Small Cap Value Report (14 Jan 2016) - HOME, LVD, BLNX, JD., RDT, TSCO, CAMB, GOAL, ASC, BQE, ZTF, MOSB

14th Jan '16 by Paul Scott

20 comments 28694 reads

Good morning!

Another avalanche of trading updates today, so I'll do my best in the relatively short time available today - I'll be interviewing the CEO of Proactis (PHD) at 11:30 today, the audio of that I'll publish tonight. Any last questions for him, here is the link again (closes at 11am today).

Firstly, my topical retailers update (not small caps, so skip this bit if you're only interested in small caps)

Home Retail (LON:HOME)

Share price: 157.8p (up 5% today)
No. shares: 813.4m
Market cap: £1,283.5m

(At the time of writing, I hold a long position in this share)

Trading update - mildly disappointing, but that's hardly a surprise, given the widespread reports of lower footfall on the High St. The exceptionally mild weather undoubtedly had some impact, but also increased online competition. Although note that Argos is at the forefront of the push for online - with about half its sales originating online, and its click & collect option being increasingly popular.

Argos (about three quarters of group sales) achieved a lacklustre sales performance, LFL of -2.2% in the 18 weeks to date of H2. That's not good enough, because of course costs are rising, and will continue to rise (e.g. the Living Wage).

Homebase (about a quarter of group sales) sales were better, with LFL of +5%.

Overall, profits are down, but not catastrophically so;

"As a result of the most recent trading period, we expect that Group benchmark profit before tax for the financial year ending February will be around the bottom of the current range of market expectations of £92m to £118m."

My opinion - it could have been a lot worse, so I think this is satisfactory, given low expectations.

Offer for Homebase - probably of more interest, was the news last night that negotiations are at an advanced stage for the disposal of Homebase to large Australian group, Wesfarmers, for £340m. This looks a very good price, so let's hope it proceeds. It also smooths the way for the sale of Argos to Sainsbury - a deal which looks likely to go ahead, in my opinion.

Few divorces are cheap, but this one looks particularly expensive - of the £340m proceeds, shareholders are only likely to receive £200m (or 24.6p per share), see this table in the RNS last night;

My opinion - Reports…

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1James1n1

14th Jan '16

Paul,

Its interesting how results and updates are coming in. I have now had 3 shares that were on the end of several months declines that have posted very strong trading updates, namely; Alternative Networks (LON:AN.), Somero Enterprises Inc (LON:SOM), and now Lavendon (LON:LVD). Whilst the first two have recovered those declines, with Alternative Networks more so (and which has even formed a part of Ed's 2016 NAPS portfolio - http://www.stockopedia.com/content/new-year-naps-top-stocks-for-2016-and-a-few-revelations-116820/), I am now hopeful that Lavendon (LON:LVD) will also recover the declines of the past few months.

On some of these its really a case of re-reviewing carefully the reasons for buying and making careful decisions on which stocks to stick with (I stuck with all 3 mentioned). I have a few more shares which have had similar patterns, but the market movements seem strange, even with high stockopedia scoring stocks, where good stocks can decline by 20% or more between news updates. Do you think its jittery markets, the gaps between positive news-feed updates or other factors?

fanmail

Thanks for this Paul - as ever. I thought the MGR trading statement this am was very positive. Is this one that you look at from time to time?

Paul Scott

Hi fanmail,

No, I don't follow Miton (LON:MGR) although I do have a lot of time for Gervais Williams - a smart small caps investor, and all round good bloke.

I try to avoid investing in brokers or fund managers. They're too susceptible the ebb & flow of investment performance, and the business hinges on a handful of key people usually, who might walk away at any point, thus destroying shareholder value.

These businesses tend to be run for the benefit of the Directors & staff, not shareholders, in my view.

Hence why I don't usually report on them. I dabbled with Panmure Gordon & Co (LON:PMR) and Cenkos Securities (LON:CNKS) shares, but both proved disappointing.

You've also got regulatory issues, etc. Can of worms, the whole sector.

Regards, Paul.

Rusty2

Morning Paul,
Yes good news from Lavendon. I was interested in your views on Home Retail (LON:HOME), with the likelyhood of it being taken over that you have sold 90% of your shares, would it not be an idea to use a stop loss say at 140p then you have limited risk and maybe much reward? If they do get 200p then your profit would go from 50% to 100% if you bought in around 100p.

Hi Herbie,

That would be one way of doing it, although a Stop Loss might only work if it was Guaranteed, because remember the price can gap straight through a stop loss & they include a slippage factor, so you can end up being closed out at a very bad price. I just prefer to manage the risk myself, through weighing up risk:reward in advance, and sizing my positions correctly.

Stop Losses can be good for some people, and in certain situations. Generally speaking though, people who watch their positions closely all day, as I do, can manage the risk fine without them. I've had issues where a freak trade can take out a stop loss, thus crystallising a large loss, for no genuine reason. They're not a good thing for me personally, but may work for some other people.

I generally think, if you need a stop loss, then it means the position size is too big, and/or that you haven't done your research properly.

Regards, Paul.

It does seem to be quite common recently a decline before the results or trading updates come out then if good a rebound, its as if investors don't want to take the risk of a fall from poor results so they sell before then buy back if good. Shoe Zone (LON:SHOE) was another. I think it pays to read the results before the market opens think you can make some money, recently Debenhams (LON:DEB), Boohoo.Com (LON:BOO) and Xaar (LON:XAR) would have been good trades.

rhomboid1

Re Lavendon , which I hold a fair slug of, I suspect a lot of recent weakness is driven by investors shunning stocks with Middle East exposure, I also hold Lamprell and Capital Drilling that exhibit similar weakness but are also trading well. I'm happy to hold as the scope for significant re rating makes them a very attractive long term proposition. The divis from CPD & LVD help to keep me happy.

Hi Paul,
Yes that is a very good point about stop losses, I also don't tend to use them but they can be useful, especially when I'm away in remote places with no or slow internet. Some trades now which are similar to Naked Trader ones I'm using stop losses on, John Wood (LON:WG.) and Trakm8 Holdings (LON:TRAK) are 2 recent ones. My positions are not large but I'm not that experienced, I think it depends on the trade and company, I would say 85% of mine don't have stop losses. Yes freak trades and market makers tree shakes are a problem I know.

mikelevie

Hi Paul, interesting to compare Rosslyn Rosslyn Data Technologies (LON:RDT) with Proactis Proactis Holdings (LON:PHD). Both in the same space (procurement/spend management software), but at opposite ends of the scale in terms of financial performance.

Hi Herbie,

I think you are right in part in that with a number of profit warnings in the past 6 months, investors have become much more cautious. It also seems as if drift occurs where there is little or no news-flow as if investors then fear for the worst or interest and positive sentiment from prior result updates then ebb away. I think Shoe Zone (LON:SHOE) is a good example to add to my three as this rose substantially after previous results and then the share pice came back down, although I struggle with this share as I cannot see growth or where the company can go. Short term, it may be able to take cost out of the business via lease renegotiations, but like McBride (LON:MCB), unless there is a strategy to grow, there is a limit to this sort of action. In contrast, Boohoo.Com (LON:BOO) seems to have been on an upward trend most of the past year since the drop a year ago.

it_trader

Hi Mike,

Just to comment that the 2 companies mentioned are not in the same space.

Proactis are indeed in procurement whilst Rosslyn sell a cloud based data analytic service and a much smaller market obviously.

goldbug

Hi Paul,

I noted your comments on position sizing. I think that lots of investors don't know about this or think about it. Maybe a topic for you or another stockopedia guru perhaps?

I've only heard about it recently myself, so now on every trade I use a spreadsheet and enter buy price, stop-loss price (manual stop-loss, not set in broker's system), and get the spreadsheet to calculate the number of shares for a range of Risk. Currently I'm using max £300 risk on every trade, which is <0.5% of my portfolio, so that any one trade can blow up the portfolio.

One exception: I bought some Home Retail (LON:HOME) after the bid announcement and set a higher Risk for that one. But as the price went up, I was able to increase the stop-loss level and de-risk it.

In above post, there was a typo:
"so that any one trade can blow up the portfolio"
should read:
"so that any one trade CAN'T blow up the portfolio"

Mark Simpson

Goldbug,

As Paul points out in his earlier post your stop loss only works if it is guaranteed. Brokers won't offer this since they are simply accepting an automatic trading instruction not taking the other side of the trade and spreadbet providers are wise to the takeover failure potential so will only allow the guaranteed stop far away from the current price. E.g. IG will only allow it 50% away from the opening price on Home Retail (LON:HOME).

If J Sainsbury (LON:SBRY) pull out of the bid then the price could fall back to c.£1 on the opening auction. It doesn't matter if your stop loss is set at say £1.30 it will be executed at £1 that's how these things work.

In these sort of situations what a stop loss tends to do is guarantee the worst possible price execution rather than protect the downside.

The only strategy that would really work for limiting the downside would be buying options but you usually have to overpay to avoid downside risk.

If you want to limit your downside to 0.5% of portfolio the only realistic way is to reduce your position so that you would be a buyer at the price that would represent 0.5% portfolio loss not a seller.

Mark

Thanks Mark.
I don't use broker stop loss and don't have a spread bet account, its all manual for me. I keep an eye on markets, but yes, there's a chance that the market moves quicker and I'll lose out.
My point was that I'm now a fan of risk management, trying to limit loss on any one trade to £300 or as near to £300 as I can get. I try to set sensible stop loss levels so that I'm not caught out by a normal move, eg i look for a previous support level being breached.
Hopefully that prevents a losing share that goes down, down and down, until you realise that you're 50% down and need a 100% rise to get back to break even. Been there, done that ;)

gus 1065

Hi dangerS.

Re. your comment about spreadbet providers' willingness to allow stops, I note that Grindertrader on his recent "Shorting the Christmas Retailers" thread was able to put a stop loss on his short for Home Retail (LON:HOME) at 109.25p (about 10% out of the money at the time) that saved him from about a £3k loss when the J Sainsbury (LON:SBRY) approach was announced and pushed the Home Retail (LON:HOME) price out to about 140p. I believe this was done automatically - perhaps GT can confirm if he picks up this thread? Not sure if he was able to cut a deal as frequent trader, but certainly saved his bacon on this one.

Here is the link to the thread.

http://www.stockopedia.com/content/shorting-the-christmas-retailers-115893/?comment=22#22

Personally, I prefer to monitor my own positions and not get stopped out in the "tree shakes". In the past week, the MM's have taken a share I've been following quite closely - Pantheon Resources (LON:PANR) - down by 20-30% over the space of a couple of hours trading on three occasions only for it to spike back up again almost immediately. Given the wide bid/offer spread and speed of the bounce, several investors have been bemoaning how they've been stopped out and then found it costly to buy back in again.

If I need to be away for any period of time, I reduce any positions that I deem risky down to my "sleep easy threshold level".

All the best,

Gus.

I think it depends on the company, smaller companies are generally more volatile than large ones, it would be very unusual for a large company to have 20-30% movement. If a share is going down and up that much then if the spread is not too wide you could pick some up cheap with an auto bid and then sell when they go up for a very quick profit? According to my broker the spread is only 0.4% and on Stockopedia. As I said it depends on the company whether I would use a stop loss. On Pantheon Resources (LON:PANR), I may be using an auto bid and a sell limit.

monzo

Re: Shorting the retailers after Christmas Ian got lucky on Home Retail (LON:HOME) as I'm sure he would admit. News leaked ahead of the announcement, so while the rest of the market was trending down (especially retailers) Home Retail (LON:HOME) was up 4, 5, 6% which took his stop loss out. Had there not been insider dealing it would have gapped to the upside and there would have been a slippage factor to say 126p which would have been far more painful.

I pretty much agree with Pauls view on stop losses. It tends to work better holding actual shares rather than spread betting though. As mentioned above, guaranteed stop losses are expensive due to the extra spread and then usually require 25-50% of a position size to guarantee. It does however work better on Forex or Indices trading.

Hi Herbie47. I agree that it depends on the company. For Pantheon Resources (LON:PANR), volumes are well up on this particular stock over the past few weeks and it's apparent that day traders are coming in to play the high levels of volatility in increasing numbers.

Re. spread, although the Stocko page is stating the closing price as 120.0p -120.5p during the trading day a quoted 2p or even 3p spread is more usual. Likewise, when the tree shake is on there have been times when there is no offer made during the bounce until a much higher offer level has been established. (I suspect bids have been pretty thin on the way down too, although I have not been looking to sell at these levels). Prices also tend to move in pretty wide steps on relatively small changes in volume.

Here's a small extract from today's trades (mine is the 10.56 purchase @ 115.40, i.e. this was the offer at that time).

Price Vol Value £
10:57:06 123.00 10,000 12,300
10:56:24 116.00 5,000 5,800
10:56:02 115.40 4,324 4,990
10:55:57 115.40 4,500 5,193
10:54:14 115.12 701 807
10:53:52 115.06 2,163 2,489
10:53:49 116.06 4,435 5,147
10:53:46 117.00 2,564 3,000
10:53:08 117.03 1,200 1,404
10:51:29 117.98 3,000 3,539
10:51:13 118.00 4,232 4,994

Gus.

Gus,

I note that Grindertrader on his recent "Shorting the Christmas Retailers" thread was able to put a stop loss on his short for Home Retail (LON:HOME) at 109.25p (about 10% out of the money at the time)

That was before Home Retail (LON:HOME) announced it was in takeover talks. I'm not saying spreadbetting companies won't allow guaranteed stops just that they are not mugs and they are not going to allow you to protect the downside against talks failing and the share price gapping downwards while they take all the risk for a few points extra spread. Hence they move where they will allow guaranteed stops in Home Retail (LON:HOME) 's case IG went from 10% to 50%.

It is academic really though since the OP doesn't really have a stop in place just an idea of where he might sell if the SP drops. If the SP gaps down he will likely lose more than his 0.5% unless he's reduced his position but hey a 1-2% loss isn't much. Most people probably have similar daily volatility this year.

HTH,

Mark

Small Cap Value Report (14 Jan 2016) - HOME, LVD, BLNX, JD., RDT, TSCO, CAMB, GOAL, ASC, BQE, ZTF, MOSB

Home Retail (LON:HOME)

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Paul Scott

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