Small Cap Value Report (5 Nov 2014) - WIN, MNZS

4th Nov '14 by Paul Scott

38 comments 20833 reads

Good morning! I am posting this early (the night before) because I want to give a quick last-minute update on;

Mello 2014 investor event in Derby, which is imminent, Thu-Sat (6-8 Nov). I'll be there for the whole three days, and I'll be doing my Small Cap Value Report live at 10:30 on Fri morning, in the lecture theatre at Mello 2014. So literally making it up as I go along, probably with a bit of a hangover, this could well be an embarrassing debacle, but what the hell, let's do it, it's only half an hour!!

Click here for the timetable of talks for the Derby event, which I am sure you will agree looks fantastic.

I understand that Thu & Fri are nearly full, but the Sat still has some places available. Therefore the organiser my good friend David Stredder has just emailed me to say that readers here can have a last minute special offer of Saturday only tickets for just a tenner. Use this discount code: MELLODAY-DISCOUNT on this link and select the 1-day ticket for Sat 8 Nov, which using this discount code will only be £10 instead of £49. Only for the Saturday mind.

The reason I am plugging this event is because it's going to be amazing - and as far as I know it's the first time a remarkably successful private investor has organised his own event of this scale, on a not-for-profit basis, designed from the ground up to bring together his most interesting contacts. The numbers are limited, so there will be great networking too, with numerous millionaire investors rubbing shoulders with fund managers & interesting small cap companies. So expect a somewhat smaller event than the London ones, but with great quality speakers & companies.

Of course, as with anything in life, there are always snipers, who want to throw mindless criticism and jealousy dressed up as cynicism, hiding safely behind false names on the internet. You just have to accept that, if you put your head up above the parapet and try to do something new & good, that the moaning minnies will snipe away. Well, who cares about that lot?! I certainly don't! You get a hide beyond rhinoceros thickness when you've been sniped at as much as I have, for various undeserved & irrational reasons, throughout life! Sod 'em!!! Let the good people prevail!

There is even superb…

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Steve Giddings

5th Nov '14

Like dasv above... embarrassed... as I too saw things exactly the same way. I console myself by knowing that I have just exchanged a small loss in closing my position for an excellent lesson from Paul in how to really read a balance sheet! Now that's a good investment!

Ramridge

Re. WIN. Like many others, I was gobsmacked to read the disparity in analysis between Paul's and a StockRank of 99.
I think the main difference comes down to the balance sheet valuation. To Paul, a negative Book Value and negative Tangible Book Value are show-stoppers. Such a share is basically uninvestable, period. And I concur, especially in today's market which punishes any share that doesn't have a relatively strong b/s.

There are a couple of early warning signals in the StockReport. In the tabulation on the top right hand side titled Valuation, there are two entries, Price to Book Value and Price to Tangible Book. When both show no values and only 'n/a', then it invariably means that BV and TBV are negative.
Regards

Splode

Paul - Re. Wincanton (LON:WIN)

Stockopedia's assessments are fairly transparent (with some geeky background if you want it) but I am not sure the exact calculations for the rankings are given (Ed will doubtless put me right on this).

An interesting remark on QualityRank says "NB. It should be noted that the QualityRank is very specifically designed to be 'predictive' rather than 'descriptive' of future returns."

ADY

Paul- Just come across the event in Derby am hoping to be there as I am 15mins down the road

OldSchool

I think it can be argued that there is a fundamental flaw in the construction of the StockRank if a company which has an insolvent balance sheet is not picked up. Surely the fact that P/BV is negative should come up as a red-flag and impact the Value ranking.

Perhaps a negative Altman Z score should be more prominently highlighted.

On the face of it you can look at the StockReport for this company, see a whole set of green flags and read into this is a relatively safe investment.

Hi OldSchool - yes, I think there are a few glitches with the software engine. In the screening facility, there are two parameters available, P/B and P/TB. If you try and filter either for negative values, you get nothing. But I am happy to be corrected by the Stocko analysts.

WarrantStar

I think it is shocking that a company with such a weak balance sheet as Wincanton should be given a Quality Rank of 80. I will put some feedback in to request that Stockopedia review how the Quality Rank is calculated.

ACounsell

Hi Paul,

Agree with pretty much all of comment on inconsistency between your analysis and the Stockopedia ranking. Personally not invested in Wincanton but in 2014 Annual report KPMG auditors appears to give it a clean audit report. How is that possible given that the business has negative net current liabilities of £95 m and Net liabilities of £250m (both of which increased in the interims!)? Should there have been some reference to 'going concern' in the audit report?

dasv

How was Wincanton able to reduce borrowing costs by refinancing its debt at a lower rate if the company has such a weak balance sheet?

Surely a lower rate of borrowing reflects a lower rate of default?

Funderstruck

Paul, thanks for your regular in depth analysis of the financials; for me it's educational. The Stocko ratings have helped me identify stocks but I do tend to give them too much weight. For WIN even the 'Q' is 80 based on a reasonable ROCE & F score of 8 BUT with a low Op margin of 5%. Only the 'Z' score gives the game away. Presumably the Bal Sht detail is left out as all the Stocko calcs are done on std figures fed into a model each day & time is of the essence. Bit like looking at the EPS & ignoring cash flow & the expenditures , capex et al.
This has certainly been a 'wake up' for me to dig even further into a companies background.
Thank you , you will I am sure ,have saved me from some losses in the future.
Antony G.

PhilHofGrowYourDough

Sigh. I dont see what the big deal is. The quality score is what it is and is formulated from the Stockopedia's team research into the financial research.

You have Altman, Beneish and Montier C Score to help you weed out the duffers. WIN and tons of the other dross just doesnt even appear in my screens so I save hours of pointless research and more importantly tons of money. In fact the three screens I use day in day out, typically only generate a handful of stocks and I go on to weed out those without good price momentum.

I would say that Stocko could and probably should look at aggregating as much of Paul's balance sheet checks into another ScottRank (TM) as that would be potentially be another useful tool.

My twopenneth
Phil

Mechanical Bull

I am reluctant to challenge Paul as he is far more experienced and knowledge than me, but I feel compelled to do so. I agree the balance sheet is terrible but the company is trading well and it is cheap. A lot of their contracts are long standing arrangements and there is new business so the bankruptcy risk seems low.

I am not surprised at the high quality ranking. Stockopedia clearly state: "We heavily weight the F-Score given it's effectiveness, especially amongst small caps", Wincanton has a F-Score of 8 (out of 9) so this explains the high ranking. I guess the logic is that while a weak balance sheet is a risk factor this does not matter so much if financial health is.improving. This makes sense to me but obviously I'm in the minority here!

Out of curiosity, I've run a screen to see which other listed companies are in negative equity. There were 79 and I was quite surprised with some entries on the list, These include BT, Rightmove, Jimmy Choo. De La Rue, and Topps Tiles. Does anyone think these companies are on the verge of bankruptcy?

Disclosure: I am long on Wincanton

Paul Scott

Hi Mechanical Bull,

Please do challenge me on anything - I very much welcome two-way discussion, and encourage bull and bear views in every stock.

The issue for me is risk. If something goes badly wrong at a company like Wincanton (LON:WIN) then its dire Balance Sheet could easily result in the company going bust. Why take that risk, when there are hundreds of other companies you can invest in which have far stronger finances, capable of withstanding significant problems?

Also, there is effectively zero chance of being paid a dividend on your WIN shares, for the foreseeable future. So why would you want to hold them, when you can get a 4-5% dividend from other companies. Or a 7.3% dividend (which might be cut) on John Menzies (LON:MNZS) the other (similar sector) stock that I covered today.

Each to their own, and it's your money, but I cannot see any attraction at all in WIN shares, once you consider how dire their financial position is.

Regards, Paul.

pka

6th Nov '14

If one is using the Stockopedia ranks to select companies for a portfolio, perhaps one should add a screening rule that each company selected must pay a non-zero dividend, even if that dividend is very small. That would exclude companies such as Wincanton which are unable to pay a dividend due to their poor financial positions and which therefore have a greater than average risk of going bust (in Paul Scott's view), and would perhaps make the portfolio perform better in the long run.

Hi pka,

Good idea. The StockRanks are not designed to be a panacea, but have been back-tested to produce very impressive results for a whole portfolio whose components all have high StockRanks. Some will do badly, or even fail, but the whole portfolio should out-perform. That's the thinking behind it.

In my view (which chimes with what you said) more screening is needed to eradicate financially distressed companies such as Wincanton (LON:WIN) . Eliminating zero dividend companies is not a bad idea at all, although sometimes failing companies continue paying divis until a very late stage, as management don't want to upset shareholders until they have no choice.

You can screen on plenty of other criteria, such as net gearing, PTBV, etc, so the screening tools here give plenty of flexibility to take high StockRank shares as the starting point, and to then filter out ones that you don't like.

Regards, Paul.

cycle

Paul,
I'm sure I'm not alone in being very interested in the 35-point red flag warning system that you mention you are developing.
Might you be able to publish that at some point?

7th Nov '14

cycle,

I keep finding more red flags, so by the time I'm ready to publish it, my red flag system could easily be up to 50! I'm going beyond just accounting ratios, and looking for things in the text, and behavioural patterns that conmen find irresistable.

I'm getting more & more cynical about AIM and small caps generally in the UK, in that I don't think you can rely on the accounts to anything like the extent people think you can. So basic management honesty is the number one prerequisite that I'm looking for. That is sadly, and disgustingly lacking in many cases.

More to follow. My ideas on this are gestating well. The Bargepole List is proving itself pretty well I think. So let's keep going with that, and see what happens!

Regards, Paul.

Morning Paul,

I think you underestimate the value to us punters of the rules you use. Things you may take for granted will be like gold for new investors.

For example all of my screens now have the rule

Net debt < 3 x operating profit

That rule was inspired by a comment in a scvr last year.

I understand that:

1) at present it might not be possible to implement all of your rules
2) that you might want to maximise the commercial opportunities by keeping them close to your chest for now. I understand and respect that. It could well be that you are having commercial discussions with Stocko or that the book is taking shape or that you have a researcher working with your ideas.

If 2 isn't an issue would you consider publishing the list and letting it develop over time as you do with your barge pole list (which I also considered as a potential list of short candidates)?

Whatever you choose to do I want to say thanks again for your efforts.

Warm regards
Phil

Alex Naamani

18th Nov '14

Hi everyone,

There is a really interesting article by S&P - here: http://bit.ly/11ggOYn

See the section on Financial Leverage (pg.5) which suggests that "lowly-geared companies beat highly- geared ones by about 1% per annum (p.a.), but this outperformance is unremarkable vis-a?-vis the reduction in return volatility (by about 3% p.a.), which may imply that lower indebtedness offers companies downside protection."

The article also notes that "further analyses suggest that low gearing is not always associated with higher-profit companies. In fact, in calmer markets, companies with less gearing often tend to lag behind those with high gearing, but they usually prevail in financial downturns, as their “safer” characteristics come to the foreground."

.....just food for thought

Alex

Rusty2

11th Dec '14

Yes I agree, I had some Wincanton but sold after reading this article. It has done OK for me up about 30p this year. I'm really going off IC tips, even ST has come a cropper this year.

Small Cap Value Report (5 Nov 2014) - WIN, MNZS

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Paul Scott

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