Small Cap Value Report (13 Apr 2015) - GTC, TCM, SYM, UNG, SSTY | Paul Scott

13th Apr '15 by Paul Scott

42 comments 28853 reads

Good morning! I'm starting to worry a bit about the outcome of the General Election, so have opened up a short position in the FTSE 100. Yes, I know that most of the FTSE 100 earnings are now overseas, so it's not a very good proxy for UK earnings, but the election outcome is more about sentiment than earnings. People are (rightly) starting to worry about a weak Labour Govt being propped up (i.e. held to ransom) in coalition with the Scottish Nats.

Casting my mind back to the 2010 election, I recall that the big worry then was the risk of a run on the pound, and Gilts. Here we are, with the National Debt far higher, and nobody seems to be worrying any more. There again, economic recovery seems fairly well established now, when it wasn't in 2010.

I won't be adjusting any of my long positions, as it's too expensive with small caps, to trade in & out, due to the wide bid/offer spreads. So having a short on the FTSE 100 will help me sleep at night, and will provide a cash buffer if the market as a whole does go into panic mode. After all, you need cash to be able to buy at the bottom.

I wonder if other people might now be reluctant to open any new positions until the General Election uncertainty has passed? It could throw up some interesting buying opportunities, if good companies drift down in price due to a buyers' strike.

Laura Ashley Holdings (LON:ALY) issued their results mid-afternoon on Friday last week, which was a bit of a nuisance, so I had to do a write-up on them here. Also I slotted in another interesting company, OMG (LON:OMG) - I hold long positions in both, as is always disclosed within each section of each report - and I think both look excellent companies, so if you haven't seen that report then the link is here.

Getech (LON:GTC)

Share price: 60p (up 12.5% today)
No. shares: 30.3m
Market Cap: £18.2m

Contract win - this is an interesting one. The company says it has won a contract with a national oil company, but on closer inspection it sounds as if they have actually made it onto a preferred supplier…

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Edward Croft

13th Apr '15

I've not remembered a period where everyone has felt quite so comfortable owning stocks and that should raise a red flag.

In my trading account I'm heading towards long/short at the moment. There's a concern about bull market age / lifespan as we've had an uninterrupted bull for the best part of 6 years now. I'm not very concerned from a valuation perspective in the UK or Europe, but I am about the USA... & when the USA sneezes everyone else follows - so there's definitely a risk of downside volatility.

On the other hand there is a lot of strength in breadth across the board in European equities, so I'm thinking of gradually becoming predominantly short USA stocks and staying predominantly long UK & Europe.

DYOR etc.

grout123

Thanks Ed. Im long to the gunnels on Europe and am dipping into Latam and Russia now as I think both a bit overdone on the downside. Funds only for the wild ride on EM but happily long of decent small caps with the usual strong characteristics of divi's decent cash flows etc.
The US isn't a particular worry for me personally as I don't have much on there at mom however the low oil price must be good.
cheers

arfournier

Hi Paul,

Telit first started in Israel and have operations all over the world. They have focused on the IOT M2M since 2002. So they are no Johnny come lately to the party. I think acquisition wise they have been pretty smart. The company has a long term vision and until recently has been pretty lucky in picking up companies at a reasonable prices. I am not sure how cheap all those M2M IOT companies going forward considering the hype currently surrounding the sector. Most of their acquisition recently have been bolt on types helping to in niches and complimentary to their product lines.

The market leader Sierra Wireless , listed on the Toronto Stock Exchange, and company that most resembles Telit is not currently profitable making a loss of 37 (USD) cents a share. Estimated EPS for Sierra Wireless is $1.10 for 2015 and $1.53 for 2016. So we are looking at a prospective P/E 42.99 and 30.9. Relatively speaking I think Telit’s long term focus and good management makes a pretty inexpensive way to invest in a potentially enormous market. I also like the fact that the market seems pretty unenthusiastic about the shares.

I’s be curious to read your thoughts if you have a look at it.

Cheers,

Maddox

The pollsters seem to think that we're in for a hung parliament. If so with that result and a period of horse trading likely before a government is formed it sounds like a recipe to create market volatility. Great for traders but a pain for everyone else until the market stabilizes.

jimbobjames2002

Hi Paul, any thoughts on Safestay (SSTY) would be very welcome. It's been on my watchlist for a while, just posted results today.

Thanks

James

Ramridge

re. Getech (LON:GTC) I like the argument put forward by a recent Sunday Times article on oil shares. The mega-merger of Shell/ BG will trigger more consolidation in this sector. The first step that the combined operations do is to cut costs and that means making less use of oil services.
I was already cautious about oil services shares before this. Now I am keeping double the distance and will wait until there is a visible sign of recovery before buying into the likes of Getech (LON:GTC), nothwithstanding how cheap they appear.
Regards, Ram

Daniel Neale

Hi Paul, thanks for covering Universe (LON:UNG) Your thoughts are always interesting and informative.

Hi Paul -
I have been a long time fan of Telit Communications (LON:TCM) as it is the only major UK quoted player in the M2M (Machine to Machine) and smart sensors space. M2M and smart sensors are finding their ways in home appliances, cars and general gadgets. Personally I think the future is very bright for this technology. ARM Holdings (LON:ARM) 's sales of microprocesors for mobiles are levelling off and the company has started to develop processors for smart M2M devices.
DYOR.
Regards, Ram

brucepackard

Hi Paul,
on Symphony. I have never met them, but heard from a small cap fund manager who had met them, that the management were really poor, I believe his exact words were "if you could arrange for mgt to be accidentally run over by a bus, I might buy some of the stock."
There was also something odd about it, because it was winning contracts in countries that you would not associate with being at the cutting edge of environmentally friendly policies (eg oil rich Gulf states). I don't own it and haven't looked at it for several years.

FREng

This profile of the CEO of Telit Communications (LON:TCM) gives some history of the company. It's from their website - which is very informative.

---------------------------

Oozi Cats

Chief Executive Officer
Telit Communications PLC
Founder
Member of the Board of Directors

Mr. Cats, aged 53, has 25 years of experience in creating and leading business ventures. In 2000 Cats founded Telit, then an Israeli start-up for high level engineering and distribution in the field of wireless communications. In 2001 the machine to machine (m2m) department was born and first products have been engineered.

In 2002 Cats led Telit to acquire a bankrupt GSM/GPRS handset company in Italy and restructure its human resources & strategy to become an m2m platform. In 2005 Cats took Telit Communications PLC public on LSE (AIM) raising about GBP 20M. With the funds in place Cats globalized the company by adding to its cellular GSM/GPRS core competence also CDMA, EVDO, UMTS and later also HxPA & LTE. In 2006 Cats opened the APAC market, leading Telit to acquire the Korean market leader and started Telit USA in North Carolina. In 2008 Telit acquired a short range technology developer and is currently mastering also ZigBee and Wireless Mesh technology.

In 2011 Cats led Telit to a quantum leap with the acquisition of the Motorola m2m division, making Telit the largest Industrial m2m provider in the world. Later that year, Telit laid the foundation for its Platform as a Service (PaaS) division by acquiring Global Connect, then a tiny broker for connectivity services. In 2012 Telit acquired Navman Location Based Technology in California, adding another important and extremely synergetic technology to its varied portfolio. Before 2012 ended Telit acquired Chicago based CrossBridge Communications Inc., topping the already existing PaaS with additional substance. In 2013, the last piece in the PaaS puzzle was been put in place by acquiring Florida based ILS Technology, a unique Cloud based back-end service, making Telit a true Global leader in m2m One Stop One Shop.

Still in 2013, Telit announced the acquisition of the ATOP business from NXP, thereby establishing its global leadership in Automotive communication enablement.

Why did the brokers cut their 2015 EPS forecast for Telit Communications (LON:TCM) from 0.27 in March 2015 to 0.2 in April?

fek47

Thanks for your report on Safestay today Paul - this is a new one to me, but looks like a fantastic growth company prospect. The thinking man's Snoozebox, I would probably say!

Francis

Paul Scott

Hi Francis,

"The thinking man's Snoozebox" - brilliant! I like that description!

I think Safestay (LON:SSTY) is a much better & more reasonably priced growth prospect than easyHotel (LON:EZH) which was another not dissimilar IPO last year, but one where I think they were much too aggressive in valuing it, and pinned the valuation on Stelios's celebrity status, rather than hard facts.

Regards, Paul.

Thanks for your thorough analysis of Safestay Paul, always appreciated. I'm going to go away and do a bit more research, do feel tempted to dip my toe in the water on this one.

James

Redrumtum

I've made a conscious decision to ignore all general market predictions - why bother when it's nigh on impossible. Seriously.

To the best of my ability, I have a simple documented reason for holding every stock in my portfolio, including a basic risk analysis. When volatility comes along it's an opportunity to top up, or buy something new.

So there.

PS a CEO named Oozi Cats must rate Telit a screaming buy. DYOR etc.

The biggest factor on all portfolios is the impact of the overall market beta. If you are net long you are exposed to the market, so in a way you expect (predict) the market will rise.

Going long/short shifts portfolio bias away from being exposed to the overall market, to being exposed to the relative performance of longs vs shorts. I'm just happy to reduce my market exposure at the moment without reducing my QVM exposure.

cig

Well the notional exposure to the market is only really relevant if you plan to liquidate the portfolio for spending soon. If you plan to spend in 20 years from now, you care about the price then, not the price now.

It's possibly relevant in opportunity cost terms (what else you could buy to replace stocks), but there's hardly any mainstream investment that's cheaper than stocks at the moment. Good take from Aswath Damodaran in that area:

http://aswathdamodaran.blogspot.com/2015/04/dealing-with-low-interest-rates.html

(Also his latest on the small cap premium, or lack thereof, may be of interest to the crowd here.)

sirsege

Hi Paul, I know you are never interested in Chinese stocks. However, going through the RNSs from Galasys Plc today, 3 things caught my eye. 1. They seem to exceed broker forecasts for the year. 2. A subscription for its shares at 33% premium to its price yesterday. 3. The company that subscribed for the shares has some tie-up(awaiting ratification) with the online retail giant, Alibaba.

Your usually useful insight will be appreciated as usual.

Hi sirsege
Re. Galasys (LON:GLS) I had a quick look at Galasys and like most Chinese companies, it shows sparkling reported net profits but cannot convert this to cash. Free Cash Flow was negative in 2013 and looking at today's 2014 report, FCF is still negative. So the dividend they are proposing to pay is actually coming out of the net cash they raised last year.
IMO Chinese companies are best left alone. Going from recent history, the credibility issue is just too big.
Regards, Ram

It could be true, but:

- Exponential receivables: tick
- Insider control: tick
- Listed on wrong side of planet: tick
- No way to check the announcements are truthful: tick

Small Cap Value Report (13 Apr 2015) - GTC, TCM, SYM, UNG, SSTY

Getech (LON:GTC)

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Paul Scott

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