Small Cap Value Report (11 Sep 2015) - CBUY, RHL

11th Sep '15 by Paul Scott

17 comments 12011 reads

Good morning!

The major indices are still searching for direction, so I don't know what's going on there. Small caps however remain buoyant, it feels very much like a bull market to me in small caps anyway. Lots of my shares are doing fairly well at the moment, and I'm hearing the same from other small cap investors.

Strategy update

Therefore I'm not particularly worried about what the major indices do, since it hasn't really had any effect on my portfolio overall so far, in fact my portfolio just hit a new high for the year, and friends are telling me similar things. We just have to accept periods of increased volatility. The important thing is that people who sold on the recent spike down, made a mistake, as most small caps shot straight back up again, often too quickly to enable people to get back in.

It soon destroys your returns if you panic sell on every market correction, and then buy back at full price once you feel comfortable again. The best purchases are usually extremely uncomfortable at the time you press the buy button - because the lowest prices are achieved when everyone else is in a state of panic/fear. So bargains sit on a plate in front of you, and the bold grab them first! Remember that your own emotions are your biggest enemy in the stock market - as they give you impulses which are usually the exact opposite of what you should be doing to make a good return.

So my strategy (for my long term portfolio) remains this - screen out junk, research good companies thoroughly, buy good quality companies if risk:reward is clearly favourable, and hold through whatever market gyrations occur. Then I buy more if further research and newsflow reinforces my conviction, or I ditch them if it dawns on me that I've made a mistake - which happens a lot, for everyone, so ditching the ego by admitting it when you get things wrong, is an essential step towards good results. After all, if Warren Buffett can be humble about his mistake in buying Tesco shares, then why should we be scared to admit our own failures?

To keep myself amused, I also do some short term trading, but that's a separate activity. I only mention it now because some people can't seem to cope with the concept that I can happily be a long…

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MGinvestor

11th Sep '15

Hi Paul,

Another recruitment company SThree (LON:STHR) has today announced their quarterly update saying that FY15 results will show PBT exceeding current market consensus forecast. Any chance of a commentary by you?

Thank you

PeterRussell

Paul,

Is there any chance you can put down the stocks which you like and have in your long term portfolio ?

Peter.

janebolacha

Paul, interesting "mining clock" in this week's "Shares" magazine (free, courtesy of Beaufort Securities), a rather good way of mapping out the typical cycle in mining stocks. Not at all small cap, of course, but still perhaps a hint at some trading opportunities on the horizon.

http://edition.pagesuite-professional.co.uk//launch.aspx?eid=f9e31ae9-8b27-4993-8144-31f13b576e88

Bloomberg tv this morning also featured some quite bullish talk on Glencore after its sharp fall over the last few months.

Paul Scott

Hi Peter,

You asked;

Is there any chance you can put down the stocks which you like and have in your long term portfolio ?

No, I'm afraid not. I've tried that in the past, and it back-fired, as people started treating it as a free tipping service, and if I forgot to update it, they started having a go at me! Unbelievable, but there we go. So I just decided that it wasn't worth the hassle, and stopped doing it.

I'm required by Stockopedia to disclose if I hold a position in any share mentioned in these reports, which is what I do, because readers need to know that, as it will obviously affect my view of the company - we all tend to be most enthusiastic about the shares we personally hold - for fairly obvious reasons - you like the company, so you bought shares in it!

But it can subconsciously mean that you become too lenient on companies that are performing badly, tending to give them the benefit of the doubt if you hold the stock personally, but maybe being more critical if you don't. So readers have to be told if I hold a stock personally, so you can factor this into your own thinking.

From that point on, the emphasis of the site here is for everyone to do their own research, and have a good bull:bear debate in the discussion. I welcome criticism of stocks I like, as it makes me think more about the downside.

If you want a good list of stock ideas, I recommend looking at the top StockRank scored companies here on Stockopedia. It's establishing a superb track record for finding good, improving companies, and I'm not paid to say that - it's my genuine belief, based on the results so far. It's not foolproof (not enough emphasis on financial strength, in my view), but it's a bloody good system that is proving itself to be very successful.

Regards, Paul.

simoan

I think your request is a little unfair to be honest. Paul has enough trolls and ne'er-do-wells looking for opportunities to bash him without him publishing his portfolio for all to see. Would you want to make yourself a hostage to fortune in that way? If you read the SCVR every day and follow him on Twitter, you'll soon get a very good idea of Paul's holdings as he fully declares his long positions in all shares he comments on.

All the best, Si

Hi Jane,

Yes, I saw that mining "clock" in Shares mag, and thought to myself how clever it was.

I've been dabbling in some oil stocks lately, but am currently about 10% underwater on Genel Energy (LON:GENL) 2% underwater on SOCO International (LON:SIA) , 15% underwater on Bowleven (LON:BLVN) . I just follow sector experts amongst my network into which stocks they are most positive on, and then double-check the figures for myself.

Although I'm 16% up on Plexus Holdings (LON:POS) having bought near the lows, so at least I got one right!

I think Bal Sheet strength is everything with oils at the moment. They've got to have the cash to survive, for me to be interested, as there could be a wave of insolvencies to come, if oil stays this low.

Regards, Paul.

Hi Si,

It's fine, I didn't take offence at all - Peter was only politely asking a question.
So no worries from my point of view.

Regards, Paul.

tradermark

Hi Paul, good article as usual! Particularly liked the strategy update, which struck a few chords...

I am in my first year of trading so still finding my way, learning by reading loads and making some mistakes too. I am running a SIPP and an ISA so I find it mentally easier to "invest" in the SIPP in longer term plays because I know I can't access the money for years (!) and "trade" in the ISA on a shorter term basis. How short term that is really depends on how a share performs but it's generally weeks to months and I will kill it if it hits my stop, or before if I don't like the look of the how the technicals are developing (MA, RSI, volume etc.)

To highlight the challenges I noticed that Robbie Burns and another longer term investor, who publishes his portfolio, had both bought into UTW around the same time I had, all within a few % of one another. Robbie was in and out of the stock in 2 weeks, netting a nice 15% gain and onto the next trade. Some would knock this, but he does it so regularly he needs to bottle whatever he has and sell it, then IPO it. The longer term investor held, seeing the price rise to a 288p high in June and then held whilst it fell steadily, breaking the 200 MA about 245p and it continued to below 200p when UTW put out a trading update in August. He sold out, making a small loss at this point and avoided the even larger fall shortly after.

I am not saying who was right or wrong but it was a fascinating real life example to study of trading discipline versus investment horizon. I have chosen to employ it regardless of the investment horizon as I struggle to accept giving up months worth of patiently earned profit when a share tanks.

Regards, Mark

Paul, I already hold Gulf Marine Services (LON:GMS) who have a strong order book and who work mostly in low producer cost environments in the Persian Gulf, besides on decommissioning rigs in the North Sea, something that could well become a high growth area! I am keeping a sharp eye on Hunting (LON:HTG), Petrofac (LON:PFC) and BP (LON:BP.), all of whom ought to survive in one way or another (or be taken over), even if Goldman's latest outlying forecast of US$20 a barrel comes about. Also Glencore (LON:GLEN) where I bought a few yesterday.

sbotting

Hi Paul,

Thanks for your report, I really appreciate your comments on periphery topics when its a quiet day for results etc.

With regards NOMADS what's your opinion of Panmure Gordon & Co (LON:PMR) (integrity and possible investment) I think you mentioned them a while ago.

They have a strong stockrank especially on the value side, and looking at their 2014 reports as well as seeing their name in several different rns with regards to being added as house broker or nomad, I was thinking about buying a few.

Also I read this article which gave me pause for thought:

https://uk.finance.yahoo.com/news/learn-broker-los...

Gives your earlier comments about the integrity of some nomads a bit of context,

Cheers, Simon

Stegrego

China Chaintek CTEK nomad walked today too.
That aint ever coming back....

robinleggate

I have not seen your bargepole list before and find it very interesting in that at least 3 of the shares mentioned have a stock rank higher than 80. (Globo 81, Wincanton 98 and Interbulk 88). I use the stock ranks a lot and believe they are great. But this shows that the algorithms can't always pick up red flags. A question of GIGO (garage in-garbage out) I think.

Catstycam

"The important thing is that people who sold on the recent spike down, made a mistake, as most small caps shot straight back up again, often too quickly to enable people to get back in.

It soon destroys your returns if you panic sell on every market correction, and then buy back at full price once you feel comfortable again........"

I hold my hand up Paul and plead "guilty, m'lud", I made a mistake as I sold out on the recent spike down. I was expecting the market to fall further and was looking to buy back in at a lower price. Well, apart from one stock, MSLH, it didn't happen. I did buy back into most of my shares again (only 5) and at a (slightly) higher price. It didn't cost me a great deal, but it was a lesson learnt.

Regards

Catsty

P.S You have my permission to thumb your nose and laugh at me!.

Henry Walpole

Re "the best purchases are usually extremely uncomfortable at the time you press the buy button - because the lowest prices are achieved when everyone else is in a state of panic/fear."

This is so true Paul but so difficult to do.

I like the quote from the great trader Paul Tudor Jones who summed it up very succinctly when he said: 'Do the trade that makes you puke'.

12th Sep '15

Hi Catsty,

Not at all, I respect your post.

Goodness knows, I've made enough mistakes in my career to date, and am sure I will make many more. Being open about mistakes is very liberating, and helps us all learn, so well done!

Regards, Paul.

Hi Robin,

As regards my Bargepole List, it's just an informal thing - I often forget to update it.
But, if I do remember, in amongst all the other thousands of things that whirl through my head every day with all the RNS I have to read, interpret & report on, then I put high risk shares on there.

Importantly, my bargepole list is NOT a list of things that I think will go down in price. In fact, often high risk shares can be spectacular gainers, if the risks are resolved. So the bargepole list is just my aide memoire of shares that I think are looking too high risk, especially things that look at high risk of insolvency, or are far too highly valued.

If the problems are fixed, say by a refinancing, then I take them off the list.

If you suffer a 100% loss, then it really dents your performance. Yet it's actually very easy to spot companies which are likely to be 100% losses. So by making a note of potential 100% losses on my bargepole list, I have successfully avoided all 100% losses since about the last 5 years.

My mission is to never again have a 100% loss in my portfolio, and the bargepole list has very definitely helped focus on avoiding bad situations. It amazes me how many people will cheerfully punt many thousands of pounds on shares of companies that are, in effect, insolvent. Many investors don't even look at balance sheets at all - more fool them!

Regards, Paul.

Cjenkins8

Hi
I also appreciate your general remarks. Looking at markets small cap UK is definitely bucking the trend compared to most places in the world where it probably would have been worth selling - if you can buy and sell say £5000 minimum ideally £10000 per trade at a spread of less than 0.5% in non UK shares (stamp duty) for £5.95 then trading costs become irrelevant compared to the potential savings you make - particularly as preserving capital is more important to most people in the long run (and harder to get back on a percentage basis). I appreciate this is the small cap report in UK stocks so here obviously better to hold firm as you suggest

Small Cap Value Report (11 Sep 2015) - CBUY, RHL

Strategy update

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Paul Scott

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