Paul's weekly SCVR summary - episode 2 for 2023 (w/e 13 Jan 2023)

Paul's Podcast w/e 13 January 2023

Audio is here, and on podcast providers such as Apple, Google, Spotify, and others (search for “Small Caps Podcast with Paul Scott”) - to download & listen offline when you’re out and about.

I’m a huge fan of podcasts & audiobooks, as it makes interesting use of otherwise wasted time, when I’m exercising or shopping, and blots out the various sounds made by the revolting element of the British public! Although considerably more care is needed when crossing roads! ;-)

The latest audiobooks I’m enjoying are: “The Dealmaker” by Guy Hands, and “Spare” by Prince Harry (yes I know, I know. I’m not judging him, well I am but that’s for Twitter, not a shares site. It’s a riveting story regardless).

I don’t get paid for doing these podcasts by the way (and want to keep them ad-free), it’s just an additional service primarily for Stockopedia subscribers, who also get the written summary here. I enjoy recapping on the week, and it helps firm up my own ideas on what’s been covered during the week. If people find them useful all good, and I enjoy reading your feedback, and reviews on podcast channels are also really helpful, and everyone likes to get a pat on the back!

Right, on to my latest podcast…

New record coverage of 46 companies - 31 Dec year ends means loads of trading updates.

Mid-caps - we covered a few, for read-across.

Of 46 cos - 7 ahead expectations, 8 profit warnings, the rest in line.

Monday 9 January

FDEV - big profit warning, now only just above breakeven.

Devolver Digital (LON:DEVO) - another computer games company, also warns on profit.

N Brown (LON:BWNG) - settled legal case with Allianz. Mixed feelings - removes big uncertainty, but cost is £49.5m, a lot for a £124m mkt cap company. Balance sheet provision was only c.£30m. Has liquidity to pay it. Shares trading at a huge discount to NTAV. Little to no profit. Lousy business I think.

Nanoco (LON:NANO) - back-peddles on triumphant announcement last week, reining in expectations for the settlement from negotiated win against Samsung. Shares have given back all of last week’s spike up. Really badly handled by the co & its advisers. No view, as not enough info.

Anpario (LON:ANP) - profit warning. Miss f/c by about 25%. Nice balance sheet. Decent company, profitable, but why valued on 30x? Seems far too high. Niche animal feeds products, but little growth. Wouldn’t interest me at even half the current price.

Excellent reader comments, on Crestchic - planetx & Michael T discussed the bid - stakebuilding by a fund. Lord Lee’s disclosable holdings discussed. Davidjhill has posted interesting comments. Wolfspirit talked about FDEV. Another thank you to MrC for his early morning snapshots, how does he do it?! Invaluable, thank you! RDHOWARTH and TommyH always talk sense, good comments. SCVRs are conversation starters, and readers then add to it - team effort!

Thank you for all the thumbs up for my watchlist ideas for 2023. So I’ll do a follow-up article with another 20 ideas for your watchlists. I liked your replies, with your own share ideas too.

Tuesday 10 January

Manically busy, we covered 10 companies -

Sosandar (LON:SOS) - trading update. One of my favourite long-term shares. Q3 update (Oct-Dec) trading in line with expectations - £43m revs, £2m PBT expected for FY 3/2023. Cash position up slightly to £4.6m, shouldn’t need another fundraise. Clean accounts. I thought it was good, but some readers were less bullish and flagged slowing % revenue growth. International expansion is next, through overseas partners. Shrugging off consumer downturn, affluent customers. But £50m mkt cap maybe enough for now? I’d like to buy back in.

Hostmore (LON:MORE) - oh dear. CEO resigns, COO taking over. Dec trading update not good. LFL store revenues are still tracking at -14% vs pre-covid. That’s disastrous, as many costs have increased so much. I see it as financially distressed now, with £29.5m net debt. £5m loss expected for 2022, and I don’t see 2023 forecasts as being achievable. High risk, so I’m avoiding this share. Sorry I got it wrong. Downside case could be emergency fundraise at 80-90% discount, or goes bust? OR, could be a serious multibagger if it survives & recovers. High risk, high reward.

Card Factory (LON:CARD) - we turned positive last year, as performance improved, and finances strengthened. Trading its socks off now, guidance raised 20-30%. I really like this share, and it's still not expensive. Although inevitably some people will be banking profits after the big recent rise. Well done to holders!

Tekmar (LON:TGP) - v interesting special situation. Winning big new contracts. High risk as financially distressed. Risen 75% since we flagged it in Dec 2022. Only for risk tolerant micro cap investors.

WANdisco (LON:WAND) - yet another contract win. I’ve sold my small position in Saga (LON:SAGA) and used the money to buy WAND, a small initial stake on the basis of big contract wins. Terrible track record though.

SCS (LON:SCS) - bought an online competitor from the administrator for peanuts.

Shoe Zone (LON:SHOE) - I reviewed FY 9/2022 results. Enthusiastic thumbs up from me. Looks like forecasts set low for 2023, so it can beat them. Value retailers are doing well in this downturn - obvious with hindsight! I remain a fan.

Graham looked at Churchill China (LON:CHH) . Also AO World (LON:AO.) - looks to be turning around finally, with a more sensible profit-oriented strategy. Although I don’t like on balance sheet liabilities re warranties - misselling risk? But my other reservations have receded.

Team17 (LON:TM17) - rushed out positive TU in response to 2 sector profit warnings - Graham covered this.

Abtan put up a good spreadsheet dissecting performance from SOS, thanks for that. Boon and BnB added good comments.

Wednesday 11 January

Cambridge Cognition Holdings (LON:COG) (I hold) - in line with exps. Also an interesting acquisition.

Warpaint London (LON:W7L) - ahead exps TU. I’ve reached out for a CEO interview, hoping to record & publish that next week. The main topic will be why is business outperforming, and is it sustainable?

Reach (LON:RCH) - profit warning, ad revenues slowing down - isn’t that as expected, why is market surprised? Market seems euphoric, with everything rising, then some drop back down again on profit warnings. So price moves up seem almost random, just as much risk of profit warnings at companies which have shot up recently.

Surface Transforms (LON:SCE) - warning re production glitches in Nov-Dec, market shrugged it off. Bound to be teething problems. I like co, but I have no idea how to value it.

J Sainsbury (LON:SBRY) - good TU - at top end of forecasts. I normally avoid supermarkets, but wondering whether they might be a good place to be protected from inflation? They’re passing on inflation, and trading OK despite volumes being down, and can afford to pay staff more.

JD Sports Fashion (LON:JD.) - thumbs up from me, strong trading update. Fancy trainers are still in demand!

Boohoo (LON:BOO) - having a sort-out of London office, growing pains from acquisitions. Slowing customer refunds from 2 weeks to 3 weeks - seems a sign of financial strain? I’m worried about this, and await the next TU.

Frasers (LON:FRAS) - relaunching Missguided brand in-store.

Direct Line Insurance (LON:DLG) - profit warning & cancelling divi, due to bad season for insurance claims. Swings & roundabouts though? But loss of 10% divi is a blow. Admiral dropped 9% in sympathy. I sold my Saga shares, as I was worried about read-across, but it didn't happen. I’ll wait to see about buying back in, when Saga reports. It’s not binary, we can top slice or sell, at any point, and buy back later. I’m planning on being more active with my shares, as buy & hold was a disastrous strategy last year.

Lookers (LON:LOOK) - raised 2022 profit guidance by 10%. Really good value sector. 2023 forecasts already factor in a huge fall in earnings, so even if business drops, they should still meet/beat market expectations. Love the asset backing, same as the housebuilding sector.

Graham looked at - Hostelworld (LON:HSW) , Nichols (LON:NICL) , Ab Dynamics (LON:ABDP) , Ten Entertainment (LON:TEG) - bowling companies doing great still.

Thursday 12 January

Tortilla Mexican Grill (LON:MEX) - burrito chain, expanding. Rose strongly on in line update. £4m EBITDA only translates to breakeven at PBT level, although EBITDA is close to cash generation. Starting to look interesting. I mystery shopped Tortilla again, always good - big portions, reasonable price. But it is so difficult to make money in this sector. So don’t get carried away with chasing shares too high. I’ve got an introductory call booked in with mgt next week. If I like it, I’ll offer them a public interview.

N Brown (LON:BWNG) - in line Q3 update. Didn’t excite the market. Says 23/24 likely to be soft. Emphasises its strong balance sheet. No divis. I don’t rate it at all as a business. But could be a rebound trade, or a takeover by the family owners? Maybe they should wind down the business and distribute cash, which might make sense given the huge discount to NTAV. But big question is whether the receivables book is good, when a large % of customers default, means getting the bad debt provision right is crucial. BWNG has much stronger bal sht than Studio Reail (which was similar, and went bust).

Portmeirion (LON:PMP) - I like - in line update.

Halfords (LON:HFD) - profit warning, down 20%. No insolvency risk. Guiding down profit guidance 15-20%. Pandemic boom in cycling fizzling out.

ASOS (LON:ASC) - big bounce. Cleverly worded update - they’re trading badly, but say £300m profit improvement planned, and big improvement in H2. I’ve been hoping for recovery in bombed out eCommerce shares - was a key theme of mine for 2022, but I was a year too early! Interest does seem to be returning in this sector, rich pickings. Asos could be a good short-term trade, but longer term I’m not so sure. Sorting out basics of a badly run business. Valuation could soar, given £4bn revenues. So each 1% gross margin improvement is +£40m profits. Sells other brands, so low margin currently. I won’t buy into the current spike.

Morses Club (LON:MCL) - says it is delisting.

Distil (LON:DIS) - poor update, needs to raise more cash I think.

Virgin Wines UK (LON:VINO) - profit warning, half/half internal, external. Nice enough business, but PBT now forecast £1.8m, vs £5.3m LY. I can’t get excited at this stage.

Graham - Trustpilot (LON:TRST) , Xaar (LON:XAR) , GYM (LON:GYM) , XP Power (LON:XPP)

Friday 13 January

Revolution Beauty (LON:REVB) - suspended. Fascinating update on accounting irregularities, worth reading by everyone. Results of independent report by lawyers/accountants. Shares remain suspended, bank supportive, looks like it should come back from suspension.

MJ GLEESON (LON:GLE) (I hold) - good reaction to TU. Entry level small, cheap houses, avg price £170k. Demand is down, as expected. Shares in sector are so cheap, below NTAV. So great value, and should recover over next 2 years. More interventionist Govts too - resumption of Help To Buy? Govt support usually targets the bottom end. Also additional 4% corp tax on housebuilders is directed more at bigger companies, benefits GLE. Reduced order book. Canx rate has moderated in the last 6 weeks. Early signs of panic receding? Such strong bal sht protection, so don’t have to worry about a short-term downturn, ride it out. Bounced 8% on Friday.

Likewise (LON:LIKE) - in line exps update. Quite interesting, tentative thumbs up. I’m hoping to speak to mgt shortly.

Wincanton (LON:WIN) - brief look. Guided down for FY 3/2024, with cautious outlook. Liberum lowered by 6% - thank you (also to Singers, WH Ireland, Finncap & others) for making research notes available to us on Research Tree, incredibly helpful. I like WIN - cheap & well run. Don’t like bal sht, but not a threat to solvency. One of my top picks for 2023.

Dialight (LON:DIA) - profit warning, down 19%. Too unpredictable, so I can’t value it. Litigation ongoing, costs of £1.2m in 2022. Avoiding this.

No mystery shares this week.

Macro news/views

Market has been strong in last few weeks, felt like a euphoric frenzy this week - but it’s indiscriminate, as we’re seeing profit warnings despite shares having bounced strongly previous to it.

Momentum traders diving back in, now shares have gone through the 50-day moving average? But just because shares are rising, doesn’t mean they’ll stay up - people bank profits, so could drop back down again. I think it’s sensible to top-slice if something has risen c.50% without any news. I did that with Saga (doubled from recent lows). Everyone has their own approach - never advice, just opinions.

Snakes & ladders at the moment.

I don’t know if it’s another bear market rally, or the start of a new bull market.

Business energy - news of Govt cutting relief, cap going. Instead there will be discounts on wholesale prices from April 2023. Hospitality sector complaining it will hurt them. Propel newsletter got embroiled in a huge row over transgender rights! Why on earth did they get involved in that?! Diversity & inclusion are great, up to a point, but it’s political & polarises opinion, so I cannot see the point in getting sucked into these debates, if you’re discussing business and shares.

Wholesale prices of gas/electric have tumbled, helped by mild winter - Europe still has large stockpiles of gas. Imported LNG now replacing Russian gas. Over time these crises get resolved. Could it be a positive theme for 2023 and beyond? Cost headwinds in 2021-2 (energy, freight, commodities, labour, and other cost inflation) could become tailwinds in 2023 onwards, as inflation now stable or falling? Maybe this is fuelling more buoyant share prices? So bull run could be based on solid foundations, although not out of the woods.

Inflation forecast to drop a lot in 2023 - eg ECB forecast. Does look like an inflation spike, now receding - bullish for bonds, equities & property. Have we overreacted to inflation maybe? We’ll see.

Small caps - price rises seem almost random. You don’t know who is selling in the background, snuffing out rises - e.g. under-performing small caps funds, meeting redemption requests from clients can be forced sellers. Monitoring 3% s/h RNSs is worthwhile, but there can be lots of activity below the 3% level, so we don’t know what’s going on with buyers & sellers overall. So my worry is such sellers could snuff out big spikes up in share prices, at some companies.

Redemptions likely to be an issue still. But I see recent update from Premier Miton (LON:PMI) saying Assets under Management has now stabilised - maybe customer redemptions might now stop? Would be better if they turn into inflows. We spotted value in PMI shares in early Dec 2022, pointed out in the SCVR, well before it was tipped by various other commentators as a year end top pick!

Buying frenzy? Has felt frantic in the last fortnight. Let’s wait for trading updates, and see if spikes up are justified. I think in some cases, shares could give back some of recent rapid gains.

Market recovery in 2009 - my recollection. I did very well in 2009, after a terrible year in 2008. The reason was that I ignored shares which had shot up, and instead looked for similar things which had not yet moved. They shortly afterwards bounced strongly, catching up. So the same strategy might work now - looking for overlooked, but good companies, whose shares are coiled springs for a rebound.

Economic recession - maybe not as bad as we feared? Since company updates so far have been surprisingly good. But maybe the winners report first?! Plenty more profit warnings likely.

Memo to self - shares need to consolidate, don’t get carried away with recent gains. Looking a bit overdone at the moment.

Reinforce earlier point - profit warnings are coming from companies where shares had also been rebounding strongly.

Household energy price caps now forecast to fall, after peaking. But still double 2021 prices.

Lots of us are using less electricity. I’ve got used to heating my flat to 18oC, instead of 21oC, and I wear a gilet over my clothes, and it’s perfectly comfortable once you get used to it!

Consumer spending could be better than expected, because NLW (living wage) rises by 9.7% from April, so young people are still spending. They have less worry about energy bills (e.g. at Uni, living with parents).

So I think we should question the doom & gloom narrative.

We’ve already seen from companies how they’re coping in tough conditions - which are prospering, and which are struggling. So I think it’s worth paying more for companies doing well, than chasing cheap ones doing badly.

Whole hospitality sector looks awful. I’m sticking with XP Factory (LON:XPF) but it’s lost a third of value recently, but no update as yet.

Inflation in US - graph showed that commodity-driven inflation peaked at +18% in late 2021, and has now fallen to zero! Inflation is now receding gradually, but takes time to come through at lower levels.

Thank you to dcon85, who helped me by showing me how to use “notes” on my google spreadsheets, which resolved a problem, making them visible to all.

I’ve created a monster with my spreadsheets - takes me ages to update them, but very useful, so will keep going.

Thanks again to all subscribers, we appreciate it, and for your comments.

Markets a bit better now, and we’ll make our money back in the next bull market!

Byeeee!