Small Cap Report (6 Feb) - QED, CAP, LOQ, ECK, RHL, VNET, KBC

Quintain Estates And Development (LON:QED) is a property developer with two key projects in London (Greenwich Peninsula and Wembley), plus student accommodation, and property fund management divisions. I've followed the company fairly closely in recent years, and have visited them for investor presentations, etc.

In the end I grew disillusioned with the company, since there is no dividend, and any revaluation gains seem to be swallowed up in declines elsewhere in their portfolio, hence NAV has actually been falling. Therefore no return whatsoever for shareholders, but plush Mayfair offices and nice salaries for the staff. So my conclusion was that this seems to be a company that operates for the benefit of its staff and Directors, rather than its shareholders - i.e. what development gains they have generated, are dissipated by hefty administration costs - something that's likely to continue, given the very long-term (20 years) scale of their London projects.

Quintain's Q3 IMS issued today doesn't contain any new information that is likely to alter the share price, in my opinion. This is a share that I tend to dip in & out of, as it moves in fairly predictable waves. It did look poised for another move up recently, but it has stalled, so I sold out at 62p a few days ago, as there seem better value opportunities elsewhere. Maybe I'm being too cynical, but it's difficult to see a short term catalyst for a higher share price at QED.

 

I generally try to avoid blue sky shares (or "story stocks"), as it's really just gambling, and the vast majority fail commercially. However, I've also found that finding a convincing-sounding blue sky share early on, or when the market cap is on the floor after initial disappointments, can prove rewarding. The trick is to not get too caught up in the hype, and to top-slice the profits along the way.

One such share which somebody recommended to me a while ago, and which I quite liked the look of, but then forgot about, was Clean Air Power (LON:CAP). They have an interesting technology (with Patents & pending) which allows diesel trucks to run on natural gas. Moreover, it's not just an idea, it's a working product which is out there for sale, through a European truck maker.

Their trading update this morning sounds promising, with full year 2012 results expected to be in line with expectations, which seems to be for a loss of £1.6m. They also say that 2013 has started well. They are forecast to make a small profit for 2013, so it's not really blue sky, but rather early stage commercial reality in my view.

Given the potential market opportunity in the USA especially (where cheap natural gas is becoming a highly significant factor), this share could get interesting. The market cap is currently around £12m, but it's proving very difficult to deal in, with a ludicrous 10% bid/offer spread, and problems dealing in anything more than tiny size. In the interests of full disclosure, I have bought a few this morning at 8.25p.

Micro caps are obviously much higher risk than proper shares, so this one comes with a huge wealth warning, so please just treat this idea as a punt, and do your own research as usual.

 

Major multi-bagger Lo-Q (LON:LOQ) issues news of another contract win, for its virtual queuing wristband for waterparks, this time for the largest such park in Pennsylvania. My view remains that the good news is now already in the price, but well done to holders who've been proved very right on this share.

 

Another company I like, but which also looks fully priced, is Eckoh (LON:ECK), which announces a contract win with a major high street retailer. Interestingly, this allows them to take card payments over the phone, without the operator seeing or hearing the card details, thus eliminating fraud perpetrated by call centre staff. Sounds a good idea. At 18-19 times this year & next year's forecast EPS, the rating here is far too rich for me.

I can't see the point in chasing things on very high (i.e. high teens or above) PERs, because the good news is already factored into the price, and yet the slightest disappointment will trigger a sharp fall in price. Therefore, unless you are very confident about the company's future performance, risk/reward is all wrong, with the late stage investor taking on a lot of risk, for little reward. Highly rated shares also usually have a poor dividend yield, so don't interest me.

 

Engineering company Redhall (LON:RHL) puts out an AGM trading statement which doesn't contain anything that sparks my interest. They state that this year will be H2 weighted, which can often be a precursor to a profits warning, so I tend to steer clear of that type of situation. Much better to pay a little more for a strong recent trading update, in my opinion.

 

Overall, I'm sensing a much greater appetite for risk in the small cap space at the moment. A lot of my preferred type of value situations are just languishing on low valuations. So I'm trying to position myself more towards reasonably-priced growth situations. My current favourites in that space are Vianet (LON:VNET) (which also has a 5% dividend yield), and KBC Advanced Technologies (LON:KBC) (very strong recent trading statements, and a forward PER of only 8), both of which I have high hopes for on a 12-month view. But as always, there are no guarantees, as what we're really doing is educated guesswork, nobody really knows for sure how companies will trade in the future.

See you at the same time tomorrow!

Regards, Paul.

(of the shares mentioned today, Paul has long positions in: CAP, VNET, and KBC. Paul currently has no short positions)