Small Cap Value Report (Thu 4 May 2017) - TUNE, TNI, BLTG

4th May '17 by Paul Scott

36 comments 15582 reads

Good morning!

Webinar at 1pm today (4 May)

Last call for Ed's webinar today at 1pm. It should be very interesting, as Ed will be unveiling some new features on Stockopedia. As mentioned yesterday, I've had a preview, and very much like the new classifications system. It will be fun to see how the site rates my shareholdings. I think this feature will be much talked-about, and is set to ruffle some feathers too!

So do sign up - here is the link.

Focusrite (LON:TUNE)

I covered this share in yesterday's report. I see it has risen by a further 7% today, on top of yesterday's rise. This reminded me of a term in the excellent Mark Minervini book, which he called something like "post announcement drift".

This is where a company puts out a highly significant piece of news (e.g. strong out-performance, or a big profit warning). What often happens is that the initial first day move is just the beginning of a much bigger move.

This is particularly the case with small caps - because lack of liquidity means that buyers & sellers cannot be immediately satisfied. Therefore buyers/sellers tend to continue buying or selling, often over a long period of time, as they have no other choice. Whereas large caps are so liquid, that most buyers & sellers can get filled quite quickly.

Also, I think a lot of traders use momentum-based strategies (which have worked very well since 2009 - buying the dips, riding the up-trend, then selling once the up-trend breaks). This reinforces the tendency of shares to continue drifting up or down after major positive or negative news.

The obvious conclusion from this tendency of prices to continue drifting after major news, is to buy or sell aggressively on the day of the big news. That's what I've been tending to do lately, and it's working a Treatt (LON:TET) ! (which is a great example of post announcement drift)!

I flagged up the great news from Treatt here on 23 Feb 2017, when the share was up about 21% on the day. Here we are just over 2 months later, and it's risen a further 29%.

A similar thing may be happening at Focusrite (LON:TUNE) although it's early days.

Therefore I am flagging to…

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Deegee Eff

4th May '17

Litigation costs are now nearly over though they will not say who they have paid what to according to chairman.
TNI's eps has been pretty stable for the last 10 years. The health of TNI is of interest to holders of other distressed nespaper groups as they are likely to be a buyer of distressed newspapers. (per the agm )

Paul Scott

Hi Hot Socks,

I thought the update today from Next (LON:NXT) was poor, but no worse than the company had previously flagged.

Also, it sounds like their problems are largely self-inflicted, but set to improve as the product issues (gaps in their ranges) have now been fixed.

It remains massively profitable & cash generative, even when delivering really poor LFL sales figures. That's why I like it!

The divis are great - remember it's about an 8% yield, when you include the previously announced special divis, which seem to be continuing as planned.

I'm happy to keep collecting the monster divis. Although I'll be watching carefully for signs that things are improving later this year.

Regards, Paul.

Hi fahimc,

Paul, Have you launched a fund?

In a word, no.

I did dip my toe into the water with fund management, through a properly FCA regulated entity, where I was part of a team. It didn't really work - we chose a value approach just at the time the market was moving away from value, into growth.

Clients who stayed with us until the end all made a profit - Boohoo.Com (LON:BOO) saved the day & recouped the losses from some not very good value picks.

I found the whole thing so stressful, that it made me realise I am not temperamentally suited to managing other peoples' money. I think fund managers need to be much more placid than I am. Still, an interesting experience, and I really enjoyed working with an excellent team at Fundamental Asset Management.

I think the only circumstances where I would do fund management again, would be in a closed ended fund - say an investment trust. Also, it would only be within a team, so I didn't have to take responsibility for the decisions. Bottom line though, I don't want to, or need to manage other peoples' money. So apart from handling some family accounts, I much prefer having a quieter life now!

Regards, Paul.

Tortoise investor

Hi Ricky - are there any microcaps you would recommend looking at currently? I am always on the lookout for research ideas.

phoenixnight

5th May '17

Hi Paraic

How about looking into Escape Hunt (LON:ESC) which came to the market this week? It operates "escape rooms" and features Richard Rose as Chairman - usually a good sign!.

For those Stockopedia members who haven't experienced the thrill of an escape room, the concept is quite simple. You are locked in a room, typically for an hour, and have to escape through solving clues. I've done it both socially (with family members ranging from a 10 year old boy, 20-something daughters and my wife in her 50s) and also 'professionally' (with work colleagues). It's a great team building exercise, with some companies even using it as part of the recruitment process. Everyone has thoroughly enjoyed it.

In terms of the model there are a number of things I like:
- tend to be in city centres, so access to large local markets
- low staff numbers required to manage a number of rooms
- often low cost due to positioning of the rooms (eg in Manchester it was above a sandwich shop)
- rooms can be updated frequently and at low cost to keep the concept fresh and interesting
- Escape Hunt (LON:ESC) are adopting a franchise model and are looking at a worldwide market, so roll out should be relatively low cost
- the market seems to be in its early days, so plenty of scope for growth
- finally for anyone that has tried to book The Crystal Maze in either London or Manchester, you will know that you have to book many weeks, if not months, in advance - so high utilisation rates if you get it right.

The downside would be that barriers to entry are quite low, but this hasn't stopped Tough Mudder becoming a goliath in the 'weekend warrior' sector.

I hope this hasn't sounded like a sales pitch. I'd be interested to know what others thought. I've been a subscriber here for 3 years though rarely post, and always marvel at the quality of the discussion and insight provided on the boards. The insights from Paul & Graham are required daily reading.

Regards

Paul

Thanks I've been to their rooms. Do you know what the market cap is? Given it already has 38 branches the revenue looks quite low to me but I'd need to look at it in more detail:

"In FY16, the Escape Hunt Group generated revenue of approximately £1.1 million revenue and profit before tax of approximately £0.3 million. As at 31 December 2016, the Escape Hunt Group had net liabilities of approximately £0.4 million."

iain1234

LSE:ESC

Your right about the barriers of entry being low. Where I stay in the UK there are already 3 company’s running similar events all in city center locations. They are good fun but presently quite expensive although I guess the prices will fall as the competition increases & people get bored/familiar like laser quest type games. LSE:ESC need to do their rollout pretty quick if they want to get a foot hold.

(Think Market cap is 30 million GBP)

Hot Socks

thanks Paul, much appreciated

Ramridge

Hi paraic84 Re. Escape Hunt (LON:ESC)
You need to look at the admission document found here to get the full picture.

My take is that this is all about future growth. Current valuation metrics are not good. For FY 2016 they made net profit of £304K . Current market value is £29m so PE is currently out of sight. Let's be generous and subtract the net cash of £12.6m shown in the pro forma balance sheet to give a cash adjusted market value of £16.4m . PE on that basis comes down to 55.

On another metric, PS (price/ sales), net of cash comes to 14. An acceptable value is less than 3.

Frankly I can't see this company growing so fast as to come within range of acceptable valuation factors. It needs explosive growth to achieve this. But that's only my opinion.

no position long or short.

ricky65

Hi seadoc,

Thanks for those voucher codes for Gervais's book!

I agree that strong balance sheets are important. Nothing worse than a stock going kaput. I'm most definitely not FCA! I only know the basics. Paul and Graham are invaluable with their balance analysis.

Let's hope we're entering a period for higher returns for micro caps!

Ricky

Hi paraic

I only have two stocks on my watchlist which qualify on Stockopedia as microcaps (market cap less than £50m). Both are cyber security companies that I haven't researched thoroughly. ECSC (LON:ECSC) - historically it's been profitable and last trading update showed revenue up. Having a look I don't think Paul or Graham have covered it which is a shame. Looking at the recent rise in the chart I wish I had picked some up! The other one is Falanx (LON:FLX) but it's not profitable which puts me off.

Ricky

I bought some Innovaderma (LON:IDP) this morning which I think looks v promising.

Cool. I've never heard of Innovaderma (LON:IDP) myself. Crikey the chart since September is very up and down. Looks like those who timed it well did well to say the least. Too volatile for me but good luck with it!

Rusty2

How about Petards (LON:PEG) has been on my watchlist for a while but never pushed the buy button. There are several posts about it on Stockopedia.

tony777x

7th May '17

Hi ricky,
I am also a Minervini techno fundamentalist in my stock picking technique. I agree with your comments. With regard to Tune I agree it appears bullish at the moment. I would now like to see either further moves up or a consolidation period with little downward movement. or slight correction further followed by uptrend

8th May '17

Hi Tony,

I agree. I see Focusrite (LON:TUNE) has pulled back today and yesterday on low volume so it seems to be behaving ok. I reckon we'll see another sideways consolidation similar to after the breakout to ~230p.

Incidentally, UP Global Sourcing Holdings (LON:UPGS) is a recent IPO that I think meets Minervini's technical and fundamental criteria.

regards

Ricky

9th May '17

Hi Ricky65,

Yes Up Global certainly seems like a share worth keeping an eye on. It seems there was not enough demand on its last update to push the share price higher and could now consolidate into a base.

Another share that had a Minnervini technical breakout is CML Microsystems. It broke out on massive volume yesterday on an ahead of market expectations trading update.

I will message you with any tips if you would like and you could do so in return as we both seem to like the techno-fundamental Minnervini stock picking style.

Regards,

Tony777x

Hi Tony777x

Thanks for bringing to my attention CML Microsystems (LON:CML). That's a nice breakout on good volume after a long sideways consolidation. Looks good to me on first glance. Something I'll have to research in more detail (I wonder what went wrong in 2014? etc). Incidentally, looking at the multi-year chart I see a nice gap up to ~530 if it breaks 490.

I'd be happy to exchange tips on here. I've also recently setup a Mark Minervini inspired fantasy portfolio on here to see how that goes. Minervini's style makes sense to me and suits my personality, since reading his first book I've drastically improved my performance over the last year.

regards

Ricky

Hi Ricky,

Exactly my thoughts when looking at 2014. I read Paul Scott report on this issue and he picked up on this statement in the company's earnings report from 2014:

"Second half sales were affected by the previously explained and unforeseen customer events within storage markets and this, coupled with the cyclical volatility from wireless, created a headwind for revenues that will also impact the current year. In reporting on a year when we have delivered record profits, it is disappointing to now convey short-term caution but, beyond this year, the board is confident of delivering a return to revenue growth."

I'm therefore hoping that this was a one off as this generally seems like a growing and profitable business. In any case the short term prospects seem fairly positive for this company. Though I will be continuing to watch the share price and chart closely.

Another company to keep on the watch list I think is Somero Enterprises Inc (LON:SOM). It is also another share covered by Paul and IMO has extremely good prospects going forward. At the moment it is going through a consolidation phase which potentially makes it more likely that on good news the share price will go up. I did originally hold this share but sold at 15.84% gain when there was a pullback in the share price.

Any shares in your Minnervini Fanstay Fund that you would say are worth having a look at? It's good to hear that your investing performance has improved since reading Minnervini's book. I am quite new to using this type of stock picking, I used to purely buy on fundamentals alone but a lot of the time was left waiting to obtain any decent returns. Btw i jsut ordered his new book from the States.

Regards,

Tony777x

10th May '17

Hi Tony777x

Thanks for sharing information on CML. It seems to me that it was more a macro issue than an issue specific to CML. Also, I see other disk drive/memory companies such as Western Digital, Seagate and Micron had similar share price falls around that time. I agree it looks good in the short term and have added some to the fantasy portfolio.

I'm in agreement on Somero Enterprises Inc (LON:SOM). I've read Paul Scott's coverage of Somero Enterprises Inc (LON:SOM) over the last year or so and have been impressed. It being American and having lost money on another London listed American stock (Digital Globe Services) put me off initially. It appears to be a fantastically well run company in a niche. Should be good barring an economic slowdown.

Of the other shares in my Minnervini Fanstay Fund I think Fulham Shore (LON:FUL) which owns the popular Franco Manca pizza chain is my favourite. Paul's covered it many times on here and is a fan. I think there's a lot of room for expansion outside London. Technically it needs to break 23p for the breakout.

I have a small position in video game developer Frontier Developments (LON:FDEV) which I see has recently broken an all time high and fell back. As a software developer I've worked on a few game projects in the past. My experience is that the industry can be up and down so while I like it, only a small position.

I originally mostly used technical analysis and "instinct" when picking stocks. Problem was I invested in too many poor quality stocks (bad balance sheets, story stocks that had never made a profit etc). I also didn't cut my losers early enough. Consequently, I didn't beat the market. I think combining technicals and fundamentals you get the best of both. Paul and Graham are great for fundamental analysis.

Please let me know what you think of Mark's new book when you've read it. I understand he focuses more on selling which he didn't touch much in the first book. I find selling harder than buying for the most part. I'm waiting for the book to come out in the UK but who knows when that will be!

I hope to see you round.

regards

Ricky

Small Cap Value Report (Thu 4 May 2017) - TUNE, TNI, BLTG

Webinar at 1pm today (4 May)

Focusrite (LON:TUNE)

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Paul Scott

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