More Midcap Madness - Stocks That Are Too Cheap Today

22nd Jan by Mark Simpson

17 comments 4652 reads

In May 2023, I wrote an article called Midcap Madness. The theory was that outflows from the UK markets had made some midcap stocks simply too cheap. I used a screen with some very simple value criteria:

Market Cap: > £300m; < £3b

I defined mid-cap fairly loosely here.

Price-Earnings Ratio Forecast 1y < 10

I wanted companies that are forecast to remain cheap.

Dividend Yield Rolling 1yr > 5%

While this wasn't designed to be an income screen, a large dividend yield is a sign of companies where the price has declined, but the company retains its dividend payout. This may indicate that management believes the company's future is not as bad as the market has priced.

Stockopedia QV Rank > 70

This was a sense check that I was getting stocks with reasonable Quality and Value.

Industry Group excludes "Collective Investments"

I wanted to look for trading businesses, so I excluded funds and fund-like stocks.

The original screen had 30 results, but it was quite heavy on banks and had a few other anomalous stocks. So, I narrowed it down to 18 stocks that I thought had interesting value characteristics. As the midcap madness name suggested, they looked just too cheap.

Were they just too cheap?

Not every stock performed great, of course. However, the average return from the article publication to the end of last week was a very respectable 23%:

…

Price at:	10/5/23	17/1/25	Price Return
IGG	728	1054	44.8%
TCAP	170	271.5	59.7%
MGNS	1778	3735	110.1%
CRN	91.9	175	90.4%
KLR	646	1372	112.4%
ZIG	382.5	313	-18.2%
FXPO	108.5	108.4	-0.1%
SQZ	230	154.7	-32.7%
PAY	430	698	62.3%
MCG	117	76.7	-34.4%
OCN	902	1315	45.8%
WIX	136.8	150.8	10.2%
CAML	206	158.8	-22.9%
KMR	450.5	310	-31.2%
LIO	799.5	407.5	-49.0%

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timarr

23rd Jan

RE: Pets at Home (LON:PETS)

The issue is a combination of things - the recent update didn't help, impacted by the budget, but there's an underlying worry about the CMA investigation into vets which is due to report later this year. PETS gets a very respectable return for a retailer in part because of their in-store vets so if that was impacted it would change the investment case.

On the other hand Rachel Reeves fired the head of the CMA on Tuesday for not being sufficiently pro-growth and nearly a third of the CMA decision committee will be replaced at the end of their terms later this year, so it'll be interesting to see how this plays out. PETS thinks it will have limited impact on them because, unlike other integrated companies who buy practices, no one can be in any doubt that they're dealing with PETS rather than an anonymous PE firm behind a friendly local brand.

I hold, but probably wouldn't be buying if I didn't ahead of the CMA outcome.

FREng

Another stellar article Food for thought. Perhaps a larger portfolio based on diversity and value will outperform stock picking and reduce risk this year.

John LA

thanks for update as always, very interesting and food for thought

cadmunkey

Excellent as usual Mark. Gives me some ideas on how to rescue my rather lacklustre portfolio performance.

chris2021

Serica Energy (LON:SQZ) (I hold) Tremendous dividends allied to potential move to Main Market this year, plus potential M&A activity, and capable management points towards a positive outlook.

Mark Simpson

Some good background, thanks timarr.

Yes, I was impressed with the recent IMC presentation. Looks like they are getting the basics right with regard to reliability and potentially a lot going on behind the scenes.

hunter157

Excellent read thanks Mark

Misfit muser

There's also an underlying dog maturity issue...hear me out! The dog cycle to them is yrs 1-3 spend is high, have to buy all the kit, leads, beds, jabs, worm medicine, etc. However years 3- 5ish there is minimal spend, until spend rises again when vet services shoot up. Given the large rise in pet ownership over covid, that hasn't continued to grow, we are in the middle fallow years from a cohort perspective.

Add this to a highly competitive market accessories market and it is a much harder market than they let on

Jon F

Hi Mark,

An interesting article as ever, but halfway through the MP Evans discussion, it appears to change to Jupiter...?

Regards,
Jon

Rusty2

PayPoint (LON:PAY) l agree looks too cheap, l have been buying.

l lost patience with RWS Holdings (LON:RWS).

CMC Markets (LON:CMCX) will probably qualify tomorrow, if the share price remains at 220p or less, before the close.

Thanks, somehow the title for Jupiter Fund Management (LON:JUP) disappeared. No text is missing tho. I’ll add it in.

The Phoenix

Interesting my quality garp screen throws up many of the companies you highlight, what is also worth noting is you mentioned the first time you did this it was weighted towards banks and certainly large cap banks have been one of the best performing sectors over the last year.

24th Jan

Yes, it was probably a mistake to only have minimal bank exposure by narrowing the field. However, the mid-cap banks have not performed as well as the large caps, probably due to some significant exposures to car financing. Interestingly, the "Large Cap Loonies" which is the same criteria applied to large caps has done equally well over the same period, but now has very few hits, so it seems that large caps may have re-rated in a way smaller companies haven't yet.

prophetwarning

Excellent article Mark, thank you.

Tortoise investor

25th Jan

I wonder if the firing of the CMA chair is a bit smoke and mirrors. The Tories installed a lot of allies to chair arms-length bodies and regulators (technically the CMA is a 'non-departmental public body') so naturally Labour have been keen to replace those. It's happened across the public sector so the CMA may have just been the latest political "victim" and Bokkerink was a businessman so not exactly the enemy of growth.

Ultimately it has a remit set out in legislation and consumer protection and better competition is core to its mission. I also think the leadership there has an independent streak. So I think we need to be cautious about reading too much into a non-exec, appointed by the Tories, getting fired by Labour at this stage.

26th Jan

Hi TI

It's clearly a political decision, but it does go to the heart of the government's industrial policy.

The CMA has long been viewed by business as overly interventionist, intervening in an unusally high number of mergers and particularly around technology decisions, and their preference for structural (i.e. divesting) over behavioural remedies has put them at odds with other competition authorities around the world. This played to the bipolar approach of the Conservative Party, wanting to be both pro-business and populist at the same time.

What's particularly interesting about this decision is that the mood music coming out of the CMA was that it was fully onboard with the government's growth approach while at the same time insisting that its current approach was already aligned with it. Reeves and Reynolds clearly disagreed, and the timing of this, just before Davos, is unlikely to have been accidental.

However, in the end, if the government really wants to change the approach of the CMA it will need to legislate. There are limits to what it can change based on its current legal remit.

So: yes, political theatre, but with some genuine desire for change behind it.

More Midcap Madness - stocks that are too cheap today

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Mark Simpson

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