Small Cap Value Report (24 Aug 2015) - BLNX

Good morning.

The sell-off continues. My first words this morning were "Holy c***!" as I checked my iPad to see what the FTSE 100 futures were reading - down about 200 points to around 6,000. It even dipped a bit below that briefly. Who would have thought the FTSE 100 would be poised to start with a 5 again?

I interviewed astute trader/investor Richard Crow again yesterday (click here for the audio file, if you have a spare hour!) and he described the FTSE 100 as a "nonsense index", being so heavily weighted with resource sector companies, and groups with international earnings. So it's not a good proxy for how well the UK economy is doing, and as I mentioned here last week, the small and mid cap indices are doing much better than the FTSE 100 - which is why this correction doesn't feel that bad for small caps investors.

Small caps were seemingly detached from the meltdown until about Fri last week, and there's a lot of selling this morning again. I'm making a list of shares which are starting to look interesting to buy, but I can't really see any amazing bargains yet. So it's tempting to just sit and wait for better bargains, before deploying my reserve cash. I'm more tempted by some large cap bargains actually.

The big question is whether this is another "buy the dip" opportunity, or whether the carnage in China & emerging markets (stock markets & currencies), plus the resources sector, is now tipping the whole market into bear territory? I don't know the answer to that, since it depends on decisions which market participants have yet to make, but I think it's best to be prepared for either outcome.

Overall I reckon we're probably very close to a strong short term market rebound, but I'm not convinced it will last very long. I'm more nervous now than I have been in previous corrections, because there seem to be so many more things going wrong macro-economically around the world.

Still, for good quality, reasonably-priced small caps, this should all blow over, so personally I've not made any changes at all to my long-term portfolio. Actually, I think the buying opportunities at the moment are more in large caps, so I've been browsing Stockopedia's USA & Europe edition, and have this morning bought some BMW, and Intel shares. Both look good value to me (even allowing for reduced demand from China), and pay nice divis too.

Blinkx (LON:BLNX)

Share price: 18.25p (down 31% today)
No. shares: 402.8m
Market cap: £73.5m

Profit warning - I last pointed out some of the things that were wrong with this company in my report here on 18 May 2015, when the shares were 35p, so readers who listened to my (correct) analysis would have side-stepped a loss of almost 50% in the last 3 months.

Today's long-winded update basically says that they are now loss-making (and remember the real losses are a lot worse than the quoted EBITDA figure), but are cutting costs, and pushing new services, to offset the decline in older products.

Helpfully, they give some figures;

·     H1 revenues between $85M and $95M;

·     H1 adjusted* EBITDA loss between ($5M) and ($8M)

·     H1 cash balance between $82M and $85M

The problem is that the declining product lines were the ones that made the big margins, and that's being replaced by lower margin activities.

My opinion - my view remains the same. Blinkx cannot demonstrate that it has a viable business model any more. I think they found a sweet-spot a few years ago, milked it, and now that business is disappearing.

It's an online marketing company, and that space is a horrible place to invest, because things change so rapidly. There has been a rash of floats of these companies in the last few years, mainly in my view because the owners realise that the profits are unsustainable, so they want to bank their profits & pass the shares on to some mugs who don't realise that earnings are not sustainable.

On a more positive note, Blinkx is at least protected by its still substantial cash pile, so that should help underpin the valuation to some extent.

It's just not a stock that interests me at all, and it's not at all clear that the operating business is worth anything at all. So I would only buy these shares at a substantial discount to net cash. There again, other people might think that the new products will do well, so there may be speculative upside on that basis, who knows?