Small Cap Value Report (9 Jan 2015) - NBU, BOO

9th Jan '15 by Paul Scott

52 comments 31622 reads

Good morning! We've just seen yet another V-shaped recovery in the US market, following the same pattern that has been going on for several years now. The chart looks astonishing - every time there has been a dip, the market has immediately recovered. So "buying the dips" in the US market (which is the main influence on the UK market) has been a fantastic strategy over the last 2+ years, see below;

The trouble is, maybe this pattern has become self-reinforcing, as it's so obvious now that everyone must be buying the dips. What worries me is this - what happens when that strategy stops working? Since people have by that stage been disregarding valuation, and instead just buying the dips, regardless of valuation, then surely this could be sowing the seeds for a market crash?

This got me thinking, that the trend in UK small caps has been very different - 2014 was a difficult year, after both 2012 and 2013 being stonkingly good. So here is a comparison chart, showing how UK small caps got ahead of the trend in the US market in 2013, but has since undershot in 2014. AIM has been a disaster, as you can see from the bottom line, where it has scrubbed off all the gains in 2013.

There are differences of course, but it's interesting to see the trends compared. Remember that small caps indices cannot be bet on by speculators, unlike the main indices. So they are "clean" in terms of showing the real trend based on what buyers & sellers of the underlying shares are actually doing.

Naibu Global International Co (LON:NBU)

As I've repeatedly said here, Chinese stocks on AIM are too risky to go near with a bargepole. The accounts are usually ridiculous, and the view I have formed (for numerous reasons) over the last couple of years, is that some of these stocks have been listed on AIM with the primary purpose being to relieve British investors of our money.

Think about it. What do you actually get when you buy shares in a Chinese company listed on AIM? You're just getting a piece of paper (or electronic equivalent) which purports to give you part ownership of a business in China that you've never seen, and can't even verify exists! The accounts will…

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dasv

9th Jan '15

Paul - thanks for the reply.

I am sure the -15% loss was a lot easier to take with the blended overall result of +40-50% !

If I had taken a -15% hit on a year, I would definitely review my approach. I certainly reviewed my approach after 2008/2009 and it has really paid off.

AlanJenkins2

I used to hold Chinese stocks,and when they fell I used to dream that the market might be wrong about them and the story would come good.Sadly,it never worked out that way - my only ever profit was on XIN in the USA - and that has halved since I sold.I suspect that if one or two actually were genuine they wouldn't be so cheap in the market,a someone would know.

rick

I think that the best comparison is that Boohoo.Com (LON:BOO) is an online version of Primark (i.e. low cost, non-branded) which has very high turnover because the clothes are very cheap so young people buy the latest fashion, but do so on a very regular basis. If BOO can gain significant traction it can be a very successful business IMO.

bsharman

Cheers for the (well argued) reply Paul.

I understand the arguments and i'm impressed with the Boohoo.Com (LON:BOO) gross margin figures that you quoted. However it's my opinion that there are better opportunities in the market such as Tungsten (LON:TUNG) and Benchmark Holdings (LON:BMK) in areas with less competitive pressure. Because Boohoo.Com (LON:BOO) targets the 'youth' market it has to constantly change its offering to keep up with current fashions and at a low cost to remain competitive. BOOHOO might be a good investment but personally I think there are too many operational risks which may lead to further disappointments.

Anyway, Have a good weekend!

Ben

Rusty2

Hi Paul, I ten dto agree about Chinese companies and foreign companies listed on the Aim but there does seem to be one exception thats HCM which has done rather well last year year, its also Slaters largest holding I believe. However the balance sheet does not look good to me.

Gostevie

It'll have to be a tomato juice actually, as I'm doing my usual 2-month de-tox again - so no boozing for me until March!

BREAKING NEWS: Pub managers along the East Sussex coast have reported a steep decline in sales during the first week of 2015, with sales of white wine, gin and vodka being particularly badly hit. Mr Rob Sherry, who runs The Shorters Arms in Hove commented: "This next couple of months look like being really difficult and I'm afraid that some redundancies can't be ruled out. However, if we can just get through this temporary downturn in trade I am confident of a bumper surge in sales in March and should finish the financial year 'broadly in line with expectations', as we entrepreneurs like to say."

:-)

Steve

(Joking aside, many thanks for another fascinating week of SCVRs, Paul. Have a great weekend.)

Edward Croft

Intuitive - I take issue with your critique for 3 reasons:

We do not use ANY forecast data in the Value Rank. We only uses reported historic data. So you can't levy that first criticism at the ranks at all.
"Stockopedia does not pick up all the broker revisions" - we rely on Thomson Reuters consensus forecast data. Some of the smaller broker revisions can take time to filter through, especially if that broker favours their own clients versus the rest of the City (which is fair game for client based businesses). We do the best with the material we have. In spite of any delay the Momentum Rank has returned over 42% over the last 2 years for the top 10% of stocks - it's been by far the most predictive of the ranks to date.
"Erroneously high ranking for Naibu" - it's currently ranked 59 with a big red M-Score flag... not really sure what more we can do there. We aim to rank every stock in the market and we won't make exceptions. There's always an argument that we could put a bigger weight on earnings quality in the quality rank - but I have repeatedly argued that investors should be excluding ALL bankruptcy risk and earnings quality risk stocks as a portfolio filter. Naibu has qualified for tonnes of bargain screens all year - but Paul and I have repeatedly stated that investors should give a massively wide berth to Chinese (& other foreign) AIM Stocks. I've been burned in them before, and I agree with all of Paul's sentiments in the above article.

I stand by the record of the StockRanks all year. Stocks Ranked 90+ returned 2% on average in 2014 (before dividends), while Stocks Ranked 10- dropped by 25%. In every bucket there were stocks that went up and down... most investors need to learn to diversify and stick to better segments of the market. I suggest anyone using the StockRanks should read this article again - http://www.stockopedia.com/content/how-to-think-ab...

Ram - the TTM Beneish score can suffer from some key missing data points in some stocks when interim statements are incomplete. I haven't checked if this is the case Naibu, but it's why we prefer the last annual version for publication on the StockReports.

I would always lean on using the last annual version over the TTM unless putting my own spreadsheet together by hand.

Jardine

The risk I see with Boohoo.Com (LON:BOO) is that growth continues to fall short of expectations, if it does it will no longer justify such a high PE multiple. High margins normally attract competition and if I wanted to compete in this market place the barriers to entry would be considerable. But there are plenty of businesses for which there would be no barriers to enter this market. Take for instance Tesco, who have warehouses, customer profile data, call centres, marketing infrastructure and tough buyers. They can offer click + collect too at a density probably no other retailer can. Did anyone notice that in the recent RNS Tesco had a 52% increase in like-for-like online clothing sales for the six weeks up to Christmas. That's rather better than Boohoo.Com (LON:BOO) achieved so if I was Dave Lewis this would be a market I would be looking at very closely.

Paul Scott

Jardine,

Boohoo.Com (LON:BOO) isn't on a high multiple any more, that's the whole point!
It's "disappointing" trading still saw organic sales growth of 25%, which normally people would think was fantastic!

Sure other people can sell clothing, but the point is that BooHoo has a targeted niche - it's cheap, fast fashion, to young females mainly, who wouldn't be seen dead buying clothes from Tesco, and Tesco probably wouldn't be able to get the styles in quickly enough & respond to fashion trends as fast as BooHoo can.

The customer base is exactly the people that my old employer, Pilot, used to sell to. We had a chain of shops, and Pinstripe (run by the people who set up BooHoo) were one of the main suppliers. They've been supplying fashion to youth fashion chains for c.25 years, so they really know what they are doing, in terms of the fashions and the supply chain.

Setting up BooHoo enabled them to by-pass the retailers completely, and sell direct to the end customer, hence they're now getting 2 margins - the mark-up from factory to wholesaler, and the retailer's gross margin on top. But they don't have any of the retailer's shop chain costs. It's a cracking business model. That's why they make such a good profit margin, far better than Asos for example, which I reckon is in a muddle.

People are really not getting the point with BooHoo, because they are fixated on a disappointment which was caused by expectations being too high, not by the business performing badly. Once that sentiment has changed, and the stale bulls from the IPO are gone, I think this stock has good potential upside. If they can deliver even 20% sales growth at high margins, the operational gearing should still be fantastic.

Regards, Paul.

intuitive6191

It is a pity that you didnt refer to my original post 13th September 2014 on this subject before responding.To make it easier I will reproduce it in full below......

Looking at the figures again I think I can see where the error in the Naibu data figures has occurred.
Stockopedia is using the 2014 forecast (56p) from a report dated 08/05/14 and the 2015 forecast (46.2p) from a report dated 05/08/14.

For some reason Stockopedia had not updated the 2014 forecast to 46.1 pence which was also revised 05/08/14. This is an important downward revision which appears to have been missed? Obviously both reports have been lodged with Thompson Reuters so logically both figures should have been updated. I would think that some explanation from Thompson Reuters is justified.

Does this matter? – Probably not for Naibu but data accuracy is fairly essential. Obviously broker forecasts can be suspect but then if their data is misreported it introduces another layer of inaccuracy. I have some doubt that Naibu would have appeared in 13 positive Stockopedia screens had the downgrade been picked up.

Regarding the “Earnings Manipulation Risk" flag – this might be useful but it also picks up many decent companies. Kentz was probably the most impressive share I have owned in recent years – yet this was flagged up as a risk on at least one occasion

Its fairly clear from this error that Stockopedia DID receive data from the updated broker report because it has got it HALF correct. So I am sorry I dont accept your argument that this is a delayed data issue. Its a data error issue as far as I am concerned.

If you look back at the tickets I have raised with you will see I have queried a number of data issues. At one stage Stockopedia was using the wrong closing price by using the price of the last trade instead. I brought this to Stockopedia's attention and it was corrected.

As I have previously suggested, you do need to doublecheck that the Thompson Reuters data feed is correct and if that is OK - you then need to see why Stockopedia is not picking up the correct data.

Ramridge

Thanks Ed. I think I 'll take this as an opportunity to learn how to calculate a Beneish score from first principles. Should be fun.

intuitive - There isn't a single data error reported by you in our customer support system about Naibu. I suggest in future if you find a data issue that you report it to our team using the green button - we put a huge effort into support and data accuracy. The boards are NOT a support forum.

It's unrealistic to suggest I should read historic comments by you in the forum before responding here. Your '13th September' comment was not directed to me nor our support team for action and I hadn't seen it. I did though reply to your 12th September post where I made precisely the same warning on Naibu's earnings quality that i did today. Perhaps you can remind yourself. http://www.stockopedia.com/content/small-cap-value...

We work incredibly hard to make this product the best possible on the market for UK investors. We aren't perfect and data is never perfect - but I do believe the error rate in our data is far lower than the error rate in human decision making. We are a small team charging a very very moderate rate for what I believe is an exceptional quality product. Blaming us for Thomson Reuters latency in updating a nano-cap's broker estimates is really not on - especially when we've put together lots of knowledge base articles explaining that Thomson Reuters specifically prioritise on large cap stocks, before working their way down the market cap scale, with a very low priority on sub £10m cap stocks.

There is a super community of investors using this website. The benefit of being part of the Stockopedia community is that all of us (thousands of us) are checking data daily - everyone helps to make the product stronger with their feedback. We cannot possibly verify the mountain of data with our skeletal team alone - we rely on people like you making an effort to let us know when you find something awry. Please do send tickets through the green button first before pointing fingers. It's a much more community minded and helpful approach.

Ok - so are you now acknowledging this is a data error?

If you read my posts carefully I am not blaming you for the data error - just pointing out to you that an error has occurred and that you should investigate either with Thompson Reuters or with your own data interface. How it has been reported should not really be an issue. I take it you will now raise a ticket for this incident and respond accordingly.

I like many other people on Stockopedia subscribe to your service with our hard earned money .If the data is incorrect then we have a right to bring this to your attention. I hope the people at Stockopedia remember first and foremost that we are customers and not just a bulletin board community.

If you have checked my tickets you will have no doubt seen that I did raise the issue that Stockopedia was giving incorrect closing prices by recording the last trade as a closing price. This is a fundamental data error which is not really connected with Thompson Reuters treatment of nano caps. In fact I doubt that this is a Thompson Reuters error at all. Given this discussion I would welcome an explanation of what happened.

I can fully understand why you would not want to have such a discussion on a thread as accurate data is fundamental to Stockopedias success. I will in future raise these issues with you via the support tab.

I hope that you realise that it takes some time and effort on my part to raise these issues with Stockopedia and that this time is given freely in order to assist. Stockopedia may wish to quietly reflect on their customer’s contribution as well as their own efforts.

Mrx9000

10th Jan '15

I can see both sides of the coin above.

Firstly there was a data error and secondly whether or not the data error was mentioned in the forums or via a support ticket, it was still mentioned.

Can I suggest to Edward that he allocates an additional resource to someones daily workload to make sure that forum posts are monitored, delegated and answered in a timely manner. Not only will this enhance the reputation of the company but it will ensure that a proactive approach is maintained at the coalface. Even if this means employing an additional member of staff.

cig

"We aim to rank every stock in the market and we won't make exceptions"

You could keep to this laudable principle while possibly getting more informative scores by looking at how you define "the market". Let's face it, things like NAIBU are statistical noise and decrease the value of the dataset -- a few freak outliers can have a disproportionate impact on statistical values, e.g. the mean of a distribution can jump significantly with just a few values that are completely off scale.

"Place of listing" is a common way to define markets but is it the most appropriate? You could have alternative definition of the market like place of incorporation, or location of HQ or management, or level of regulation. Even at the place of listing level, should different markets like AIM and fully regulated main market shares be bundled in the same market just because they're all listed in London? It's not the same rules, and not a level playing field! Imagine a city has both a golf and tennis tournament at the same time, is it a good reason to rank golf and tennis players in the same table? No alternative market definition will be perfect, but most of them would probably make a better starting point for ranks or filtering system than country-of-listing. You don't necessarily need to choose one, it could be a user choice, with a sensible default.

peterg

11th Jan '15

You could keep to this laudable principle while possibly getting more informative scores by looking at how you define "the market".

I think you are looking for too much from Stockopedia's (or anyone's) screens. Any mechanical screen has to be treated with care. They provide an excellent basis for further work, but in general the outputs should probably be seen as that - it's the end users responsibility to either accept the output as it is, and accept any flaws that may include, or to apply whatever additional filtering they may choose to - such as excluding Chinese based stocks, or whatever category you view as particularly risky.

Peter

12th Jan '15

I agree Peter. Screens are only to produce a shortlist. The hard work on researching each stock then starts, to weed out the obvious problem stocks. Value screens for example will usually pick up a lot of complete dross - the lowest PER stocks are on a low PER for a very good reason usually! However, amongst that, you will sometimes find an absolute gem.

P.

cig - there are US and institutional companies that rank stocks which exclude all stocks with a < £10m market cap. That's something I'd personally like to do, but I'm not sure how popular it would be. Maybe I'll start a thread on that.

We provide our data on a best endeavours basis with terms that are clearly laid out in our Ts&Cs. We are always dealing with a very small number of data issues. It's part of our quality control and assurance - we work closely with Thomson Reuters and the community here to resolve them as and when they show up.

Thomson Reuters who have thousands of data collection and quality assurance analysts.If everyone who subscribes is willing to be charged £20,000+ per year (rather than £200) then perhaps we could launch our own data collection business, but I imagine this would be rather unpopular with private investor subscribers !

As a sidenote, there's a difference between data errors and data timeliness. In the Naibu example I believe you were complaining about the timeliness of broker estimate data. As explained clearly above - for an £8m mktcap company there's absolutely no way that estimates will be updated instantly. We make this v. v. clear in our knowledge base. Large caps are updated first, and £10m and less companies get far less attention. So no, I don't acknowledge this specific case as a data error.

I think it's clear from the voting on this thread which side of this argument the majority are on. I'm closing this thread as I've got more pressing things to attend to than going back and forth on this ! Please raise any data-specific issues via the Green Feedback button on the site.

Small Cap Value Report (9 Jan 2015) - NBU, BOO

Naibu Global International Co (LON:NBU)

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Paul Scott

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