and sold Tungsten far earlier than I might otherwise have done. Helped me towards a great result
Also as a result of you daily reports I have subscribed to this site which I find invaluable. Seems to suit my investing style.
Happy New year and Thanks
Brian

Paul Scott

Thanks for all the kind messages, much appreciated!

Regards, Paul.

CrazyHorse

1st Jan '16

It's easy to transmit apparently sencior words in online messages but your effort and guidance really is appreciated.. I still don't really know what I'm doing so reading your reports every day provides an honest and trustworthy education for me.

Thankyou very much and have a happy new year.

geoff1309

As always Paul gives invaluable research details and is completly unbiased , lokk forward to his articles every day

garbetklb

Paul
Thanks for these excellent reports. Look forward to reading loads more in 2016 and beyond.
Andy

nhb001

Paul,

Just wanted to say thanks for the daily reports throughout the year. Your expertise around interpreting balance sheets has been a great help to me. I wish a prosperous 2016 to you and your readers.

Cheers

Ramridge

2nd Jan '16

Hi Paul -
Re. Profit Warnings . In case you haven't come across this, EY do a quarterly analysis of UK profit warnings. Here is the link

http://www.ey.com/UK/en/Issues/Capital-and-transactions/Restructuring

You can download the full Q3 2015 report from the website. Useful material for the start of your analysis.

gus 1065

Thanks for the link Ramridge, a very interesting commentary. I note that on the same website there is also a quarterly report on LSE IPO activity, another useful resource.

Gus.

Rusty2

Yes very interesting, 3Q 15 is nearly 4 year high, but 2Q 15 was 2 year low, so all eyes on 4th Q, 4Q 2014 was a 6 year high. So is 3Q high because 2Q was low? Last 4 years the 4Q has been the highest quarter.

Hi Ramridge,

Many thanks for the links to the EY profit warnings reports. Looks useful background, but unfortunately they don't seem to give any individual company information, just summaries by sector, etc.

I might email their analyst to see if they would let me have sight of the granular detail, which is what would be more useful for me, as I'm really more interested in what's happening at the individual company level, and whether profit warnings could have been anticipated. Plus whether to sell on the warning, hold, or buy more. Or what is the optimal time to buy after a warning, that's the kind of thing I'm focusing on.

Regards, Paul.

Hi Paul - Yes I thought you will need the granular stuff for your purposes. You can of course contact EY for the raw data, although having dealt with them in the past, they are pretty protective about their research data, as opposed to freely disseminating reports designed to attract new clients.

brucepackard

Yes, definitely very useful!!! Particularly

"Could profit warnings have been foreseen & therefore avoided? If so, what were the best signals in advance that something was going wrong?"

I have been working on textual analysis of management statements, and seeing if a close reading of what management say in their statements signal any "red flags" (eg contradictions, incoherence, inconsistencies). I've just done it for banks though.

I think sometimes there are warnings in the statements, I think Paul in his reviews does a good job at highlighting these and other signals.

One I had experience of recently was Amino Technologies (LON:AMO).

21st July 2015 Interim results everything looked very good: "Today's results mark a real turning point for Amino. Following a significant amount of hard work, and thanks to a clear and well thought-out strategy, our business has reignited its organic revenue growth, extended its margins and profitability, and begun to put in place some very exciting building blocks for the future.

Our financial strength is allowing us to be bolder in our plans for growth. Our acquisition of Booxmedia Oy extended our credibility in customers' eyes as an innovator in the TV space. Today's proposed acquisition of Entone takes that credibility one step further still, not only adding excellent product and people to our offering, but transforming the scale of our business too. We enter the second half confidently and are excited by the long-term potential for a bigger, bolder Amino."

Then 2 contract wins in September. Then trading update 27 Oct 2015: "The Company now expects to report a second half shortfall in revenue versus expectations within its core Amino business. As a result, the Company expects profit before tax, before exceptional items, to be below expectations, but in line with that achieved in the previous financial year."

Shares fell 32%, did rebound a bit but now drifted down to around that level.

I will have a look at Solid State (LON:SOLI) next.

AlanJenkins2

Thanks,Herbie,but what was the warning [in the statement/signal] for Amino ? [As opposed to the actual profit warning].

Solid State (LON:SOLI)

2nd April 2015: Trading Update

"The results for the year ended 31 March 2015 will, as anticipated, be significantly better than last year. Profit before taxation for the year ended 31 March is expected to be at least in line with market expectations although revenue is expected to be slightly lower principally due to exiting certain low margin, high volume business in the LED market during the year.

The Directors are confident that further progress and growth will be achieved in the current financial year. The current financial year commences with an open order book of 18.5m (30 April 2014: 14.7m) and an encouraging level of enquiries. In addition and as expected, the year will also benefit from the first material contributions from the three year contract with the Ministry of Justice, awarded last year, to supply monitoring hardware for GPS offender tagging."

Again everything looks pretty good, revenues slightly down because of ending of low margin contracts.
Then nothing until 29th October: "Following a customer meeting on 27 October 2015, delivery expectations for a material contract have been varied which will impact the second half of the year. The contract is high profile and a high priority for the customer and Solid State is confident that it is fulfilling its obligations to the customer."

Bang shares crash about 40% and fall further in following days. So again no warning I can see, although SOLI does relie on certain large contracts. The warning was the large director sales in July/August 2015.

Small Cap Value Report (31 Dec 2015) - SMXX

2016 Charity Challenge

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Paul Scott

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