Small Cap Value Report (Thu 15 Jun 2017) - PURP, PRSM, DFS, SPRP,

Thursday, Jun 15 2017 by

Good morning, it's Paul here!

Many thanks to Graham for covering Mon-Wed SCVRs here. That allowed me some time off, to relax with family, who visited me for a couple of days.

A few overview comments, before I get stuck into some companies reporting on trading, and results.

Growth companies & BMUS

The extraordinary bull market which we have seen in growth companies seems to be having a serious wobble at the moment. The big question is whether this is (yet another) good time to buy the dip, or whether things are turning bearish? I don't know the answer to that, as it depends on the sentiment of other people. Although I'm leaning towards being more cautious now.

Personally, I decided to bank some of the stupendous profits (186% in 2 years, with no gearing) on BMUS. Why get greedy? So I sold everything that looked fully priced or more. I've only kept 3 conviction, long-term holds, and a few other smaller bits & pieces.

The nice thing about selling out & holding cash, is that you can change your mind and buy back in at any time. Plus of course your cash increases in buying power, if the market does continue falling.

There have been some really sharp corrections in tech stocks lately. I see that the US FANG stocks have had a wobble. Also, some UK growth companies that I follow have dropped sharply - e.g. Purplebricks (LON:PURP) was 450p a few days ago, and is now 370p - an 18% fall.

Another wildly pricey growth stock, Blue Prism (LON:PRSM) (in which I hold a short position currently), peaked only days ago at c.950p, and today has dropped to 724p, a 24% drop, on no news.

This is a reminder of how volatile prices can be in growth companies, especially when everyone is trying to buy or sell at the same time. Companies like PRSM and PURP look staggeringly expensive on conventional metrics, and are almost impossible to value accurately. Hence when sentiment turns in either direction, price moves can be blisteringly rapid, and overshoot in both directions.

Consumer spending turning negative?

There are some troubling facts & figures emerging, which seem to point to consumers drawing in our collective horns. Inflation of 2.9%, and average wages…

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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

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DFS Furniture plc is an upholstery retailer in the United Kingdom. The Company is engaged in designing, manufacturing, selling, delivering and installing a range of sofas, and other upholstered and furniture products. The Company's segment is engaged in the retailing of upholstered furniture and related products. Its other segments comprise the manufacture and distribution of upholstered furniture. The Company offers approximately 10 unit types per range, and a range of materials with approximately 50 colors available. Its branded upholstery ranges include Capsule Collection and Grand Tour. The Company operates approximately 100 retail stores in the United Kingdom, the Republic of Ireland and the Netherlands, an online channel, and approximately three upholstery factories in the United Kingdom. The Company's subsidiaries include Diamond Holdco 2 Limited, Diamond Holdco 7 Limited, DFS Furniture Holdings plc, DFS Furniture Company Limited and Coin Retail Limited (Jersey). more »

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Blue Prism Group plc is engaged in robotic process automation (RPA), enabling blue-chip organizations to create a digital workforce powered by the Company's software robots that are trained to automate routine back-office clerical tasks. The Company is engaged in Licensing for the provision of software licenses, where the agreement is established of a legally binding contract between the Company and its customers. It is also engaged in the Professional Services and training where the customer requires consultancy or training on a project by project basis. It provides an execution platform for artificial intelligence (AI) and cognitive technologies. Its enterprise-grade software enables the automation of manual, rules-based, administrative processes to create back-office. It operates in Manchester and London (the United Kingdom), and Miami, Chicago, New York and San Francisco (the United States). Blue Prism Limited and Blue Prism Software Inc are the subsidiaries of the Company. more »

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  Is Purplebricks fundamentally strong or weak? Find out More »

36 Comments on this Article show/hide all

Jcorsellis 15th Jun 17 of 36


Could you review ECHO, SOU and FUM? I would be very interested to know your views.

Best, Jack

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ExpectingValue 15th Jun 18 of 36

In reply to dscollard, post #13

"Let's face it, the calls on interest rates over the past decade have been serially wrong"


"is also pretty clear that the direction of travel can only be upwards"

There is some irony here... this is what everyone has been saying for 8 years, after all! :)

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Paul Scott 15th Jun 19 of 36

In reply to Jcorsellis, post #17

Hi Jack (post no.17 above)

 Could you review ECHO, SOU and FUM

I'm afraid not. The first 2 are resource stocks - I don't cover that sector at all.

The other one (FUM) seems to be a blue sky pharmaceuticals company, which again I don't cover.

Sorry about that!

Regards, Paul.

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Paul Scott 15th Jun 20 of 36

In reply to ACounsell, post #16

Hi ACounsell,

What instruments do you use to hedge with short positions

I just use spread bets. When placing the trade, you just click on sell or buy. That determines whether the position will be a long, or a short position.

I should add that shorting is not something I would recommend to anyone. It's fraught with risk, and probably best avoided altogether for the vast majority of people.

Regards, Paul.

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ricky65 15th Jun 22 of 36

In reply to Paul Scott, post #15

Hi Paul

You're right, every situation is different but I fear that odds of success for bulls here are poor.

Revolution Bars (LON:RBG) is down over 65% since the profit warning, on high volume. This tells me that something is wrong and that big institutions are dumping the stock. It begs the question - if the fundamentals are so good, why are they selling?

I'm currently reading Minervini's new book and this quote comes to mind - "a stock that has corrected 60% or more is off my radar, especially because a decline of that magnitude often signals a serious problem". He also has a section on what he refers to as "differential disclosure". He mentions cases of stocks tanking or overreacting negatively on no news or apparent good news (say results beat estimates by a good margin). He says that this can be caused by negative undisclosed information that the big institutions are privy to. To quote Minervini - "you don't know what the big institutional players know (the players responsible for that big drop). In the absence of that knowledge, you'd be wise to stay away". I'm in no way suggesting that this is the case with RBG but I think it's food for thought.

Perhaps a bid will come or the company's situation will improve. If it's the latter you still have to contend with the overhang caused by investors trapped with losses. From my perspective, it looks bleak. I wish you and other holders good luck.

Kind regards


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LilliputTom 15th Jun 23 of 36

Interested in any views on the updates from SysGroup (LON:SYS)1 today; a company Graham covered in February and April. Results look positive and dividends are up, but there is a indication also that Q1 trading has been a little softer than expected. Price is down 10% today and was also down in the run up to announcement. Perhaps an example of change in sentiment in growth companies, as Paul suggests?

I am holding a small amount and have been topping up as the balance sheet looks good to my untrained eye.



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LilliputTom 15th Jun 24 of 36

Sorry, my post is about 'system 1' (formerly 'Brainjuicer'), not 'SysGroup' - ticker didn't work!

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Cisk 15th Jun 25 of 36

In reply to Paul Scott, post #15

Picking up on what Paul said, obviously retail as a whole is starting to suffer, but its wrong to lump every retailer in with the likes of DFS. From memory it's the same bunch of jokers who bankrupted the company last time, so I'm not at all surprised they are having problems and I would never invest in them.

There are many quality outfits out there who aren't heavily geared and generally pick up business in recessions because they are well run, with prudent balance sheets. Personally I like Travis Perkins (LON:TPK) and Headlam (LON:HEAD); I'm not saying they are recession immune but they should do proportionally better. The sector will drag many decent companies down with it, there may well be a few bargains emerging.... (well, at least I'm hoping!)

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Jamaker 16th Jun 26 of 36

RE: Shorts :food for thought perhaps?

The 1987 villain was something called portfolio insurance. It was a product that used stock index futures and options to assure institutional investors that they need not worry if market prices seemed to be unreasonably high.

Portfolio insurance would let them get out with minimal damage if markets ever began to fall. They would simply sell ever-increasing numbers of futures contracts, a process known as dynamic hedging.

The short position in futures contracts would then offset the losses caused by falls in the stocks they owned.

Portfolio insurance did not start the widespread selling of stocks in 1987. But it made sure that the process got out of hand. As computers dictated that more and more futures be sold, the buyers of those futures not only insisted on sharply lower prices but also hedged their positions by selling the underlying stocks. That drove prices down further, and produced more sell orders from the computers. At the time, many people generally understood how portfolio insurance worked, but there was a belief that its very nature would assure that it could not cause panic. Everyone would know the selling was not coming from anyone with inside information, so others would be willing to step in and buy to take advantage of bargains. Or so it was believed.

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StandardModel 16th Jun 27 of 36


"I'm out, or almost out, of all conventional retailers & hospitality stocks."

This includes your holding in Next (LON:NXT) too, right?


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Trident 16th Jun 28 of 36

Interesting Jamaker. The role of hedged risk has a very interesting role in market dynamics. There was supposed to be a sliver of 'insurance' with sub prime debt which encouraged people to take on more risk with sub prime. I think it was only US Govt. support that prevented the insurer from being wiped out when the market finally cracked, amongst many other corrective actions.

It would seem that in the example you have cited that the hedge positively encouraged a take down of stocks because the hedge was just as rewarding, if not more, than the long position was. Maybe if shorts start to pile up we may have a similar dynamic? I am afraid I am not experienced/wise enough to know how to judge the signals for that?

I can imagine if institutions take out increasingly short positions

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Trident 16th Jun 29 of 36

Sorry poor editing, delete the last line

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Paul18 16th Jun 30 of 36

Hi Paul

Would also be interested on your view on System1 as I to hold a small amount.


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rmillaree 16th Jun 31 of 36

In reply to ricky65, post #22

Hello Ricky - interesting thoughts

" I'm currently reading Minervini's new book and this quote comes to mind - "a stock that has corrected 60% or more is off my radar, especially because a decline of that magnitude often signals a serious problem"

"I fear that odds of success for bulls here are poor"

I guess Minervini would have missed out on the 10 bagger potential of Boohoo that Paul pointed out when had dropped from 75p to 23p an over 60% correction.

The proof of the pudding for any theory is posting live decisions based on the clear rules keeping updates of conviction choices and proving that statistically works over the long term - not many of these theories are back up by useful current ongoing evidence that the system still works as the "guru" describes - they obviously work back tested due to the selection criteria in the first place.

I would agree though that blind faith is silly and deep skepticism of what companies announce and say should always be used.

with regard to inside info - its a fact that if institutions and big sellers statistically there is likely to be more selling than buying pressure and the only obvious result is a downward pressure on shareprice, to presume that most of the time institutions are selling out they also have serious inside news that could affect the shareprice were it to leak out seems a bit fanciful.

Ho hum

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herbie47 16th Jun 32 of 36

In reply to ricky65, post #22

Minervini is an American momentum trader usually on mid-large US stocks. That is not the only way to invest. Boohoo.Com (LON:BOO) went down to 23p, I know because I bought some and now they are over 240p. Big institutions do they beat the market? Do they invest much in UK small caps? Not sure you can really compare US mid caps to UK small caps. Paul has meet the Revolution Bars (LON:RBG) management several times, so he probably knows more than your average investor.

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ricky65 Sun 1:16pm 33 of 36

In reply to rmillaree, post #31

Hi rmillaree

I understand and share your skepticism of any strategy that is only back tested. I agree that they need to be field tested live. For that reason I set up a Mark Minervini inspired fund in May. You can see it's progress here: Over time I hope to give Paul Scott's BMUS a run for its money!

I wasn't saying that big institutional selling is due to leaks "most of the time". Most of the time it wont be but I think it's worth considering as a possibility. For me, big institutional dumping is a negative whatever the reason; it's the big institutions that are responsible for moving share prices for the most part. I want them on my side of the trade, not the opposite.

Indeed Minervini wouldn't have bottom fished the Boohoo.Com (LON:BOO) profit warning at 23p. That Boo profit warning is the exception though. As the Stockopedia profit warning research showed, buying immediately after a profit warning is a losing strategy - most of the time. I want the probabilities to be on my side when investing! I note that it met his Trend Template criteria on October 2015 and still does to this day, so he wouldn't have necessarily missed out.

Kind regards


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ricky65 Sun 1:45pm 34 of 36

In reply to herbie47, post #32

Hi Herbie,

You're right that there are many successful investing strategies. I probably do put Minervini on a pedestal; that's because his strategy is the most successful that I've yet come across.

I'm going to have to respectfully disagree with you on some points here!

Minervini is not just a momentum trader, he combines technicals and fundamentals and considers himself to be a techno-fundamentalist. His strategy doesn't just work well for mid-large US stocks, it also works very well with UK small caps. Consider some of the biggest winners in the UK over the last few years (Fevertree Drinks (LON:FEVR), Keywords Studios (LON:KWS), £G4M). All broke out from VCP bases on high volume after their IPOs and all went on to be superperformers. A lot of other strategies I have read about would have eschewed those buy points (P/E too high and so on) and missed out. Admittedly it coincided with a great period for growth stocks.

"Big institutions do they beat the market?"

No. My understanding is that less than 20% of funds beat the market. Though that's missing my point which is that it's the big institutions that are responsible for moving share prices for the most part. You'd probably be surprised at the big institutional shareholdings of many UK small caps.

Congratulations on successfully bottom fishing Boohoo.Com (LON:BOO) at 23p. If you can do it consistently you're a considerably better investor than me! As I mentioned to rrmillaree, Minervini wouldn't have bottom fished the Boohoo.Com (LON:BOO) profit warning at 23p. That Boo profit warning is the exception though. As the Stockopedia profit warning research showed, buying immediately after a profit warning is a losing strategy - most of the time. I want the probabilities to be on my side when investing! I note that it met his Trend Template criteria on October 2015 and still does to this day, so he wouldn't have necessarily missed out.

I will agree with you that Paul knows more than your average investor!

All the best.


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herbie47 Mon 1:29pm 35 of 36

In reply to ricky65, post #34

Yes growth and momentum investing has done very well over the last 2 years, I have benefited but I think that is about to change, I also believe Minervini is about 90% cash now. I also just read this in Paul's report which I thought is interesting "I was chatting to Ed (the boss here) about growth vs value investing. He was saying that value investing performs best in the long term. However during bull markets, there are periods when growth investing can be spectacularly successful - providing you cash out at or near the top. Everyone looks a genius in a bull market, but only the best investors hang on to those gains longer term.

That's very much been my experience, when I decided to focus more on growth shares about 2 years ago (with a particular focus on the fastest growing eCommerce companies, e.g. Boohoo.Com (LON:BOO) and G4M, both of which have been spectacularly good investments). Although I'm very conscious that this currently successful strategy will stop working, sooner or later."

I have sold many of my UK shares recently, now over 50% cash. I will hold onto my income ones but I have taken profits on the likes of Purplebricks (LON:PURP) and Fevertree Drinks (LON:FEVR). Also sold Fulham Shore (LON:FUL) and most other retailers.

No I'm not good at bottom fishing it's not something I really do, I just read Paul's reports and then decide.

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ricky65 Tue 1:41pm 36 of 36

In reply to herbie47, post #35

Hi Herbie,

I share your wariness for growth stocks as they've had such a good and run and many are looking extended. In my personal portfolio I've been moving to more value stocks recently which have been breaking out ( Coats (LON:COA), Northern Bear (LON:NTBR), Molins (LON:MLIN) ).

I agree with Paul that for successful growth investing you need to cash out before they correct too much. I think Technical Analysis can help. In his first book Minervini mentions that If you wait for the fundamentals to break down you may give back too much profit.

Kind regards


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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