Paul's SCVR podcast - summary episode 19 (w/e 5 Nov 2022)

Paul Scott’s podcast - episode 19 (5 Nov 2022)

The audio went up on my website here on Saturday lunchtime, and also on the main podcast platforms. It’s so quick & easy to create audio content, which is why I prefer this format.

Here’s the written summary for Stockopedia subscribers.

Monday 31 October 2022

Hello from Paul Scott, small caps specialist & writer of the SCVRs, with Graham Neary.

Thank you to subscribers, for sticking with us in a bear market, it’s much appreciated. Other listeners, why not do a free trial of Stockopedia?

James Cropper (LON:CRPR) - profit warning. Breakeven expected in H1, due to energy & raw materials cost inflation, and time lag in passing these on to customers. That’s a reasonable explanation. I don’t think the fundamental valuation of the company, long-term hasn’t really changed. This is now the 3rd year it will only produce 15p EPS. So 850p/share seems far too expensive. It also has some debt & a pension deficit. I’m not interested in this share.

Science (LON:SAG) - good track record, shrewd management. Has bid for TP (LON:TPG) (a consultancy group). Previously bid at 6.5p last year. Now the bid price is only 2.25p cash, but a 190% premium. I don’t know why SAG wants to buy it.

Argo Blockchain (LON:ARB) - Graham reviewed this. I reviewed it in Aug 2021, when it delivered a good profit, but I concluded it was a ticking time bomb at the time. It’s almost collapsed, has lots of debt, seems likely to go bust. Blockchain is a giant speculative bubble, I remain of that view. Although there might be some uses for blockchain technology. But tokens have zero intrinsic value.

Empiric Student Property (LON:ESP) & Lok'n Store (LON:LOK) - Graham reviewed these.

Paul Hill of Vox Markets had an interview/discussion here with me. Good chat, bounced ideas around, some interesting points.

Tuesday 1 November 2022

MADE.com is going bust, shares suspended. Press reports that Next (LON:NXT) may buy data & brand for c.£2m. Mike Ashley of Frasers (LON:FRAS) also said to be circling. Maybe Boohoo (LON:BOO) [I hold] and others could get involved? Makes sense to buy the brand for peanuts, without any of the costs or liabilities, from the administrator (about to be appointed). Almost certainly a zero for shareholders.

Fulham Shore (LON:FUL) - Franco Manca & The Real Greek restaurants. Reports robust trading, quite surprising. In line with expectations. Bucking the trend in a downturn. Opening lots of new sites. Forward PER reasonable at 13.2. How will a recession affect them? Bank of England is now saying a 2-year recession is possible. Misguided BoE policies, in my view. FUL offers good value for money, nice products, so I like this share.

Virgin Wines UK (LON:VINO) - I had a rummage through FY 6/2022 results. Has dropped c.80% from IPO price. Quite resilient business. Gets a thumbs up from me. Tons better than Naked Wines (LON:WINE)

Snazzytime flagged up Osirium Technologies (LON:OSI) in the reader comments. Only £2m mkt cap, interesting discussion. I love it when readers flag up your own share ideas. Looks desperately in need of a fundraising, but could be an interesting punt once that is done.

Mincon (LON:MCON) - Graham reviewed this maker of drilling equipment for natural resources sector.

Eckoh (LON:ECK) - trading in line with expectations.

Vertu Motors (LON:VTU) - small acquisition.

Clean sweep on Mon & Tues, we covered all small caps reporting.

Wednesday 2 November 2022

Retailing is my sector specialism (unfortunately! I wish it wasn’t!) so I looked at Next (LON:NXT) with a solid Q3 update. Large cap, but a mine of information in its updates. Reassures, performing well, leaving guidance unchained. PER of only 9. Such an attractive share, so why bother with small caps?! It will be interesting to hear the excuses from competitors, who are not trading so well.

CEO interview - worthwhile, but it’s about 5 hours work in total for each one, but worth doing. I only select good companies, trading well. I interviewed Louis Hall, CEO of Cerillion (LON:CER) - audio is on my podcast channel, and on my website. I typed up a transcript for Stockopedia subscribers here. Really interesting interview. I try not to duplicate webinars (e.g. on IMC, PIWorld, Mello, Sharesoc), instead I try to get to the crux of what is driving the business? CER profits have gone through the roof. Boils down to 20 years establishing a track record with great software, and the market of telcos now switching over to the cloud, which CER specialises in. Sounds like they’re riding a wave here. CEO still holds 30%, seems very grounded & modest. I really like CER shares - but looked too expensive, but has still 8-bagged! Should we just pay up for growth companies?

Morgan Sindall (LON:MGNS) - huge construction group. Not a sector I usually like, as often go bust. But I like MGNS - really strong balance sheet with plenty of cash, trading in line, big order book. All about mgt execution, with contracts that avoid mishaps. I like the disclosure of average daily cash, all companies should do this. Whereas cash on the balance sheet date is a one-day snapshot that can be easily manipulated. Overall, MGNS looks worth a closer look. PER & divi yield both around 6-7.

Foxtons (LON:FOXT) - looks quite interesting. I looked at it a few days ago. Graham reported on a newly announced share buyback.

Graham also looked at profit warning from Aston Martin Lagonda Global Holdings (LON:AML) and Metro Bank (LON:MTRO) .

Thursday 3 November 2022

I posted my transcripts of CEO interviews with Cerillion (LON:CER) and UP Global Sourcing Holdings (LON:UPGS)

CEO interview with Andy Gossage of UP Global Sourcing Holdings (LON:UPGS) - I previously interviewed him just as covid was starting, in Feb 2020. He sounded confident then, that UPGS would get through OK, and it did. The shares 4-5 multibagged from the pandemic lows. It imports small consumer goods from China, branded. Sold to retailers & online. Nice business. My interview is full of insights about supply chains, really important points, with wide read-across.

I covered 3 mid-caps - triggered some of the readers! We want to find out what’s going on in the economy, so if it’s interesting we’ll report on it.

Howden Joinery (LON:HWDN) - trading well. Mainly flat pack kitchens. Expects PBT to be marginally ahead. Surprising.

J Sainsbury (LON:SBRY) also said trading well, guidance unchanged.

£BT fell on news of fresh cost cutting. Divi yield is about 6%, and PER about 6. Might be worth a closer look.

UP Global Sourcing Holdings (LON:UPGS) results good, in line with last trading update. Entrepreneurial mgt have big personal shareholdings. Mgt think they will get through recession OK, by gaining market share (small share of huge markets).

Kitwave (LON:KITW) - looks interesting. Impressive trading update for FY 10/2022. Strong trading in H1 & H2 so far. In line with expectations. Positive outlook. Fwd PER only 8.5, and 5% divi yield.

Gattaca (LON:GATC) - only trading around breakeven. STEM specialist staffing company. How come SThree (LON:STEM) is doing so well, but GATC not making any more. So not a good business. BUT GATC has a very strong balance sheet, and its net cash is ¾ of the market cap. So turnaround potential is in for free.

IG Design (LON:IGR) - Graham reviewed. Also TI Fluid Systems (LON:TIFS)

Sorry we didn’t get round to looking at Xpediator (LON:XPD) or DSW Capital (LON:DSW) - if they’re small, boring, and in line, then we don’t usually cover them.

Friday 4 November 2022

DFS Furniture (LON:DFS) - TU - said last 2 months have improved, after a soft April-August. Will hit mid-point of current year guidance. Finances are awful - stretched balance sheet, now doing buybacks funded on bank debt. Management seem reckless, gearing up going into a recession. Had to do a placing during covid, making same mistake again? Seem to think they’ll be impervious to the coming recession. Why does the stock market ignore the balance sheet risk? Uninvestable for me.

National World (LON:NWOR) wants to bid for Reach (LON:RCH) (which is 6 times bigger market cap). It is possible for small cos to take over big cos, but rare. Vin Murria tried to buy M&C Saatchi (LON:SAA) in a similar type of deal recently, but it failed.

Portmeirion (LON:PMP) - trading update hidden in an announcement of a design partnership. I did a recap, PMP looks good. Energy costs hedged until Q1 2024. Looks interesting long-term, but what will happen to demand in 2023? (if we go into a recession)? Profits could collapse at lots of companies. It seems to early to anticipate earnings recovery.

4imprint (LON:FOUR) - fantastic updates this year, I flagged it in August. Upgraded again.Fwd PER of 17.6, but are we at peak earnings? That’s the risk. Main business is in USA, so dollar strength helps. Major multibagger long-term.

Macro news

US has raised interest rates again, aggressively. I think they’re raising too fast. Powell spooked markets, saying “We have a ways to go” before interest rates peak. Lots of traders follow every nuance of his words.

Bank of England raised 75bps to 3.0% - following the Fed. At least people with cash savings can now get some interest receivable on their cash.

Dollar strength continues. Sterling & Euro are still weak.

UK 10-year gilts have fallen to c.3.5%, after mini-Budget kerfuffle. USA is higher, at 4.1%. Germany is lowest in Europe at 2.6%.

Recession now looks highly likely (UK and elsewhere).

Bank of England comments were unhelpful - 2 year recession, if interest rates rise sharply. But now saying rates won’t have to rise as much as previously feared.

Quantitative Tightening has just started - selling Govt debt. I think this is madness, at this point in time.

My thoughts on markets & my portfolio

BoE & Govt pulling in different directions? We’re in a real mess. My main concern is that Govt/BoE are inducing a recession, to stifle inflation. Not necessary, as inflation will fall naturally as supply chains unblock. Inept policy likely to cause earnings to fall at companies we invest in. All of this is making me feel nervous, and I don’t want to deploy all of my cash pile (fresh money that is coming in, in a couple of months). I might buy some things, but keep some powder dry too. Many earnings forecasts haven’t come down enough yet.

Thinking back to 2008 and 2020, the start of bull markets was triggered by big changes in Govt policies globally. Late 2008 market bottom was all about Govts backstopping the big banks. Then spring 2020 market bottom was all about major covid support schemes. Policy currently seems to be making things much worse.

But are shares cheap enough now? In some cases, yes I think so.

I’ve renounced gearing! Have closed my IG and Spreadex accounts. Gearing is too volatile & stressful. Geared trading is quite addictive. I shouldn’t have been doing it in the first place. Making millions in the good times is definitely addictive, and you go a bit crazy. So from now on, I’m changing my strategy to only buying shares outright. OK, I am keeping one small geared account open (just for fun). Things are OK overall, much worse than last year, but I need to take things more steadily. My analysis makes sense, value/GARP, but I’m like two people - a steady person doing the analysis, then a reckless maniac implementing the trades. So I have to be more structured & disciplined, without gearing. I see this as a 20-year apprenticeship. I love shares, because I’m learning something new every day. It’s easy to make money, but difficult to hang on to it, in the downturns. Hopefully I’ve learned the lessons in this bear market. We shouldn’t beat ourselves up about making mistakes, life is like that.

Markets generally - the bull market (I misspoke here, and wrongly said “bear market” when I actually meant “bull market”, apologies!) mentality of buying things when they rise sharply, looks wrong. We should probably be selling things that rise sharply, as those spikes up often don’t seem to hold. Bear market rallies? It feels that way, yes. I want to keep some powder dry for further drops.

Many companies (most) are reporting in line with expectations updates. But are we seeing peak earnings? Earnings could halve, or disappear altogether, if we go into a recession in 2023. Profit is just a sliver, between big numbers - revenues, and costs. If revenues fall, and costs rise, then profit could disappear.

Freight costs - as Andy Gossage of UPGS said, they peaked at $18-19k per container in 2021, but has now plunged to c.$3k, and could even overshoot down to $1k. Factories in China are very quiet, planning to close for New Year 3 weeks early. Desperate for business, and cutting prices. The West is over-stocked, so demand falling, hence factory orders are low in China. Gives supply chains a chance to recover. Plunging cost of freight is now fully offsetting other inflationary pressures, eg the strong dollar, according to UPGS. Very different to what NEXT said recently. So maybe inflation in 2023 may not be as bad as people think? NEXT said it would raise prices 8% in 2023. But UPGS said it won’t be raising prices at all in 2023, due to the plunging cost of freight providing a big benefit.

Reader comments - have been brilliant again from subscribers. Lots of discussion about bonds, following on from my interview with Paul Hawkins. Main problem is the minimum investment size is so large.

No mystery share this week. Nothing massively stood out for me.

Mello London (at Clayton Hotel, Chiswick) - I’m really looking forward to this physical event (Wed & Thu, 16-17 November), which we need to support. The online shows also continue on Mondays. Do come along & say hello. Lots of good companies attending. They prefer webinars, but I think once a year companies should come along to a physical show.

Ed, and Graham will also be at Mello. Should be a great laugh. Excellent panellists, eg Andy Brough, Leon Boros, Lord Lee, Katie Potts, Gervais Williams.

This bear market will end! We’ll get through it. Feels like this is another bear market rally for now, but who knows? We’ll make our money back in the next bull market! Thanks for listening, bye for now.