Small Cap Value Report (14 Jan 2014) - MOSB, IDEA, CRM, APH

Tuesday, Jan 14 2014 by

Good morning. Last night was interesting in the US markets (which the UK closely follows the next day), as there was a roughly 1% correction - which doesn't sound much, but you could really feel the tone change on CNBC for example - everyone now talking about taking profits, and valuations being too high, the need for a 10% correction to blow off the froth, etc. I think that's absolutely right - markets have gone up too far, too fast, to borrow a phrase (!), and in my opinion a correction is needed and would be a healthy thing, especially in the most speculative stocks, which have gone well into euphoria territory in some cases. So it will be interesting to see which stocks wobble today, as that will give clues as to what would really nosedive in a more serious downturn perhaps?

On this type of day, being a value investor, of course one can just sit back & relax. Value/GARP shares don't have any speculative froth in them, so holders don't tend to panic sell on a down day. Famous last words ...!




There are an unusual number of positive trading updates today, reflecting the undeniably strengthening economy. In terms of strategy this is something to keep at the front of our minds. Companies which are now trading well could end up beating market forecasts by a long way - due to the operational gearing which means that in many cases only a small rise in turnover can generate a big rise in profit. So an apparently high valuation can quickly become reasonable, or even cheap, if earnings forecasts are blown out of the water - and remember that in an economic recovery brokers tend to be too cautious, so forecasts are in some cases likely to be too conservative.





I like the trading update from Moss Bros (LON:MOSB). They had a remarkably good Christmas, with LFL sales for the five weeks to 11 Jan 2014 up a whopping 12.9%! That's amazing, given how tough economic conditions have been, and the terrible weather too. LFL sales for the 24 weeeks of H2 (it's a January year-end) were up 7.3%, so you can see that Christmas saw an accelerating sales trend.

Margins are down slightly,…

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Moss Bros Group PLC is engaged in retailing and hiring formal wear for men. The Company operates through Moss Bros branded mainstream stores. The Company's segments include Retail and Hire. The Company offers various types of suits, skirts, jackets, trousers, coats, casualwear, ties, shoes and accessories. The Company offers clothing and accessories for various occasions, including weddings, prom, race day suit, tuxedo and black tie, interview attire and graduation. The Company also trades through Savoy Taylors Guild fascia. It has approximately 100 Moss Bros and Savoy Taylors Guild branded stores and over 20 Moss Bros outlet stores, which trade Moss Bros own brands and selected third-party brands, including Hugo Boss, Canali, Ted Baker, DKNY and French Connection. The Company has approximately 120 Moss Bros Hire outlets, which are contained within Moss Bros Retail and Savoy Taylors Guild Stores. The Company's sub brands consist of Moss London, Moss 1851 and Moss Esq. more »

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Ideagen plc is engaged in the development and sale of information management software to businesses in various industries, and the provision of associated professional services and support. The Company is engaged in supplying governance, risk and compliance (GRC) solutions primarily to the healthcare, transport, aerospace and defense, manufacturing and financial services sectors. The Company’s portfolio products include Q-Pulse, Coruson, Pentana Audit, Pentana Performance and PleaseReview. Q-Pulse, which provides quality and safety management. Coruson,which provides cloud-based software solution. Pentana is an auditing software within its internal audit.It has operations in the United Kingdom, European Union, the United States, Middle East and Southeast Asia. more »

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Carr's Group plc is engaged in the agriculture and engineering activities. The Company's segments are Agriculture and Engineering. The Agriculture segment includes the sale of animal feed and feed blocks together with retail sales of farm equipment, fuels and farm consumables. The Engineering segment includes the design and manufacture of bespoke equipment for use in nuclear, oil and gas, and petrochemical industries. Its products include manipulators, robotics, specialist fabrication and precision machining. The Company's agriculture division develops and supplies a range of branded animal nutrition products into the livestock industries, as well as services the United Kingdom farming and rural communities through a network of retail stores and fuel businesses with manufacturing locations in the United States, United Kingdom and Europe. It is focused on the design and manufacture of pressure vessels and steel fabrications. more »

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

18 Comments on this Article show/hide all

mikehunt 14th Jan '14 1 of 18

ANy views on QPP today?

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Paul Scott 14th Jan '14 2 of 18

In reply to post #80555

I don't report on Quindell (LON:QPP) here any more, as the market cap is now too large.

On the positive side, Quindell's contract wins and big fundraising are very impressive, and certainly have strengthened the bull case, so I accept that I got it wrong in terms of short term share price.

On the negative side though, I think their business model is extremely flakey - that type of business shouldn't really exist, if the insurers got their act together, as there's no need to have intermediaries handling claims. Bear in mind that it's really all about personal injury claims - mainly whiplash claims, the vast majority of which are either exaggerated or totally fictitious - that's where the big profits actually come from.

Amazingly, personal injury claims now exceed the total cost of the repairs to the actual vehicles in UK accidents. That's an untenable situation. Imagine if a test is developed that can check if whiplash is real or not - it would destroy these ambulance-chasing personal injury companies overnight.

So personally I wouldn't touch it with a bargepole. Also I note that yet again QPP report strong profits, but no cashflow. They have a track record of aggressive/dubious accounting too, so it's not a management that I personally would want to back.

Good luck with it, and the shares might well continue rising in the short term, but at some point I think they could collapse, for the reasons stated, hence why it's far too high risk for me.
All the above is just in my opinion.

Cheers, Paul.

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Reynart 14th Jan '14 3 of 18

Saw your tweet this morning on the ASOS valuation looking expensive at 108x compared to 37% growth. I bought in 7 years ago at £1.50 and have agonised about when to sell ever since. However, having sold half my holding at £20 I have held on to the rest. My reasoning is:

- the valuation makes more sense if you believe ASOS will really be a leading global retailer with continued double digit growth across a number of markets
- the company has been very effective in refreshing its board and management team to cope with each stage of growth
- even after 15 years of online retailing, the surge this Christmas took everyone by surprise, even the large department stores. But ASOS seems to have geared up for it well.
- ASOS has such an advantage over high street retailers in not having to cope with pestilential leases and it is not even paying a dividend. So all cash goes back into growing the infrastructure.

The biggest risks for me would be the risk of CEO incapacity or a hiccup in a major market like China. But for the time being I am taking the John Lee view and running my profits. All comments welcome.

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campbellsmith 14th Jan '14 4 of 18

Paul: I'm amazed how the Indigovision (LON:IND) price has shot up by 5.6% after trades of less than 11,000 shares and no news announcements.


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Camtab 14th Jan '14 5 of 18

Following the Churchill China results you came up with Portmeirion as an interesting play off the back of the good results. Looking at the Stockopedia page there is plenty of green and the quality rating is quite high. The PE Ratio of 13 (EV/EBITDA = 9.5 times) doesn't seem too demanding in this market. Div yield of 3.75% over 2 times covered. Operating margin perhaps a little low at 10.9% but ROCE 20%. Just interested in whether you have taken the idea forward. The businesses are related but not identical and geographical spread seems to vary. But PMP got US exposure which must have done well and people have been making these feel good spends. Could be very clever?

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tjl 14th Jan '14 6 of 18

Somero Enterprises (SOM.L) a US-based manufacturer of laser-guided machines for laying concrete in large developments (shopping centres, office blocks etc) has also released a statement today saying it has seen increased demand for its products across the United States, Europe, Australia, China and the Middle East.

Consequently it has announced it expects its EBITDA for the full-year 2013 to be at the top end of guidance and 'in excess of double the US$4.2m EBITDA reported in the prior financial year'.

I got into SOM.L earlier in the year as a play on the expected growth in the US economy and in particular increased construction and property development. I'm sticking with it and expect the SP to more than double over the next year.


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Paul Scott 14th Jan '14 7 of 18

In reply to post #80557

Hi Reynart,

Well, kudos to you for a brilliant investment, and having the balls to run the position to a sky-high valuation! Wish I had done the same, instead of banking my >100% profit on my 500k ASOS shares at 9p per share. Doh!

I take on board the points you mention, but now that growth rates are inevitably slowing (due to the size of the business), then surely the forward PER of over 100, and the £5.5bn valuation are now at an unsustainable level?

There is loads of competition to ASOS - bricks & mortar clothing retailers are seriously sharpening up their act at the moment, as the penny has finally dropped that online is vital for the future. So people like HoF, Debenhams & John Lewis are achieving the same (or better) growth rates than ASOS now in their online offerings. To me that says ASOS will inevitably slow in terms of % growth, and with it the PER is likely to contract.

The party can't carry on forever, but hats off to you for calling it brilliantly right, over a very long period of time. By the way, if you find something similar, please email me!!!

Regards, Paul.

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Paul Scott 14th Jan '14 8 of 18

In reply to post #80561

Hi Camtab,

Indeed, I like Portmeirion (LON:PMP) for the reasons you mention, and have a long-term long position in it.

The one point where I disagree with you, is that their operating profit margin of 10.9% is actually quite high! It gets a solid green bar on Stockopedia, and by hovering my mouse over that, Portmeirion is actually ranked 1st out of 10 companies in its sub-sector for operating margin.

Their main products are almost annuities - being virtually guaranteed annual sales especially at Xmas from their "Christmas Tree" plate range, which is very popular as a gift/collectible item in America.

Throw in some growth from improving key economies (UK & USA), and I could see PMP re-rate in time to say £10 per share. In the meantime it throws off a nice divi too.

The main risk seems to be the anti-dumping duties on Chinese goods, as PMP manufacture some product in China. So we'll have to see what happens on that front, as it did hit their seasonally quieter H1 profits.

DYOR as usual, just my opinions.

Regards, Paul.

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pyemckay 14th Jan '14 9 of 18

I have taken more cash off the table and sold some of my large risers. When we here of "baggers" that have happened over the last year i think its time to be more wary. Also a lot of my small caps are now above their average p/e and growth rates dont justify their p/e now. I also feel the small cap area has become a bit of bandwagon for a lot to jump onto. I too would like a small 5-10% tumble to remind us all that shares indeed do go down as well as up. My cash would get to work on any large tumble too. If you think Im mad wishing for a 10% tumble then i confess i have 25years to retirement!

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purpleski 14th Jan '14 10 of 18

Hi Reynart/Paul

I don't suppose you could share with us the insight that led you to invest at 150p and 9p respectively and why you have held on to £63 and Paul why you sold at 18p and yet another share you, Paul, would let your profits ride. How do you cope with that potential missed profit. I sold CSG 6 months ago at 21p and the missed 3 bagger still haunts me! I am very new to this and very much still on my learning curve.

Thanks as always for the great must read column

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Reynart 14th Jan '14 11 of 18

I was tipped off by a retail IT consultant about ASOS around 2003 when the shares were about 50p from memory and took 4 years to getting around to buying. I think those inside tips by people actually trading with/employed by companies are the most valuable. Similarly I am using Dotdigital's Dotmailer product at present and believe they have an interesting niche in the email marketing space. I bought the shares first in October 2013 and have since seen a 67% gain in just over 3 months. I have often sold too early - sometimes driven by a mistaken need to use the CGT allowance.

The one comment I would have on Paul's very generous response is that ASOS is only one third exposed to the UK and many other international markets are much less well developed in online sales. So whether or not the UK department stores get their act together and compete more aggressively against ASOS will become less and less important. Anyway to be getting 37% growth at Christmas 13 years into the life of the company is a stonking performance.

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purpleski 14th Jan '14 12 of 18

thanks Reynart. interesting i think they call it scuttlebut across the pond. good luck with ASOS though I wont be buying at these levels!

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cig 14th Jan '14 13 of 18

In reply to post #80565

The 1 year forward PER is not very interesting for a growth business, also the E will be artificially depressed if they reinvest the raw earnings without aggressively capitalising them. If you look at price/sales compared to industry leaders and try to project sales 5-10 years assuming mostly organic growth, it's not outlandish even with an allowance for failure.

Basically what do you think is the right market cap/EV for a company with say a 25% chance to be the next H&M within say 10 years?

Loads of competition, it's a good point, but fashion tends to be a winner take all business for those who manage to combine being trendy with good execution. ASOS seem unusually good at capturing some demographics (frankly, Debenhams becoming an icon of teenage fashion?! really?) and at executing. It's a big world out there, just replicating their UK success in the major markets gives a lot of growth scope.

Last week I stumbled on an article about the definition of bubbles, the best of which was that it's when things get valued well above what even the most optimistic scenario could support. This is just not the case here.

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Edward Croft 14th Jan '14 14 of 18

In reply to post #80566

For the geeks... the Moss Bros announcement is interesting. Generally what happens when companies beat expectations or give positive announcements that they will beat expectations is that the market under-reacts. You find a post-announcement price drift that continues in the prevailing trend. The sellers are all happy to get out on the spike, but lots of smart money/momentum buyers will tend to buy in the likelihood that the trend will prevail over the next 2 or 3 months as brokers & fund managers digest new info, upgrade forecasts etc.

So in spite of the positive shift today, the trend may well persist. Earnings surprises and upgrades are some of the 'anomalies' that we try to pick up on in our overall momentum rank which is weighted 50:50 between earnings momentum and price momentum. The momentum rank for Moss Bros is likely to creep up and up over the next few weeks as broker numbers change and if the price drift does continue. So the overall StockRank will probably creep up into the 80s.

Am not saying the drift will always happen, nor that it will happen here for Moss Bros, but that it generally happens for behavioural reasons. The general is not the specific. DYOR and all that.

If you want to know more about how these kinds of strategies have done... see here:


And some articles to peruse:


Generally it pays to run winners.

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cig 14th Jan '14 15 of 18

In reply to post #80579

Btw Ed, what about using a better benchmark for the screens? Any large cap/FTSE rally is going to make them all look bad for the wrong reasons. What about showing the screen next to a reference screen built using the same size rules and weighting policy as the full rule, so as to show the actual effect of the rule's core criteria disentangled from the mere effect of equal weighting small caps?

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cyberbub 14th Jan '14 16 of 18

Paul, you asked about a stock tip for something ASOS-like....

Have you looked at Quadrise Fuels International (LON:QFI) ? I think I mentioned it a few weeks ago. It probably won't be your cup of tea as it's a growth company, and its valuation of over £300M with zero revenues will probably horrify you. But if you look at the excellent management, the very large and serious companies it's working with, and the enormous size of its markets, there is a good chance that it could 5- or 10-bag on a 3 year timescale even from the current valuation.

All just my own opinion of course.

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Edward Croft 14th Jan '14 17 of 18

In reply to post #80580

Hi cig,

Am not sure what you mean - can you clarify on benchmark construction? Certainly the FTSE 100 isn't ideal as screen benchmark, but it is the one index price that everyone knows. We could use the All Share, but again that's market cap weighted. We are considering creating our own equal weighted benchmark of all the shares in the market, and our own equal weighted indexes of various fundamental weighted, annually rebalanced indices. Some time off and loads of issues involved but hopefully we'll get there.


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cig 14th Jan '14 18 of 18

Imagine you have a rule that says

(1) PE < 15
(2) Earnings growth > 0
(3) Market cap < £50M
(4) Daily volume > £10k

You automatically derive a second rule that keeps only the "universe selection" items, in this case 3 and 4 and then you run it through the same rule simulation code, benchmarking the "1+2+3+4" screen against the "3+4" screen, that way you get an idea of the value added of 1+2 which is where the cleverness is supposed to be. At the moment we're in the dark, because 3+4 on its own will trounce the FTSE100.

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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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