Catch a wave, and you're sitting on top of the world.

10th Aug '18 by Gromley

8 comments 4715 reads

I’ll shortly be departing on my annual routine of one week volunteering followed by one week family holiday. Now I’ve never surfed in my life, but I do find that a little bit of Beach Boys in the sunshine gets me properly in the mood for summer.

The convolutions of my mind led me on to think about those stocks that promise to make you rich by riding one economic mega-trend or another. Let’s face it there is no shortage to choose from. As a cautious type, I tend to suspect that many of these will not come to fruition or run out of money before they commercialise or fail to deliver the riches for other reasons. Nevertheless, hope springs eternal and so I thought that I would write a few words on a stock I recently took a speculative position in. I’m also prompted by the fact that Filtronic (LON:FTC) are due to announce their results next Thursday, by which time I will be sitting in a field in Norfolk, so will probably have to wait for the arrival of the daily carrier pigeon to find out.

I can present the speculative bull case very succinctly :

In April Filtronic announced that together with Nokia they had developed a “Massive MIMO” [mMIMO] antenna (if you want the techie details you’ll have to look them up)
On the 1^st of August they announced initial production orders from a “major Europeam OEM”. At $2m in the first half of the current financial year, this is a mere toe in the water.
mMIMO will be a key component of the roll out of 5G mobile networks and according to one industry report : “The massive MIMO market was valued at USD 1.11 Billion in 2017 and is expected to reach 20.91 Billion by 2026, at a CAGR of 41.6% during the forecast period.”
Filtronic has a market cap of £29m (at the time of writing with the share price a shade below 15p)

That’s it, plain and simple.

I have no forecasts for what share of that market Filtronic can achieve (and having worked in the industry I would not place much faith in such forecasts anyway). It’s a massive and growing market and Filtronic are involved to some degree.

There are, however,…

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Henry55

11th Aug '18

Marvelous article Gromley, keep em coming. Just back from a month in North Norfolk - internet coverage not as bad as you are expecting.
Henry

stewa268

Well researched Gromley I would like to see some Directors buy shares before I had a punt.

Andrew

jonno

Hi Gromley

Really interesting and readable article. I wish you well and will take a further look at Filtronic. In a similar vein I have taken a small and very much speculative position in Allergy Therapeutics (LON:AGY) To continue the Beach Boys theme 'God Only Knows', but if you don't buy a ticket you are not in the race.

All the best

Jonno

brucepackard

17th Aug '18

Thanks for this article. Really interesting.
One observation I would make is that in 1995, the Filtronic (LON:FTC) share price was 32p
2000 it hit 320p
2005 back to 32p and has since fallen by 2/3 since then

This is over a time when mobile phone companies have been spending huge sums of $$$ CAPEX on their networks. Companies like VOD and Telstra in Aus share prices have gone nowhere, because they can't convert higher levels of data usage into higher margins / higher RoE. I thought maybe a company like Filtronic (LON:FTC) would have benefited from all this CAPEX spend by the Telcos...but obviously not.

That is, we can now stream videos on our phones, but all the benefit of the CAPEX has gone to the customers, rather than the shareholders.

What is going to change so that the benefit of new technology goes to shareholders (either of Vodafone (LON:VOD) or Filtronic (LON:FTC) ), rather than customers?

Enjoy the sunshine in Norfolk!

Gromley

28th Aug '18

So, there wasn’t really a great deal to get excited about with the Filtronic (LON:FTC) results a few days ago. There was no new news on mMIMO roll-out (it wasn’t really to be expected at this stage). As a result the share price “came off” a little from highs in the high 14s to the low 13s, probably as a result of short term traders moving on for more immediate gratification elsewhere.

My initial thoughts on this were that, assuming the bull case plays out, we might see a staircase formation on the chart with increases on material news interspersed with longer shallow declines in between times. Over the past year or so I have been working to improve my investment returns by avoiding “buying to soon” and/or holding through periods of boredom and on this score possibly the smart move would be to sell now and look to buy back on more material news.

However, for better or worse, I decided to retain my small position here. It seems to me that it is possible (I’d hate to get over-excited and say probable) that the next material news will come in outside of the normal reporting cycle (next scheduled news would be the AGM statement on 25th October) and therefore there would be a risk of missing the party if otherwise occupied.

The outlook statement itself was pretty positive, but it would be wouldn’t it?

“Reorganisation of the business identified to capitalise on opportunities in 5G as we leverage our operational and engineering capabilities.”

That all sounds quite exciting and perhaps I’m too grumpy / cautious about such things but I couldn’t help the words “execution risk” flashing before my eyes.

Overall though I think the speculative bull case I made above still holds and I’m looking forwards to seeing how this plays out.

The share price is back up quite nicely today at 14.5p and this appears to be on the back of a couple of pieces of “second order” news :

Firstly the news last week that the Australian government has barred ZTE from taking part in 5G roll-out citing security concerns, there is speculation that other western governments may follow suit.

My understanding is that ZTE have about a quarter of the global mobile infrastructure market, so this could be good news for Filtronic’s partner Nokia who currently have a similar share.

Secondly and perhaps more tangibly, yesterday Nokia announced that they have secured a 500m Euro loan from the European Investment Bank to “accelerate research and development of 5G tech”.

The go on to say that “5G is happening fast, faster than most people even expected.”

That’s clearly some good background news, but I don’t want to get too excited about “the story”, with the company’s somewhat chequered past I am happy to wait to see some more material news on profit impacts before considering upping my stake.

30th Aug '18

Just to keep up with the news here, Filtronic today announced a further mMimo order from "a major European OEM" (i think we know this to be Nokia so I'm puzzled why there is presumably an NDA preventing them from being named).

This is order is valued at $1.1m and is expected to be completed during this calendar year, it comes on the back of the order announced at the start of August for c. $2m which was expected to be fulfilled during the 1st half of the current FY (ie by the end of November).

The announcement goes on to say that :

As this product moves into regular production, demand is expected to flow in accordance with our customer's normal buying cycles. As a consequence, Filtronic will not announce further orders for this product type unless they fall outside the expected pattern or are material in the context of our anticipated financial performance.

This is as it should be, the company really has no business RNSing individual orders that amount to 2-3% of expected annual revenues.

The problem I have however is that I don't believe we have been given any guidance as to what the customer's "normal buying cycle" actually is.

One could perhaps join the dots and assume that as the first order was expected to complete by November and this second order for $1m is expected to be delivered by December, that maybe the order flow could be expected to be $1m per month? That's just guesswork though and I wouldn't want to rely on it to much but it could suggest that the mMIMO contribution in the current year (ending May-19) will be material at maybe $8m so maybe c, 25% of current forecast revenues (whether that is 25% growth though would in any case depend on how other demand stacks up).

It is a bit frustrating how we have to speculate to this degree, whereas I would imagine the company has a somewhat clearer view of what to expect.

On past form we should get a scheduled trading update in mid December and the half year results at the end of January and those results should at least tell us something about how well at least the first $2m order translates into profits. The fact that, as brucepackard reinforced above, Filtronic seriously failed to make hay the last time the sun shined (4g mobile roll-out) does mean that I really want to see evidence of enhanced profits before I get too excited.

This probably also supports the view I expressed a earlier in the week that the smart move might be to sit on the sidelines until the next material news (personally I'm still going to hold my position, because I am still minded to think that un-forecast positive news is a possibility).

The StockRanks may well be delivering the same message.

At the time of my original piece in this thread, Filtronic had a winning style of "turnaround" with a stock rank of 75 (Q:36, V:61, M:95) , now it has a losing style of "momentum trap" and an SR of 51 (Q:38, V:37, M:83). It's a bit of a no-brainer that a sharp increase in share price reduces the value score, I'm surprised though by how much and I'm a little puzzled as to why the Momentum score fell.

I tend to think that looking at the StockRanks in this way may be a bit of a diversion from what they actually represent; but I know there has been some interest in how stockranks and styles develop over time so I am interested to track this. It is interesting to note that if momentum falls off a cliff over the next few months, the classification could easily fall to "sucker stock" which would be an interesting development, but perhaps not too hard to explain given that the bull case here is very reliant on the 5G "story".

All things being equal there should be nothing more to say until Mid-December, although any exception to this I would expect to be positive so I'll probably be either wearing my party hat or santa hat at the next contribution here!

10th Sep '18

Just a quick "note for the record" to explain the 26% increase in the share price today (10-Sep-18) in case anyone is unaware or is looking back at this from the future.

It seems that it was entirely due to the fact that Small Company Share Watch [SCSW] tipped it over the weekend.

I have no idea what they said, other than that it was obviously positive ; but I am totally blown away that a few carefully crafted words can create nearly £10m pounds in shareholder value (4.88p share price rise on 196m shares).

Of course whatever they said will have no material impact on the valuation of Filtronic (LON:FTC) in the long run, but it does create something of a dilemma for Filtronic shareholders - to take the profits or not?

For me it is tempting, despite my 'fantasy bull case' being for maybe a 10-bagger over a few years, a sliver under 100% gain if 5 weeks is something I have not achieved before. Add to that the fact that SCSW have added 20% of "froth" to this, it is sorely tempting.

But I will stick with this for now, both because of my 'fantasy bull case' and because of a view of SCSW.

I note that SCSW also tipped Filtronic back in May-16 and, if I am correct about the date of their tip, the share price went up 21% on the day (this was the same day a a major contract win so I may be wrong in attributing the reason). Over the next month or so the shares appreciated by a further 16%.

It was only a few days later that the shares retraced falling to within 5% of the original tipped price.

This "seems like" a profile that is common to a number of SCSW tips so I am going to stay in for now, but will consider selling to buy back lower if I think I can see the "hot money" leaving,.

This is totally new territory to me, so **REALLY**, do not follow me because you think I know what I am doing. - I don't.

brballs

I read your initial write-up a couple of days after you posted it, and was so impressed I added it to my watchlist to review at a later date. Oh well...

PS. I disagree with your final sentence. I’ve read a few of your posts and comments on this site and find them thoroughly interesting and well-written.

Catch a wave, and you're sitting on top of the world.

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Gromley

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