Small Cap Value Report (10 Oct 2014) - MTC, OPTS, CAR, MLIN

Friday, Oct 10 2014 by

Good morning! It's quiet for results & trading statements today, but all eyes will be nervously looking at whether the current sell-off continues or not? Small caps are being hit the hardest, both with the Russell 2000 Index in the USA, and here in the UK with AIM once again hitting a fresh low for the year yesterday.

My view remains the same - market corrections happen from time to time, and providing you take a long term view of decent companies with sound finances, paying good dividends, and at reasonable valuations, then there's really nothing to worry about - short term share price movements are just background noise. The only exception to that is when the economy really is going into Recession, e.g. in 2007-8, when people who sold early would have protected their capital in the short term. Although in my experience nervous sellers rarely have the courage to buy back in anywhere near the market lows, so they might miss a big downturn, but they will also usually miss the big recovery too.

Anyway, we'll see what happens. I've kept a bit of powder dry, and am already seeing one or two companies on my watch list starting to look interesting in valuation terms.

John Lewis partnership

Although a partnership, not stock market listed, the department store and Waitrose group announces weekly sales figures. These show a strong improvement for clothing, after a soft patch caused by mild weather in Sept. That should have read-across for other clothing retailers. In my view the market gave us a buying opportunity in several clothing retailers which saw steep share price falls over what is just a temporary factor - mild weather. As the old saying goes, the only weather that matters is whether you have the right stock in the right place at the right time!

Mothercare (LON:MTC)

Share price: 169p (down 57p today)
No. shares: 88.8m existing + 79.9m new Rights Issue (9 new for 10 old) shares = 168.7m
Market Cap: £285.1m

Rights Issue - Mothercare announces this morning that its nil paid Rights will today be given their own listing. This is normal in a Rights Issue, in that shareholders who are allocated Rights can sell them in the market  nil paid for a certain amount of time (about a week or two usually I think), or keep them and subscribe for some or…

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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

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Carclo plc is engaged in the supply of fine tolerance, injection molded plastic components, mainly for medical products. The Company is also engaged in the design and supply of specialized injection molded light-emitting diode (LED)-based lighting systems to the automotive industry. The Company operates through four segments: Technical Plastics, LED Technologies, Aerospace and CIT Technology. The Technical Plastics segment supplies fine tolerance, injection molded plastic components, which are used in medical, optical and electronics products. The LED Technologies segment develops solutions in LED lighting. The Aerospace segment supplies systems to the manufacturing and aerospace industries. The CIT Technology segment manages its digital printing of conductive metals onto plastic substrates. The Company is a supplier of control cables in Europe. more »

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  Is LON:MTC fundamentally strong or weak? Find out More »

21 Comments on this Article show/hide all

bsharman 10th Oct '14 2 of 21

wow. It has been a horrendous Autumn and my portfolio is taking a daily hammering.... I wonder where the FTSE will be by the end of the year? I am starting to see lots of bargains but don't want to catch more falling knives..

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Metier9 10th Oct '14 3 of 21

My portfolio has taken a real hammering as well. I think i learnt one lesson and thats I need more diversification!

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bsharman 10th Oct '14 4 of 21

In reply to post #86915

I have diversification but most things are sliding with the market.. (nothing is protected)

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Metier9 10th Oct '14 5 of 21

I recently set up a new screen and noticed it is performing better than my own portfolio. It is strangely a sad and happy event :S

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garbetklb 10th Oct '14 6 of 21

I'm heavily diversified, but still being hammered!

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WatsonNimrod 10th Oct '14 7 of 21

Got shot of most of the BlueSky stuff a few weeks back (it was only 5% of my portfolio) which was sad in way because I follow those companies more than the plodders and to me its the most interesting part of investing. I still cant force myself to sell Snoozebox (ZZZ) tho!!!

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GrindertraderUK 10th Oct '14 8 of 21

As hard as it is to do so and somewhat going against Paul's advise I am sticking to my stop loss strategy. Most of my portfolio has now been stopped out from 10 down to 4. It looks like that will be reduced further as Trifast moves down 9% . My stop losses around the 10 - 15% mark.

I guess as disappointing as it is to see this I am more comfortable with protecting my capital. I am certainly not nervous as I also bought into the ETFS 2XF FTSE100 (SUK2 Super Short) and so I am making some money back from the losses.

I am going to consider more spread bet shorts of AIM until I feel the sell off is running out of steam.

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Paul Scott 10th Oct '14 9 of 21

In reply to post #86920



I NEVER, EVER give advice!

Am just giving personal opinions in these reports. People can do what they like with their own portfolios.

Long term investors ride out market volatility like this, whereas traders try to dip in & out in response to market moves. Horses for courses & all that.

Regards, Paul.

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GrindertraderUK 10th Oct '14 10 of 21

I am sorry Paul I never meant to upset you. My wording is could have been better is all. I still do not see myself as a trader, but even as a long term/medium investor I still like to have some protection of my capital.

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bsharman 10th Oct '14 11 of 21

Thanks for the daily reports Paul, which have been a great education for me over the past couple of years. It's TIN HAT time today though and I remember Antony Bolton said that on days like today he just switches off the computer and does something completely different - probably his hobby of composing classical music! It's easier said than done however...

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Camtab 10th Oct '14 12 of 21

Re my earlier post I am interested in opening a discussion about calling the market as it is clear if you can do it then it will significantly improve your return. I agree with your fundamental approach entirely but if you can buy the same stock 20% lower why wouldn't you? I also accept that calling markets is difficult but the recent one just stalled and you have warned many times of the high valuations. (You probably have increased cash). It does seem to me that we are dealing with the lesser part of the investment circle. I don't want a discussion on gdp, inflation etc wholly backward looking often but your overall valuation discussion would certainly emboss your overall approach - IN MY OPINION - please let me know your thoughts, you may feel you signalled the down side quite early.

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JTG 10th Oct '14 13 of 21

bsharman, I think Bolton was right there. It's Friday, when sell-offs get bigger. If you're long only, like me, you try not to panic and use a bit of time (and Stockopedia) to re-examine the fundamentals of your stocks. Ultimately it's the companies that make me wealthier or poorer, not their price. Today is a "voting machine" day. I try to avoid heavily indebted companies (unless regulated) and make sure I have a spread of businesses paying enough in solid dividends to meet our needs. Then I can be more speculative with the rest and still sleep nights.

My only regret is using my cash to top-up in the past three weeks and see I could do better today! But I will stay fully invested. There's some value out there compared to other assets now.

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johnrosier 10th Oct '14 14 of 21

If you have a bit of cash day's like this can give you a great opportunity to top up in holdings where others are clearly being stopped out or panicking out. Just added to Renew Holdings on a 10% fall this morning! 12.2x consensus earnings for the current year ending September 2015 for 24% earnings growth. Recent trading statement was encouraging. Looks good to me. Why would anyone sell today 10% lower than yesterday!

Website: JohnsInvestmentChronicle
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GrindertraderUK 10th Oct '14 15 of 21

Being stopped out allows me to profit year in year out.. that is why I feel stop losses are a good thing.

I made profit on COMS, QPP, GBO, BOOM.. all because of my strict stop loss strategy when most are sitting on huge losses arguing on bulletin boards and shouting out 'this is cheap, they are going to multi bag soon' type of thing. I was out of BOOM a couple days ago with an 70% profit. It is now falling like COMS, QPP, GBO..

I was stopped out of RNWH today taking with me a decent profit around 25%. It became expensive and just looking at the Stockopedia report it is now value 67 and quality 56. It is moving out of the top right quadrant and its PE is getting expensive in its industry and market.

So why would anyone sell RNHW.. for my reasons above I feel now is time to take the profit and move on from it, until next results at least.

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nevilleaustin 10th Oct '14 16 of 21

Stop loss strategy ! surely if we have done our research, so there for we hold some good stocks, then if they become cheaper we should top up? why sell? blash.

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purpleski 10th Oct '14 17 of 21

@bsharman I agree I was going to write that surely a day like today is one to turn off the screen(s) and go and do something better instead (as the children's tv programme use to say.

I have been in London had a lovely day though the offering at Patisserie Holdings (LON:CAKE) Paddington is awful. I won't be going there again. I still subscribe to the Buffet view that if you believe long term in the stocks you are in market set backs, falls, corrections or whatever you want to call it are buying opportunities.

I am absolutely no expert but the US and the UK economies seem to be doing quite well and this seems a bit over done to me.

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Paul Scott 11th Oct '14 18 of 21


On the subject of stop losses, they are something used by traders, not investors. A lot of people think they are investors, but are in reality traders. Investors buy shares for the long term, and make buy/sell decisions based on the fundamentals. So if a share drops a lot, as an investor I would of course re-assess the situation, work out what (if anything) has gone wrong, and take action accordingly. If I think the share is going wrong, I would sell. But that would be a conscious decision that I would make, based on research. The idea of having an arbitrary figure where my investment would automatically be sold seems ridiculous to me - the value should be better now, as often the market over-reacts to bad news, which can selectively make a large drop a good buying opportunity.

Short term traders however have a very different mindset. They want to make small losses, and big gains. So a trader will tend to run his winners, and cut his losers, and pay little attention to the fundamentals. Which, if you are good at it, can make money.

Some people combine elements of the two.

Each approach has its merits, and I always think that if you have a strategy which consistently works, then keep doing it, whatever it is!

Incidentally, the companies which Grindertrader mentioned as his trades, COMS, QPP, GBO, BOOM, are all stocks that I would say are inherently highly speculative. Hence these are probably good shares to use a stop loss on - as all you're doing is playing market sentiment, not making a proper investment as such. So for playing market sentiment, a stop loss might be a good idea in my view - you're trying to catch the big moves up, and lock in your gains before the thundering herd changes direction & stampedes back out of such speculative shares.

However, for longer term investing, in sensible companies, which you have researched thoroughly and correctly, then a stop loss will be a great hindrance, since you are selling at the time you should probably be buying! (not always, each situation has to be assessed on its merits).

E.g. if I like a company on fundamentals at 100p, I buy some, and it then falls to 80p on no news, then a 20% stop loss would make me automatically sell. But 80p is just an arbitrary figure! What if I hadn't spotted the value in this company at 100p, but instead first found it at 80p? In that case I would be an enthusiastic buyer of the shares, not a seller! So the stop loss is forcing you to do something completely illogical in terms of the value inherent in the shares.

The market neither knows, nor cares, what price any of us paid for our shares, and nor should we care. Once the shares have been bought, our original buying price should be irrelevant to the sell decision. We should base the sell decision purely on the value inherent in the share as of today, and forget about the price we paid, it doesn't matter. I think that approach will, over the long term, lead to better decision-making.

However, I'm also perfectly happy to accept that some people like to use stop losses, and if it works for you then, keep doing it! (especially with highly speculative, over-priced story stocks such as the ones mentioned above - where a stop loss will stop you falling in love with the story, and holding all the way down, when things are clearly going badly wrong - as I would say is the case with 3 out of the 4 companies you mentioned earlier!)

I think it's better to screen out the story stocks completely, focus on quality at reasonable price, and then ignore market fluctuations, but that's my strategy for my long term portfolio. I might well take a different approach with shorter term trades, and try to catch a speculative wave in a bull market.

Another point is that when everything is dropping (e.g. now), then a stop loss is least useful - because it can shake you out of good investments which are only falling because the whole market is going wobbly. You can hedge your portfolio by buying some Put Options, or opening an Index short, if you're nervous about the market overall.

Also if you get stopped out of a share you like, how do you time your re-entry? What if you sell right at the low, and it then shoots back up again, which often happens with stop losses? (traders know where the stop losses are, and often slam the share price down to stop everyone out, and they take your money on the way down, and on the way back up again when you scramble to buy back in!)
You're then likely to buy back at a higher price, and destroy your returns. I've done that in the past - going in & out, in & out, and when I looked at the gains I should have made from a good share, I dissipated most of those gains by trading it badly on the way up, or even lost money on a rising share!

Hence for me, and it's only a personal view, I like to find good stocks, and then stick with them. If there is some material bad news, then I will re-assess the position, but share price movement alone (with no news) would not make me hit the sell button. With small caps, such moves down can often be good opps to top up, as it's often just the illiqudiity meeting a seller, and then no buyers, so the price drops. Then other people worry that something might be going wrong, so they start selling too, and before you know it, there's a chance to buy say 20-30% cheaper for no reason at all - which is a bargain in my book!

Regards, Paul.

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MGinvestor 11th Oct '14 19 of 21

In reply to post #86937

Hi Paul,

some interesting comments from you regarding stop losses. I've never looked at it like this. I guess saying that we are investors but in reality being traders doesnt help! I need to look at this in more depth now. Thank you for providing this valuable insight.

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purpleski 12th Oct '14 20 of 21

Thanks Paul for the long post about stop losses and I am pleased to have my thinking (that I have come to over the past few years as try to learn) backed up by someone who knows his stuff. I have always thought stop losses seem a bit daft for the reasons you state.

I had a lucky escape when I reversed my thinking on the ethics of investing in Tobacco and sold my Molins for a small loss though I am still not sure about the logic of it. Because if you take the thinking to the logical conclusion one should not invest in the supermarkets(or shop at them) because surely most cigarettes are bought from the likes of Tescos so if they stopped selling them.........

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GordonRussell 13th Oct '14 21 of 21

Molins ...".work towards realising the value of surplus property in the Group".

It seems Molins are actively working on the sale of their Sports Grounds in the Wycombe area , and are seeking planning permission for development of a sports complex and 90 homes on it . I have no idea how long this will take , or what the chances are of it succeeding . But relative to the low market cap , this is a significant new catalyst . See link below .

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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