Small Cap Value Report (14 Jun 2016) - NXR, DSG, TRI, CML, CYAN

14th Jun '16 by Paul Scott

63 comments 24832 reads

Good morning!

EDIT: Forgot to mention, I've been nominated for an award for writing these reports! How exciting. Let's hope the judges didn't see last Thursday's, when I was plastered. It's the 2016 Small Caps Awards dinner this Thursday, and I'm on the shortlist of 3 for "Journalist of the Year". Here is the link, it's the 7th section down. So keep your fingers crossed for me!

Fairly busy for results today, so thought I'd better start a bit earlier to fit it all in.

As no doubt you've already seen, markets are really going wobbly at the moment, with all this uncertainty about Brexit. I enjoyed our reader discussion in the comments section here after yesterday's report. If only the politicians could have such a sensible & courteous discussion as we managed.

Taking everything into account, the only bit I'm really worried about is the impact on the financial sector. Although City veteran David Buick reckons there's nothing much to worry about on that front, in this video.

There's also a fascinating article from former Chancellor, Norman Lamont, in which he runs through some figures which suggest the UK would have a better trading arrangement outside the EU. His argument is that paying the 3-4% external tariffs to the EU would actually be cheaper than our present arrangement, which works out as the equivalent of a 7% tariff! Plus of course we would collect in a mint from taxing German cars ourselves with a 3-4% import duty. I wish there had been more commentators who had actually crunched the numbers properly. It's mainly just baseless assertions from both sides.

The betting odds have narrowed sharply to about a 40% chance of Brexit happening, and equity markets are floundering, I'm sure most of us are taking some pain in our portfolios right now.

There are lots of bargains appearing, especially in illiquid stocks. In normal circumstances I'd be snapping up those bargains, but given the Brexit uncertainty am sitting on my hands for now, probably like most other people. So I think we could see some even better bargains appear over the next fortnight from panic selling.

Volatility is part of investing in equities. I think it's important not to get shaken out of great companies at the wrong time & price, only to miss the rebound. Having said that, this is definitely not a time to be geared, in…

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herbie47

14th Jun '16

Its seems 37/57 uk applicants are rejected from nurse training, no doubt quite a few drop out as well: http://www.telegraph.co.uk/news/nhs/11689202/NHS-spends-huge-sums-on-foreign-nurses-yet-two-thirds-of-local-applicants-are-rejected.html

Why so many are rejected is not clear and maybe something that needs addressing.

Also maybe part of reason for doctor shortage: https://www.theguardian.com/society/2015/dec/04/al...

Plus 40% of EU doctors fail the language test.

purpleski

Andyin you are so right but many Brexiteers don't see it. Tragic and sad. That said the 20 thumbs up for Maddox post 20 (I can't remember seeing that many on a SCVR comment) gives me hope that a silent sensible portion of the population will vote the right way.

Additionally I suspect that what I read is skewed by the age and political profile of the average PI. Right wing, middle aged and middle class. Just like me. I just happen to have voted (postal) remain!

jonesj

One could argue another reason for a shortage of our own workers in certain segments of the economy is because we make it so easy for whole families to live on social security. Where they actually have a higher living standard than working people in many parts of the world. Burdening our taxpayer like that & encouraging such indolence is also a morally questionable practice.

As for GPs, when we go along there, usually they just ask a series of questions and guess at a diagnosis. If we're lucky, the GP might get some blood tests or scans done, which is the kind of scientific approach I would expect. The whole process is hit and miss. I've seen cases where people are onto the third GP after many months, before they take the necessary steps that should have been taken first time and then cancer is diagnosed.

The part where they just ask the questions is ripe for automation. That part could be handled by a computer, which would be a lot cheaper and more reliable. If that goes well, they could refer the patient to the queue for the doctor. Possibly with a print out of the diagnosis and prescription to be signed or rejected.

This would free up loads of time and cash for doing tests & paying for treatment.

There is little hope of seeing such innovation within a state run monopoly. But this is exactly the type of innovation we could benefit from.

ap8889again

So you think it's fine to lure doctors here from countries who won't have enough doctors of their own?

Yes. Do you think it's fine to prevent them from choosing freely between employers to better provide for their families?

As for the poor and ill in their countries of origin- while I would like the Phillipines to have First world levels of healthcare, it is not in your or my power to make it so, and not is it your or my responsibility. It is for the people of the Phillipines to arrange their own healthcare system via their elected politicians.

In any case you will find the needy are bloodkin of the migrant worker who is likely to be remitting money to support them, if not directly then indirectly by boosting GDP and thus taxes. If you read the article above it is clear that Phillipino nurses are often privately trained, so it is debatable if any third world taxes are expended on educating many of these imported skilled workers beyond the minimum high school level. Their families invest in educating them in the hope they will find work overseas. They are keen to work but there are no paying jobs in the Phillipines. This is not their fault, it is market forces and prioritisation of other programmes over healthcare needs by their own polity that allow such a situation to persist.

There is no shame in purchasing medical care from a willing provider any more than there is shame in falling ill. There is no shame in sending your nations clever children overseas to make money to send home. There is no shame in using the resources you have at hand are what you use to improve your situation, be that as a nation, a family or at individual level. Exporting healthcare workers is not a net negative for a third world nation. It is a beneficial move, like all good trades.

One shame is the decision not to allow market forces loose to establish private medical and nursing universities in the UK, which might unlock more British medical talent. I caveat that we have a full employment economy. The 2 million currently unemployed seem unlikely medics. Good luck finding many who might be suitable from the unwashed, unqualified JSA scrotes that are more my experience from that cohort. Perhaps the truth is that education overseas is cost competitive with such institutes and other countries like might have a pool of better educated, harder working people with a system that delivers more of a vocation to care than we have. All the young Brits with A Level STEM subjects I know want to work for Goldman Sachs, Google, or Simon Cowell.

Paul Scott

Mohammed,

your comment about tariffs suggests to me that you have never engaged in any formal study of economics.

Well you're completely wrong I'm afraid. I studied Economics at O-level Economics, A-level, and it was a major part of my Degree. Plus I did a 3-year chartered accountancy course, and passed all the economics in that (if not my finals exams).

I also spent 8 years as FD of a real world business, which was far more useful than any of the Economics I studied.

The big problem with Economics is that it's gone down a cul de sac of excessive mathematics. Even some economists are now admitting this - that probably 90% of books on economics could safely be dumped into landfill, as they serve little to no real world use.

It's difficult to think of any economists who consistently get things right. Which is why most people totally ignore them. Remember when Thatcher was presented with a letter from 364 economists, warning her c.1983 how her policies would drive the UK economy into a permanent depression? They were all completely wrong - the economy started to roar back into recovery, and was booming by 1987. Thatcher quipped, "364 economists. That's one for every day of the year, except All Fools Day!"

Where you have possibly misunderstood my comments on tariffs, let me clarify. What everyone is focusing on, is that the EU could slap tariffs onto British goods being exported into the EU, and how damaging that would be. They might well try to do that. In which case, the UK would simply reciprocate. As we import far more than we export, then tariffs would be a net fundraiser for the UK economy overall. Remember we're only talking about very low tariffs here - ballpark 3-4% is what the EU typically charges externally. That's not going to make a lot of difference to levels of trade.

This is an undesirable situation, as we all know that usually both sides flourish when tariff barriers are taken down, and businesses can trade freely across national boundaries. That's why I think any tariffs between the UK & EU would only be temporary, as both sides would quickly realise that it would make sense to get rid of them.

So perhaps you thought I was advocating tariffs, which of course I wasn't.

Paul.

Yes some good points there. Its always interesting to read articles which say we are robbing countries of nurses etc to fit their arguements. I have been to the Philippines many times and have friends there. The Hospitals are very good but as the Americans were there for nearly 50 years they have a similar system, so the hospitals are expensive and most filipinos can't afford them or if they do use them they soon go bankrupt. Anyway many girls get trained up so they can get a good job, many look to go abroad because the pay is so much higher and then they can support their families. So actually giving them a job is what they want and it will help them, their family and a lot of the money goes back home which supports their economy. So its not all one way as some people think. I used to think the Philippines survives on the 10m overseas workers, seems most families have someone working abroad. The wages in the Philippines are very low.

Hi Maddox,

Good points, well made.

After talking to several other friends in financial services in London, I am increasingly worried about the potential impact of Brexit on that particular sector. As you say, there could be (highly paid) job losses, and the City could see its dominance reduce, or disappear.

Mind you, opinions differ on that. David Buick says London will be fine, as it's such a centre of expertise in so many areas.

I've heard other City people say that some activities would be moved to European subsidiaries, in order to achieve EU passporting, but that the bulk of things would remain in London.

Who knows? It does however seem likely that the City would probably suffer some, and potentially serious job losses. So we have to weigh up the cost of that, against the benefits of leaving.

I'm not anywhere near as confident as you that the EU will last forever, nor that it will be stable.
Things are pretty bad right now, but throw in say a sovereign debt crisis from Italy or France, and we're into uncharted territory. In that case, the UK wants to be as far away as possible from the EU.

Regards, Paul.

James RH

purpleski - please don't think this is solely directed at you, I just so happen to have read and replied to your post.

I've seen this kind of argument a number of times recently across forums and comments sections.

I think it quite unfair to label people and/or their views just because they have a different opinion to yours. I'm in the Leave camp and so far, if I'm to believe what I've read in the last few days, I apparently must be xenophobic, uncaring, rich, uneducated, sad and old to name but a few.

Why can't people have differing views without fear of being labelled as something?

Quite simply, we will all make our decision based on what we either fear or desire most, be that immigration, economics, politics, job security, laws, trade agreements and a whole host of other reasons a person may decide is an important issue to them.

There is no right or wrong way to vote, just different ways of interpreting the facts and propaganda we are being fed on a daily basis from both camps which will lead to a decision.

The positive thing for SCVR readers is that Brexit may well throw up some stonking good shares at silly prices.

For this reason alone I think I may have just persuaded myself to vote out. Who doesn't like a bargain! Plus the chance to give our complacent political elites a decisive middle finger. If hated Eurocrats, bankers, and failed politicians like Tony Blair, Gordon Brown, John Major and anachronistic irrelevancts like the Archbishop of Canterbury all agree on something it seems a fair combat indicator that if we do it it's going to end badly for the common man. We might on reflection want to decline their kind offer to Remain. Who else can they possibly wheel out to scaremonger next?

-5

underscored

Housing is a demand issue http://www.civitas.org.uk/content/files/Restoring-a-Nation-of-Home-Owners.pdf

Hi James

Thank you for your reply and you may well be right. The labelling thing is what tends to happen in society and is indicative of broad tendency of a particular grouping. ie. For example I think you will find a majority of the young (under 35 say) most liberal (neither of which describes me) will be voting remain.

The point I was trying to make was that most of what I read is from PI sites like Stockopedia and that I think most PI's will be like me in profile middle aged, middle class and right of centre (if not right wing) and that that grouping tends to be more Brexit leaning and that therefore I might be getting a slightly skewed view of the way the country is leaning. I was not trying to be pejorative towards any particular grouping.

I welcome all those things that the Brexit camp is against:

- I like being part of a large multinational market that is the EU
- I like being able to travel as freely as I do
- I like being ask to run my uk based business in France as easily as I am able to (search purpleski)
- I like the immigration that brings I believe a net benefit to the UK economy
- I don't believe the EU is perfect (by a long way) but it will change and we, the U.K., can be part of the force for change. There many rediculous things I would get rid of but none of these things would make throw the baby out with the bath water.

Kind regards

Michael

roddy10

Paul:

1. I think one of the issues re the City is that we forget that it's success was partially by accident (President Kennedy IIRC taxing bonds leading to bond trading moving offshore to create the Eurobond market). People 'assume' we have an inherent right to be a major financial centre - we do not.

2. A lot of the major financial companies (think eg investment banks) are foreign owned and often manned (to a significant %) by non-UK nationals. If the EU requires Euro clearing to move to the Eurozone then there will start to be a movement into the EU. One has to think where the position will be in 20 years time - the boards major loyalty will be to maximise profit not location.

3. Surely post Brexit the mayors of Paris and Frankfurt will be on planes to NYC, Tokyo etc inviting banks to relocate - and lots of nice incentives?

4. Earlier there was a comment on manufacturing - again how many of the car companies are owned by overseas players - and is part of their strategic investment in the UK because of EU access.

5. PS I noticed I have an invite to the rewards ceremony - sadly I will not be able to go but best of luck to you.

R

Hi Roddy10,

Interesting points, thanks.

My view FWIW, is that if a Brexit vote happens, then the number one priority for Cameron & Osborne's successors next month, will be to call in all the big banks, and basically ask them to give a wish list of what is needed to keep them in the UK.

So the key point is that a new UK Govt would have to be highly active, not reactive or passive.

One key thing I would do post Brexit is to announce further falls in Corporation Tax, to continue the 1% p.a. falls we've had so far. If we indicate a direction of travel down to say 10% Corp Tax, then I very much doubt many big companies will be leaving the UK. They'll be queuing up to come in.

The Remain vote dismays me, in that it's so weak. They have nothing to offer, other than dire warnings of appalling consequences if we leave. It doesn't seem to even occur to remain people that the UK could have a dynamic, business-friendly Government which could do marvellous things outside the EU.

Regards, Paul.

P.S. Worst still, Osborne has said tonight that if there's a Brexit vote, he'll do an emergency Budget, and put up income tax by 2%! Pure scaremongering, and deceit. That reinforces my desire to vote Out.

Thank you, Michael, for your considered reply.

I believe you are correct in that as a society, we tend to want to label people if we disagree with someone, rather than accept people can have their own opinions. It's almost narcissistic to the point of if you don't agree with me, then you must be inferior. Again, nothing pointed at you and it's just an ugly observation of what this referendum has done by bringing out the worst in people (a them and us attitude).

You raise good and reasonable arguments for remain as part of the EU and if I had to pick a standout, I would choose your last point. Whilst I've settled on my decision to vote leave, if as a nation the majority want to stay, then my only desire is that we are not subsequently walked over by the EU insofar as 'you voted to stay, now do as we say or else'.

Best wishes,

James

p.s. As per your example, I am one of those 'young' ones as you put it, however I appreciate you wrote 'majority' though! I'm not middle aged, don't believe in a class system (as you can probably gather I have a problem being labelled!) and have no real view on politics or allegiance to one party, other than I find myself at times agreeing with all parties, other times not.

p.p.s your Méribel resorts look lovely. I wish you good luck with them and if being part of the EU helps in that respect, fair play to you. As mentioned, we all have our fears and desires of remaining/leaving.

IR35

Paul

That's a bit of a sweeping statement to say "It doesn't seem to even occur to remain people that the UK could have a dynamic, business-friendly Government which could do marvellous things outside the EU." It could just be that some of us have thought it through and realise that the paradise promised by the exit campaign just isn't going to be delivered. My view is pretty similar to Jak's in that we will retain very close ties to Europe in the same way as Switzerland or Norway -with all that entails.

As I said yesterday there are several EU countries with low corporation tax rates - and some of them have younger, much better educated and much better motivated workforces than the UK (as well as access to the 500million other EU residents). Why wouldn't companies chose those locations over a country with a limited workforce.

I also doubt that Cameron will go immediately - if its a vote for Brexit I would expect him to go in the Autumn.

ed_miller

15th Jun '16

Some good comments and suggestions, Jeff. I found Herbie's news link on Filipino nurses (post 37) informative, and I'm glad to learn something - as one should in a good debate. Innovation in a state-run monopoly isn't impossible but is, I agree, unlikely, and runs against the culture pervading the NHS. For all its faults, a health service, universally free at the point of use (though already mostly lost in respect of eye- and dental care) is something most of us are proud of, though it might be more effectively and sustainably achieved by a different funding system, such as an insurance scheme.

Bringing the debate back to the referendum rather than the issues Jeff was responding to, like James RH, I don't want to be labelled and don't fit neatly into a category - no-one does. It is perfectly possible to want out of the EU without being xenophobic (indeed being very keen on Europe and Europeans) because one's ideology places different values on different things relative to the values of those that wish to remain in. It is very easy to call those we disagree with bigoted but often that isn't true.

In my view the EU didn't work well when it had half as many members than its current 28. Yes it does many good things. No, it never gets its accounts signed off - that's appalling. Its decision-making is snail's pace, as is inevitable when so many different and conflicting national interests are vying with each other. The EU is even more wasteful than our own seats of government and MEPs overpaid and over-expensed.

We may not be formally tied to an ever-closer union but the EU is a political project: those that run the EU want a single European state (they know that for the EU - and certainly the Eurozone - to function efficiently it needs to be). Being linked to such a project, even a little more loosely, drags my country in a direction I don't want to see, even if it were to give me a little more prosperity. I love Europe but I do not identify with European nationhood - that's not for me. We can certainly afford to be a sovereign nation, a democracy (which is not to say our political systems and institutions are perfect, far from it). If I didn't care about the sovereignty issue, the democratic deficit (e.g. most EU law can only be proposed by an unelected European Council; Lisbon Treaty repackaged as a treaty document and signed through, when a French referendum voted it down before we got our referendum on it), then I would vote to stay in. It is possible we will end up poorer if we leave: entirely possible that our political leaders and civil service will squander the bargaining power afforded a nation of 65 million relatively wealthy consumers with a massive trading deficit; entirely possible they will fail to use our £8.5B net annual EU contribution effectively, but if Australia and even New Zealand can afford their independence then I'm convinced we can and I should like to see Britain returning to its proper purpose as a trading nation fully engaged with the world, and not just an inward-looking Europe, dominated by German economic interests and saddled with economic problems and a debt crisis at its fringes that it won't face up to.

Even if the vote is for Leave, which I think unlikely, I don't think we will get out - as we've seen happen to Denmark - there will just be another referendum - we'd need a large 'Out' majority to make it stick, which I can't see happening. If we vote to stay in we will have lost our negotiating power to effect much needed change in the EU - knowing we are definitely not then going to leave, we will have to do as we are told: we'll be in but not even in the passenger seat - we'll be bundled in the boot - with Germany at the wheel (no I don't hate Germany, I love Germany) - which is great, for Germany.

Paul is very good at making sweeping statements about companies and he is so often right when he does so following his convictions. But in this instance o believe he is so so wrong.

I think it will be case in years to come that the UK will have its Joni Mitchell moment:

That you don't know what you've got
'Till it's gone

I am sure Cameron and Osborne will go (why would he want to stay?) and besides this has been Bonkers Boris and Give's plan A all along. They have bet the farm (of their political careers) on a Brexit vote. Why would they not grab as soon as they can.

Trump and Boris! It will give a whole new meaning to the phrase 'special relationship'.

Kind regards

Michael Broom Smith

JonathanWatt

Hi stock picking outstanding value companies with momentum and managing those positions in the context of an overall portfolio strategy and individual trade management of the position (size, target profit Stop loss) is clearly the cornerstone of a successful investment strategy. My question concerns hedging an equity portfolio -
Exit return to cash as per Stop losses
Gold
Or a short etf on the ftse x1 x 2

Clearly the intelligent investor would manage the hedge positioning dependent on market sentiment.
Any thoughts prior to me spending many hours tracking these tools against a great strategy portfolios over the last 10 years?
Jonathan

BlueFrew

Just a quick comment on CML Microsystems (LON:CML) and their R&D spend, as you've commented that it is quite high. Quick disclosure first though, I'm in the semiconductor industry, so I don't have any position in CML Microsystems (LON:CML). I try and avoid investments where my portfolio will turn down at the same time as potential employers.

Anyway, most people within the semiconductor industry are pretty well paid. CML Microsystems (LON:CML) products look like they are mainly mixed signal, meaning they have analogue circuitry and digital circuitry. People working on the digital side may be well paid in comparison to most people, but we're paupers compared to analogue designers. So anything will analogue circuitry in it will cost a fair chunk of cash to design and support. But since good analogue designers don't exactly grow on trees, provided you keep them happy, then you should have a competitive advantage.

Yes its interesting that you pick that song because thats about paving paradise, what happened in Hawaii, I feel that is happening to parts of England, we are building more and more houses for the growing population. "They paved paradise to put up a parking lot"

So yes I think you are right that the UK will have its Joni Mitchell moment but not in the way you think. People may regret they way they vote, no one knows what the future holds. Will the EU succeed or fail, at the moment its not doing very well and we are not even in a recession yet.
The EU needs to reform but it won't.

I think we will stay in, it will be similar to the Scottish vote, it will be close in the polls but some people will vote for the devil they know.

Small Cap Value Report (14 Jun 2016) - NXR, DSG, TRI, CML, CYAN

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