Small Cap Value Report (11 Apr 2014) - BON, HMLH, GAW

Friday, Apr 11 2014 by
23

Good morning! Well, I can really smell the fear in the market this morning, following on from a bit of a sell-off last night in the USA. People who bought fashionable, over-valued shares purely on hype & momentum are rightly being whacked the hardest. I think that's very encouraging, and healthy - this market has for too long rewarded reckless people making bad decisions, so it's excellent to see some sanity coming back into valuations.

Meanwhile the value shares in my portfolio are barely moving, some have even gone up. This just reinforces my view that it's a mug's game trying to ride momentum, because you never know when an upward move is going to end. Valuation always carries the day, in the long run. So any share that is difficult to value right now, or has a large speculative element to the valuation, is highly vulnerable to a big drop.

I'm short of five overvalued stocks, and that has proved lucrative, although it was scary standing in the way of the momentum at the time of opening the shorts. It's also been a good portfolio hedge, and has given me a larger pot of cash to deploy buying any bargains that crop up. So I've topped up on one long-term value position yesterday, and am scouring the market now for more bargains.

One of the best lessons I've learned, but which has taken over 15 years to achieve, is to take my foot off the gas when markets are frothy, and put some money on the sidelines, then just wait. Eventually the market will throw some bargains at you, but you can only buy them if you have cash on hand. Being fully invested all the time, or even worse being geared up all the time, is just a disaster waiting to happen (as I discovered in 2007-8). Markets favour the patient!

I'm not ready to buy into cut-price speculative shares yet. This feels like a proper correction to me, so I think there could well be much better buying opportunities ahead, as people panic sell, especially those on margin. Just look at how much large cap speculative shares have dropped from recent peaks - e.g. ASOS (LON:ASC) peaked at £70 a share, and is now under £44 a share, a 37% drop!

It's amazing how investor psychology can change, and rapidly.…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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Bonmarche Holdings plc is a multi-channel retailer of womenswear and accessories. The Company offers clothing and accessories in a range of sizes for women through its own store portfolio, Website, mail order catalogues and through the Ideal World TV shopping channel. The Company's subsidiaries include Bluebird UK Topco, Bluebird UK Holdco and Bonmarch Limited. The Company has approximately 310 stores across the United Kingdom. more »

LSE Price
84p
Change
3.2%
Mkt Cap (£m)
40.7
P/E (fwd)
8.3
Yield (fwd)
9.5

HML Holdings plc is engaged in the provision of property management services. The Company's segments include property management, professional services and insurance services. Its property management segment is engaged in residential property management. Its professional services segment is engaged in chartered surveying services. Its insurance services segment is involved in insurance broking intermediary services. Its surveying services include building surveys and inspection, project management, lease extensions and right to manage. Its ancillary services include company secretarial, management of site staff, and health and safety. It works with housebuilders and developers, and provides a range of services, including a review of the plans and specification, preparation of service charge structure and indication of costs and preparation of a management plan or strategy. Its residential property management services include accounts preparation and routine inspections. more »

LSE Price
30.5p
Change
 
Mkt Cap (£m)
13.9
P/E (fwd)
n/a
Yield (fwd)
n/a

Games Workshop Group PLC designs, manufactures and sells fantasy miniatures and related products. The Company's segments include Sales channels, Product and supply, Central costs, Service centre costs and Royalties. The Sales channels segment includes Trade, which sells to independent retailers and includes magazine newsstand business and distributor sales from its publishing business (Black Library); Retail, which includes sales through retail stores, its visitor center and global exhibitions, and Mail order, which includes sales through its Web stores and digital sales. The Product and supply segment designs and manufactures products and incorporates production facility in the United Kingdom. The Central costs segment includes its overheads, head office site costs and costs of running Games Workshop Academy. The Service centre costs segment provides support services and undertakes strategic projects. The Royalties segment includes royalty income earned from third-party licensees. more »

LSE Price
2805p
Change
-2.8%
Mkt Cap (£m)
937.2
P/E (fwd)
16.8
Yield (fwd)
4.3



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


19 Comments on this Article show/hide all

britishb 11th Apr '14 1 of 19

You are somewhat dismissive of quality of HMLH IMO. Grown top line every year for 10 years, from £2m to £14m+, right through property downturn. Really don't think it's very property market dependent. Now throwing off buckets of cash. Top line growth c. 11% year just finished and pbt growth c. 20%+ suggests nice op gearing. Obviously I don't get to decide but fancy Ben Graham would suggest a P/E of 20 perfectly reasonable...

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purpleski 11th Apr '14 2 of 19

Hi Paul

Great article again. I am too new to this to be short anything as I take the view that if I don't understand it I will stay out of it but I have 'shorted' for a couple of months

ASOS
Carpetright
Ocado
Premier Foods
QPP

Do we match?

Thanks

Michael

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Paul Scott 11th Apr '14 3 of 19

In reply to post #82634

Hi Michael,

Stockopedia editorial policy is that I am barred from talking about stocks that I'm personally short of.

However, I can say what I like on Twitter, and do! @paulypilot ;-)

Cheers, Paul.

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kevanp 11th Apr '14 4 of 19

A solid, if unexciting, interim statement from XP Power (LON:XPP). Good enough for them to be up nearly 5% against a mighty market headwind this morning.

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gl196 11th Apr '14 5 of 19
1

What you've said at the UK Investor Show about frothy valuations, and a shortage of value opportunities out there, has proved to be prescient and timely. Just shows the importance of staying objective in all market conditions...

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Paul Scott 11th Apr '14 6 of 19
1

In reply to post #82638

Thanks gl196.

What I'm finding particularly interesting at the moment, is that this is not a general market sell-off. It's mainly confined to the stocks that are particularly over-valued. That's true in the USA, and here in the UK.

So any stock that is difficult to value, and/or has a lot of speculative optimism in its valuation is getting whacked. Whereas value shares are actually doing alright - perhaps because there is still a lot of money in the market, but people just want to bank profits & avoid losses on the highly speculative stuff. So maybe people are rotating into more defensive shares?

Very interesting situation. I think people want dividends, and actually some large caps are looking attractive in that regard. I think that smaller companies which are trading well, and whose valuation is still reasonable, should be fine.

Regards, Paul.

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sminers 11th Apr '14 This post is under review
35

As usual, full of your silly personal opinions

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Paul Scott 11th Apr '14 8 of 19
20

In reply to post #82640

"As usual, full of your silly personal opinions"

Errr, yes. That's kind of the whole point!!!

If you don't like it, don't read it.

P.

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gl196 11th Apr '14 9 of 19
2

In reply to post #82639

Indeed, the money is generally staying in the capital markets, but people are probably just realising some gains. Without any negative macro catalyst, it's hard to imagine a further deterioration in market sentiment. I'm just keeping my powder dry and waiting for signs of capitulation. (could be a very, very long wait....)

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Paul Scott 11th Apr '14 10 of 19

In reply to post #82642

Hi gl196,

I think that's absolutely right. Pockets of over-valuation are blowing up, but at this stage of the economic cycle (i.e. fairly early in a recovery) then we should have 5+ years of economic growth to look forward to - therefore that should provide a benign setting for earnings & dividends.

Another financial crisis could de-rail it, or some sort of political disaster, but those risks are always there.

To my mind it's mainly a question of ensuring that you don't overpay for any shares, and ideally look for support from sustainable dividends. Also above all, don't use gearing, as then we can ride out any downturn, whereas geared market participants cannot.

Regards, Paul.

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rick 11th Apr '14 11 of 19

"One of the best lessons I've learned, but which has taken over 15 years to achieve, is to take my foot off the gas when markets are frothy, and put some money on the sidelines".

Paul,

What in your opinion is a sensible cash holding at times like this when markets are frothy? And should one be buying the fallen "stars" or stick to value plays (from what you say these are likely to fall less).

thanks,

Rick

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sminers 11th Apr '14 This post is under review
31

LOL the point of you blog is to make silly opinionated comments. You said it not me!!!

What company were you financial officer for?

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bsharman 11th Apr '14 13 of 19
11

In reply to post #82645

Paul analyses company statements and gives us his opinion. Because he has a opinion is not a problem and we are free to disagree with him - that is what makes a market. Perhaps some people don't like his opinion because they are in love with a story and choose not to look at the fundamentals. They are invested so only want to hear the positives and do not pay any attention to the negatives. That is a very blinkered and dangerous attitude to take. Paul - the vast majority of stockopedites value your commentary. Thanks!

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CliveBorg 11th Apr '14 14 of 19
1

And the vast majority of Paul's readers choose not to post rude and insulting remarks. As for @paulypilot: Its called Twitter: If Paul by his own admission chooses to be a twit on it, where better?

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Fangorn 11th Apr '14 15 of 19
4

In reply to post #82645

It's a blog you tit - ergo it's going to be his opinions of companies.

blog
bl??/Submit
noun
1.
a personal website or web page on which an individual records opinions, links to other sites, etc. on a regular basis.


What were you expecting?

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matti69 11th Apr '14 16 of 19
1

In reply to post #82650

Fangorn.

I have to take issue with your comment, which is an insult to tits ;-)

Matti

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Fangorn 11th Apr '14 17 of 19
1

In reply to post #82651

Indeed Matti,

Many apologies. Cant insult Tits in that way.They don't deserve such disparaging remarks. :)

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NS23 11th Apr '14 18 of 19
1

Interesting observation in relation to the frothy situation - All 10 of Stockopedia's Top 10 GrowthRank stocks are red today, most down >2.5%

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PhilH 11th Apr '14 19 of 19
7

Hi Paul,

Thanks for your daily reports. I enjoy reading them. I have to give an alternative perspective to these comments ...

I can really smell the fear in the market this morning, following on from a bit of a sell-off last night in the USA. People who bought fashionable, over-valued shares purely on hype & momentum are rightly being whacked the hardest. I think that's very encouraging, and healthy - this market has for too long rewarded reckless people making bad decisions, so it's excellent to see some sanity coming back into valuations.

Meanwhile the value shares in my portfolio are barely moving, some have even gone up. This just reinforces my view that it's a mug's game trying to ride momentum, because you never know when an upward move is going to end. Valuation always carries the day, in the long run.

I've recently been watching the excellent series on Horizon and in particular the episode that explored the instinctual and analytical aspects of the brain. Your statement felt like an example of confirmation bias. I currently hold the #1 Stockopedia ranked European Growth stock namely Let's Gowex SA (MCE:GOW). It's down 7.4% today and approximately 20% from a double top of 26 euros in the last few weeks. I've held them for nearly a year and they weren't 'cheap' when I bought them. As I write I'm sat on a 268% gain with them. If I'd followed a value based approach I would never have gotten into this stock and if I had I would have found numerous opportunities to sell, no doubt missing out on substantial gains. I'm quite happy to be called a mug in this case. In my view an upward move will end when it ends and then if appropriate I'll sell. I might also have sold due to bad news.

Now I'm not saying buy any old growth stock but I would argue that not all growth stocks are created equal. Let's Gowex SA (MCE:GOW) has an exceptional record of revenue, profit & EPS growth. I only buy high quality stocks.

I understand why you might not want to do this, but I'd love to see you manage a fantasy fund here at Stockopedia so we could get a more objective view of your approach.

Looking at the annualised performance of the Stockopedia guru strategies one might assume Value Investing is King yet both Miller (68%) & Kirkpatrick (62.5%) screens generate very few selections. Winning growth & Income (43%) has moderate diversity, Driehaus (37%) & CANSLIM (37%) both have low diversity. The best performing strategy with good diversity is in fact Best Dividends (35.8%). Other approaches with good diversity are Slater's Zulu (34.8%),  Net Nets (34.4%) & Naked Trader (34%). 

In fact it was exactly this analysis of the guru strategies a year ago that led me to shift to a Naked Trader based approach. Whilst Miller & Kirkpatrick value screens can generate some great returns they dont generate enough diversity (even in the euro version) and last year was a bad time to be sat on the sidelines. 

Personally I'd prefer to pick up Let's Gowex SA (MCE:GOW) at the price I did last year over something speculative like Clean Air Power (LON:CAP)

Anyway enough rambling

Phil

 

Professional Services: Sunflower Counselling
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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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