Holland Colours feeling a pinch

13th Apr '18 by PhilHofGrowYourDough

8 comments 5241 reads

Holland Colours NV is a manufacturer and supplier of pigments, granulates and pastes based in the Netherlands.

It has a really good investment profile. It's history of revenue and profits is fantastic.

It has a great Stock Rank profile and increasing broker estimates which is something I look for when buying.

I've been invested in £HOLCO before taking a 15% profit between March & November 2017. I sold out due to a strong bearish break below the Ichimoku cloud.

I use Ichimoku Clouds as a way of picking a trailing stop loss and it's served me really well in terms of running winners and cutting losers.In this case (Nov 2017) I actually picked the bottom of trend. C'est la vie! This is bound to happen from time to time.

Fast forward to early January 2018 and the stock has taken off with heavy volume. The fundamentals that drive my screens are all in place and now Ichimoku signals are all positive. I'm back in on the 3rd Jan. But the euphoria passes and the stock consolidates and has been consolidating now for over 3 months.

Thanks to brucepackard and schober I have been able to resurrect my charting packages using the alphavantage data feed (see Best source of historic prices thread) and that means I was able to quickly scan my portfolio through my software. What jumped out was when I viewed Holland Colours with my Point & Figure Charting software.

What stands out for me is the tightening of the price action and this is highlighted by the very narrow Bollinger Bands. In Point & Figure terms this referred to as a Pinch. When a Pinch occurs the future is very uncertain as bulls and bears are so finely balanced that is is hard to have any degree of certainty who will prevail.

Here's a Stockopedia version of the Point & Figure Chart where I've cleaned up the chart and included some boxes to highlight the tightening.

Perhaps the lesson here is that with small caps the…

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abtan

16th Apr '18

Thanks for the post Phil.

I've held £HOLCO for about a year now (first bought 6/17) and it continues to be a hold.

Like you, I've considered selling out due to the prolonged share price drift and the opportunity cost inherent in not investing in something with potentially higher growth. I don't think the lack of regular news helps this (last results news was in October 2017), but this seems to be a common theme with European shares. The next results update is not out until the end of May.

The reason I continue to hold is because £HOLCO, more than any other share, keeps cropping up across my various screens.
(My screens, in general terms, incorporate rising revenues, high cash flow, no debt, minimal shareholder dilution, low p/s, dividend)

I also like that management continue to hold a high # of shares.

Given the strong metrics, the only reason I would sell would be if the story changes, so I will wait until the next results are published at the end of next month before making any further decision.

A

Daniel Rudd

17th Apr '18

"I might argue that if this stock is just going to languish for extended periods is there an opportunity cost, after all I could be invested in stocks that are clearly trending and carry less uncertainty."

Have you considered adding % 10 day vs 3 month vol - rank in market >33%?

Rusty2

I used to hold this share, I bought in Dec 2016 and sold at around 86 euros in July 2017. I felt it was losing momentum. Since then I believe the company said it was not going to give any forecasts. I took the view that I made a reasonable profit and sold. I was considering buying back in but no news since October, will wait for the next results and then decide. I agree that the news on Euro shares is limit but not usually this limited. I'm not finding the same opportunities with European shares that I was early last year.

PhilHofGrowYourDough

21st Apr '18

Hi Daniel,

I do tend to buy on breakouts and in late Dec and early Jan there was good volume associated with the breakout. I guess it's just the nature of some small caps.

Best of luck
Phil

ISAallowance

4th Jun '18

So, the annual results for 2017/18 are now out (thanks to Abtan for highlighting this on the SCVR thread the other day - despite holding HOLCO I'd missed the results). The market seems to like the results, with the share price breaking out a little from its previous narrow range.

There has clearly been a difference in profitability between the 3 geographical regions:

Americas ($m)

Revenue: 33.9 (+7%)
Operating profit: 4.5 (+25%)
Operating margin: 13.3% (2016/7: 11.4%)

Europe (Em)

Revenue: 42.6 (+12%)
Operating profit 0.5 (-55%)
Operating margin: 1.2% (2016/7: 2.9%)

Asia ($m)

Revenue: 13.9 (+21%)
Operating profit: 2.2 (+175%)
Operating margin: 15.8% (2016/7: 7.0%)

The significant reduction in operating profit for Europe was attributed to increased raw material costs, and increased competition in the building & construction materials sector.

Free cash flow was significantly down on the previous year, mainly due to a large increase in working capital. Part of this was attributed to the need to hold greater stock to mitigate raw material shortages, which seems sensible. Debtors look OK (they give a breakdown by age in the notes), so I don't have a problem with this. Capex was a bit less than the previous year, and roughly inline with depreciation.

I am currently a holder of HOLCO. I bought it into a "stockranks" ISA 22/5/2017, when the SR was 99, with superstock status. The SR has now drifted to 92, style neutral, and I am somewhat conflicted as to whether to let it run, or replace it with a higher SR candidate. Clearly HOLCO is a well run small company, with excellent ROCE over the last 7 years, no debt, and a high level of employee ownership, all of which I like. Additionally, it has one division (Asia) which appears to be firing on all cylinders at the moment, which could potentially be exciting. On the other hand, HOLCO is clearly an extremely cyclical stock - it it categorised in the chemicals sector (cyclical) and additionally sells a significant proportion of its output to the building and construction sector (cyclical). So it's almost a double cyclical! Looking back at the share price shows major declines both in 2007/8 and also in the 2011 correction. Stocko's ROCE figures only go back to 2012, but it's not hard to imagine that ROCE over the full economic cycle could be a lot lower than the last 7 years during global expansion.

So, for the bull case, a well run small company with good last 7 years ROCE and increasing sales and profits in emerging markets (Americas includes Latin America).

For the bear case, very low margin in its biggest market, inability to pass on raw material costs in a timely manner possibly indicative of lack of true competitive advantage, increased competition in one of their market sectors (B&CE), and very cyclical at a time when the global economy may be on a knife-edge between continuing growth or a trade war and/or debt crisis.

I thought writing that down might help me decide on stick or twist, but I'm still conflicted!

Well it's definitely burst out of the pinch!
I'll hold now until ...

1) Loss of price momentum
2) Bad News
3) Another opportunity arises that is clearly top notch and HOLCO is my 'worst' holding

Best of luck
Phil

6th Jun '18

Completely agree with this assessment!

My biggest concern was also the inability of the company to pass on significantly higher raw material costs, though I was slightly reassured by the inventory stockpiling to negate this in future periods. If Europe continues to under-perform, however, I would consider selling.

In the meantime I'll continue to hold as (nearly all) the numbers are pointing in the right direction, there's a growing dividend and despite the stock being cyclical it looks like it would survive any downturn.

25th Oct '18

H1 release for those still holding:

https://hollandcolours.com/ima...

Holland Colours feeling a pinch

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PhilHofGrowYourDough

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