Small Cap Value Report (15 Dec 2016 - Part 1) - JE., PURP, IPEL, PTY, CMS
Good morning!
We have 2 reports for your delectation again today. I shall be covering trading updates from Impellam (LON:IPEL), Communisis (LON:CMS), and Parity (LON:PTY) . Plus any other bits & bobs that look interesting - e.g. big price movers, takeover bids, etc.
Graham will be writing his own report, click here today - covering Xaar (LON:XAR), Sutton Harbour Holding (LON:SUH), and Haynes Publishing.
Tomorrow it will be 1 report only, from Graham, as I'm having the day off.
All our reports appear on the SCVR landing page here. The most recent is highlighted in the large box, but others appear below. So it's worth scrolling down to see if there are 2 reports for the day, although we'll always mention this at the start of each report too.
Internet shares - winner takes all?
Just Eat (LON:JE.) has announced this morning the acquisition of two competitors. In the UK, it has bought its main competitor, Hungry House, for £200-240m. I'm surprised this has not triggered competition regulatory issues. Certainly, from what I've seen, JustEat and Hungry House have been the 2 big takeaway delivery companies in terms of TV advertising. It seems that JustEat has won the war, and is now gobbling up its competitor. This now gives it a very dominant position in the UK - although Deliveroo and UberEats seem to be up & coming.
(UPDATE: a friend has pointed out to me that Deliveroo & UberEats serve a different market - delivering food from restaurants which don't have their own delivery staff. Whereas JustEat is an interface between takeaways & their customers.)
We've seen similar things in many other sectors, where once in a lifetime changes to business models are taking place, driven by the internet and ubiquitous smartphones.
Where sector disruption occurs, with new technology, It seems to me that, all other things being equal, after a while there tends to be one big winner. This might be the first mover. And/or the big winner might be the company which simply out-spends the competition on marketing. It's often the case that the big winner becomes self-reinforcing after a while, as it sucks in liquidity of users - so think Ebay, PokerStars, Rightmove, etc. - they're dominant because they have the most users, which attracts more users. Ultimately creating an unassailable lead.
So you really can't apply conventional valuation metrics in these scenarios. I missed out on Just Eat (LON:JE.) because I thought it always looked far too expensive. That was a mistake, as I hadn't grasped that it was becoming the dominant player, and would crush the competition, as we're seeing today with Hungry House selling up.
JustEat also announced today that it's buying a Canadian business for £66.1m, to add to its other international operations. That's another aspect of why valuations on internet shares can be so expensive - e.g. Asos & BooHoo - because they're not only succeeding in the domestic market, but are delivering strong growth internationally too. So the growth could continue almost indefinitely.
All the while, conventional companies such as High Street retailers, are being squeezed from all directions. They're losing business to rapidly growing internet competition, plus their costs are rising quite rapidly.
Having done very well on Boohoo.Com (LON:BOO) this is an area that I'm focusing on much more closely. As mentioned before, one of my favourite stocks for 2017 (and beyond) is Gear4Music (G4M), in which I hold a long position. This is one of several companies disrupting the European musical instruments/equipment sector. A niche area, but the margins improve with scale, and triple-digit % sales growth in Europe augurs well for G4M I reckon.
My latest stock pick in this area of internet disrupters, is Purplebricks (LON:PURP) (in which I hold a long position). Again, the valuation looks nuts on a conventional basis. However if you look at the opportunity the company has, it's potentially enormous. Sure there are competitors, lots of them, but I doubt many will achieve critical mass where they can afford the marketing spend required to prosper.
So again, I see the online estate agency area as a dash for market dominance - where the winner is likely to take all. If PURP is that big winner (no guarantees it will be, of course), then the valuation would be into the billions, not hundreds of millions. This is clearly what Neil Woodford spotted, when backing it heavily pre-IPO.
Also, if PURP became really dominant in online estate agency, then why would it need Rightmove? It could cut out Rightmove altogether (or offer it as an optional extra), and create its own property portal.
Also, I think conventional estate agents are pretty much doomed, long term. How can they possibly compete, with all those big fixed costs, and pricing which is now completely uncompetitive? What's going to happen to all those empty shops too?
For this reason, I've decided to look through the high valuation, and am considering whether to increase my position in PURP. There's a really good video of management presenting recent results here.
I welcome reader input on this issue. Have I gone bonkers in a bull market, losing sight of my value investor credentials? Or am I on to something? Let me know what you think in the comments below!
US interest rates
Have started moving up, ever so slightly, from 0.5% to 0.75%, with 3 more increases planned for 2017 apparently.
ITV news showed a chart last night of how, historically, UK interest rates have followed the trend set by the US. So I suppose we ought to think about the impact of higher interest rates in the UK too, at some point.
My feeling is that the amounts are so trivial - even after several increases, our interest rates are still likely to be extraordinarily low by historical standards, that I can't see it having much impact at all on my investing strategy.
Although rising bond yields do of course mean rapidly shrinking pension deficits. I saw a very interesting broker note on Norcros (LON:NXR) (in which I hold a long position) yesterday, which pointed out that the share price is tracking bond yields very closely. So I'm pondering whether or not to buy some more Norcros.
We should probably be getting a lot less worried about companies with pension deficits now, anyway. There could be some nice opportunities there.
If our interest rates rise to say 1-2%, will that really suck money out of equities into savings accounts, which will still be paying a pathetic amount? Equally, bonds look hideous, as their capital value falls as interest rates rise. Property comes under pressure when interest rates rise. So it seems to me, decent quality, reasonably priced equities are really the only place I would want to put my money for the foreseeable future.
Impellam (LON:IPEL)
Share price: 695p (down 2.5% today)
No. shares: 50.3m
Market cap: £349.6m
Trading update - this is a pre-close update for the year ending 30 Dec 2016, for this staffing group. It sounds OK, in the circumstances (several staffing groups have reported tougher conditions in H2 of this year);
Notwithstanding the well-publicised disruption in the UK healthcare market and the increased uncertainty following the UK referendum, the Board expects to deliver 2016 EBITDA broadly in line with market expectations.
I don't know why they quote EBITDA. I prefer adjusted profit before tax as the key profit measure, providing the adjustments are reasonable. When companies refer to EBITDA, it raises my suspicion that they're trying to hide something (e.g. capitalised costs).
I had a good dig through the interims from IPEL here on 28 Jul 2016, so have just re-read my notes there, to refresh my memory. Debt is too high, and the balance sheet too weak, for my personal taste.
Comments today on UK performance are interesting - note how Govt is squeezing their profit margins on NHS doctors (good!);
Trading performance in the UK has been mixed.
Some of our UK specialist businesses have seen weaker performance compared to the same period last year and we continue to be impacted by disruption in the healthcare markets as a result of Government announcements regarding caps on locum pay rates and agency margins. This has impacted performance within our UK doctors business.
Our market leading managed services businesses have continued to perform well, benefiting from 10 new client wins including Willis Tower Watson, Veolia, Johnson Matthey and Kings College Hospital and have a strong pipeline.
Overseas businesses seem to be doing well, and there is a favourable forex translation effect too;
Since the announcement of the interim results on 30th July 2016, the Company has continued to see strong performance across its US businesses.
The integration of the Bartech business continues to proceed as planned and the business has performed well in 2016 with some notable new client wins and extensions of services.
Delivery of the synergy cost benefits following the combination of the legacy Impellam and Bartech businesses are in line with management's expectations. In addition, the weakening of sterling has provided a currency translation benefit.
Net debt - some positive noises are made on this, although no figures given.
On a group level, cash generation continues to be strong and we expect net debt to be materially lower than at the end of 2015 and in line with market expectations.
I'll check out the 2016 results in the spring of 2016, and see if I can get comfortable with the debt, and balance sheet generally.
(UPDATE: looking at a broker note, net debt is forecast at £94.3m at end 2016 (1.3x EBITDA doesn't sound bad at all), dropping to £56.4m at end 2017.
Note the very strong forecast free cashflow generation which is set to reduce net debt quite rapidly, providing nothing goes wrong of course.)
Outlook - sounds a bit hesitant;
Whilst the Board is pleased with the positive results from Impellam's UK Managed Services, US and Australian businesses and the progress made in 2016 with the Group's strategic plan, it recognises the prevailing uncertainty in the UK and will therefore continue to manage the business prudently, whilst investing in opportunities to drive profitable growth.
Valuation - growth has come mainly from acquisitions, and that's been fuelled mainly by debt, which is important to bear in mind before getting excited about growth rates, and the low PER.
Also bear in mind that this whole sector (staffing companies) is cheap at the moment. This may be partly due to worries about the UK economy, but also down to repeated media reports of temporary warehouse staff being (apparently) treated badly. Also, will cheap & malleable E.Europeans tire of being exploited by big companies in the UK? Brexit seems a receding risk though, in terms of workers actually being forced to leave the UK.
So here are the Stockopedia valuation & growth graphics;
That PER does look attractively low. Especially as the company says it is generating cash & paying down debt. Think I might put this share back on my watch list.
There's a dividend yield of 3.1% too. It's always nice to be paid whilst you wait for a share to go up.
My opinion - I'm warming to this share, on valuation grounds. Not one I currently hold, but it's going back on the watch list.
A couple of quickies, as I have to get ready for a seminar this afternoon.
Parity (LON:PTY) - this sounds a positive trading update:
The Board is pleased to report that the Group's momentum, detailed in the interim results announced on 8 September 2016, has continued and that it now expects EBITDA* for the year ending 31 December 2016 to be slightly ahead of its original expectations.
The Group has benefitted from increased internal collaboration to support growth in the higher margin Consultancy Services division, which has driven profit improvement and cash generation.
The Board looks forward to 2017 and continues to be focused upon improving shareholder value.
I draw your attention to the last paragraph about shareholder value. Sometimes that can be a coded message that some sort of deal is being considered - maybe a sale of the company?
Skimming over the StockReport, several factors jump out at me;
- Looks like there's a fair bit of debt
- Weak balance sheet
- Rather poor track record
- Doesn't pay divis
So probably not for me.
Communisis (LON:CMS) - I don't usually comment on contract wins unless they look significant. This one looks good, although no financial details are given;
Significant contract win with Her Majesty's Revenue and Customs (HMRC) for all outbound customer communication....
The Term of the contract is 5 years, consisting of an initial 3 years with the option of a further 2 year extension. Preparatory work has already started as Communisis progresses toward a go-live date in mid-2017.
HMRC currently issues in the region of 185 million letters each year, and the contract also includes the deployment of document composition technology...
...We are excited to be starting this new relationship, in support of HMRC's "digital by default" agenda."
I'm not quite sure how sending out 185m letters every year fits a "digital by default" agenda though?
My opinion - the poor balance sheet puts me off this company. However, this is reflected in a low PER. It would be interesting to find out how much profit this new contract is likely to add to future performance. Might be worth a closer look.
Right, got to dash.
I'll see you next week, as Graham is holding the fort tomorrow.
Best wishes, Paul.
(usual disclaimers apply)
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56 comments
Purplebricks.
Anyone got any thoughts or ideas on how many share options are around for directors, sales people etc.
How does one find this out?
Concerned that perhaps there are huge incentive share options lying around here that will always have the share price under pressure.
A good question herbie, and perhaps it tells us something about the viability of the busines model.
From a quick search on google I found several similar companies, and all of them seem to be much cheaper than Purplebricks while offering the same or similar service. Housesimple for example offer a fixed fee service for £495 or a no sale/no fee service for £995. Emoov are £695. Hatched.co.uk are £495.
Purplebricks seem to be the most expensive.
But there is something more worrying about Purplebricks, which is that they seem to be promoting "nothing to pay upfront" in the hope that customers will misunderstand that to mean "no sale-no fee." I notce that there have been a couple of complaints upheld by the ASA to this effect. If that is the case then either regulators will step in at some stage or there will be significant adverse publicity making it clear that they charge regardless of whether or not they sell your property. Aside from the dishonesty it looks like an accident waiting to happen
The Austrailan link is important because they are about to spend £17million launching into the Australian market. There are already lots of players in Australia. One of the most high profile buymyplace.com.au charges vendors half the cost Purplebricks intend to. Is purple bricks going to try and outspend such competitors on advertising? Are they going to have to lower there fee to compete?
I'm currently choosing an agent with whom to place my (first) house on the market so thought I'd add my thoughts (so far) here.
I was immediately drawn to Purplebricks (LON:PURP) as the whole estate agent game seems ripe for being radically undercut by an internet-based company. I had seen a few signs in my area over the last year or two so was aware of the brand. High street agent's offical cost is approx £4,500 - albeit this is negiotable to some extent - whereas Purplebricks is £849 without them conducting viewings.
Despite the fact that there's a reasonable chance that we end up removing our house from the market without selling (due to some narrow requirements re what we're looking for) this doesn't put me off PURP, as once paid now the fee means we can sell with PURP at any time in the future without further cost (bears may laugh at my naivety). This being my first house it is almost guaranteed that I will sell it at some point in my life, likely within the next 5 years.
I hadn't heard of the other similar companies mentioned until reading this thread.
Housetree at £586.80 (inc floor plan & sale board) is significantly cheaper but their website looks dated & unimpressive to me, including a sentence that doesn't make sense on their 'About Us'.
Hatched require another up front fee to continue/repeat their services after 12 months.
Housenetwork (£599) looks more tempting for me as their fees last indefinitely, like Purplebricks.
I think Purplebricks (LON:PURP) do have a head start if they're agreeing 90 sales a day (they claim a sale every 16 mins, 24hrs a day) so perhaps >30,000 sales a year compared to, say, Housenetwork's 11,577 all time. Couldn't find figures for Emoov.
Just to continue the bear in Purplebricks (LON:PURP). Buymyplace.com.au, BMP on the ASX again is another company very similar to purplebricks. Go to their website and have a look. Current value $0.37. Her is a comment in an investors forum. Sound familiar?
"BMP is if anything an attempt to replace agents
Seen the quarterly report
Do the sums
Have spent $m to deliver a couple of hundred thousand revenue over organic... In my book that's a fail
But hey. DYOR if you find something .... Parabolic growth, new revenue etc do let me know... I would be intrigued"
I don't think Purplebricks has so much of a head start. House Tree for example (www.housetree.co.uk) have been around for years and they offer the same service as Purplebricks but at a much lower cost. In addition Housetree also offer a 0.5% no sale/no fee alternative.
In the early 1990's there was a property market correction and the phrase "negative equity" came into common use. At the time I was trying to sell a leasehold flat through a traditional estate agent. I was repeatedly contacted by a local agent offering a cheap service with an upfront fee. Even though it was much cheaper I did not consider it as I knew the property might not sell in that market. Within a year the upfront agency had disappeared. A lot of traditional estate agents also disappeared, but the upfront fee agencies seemed to have a much harder time in the market downturn.
Yes I have found the same. Hello Real Estate is an on line realestate in Austrailia that described itself as being the next uber. Its model is almost identicle to purplebricks. It , a private company, was to list on ASX but has not as from what I can gather buisness did not pan out as good as expected?
I have never heard of them. Had a quick search and nothing in my area. On reviews there are only 4 on Trustpilot, as I said PurpleBricks have a head start. If they have been around for years why have they not grown?
I am tempted to dabble with Purplebricks (LON:PURP). but am still not 100% convinced. I was reading realestate website forum post re purplebricks and mcuh of what they were debating you could transfer to ther Stockopedia froum and title it as bull and bear arguments! Purplebricks (LON:PURP). is obviously starting to be noticed by conventional realestate angents, I dont think they will just roll over. There are some vaild "bear" points they make though that would concern me.
1. Of the instructions how many turn to sales? If the percentage was small,even if it matched local estsate agents, the upfront fee model could colapse. I could just see some news article saying how many people pay upfront and get nothing in return. Many on the forum state cheap upfront fixed fee realestate agents are not new and dont last.
2. Do purplebricks get the best price for the seller? If it transpirses in the future that this is not on par with normal estate agents, again, this could serious taint purple bricks.
I'm not totally convinced either but, I looked at their reviews on Trustpilot and there were over 10,000 and they score 9.4 which is very good, so most sellers seem happy. How will traditional estate agents compete with their overheads, offices in town centre locations? Yes some other agents may adopt this selling method but Purplebricks (LON:PURP) has quite a head start? Many people don't like estate agents.
Much will depend on the housing market over the next 2 years or so, if a crash comes soon then it could be goodbye or else they will survive with their low overheads?
Communisis (LON:CMS) has strong free cash flow which should allow it to improve its balance sheet over time, even with its high div yield.
"1000s of instructions doesn't bring in sales revenue "
Actually it does. You have to pay these agents regardless of whether or not they actually sell your property. I think that's one possible flaw in the business model. In a downturn when property is hard to sell people may prefer the traditional commission only fee structure.
Just had another thought regarding purple bricks. Just supposing these guys were able to close on four property sales a week which quite frankly working from either their front room or at best secondary shop or office position in parkstone is extremely unlikely, that is still less than 200k turnover a year .
I know The argument is well it's all done on the Internet but you still have to persuade vendors to instruct you and buyers to contact you and working out of a secondary side street position it just ain't going to happen.
In the late 80s everybody wanted to own estate agents. Insurance companies, banks, building societies they all wanted part of the action. Look how many failed . Agents that had sold for 250k an office were buying their businesses back for a quid five years later. There is a justifiable dislike for estate agents and a desire to see an alternative but I do not see purple bricks as that option.
4 a week? Where do you get that from, they have 1,000s on their books, their revenue for this year is already £30m. I don't really think the location of their office is relevant at all. Most people in the uk won't even know about that area or care.
I meant 4 a week from that branch in a back street of parkstone. Most sales are created by people living within the area. People moving into an area make up very small proportion of sales. So location and number of offices within a location is very important.
1000s of instructions doesn't bring in sales revenue
How many branches do they have ? I think it is a very brave investor who buys shares in this company.
Do they have branches? I thought it was just internet based with contacts for each area. The more properties you have the higher the revenue? Their reviews are excellent, so it seems most people who have used them are happy.
It is my understanding they are paid up front on instruction. Their model is to have all who put their house on the market pay a small slice rather than taking a big slice from those who actually sell. This also cuts out time wasters, or people who change their mind or double list so Purple Bricks takes profit from all clients. Re: An internet based companys address, who would take a an idiot kid in his university bedroom seriously?
Hi paul
Hope the hangover not too bad this morning.
I used to own an estate agency with several branches n Bournemouth which I sold out in the late 80s.
I see purple bricks operates from an address in Livingston rd parkstone poole which is not Bournemouth , and not exactly the best postal address in the world. No disrespect meant to residents of this first time buyers location.
I just cannot see people living in the sandbanks or canfird cliffs of the area taking them seriously.
At the end of the day what is so different from the purple bricks model that we haven't seen before.
Lots of unanswered complaints against them on the Internet .
I remember a company called seekers a few years ago opening in secondary positions promising to beat the world that went bust and I suspect this lot will go the same way
Paul
"Also, I think conventional estate agents are pretty much doomed, long term. How can they possibly compete, with all those big fixed costs, and pricing which is now completely uncompetitive? What's going to happen to all those empty shops too?"
Absolutely agree.Estate agents, abr the very top end are ripe for the picking. Doomed as you say. As to all the empty shops - well they'll turn into what they always do - Charity shops, funeral parlours, hair dressers and nail varnishers!
"If our interest rates rise to say 1-2%, will that really suck money out of equities into savings accounts, which will still be paying a pathetic amount?"
Not so sanguine as you in regard to interest rates rising to 1-2%
There might be minimal PI / Institutional cash movements into savings accounts as far beter yields exist for reasonable-ish risk(4-7%), or USA side 8-12% for likes of REITS/MLPS's..
What would be of more concern is the state of the nation's finances, the elephant in the room.
Annual Budget deficits still £70bn+ odd.(even despite Brexit)
National Debt now £1.77 trillion odd. (up from £750bn odd in 2008!)
Annual Debt service cost - WITH interest rates at 0.25%
£50-55bn pounds sterling.
Yes, with historic interest rates the cost of servicing our debt is £50-55bn,or the Defence/Police budget,annually.
At 2% interest. Debt service costs will be eywatering,especially as we are still piling on debt!
Bodes ill for the future.
p.s Really enjoying the two pronged attacked by you & graham
Fangorn,
"National Debt now £1.77 trillion odd. (up from £750bn odd in 2008!)"
"At 2% interest. Debt service costs will be eywatering,especially as we are still piling on debt!"
Gilt prices have risen as interest rates have fallen. This makes the national debt larger in theory. Lower gilt prices on rising interest rates would make the national debt smaller, but either way, the interest paid (dividends on gilts) would be little changed. The payments due on existing gilts would be unaffected.
The same however is not true of mortgage payments. How homeowners who have borrowed at high multiples of incomes will cope with rising mortgage rates, and what effect that will have on house prices and housebuilders shares is an interesting speculation.
National Debt increasing month on month Bliss, to tune of £70-90billion odd a year.
So interest bill will rise accordingly both as a result of this extra debt in the first instance, but also being "financed" at ever rising rates of itnerest one would expect.
"The same however is not true of mortgage payments. How homeowners who have borrowed at high multiples of incomes will cope with rising mortgage rates, and what effect that will have on house prices and housebuilders shares is an interesting speculation."
Indeed. it wont be pretty for those overleveraged home owners.
The ability to kick the can down the road is fast eroding. At some point the ponzi schemes many have used to live lifestyles they cant actually afford in normal itnerest rate environments will come home to roost.
Wont be pretty.
The whole process of buying and selling in this country is a farce so anything that makes it cheaper
and simpler is a positive. The conveyancy process is rediculous and England should follow the Torrens Title method so if you bid and put down a deposit the contract is a committment....or you lose the deposit. The second element is the survey report. That should be available with the sale so that a proper assessment can be made. I am aware of 2 reports on my road where the deals fell through in light of such reports. And every potential buyer has to instigate a separate survey. What a racket that is. And then we have all the taxes. To get back to PURP.....anything that makes the process cheaper is good but this is only one small part of the process.
Purplebricks is an interesting discussion. The Stockopedia Stockrank score is only 8 but yet there is a lot of enthusiasm for it in the discussion above?
My concern with Purplebricks (LON:PURP) would be whether they are appropriately aligned with their customers through their pricing policies. There also seem to be some concerns whether their LPEs are appropriately aligned with the seller's interests, suitably qualified and whether they are suitably compensated.
It reminds me a little of the debate in the online hotel industry between the merchant and agency model. Those pursuing the merchant model made a killing in the early 2000s recession by buying hotel room stock at a severe discount to market and remarketing hotel rooms through their website at a discount to what the hotel companies were charging. Retail customers were happy but the hotel companies weren't. On a 3 night £450 stay, the merchant model could make well in excess of 30%. The proponents of the merchant model pursued openly antagonistic policies which sought to maximise their profit at the direct expense of their suppliers. When occupancy rates started increasing again as the economy recovered, those with the merchant model found that hotel companies were reluctant to deal with them and when they did, the terms were different as the balance of power had shifted.
Those pursuing the agency model sought to align the interest of customers and hotel companies preferring to focus on being a booking engine as opposed to a remarketer of purchased hotel inventory. They innovated useful tools for the benefit of hotel companies and reviews etc. for the benefit of customers. The hotel company could choose how many rooms and at what price to make them available. They charged the hotel companies 10-15% after the customer completed the stay so they made money only after the customer made money (this may have changed since).
In the early to mid-2000's, Priceline's international operations pursued one model and Expedia and many others pursued the other one. Which one pursued which model?
In the case of Purplebricks (LON:PURP), even if their model needs refinement it may not end up mattering since they have a listing, £29m in cash, a seemingly very significant share of an expanding market and good name recognition.
Hi Steve, are you the ex P Ex Steve Hill? I was thinking that the operators might reconsider whether the Just Eat model worked for them in the light of all the margin squeezes and turn away from JE and their ilk as a general way of reducing overheads but maybe they don't have an alternative.
Hi alpha 2, no not the ex P Ex Steve Hill, at least I don't think so !!
I take your point, I would imagine they will find Just Eat are now a necessary evil, a bit like Rightmove for estate agents or Amazon for small retailers, thats clearly what Just Eat are trying to become, I guess they will then ratchet up their charges & the profits will follow.
I have a home in France that I rent as a holiday let & Homeaway have done the same thing, bought up all their competitors, were offering a great price / service, but have now started to take the Michael with their charges.
As a customer it does leave a bit of a nasty taste, but as an investor it is a good model.
Some takeaways where I know the owners are taking a large percentage of their trade through JE. They won't be turning off the system any time soon. Hungry House was struggling to make in roads and would have been hurting on the profitability front. Hope for my friends sakes they don't push the royalty up.
"I welcome reader input on this issue. Have I gone bonkers in a bull market, losing sight of my value investor credentials? Or am I on to something? Let me know what you think in the comments below!"
FWIW as a long-term Paul Scott observer, I think you have come up with a working, disciplined approach to investment which is working well. But your low boredom threshold means you don't enjoy the straight-jacket of self-imposed discipline and want to climb the risk ladder again. That's only a problem if you get radical with your position sizing. 1% of portfolio punt on Purple Bricks owning the market and making a fortune - why not? Leveraged large punt? Lot of cash to put in jeopardy.
Many people have a risk compulsion - manifested in anything from gambling to drugs, affairs, whatever. You already flew too close to the sun with investment risk, but made a great recovery. I would hate to see you crash again.
Emphasis on the FWIW - it's your life. And I have deliberately not considered the investment merits of your market disruption candidates, just the notion of moving away from value candidates for your investments.
All the best - You did ask!
Jon
I welcome reader input on this issue. Have I gone bonkers in a bull market, losing sight of my value investor credentials? Or am I on to something? Let me know what you think in the comments below!
Paul,
I think the question I would be asking myself would be more like, "which type of stocks (i.e. Low PE Value or High PE Growth) have I made the most money out of in the last 12 months". Whichever it is allocate a least 50% of monies to that pursuit - Best to continue and do more at what you are best at.
I personally see no problem having a foot in opposite investing camps to balance out risk and avoid missing out if one particular type of investing does well.
Hi Paul, welcome back!
Completely agree regarding PURP. Have been a very happy holder recently and as you say, if they carry on delivering as they have the valuation will be in the billions as they completely upturn the industry. Just Eat is another example. Unlike Deliveroo / Uber Eats it is truly scalable and still has a huge market to grow into. Deliveroo is an interesting business model but a different market and nowhere near as scalable given the courier overhead and the living wage issues. I have a sneaky feeling we'all look back in a few years at the valuations today of both PURP and JE and see it as a terrific entry point.
Panmure put a great note out on Just Eat back in September FYI. Thorough analysis of the industry and the company..
Cheers
Rob
How Can AO World (LON:AO.) have a quality rank of 84 and a negative operating margin and return on capital?
AO World QualityRank™ Components
Ratio Value Rank
Franchise Factors
ROCE LT Avg 4.25
Net Mgn % 5y Avg -0.47
FCF LT/Assets 1.22
Gross Profit to Assets 63.1
Fundamental Momentum
Piotroski F-Score 7.00
Quality of Earnings
Beneish M Score, Last Yr -2.26
Financial Distress Risk
Altman Z Score (1) 6.62
QualityRank™ Composite: 86/100
Sorry I don't know how to copy it over on here.
Gross Profit to Assets 63.1seems to be one of the main drivers as well as Piotroski F-Score 7.00
I see it in the software and IT sector, not sure that is correct.
Thanks Herbie - It took me a while to work out how to get that information (I can only get there through going to the "browse sectors" section - is there a better way?), I had not seen it before. It obviously looks a significantly better business on those metrics!
No I don't think there is unless you add it to a Folio then you can see it also. I'm not sure because I presume the profit is from a tax rebate? I see op. profit is a loss but net is a profit.
It's not one for me, but I'm considering Purplebricks (LON:PURP).
Paul, the difference between Just Eat and Deliveroo/Uber would appear to be class/taste based. The JE market seems to be the really cheap chicken/kebab/burger takeaway market. Uber/Deliveroo the fast casual market. In my area a lot of the Deliveroo business seems to have been taken over recently by Uber. Don't like the JE price, seems absurd, with the re-rating and raised min wage in the UK affecting the sector very shortly I think there will be a lot of head scratching as to whether it is affordable by the operators. I'd sooner watch from the sidelines.
alpha2 I think Just Eat are an IT company (they do not deliver food, just take the order, the restaurants deliver the food) & therefore the minimum wage will have a beneficial effect for them as Deliveroo / Uber are logistics companies (they collect the food & deliver it) & therefore will be effected by the minimum wage, assuming the courts attempts to make their riders / drivers have the rights of an employee succeed.
However as you pointed out generally they work in different markets although there is some crossover in the mid market, Just Eat generally work with restaurants that have their own takeaway service, Deliveroo, Uber & Amazon (who are also entering this market) are more aimed at allowing users to order food from restaurants that previously did not have a takeaway service.
So although Deliveroo, Uber & Amazon's costs will rise in comparison to Just Eat when the minimum wage increases they may not gain too much as at present they work in different mark segments.
Hence Just Eat is priced on an IT based multiple rather than that of a Logistics company.
Interest rates UK following USA. Well one day, when we finally get over Brexit they might but right now we are heading the other way, trying to stimulate an economy while telling businesses don't invest it is too scary. The reason US can up interest rates is that they are being restiricted in growth due to low levels of un-employment and the work they do it getting more productive. NB this is not even close to an issue in the UK.
ITV news, you'll be quoting the Daily Mail next :-)
Paul my nervousness with Impellam (LON:IPEL) is that last time I checked it wasn't terribly clear what exposure it precisely has to NHS recruitment. Agency spending is coming under a lot of pressure in the NHS and NHS Improvement have just announced another round of squeezing and I find it hard to quantify the impact on Impellam (LON:IPEL). I sold earlier in the year for this reason.
Just to say I always find your comments in the introduction very interesting and useful. It adds colour to look at investing themes and lessons that might be applicable across a number of stocks.
Regards
Andrew
I share your opinion Paul that the potential of PURP is enormous, it is very much a share valued on forward potential rather than current or near-term activity. The price is quite volatile though, so I think this is one that can potentially be accumulated on dip-days
The thing about purple bricks is that you can use any old flat-fee estate agent now. We used Scothousemove last year. 400-odd quid up front and that was that. They all advertise on Rightmove, Zoopla and s1homes - and that's the only websites you need to be on in Scotland. There are a number of similar services - so everyone is just going to choose the cheapest. Purple Bricks don't do anything better than the rest. It's just a franchised local estate agent in the end.
Re Purplebricks (LON:PURP), I accompanied my daughter and her boyfriend to a viewing of a house that is being marketed through Purplebricks last weekend. The vendors were delighted with the service in terms of speed, quality, value, and response from buyers. From the buyer's viewpoint my daughter said it was much easier to book the viewing online than deal with the traditional estate agents who can't be relied on at all to call back when they say they will.
Having the seller conduct their own viewings means you get to see who you will be dealing with and they can actually answer questions, unlike the often clueless traditional agents.
I think Purplebricks are best suited to the mass market where everyone can easily get a fair idea of the valuations. For higher value or unusual properties a good agent would still be my choice, assuming you can find a good agent.
I'm not so sure about them bypassing Rightmove though. I think the Rightmove listing is the thing vendors really want and they would not use Purplebricks without it. The Rightmove e-mail alerts are the key way that buyers find properties coming on the market.
I think I've talked myself into buying some Purplebricks (LON:PURP) !
You might have a point there.
There are so many traditional estate agents who don't do what they promise & are downright unreliable, there may be a ready market of people wanting to kick them all into touch & use a web based service.
I presume the Purple bricks website is honest in dealing with customers, so that could be a USP ? (Disclosure: Small position opened. Need to research it more before expanding that)
Impellam. Yet another company that isn't being impacted by Brexit at all. Honestly. Really.
>>Re Communisis (LON:CMS) - well, numbers would have been very nice but I suppose they'll claim confidentiality.>>
From ADVFN:
Communisis wins "landmark" HMRC deal
We have been tracking print and document services provider, Communisis as it transitions to being a provider of “personalised communication services”. Today it has announced that it has won a major deal with HMRC, described by Chief Executive, Andy Blundell, as a “landmark contract”. The five-year contract (consisting of an initial three years with the option of a further two-year extension) is to handle all outbound customer communication for HMRC.
HMRC’s Prior Information Notice (PIN), for “Print & Scan” services, was published in April this year. It covered five lots including document design, composition and control, central and bulk print services, email delivery and image capture. The total estimated value of the contract was £175m. It is our reading that Communisis’ contract covers a range of these Lots; HMRC said it might combine some Lots under one contract but the value of the deal has not been revealed.
Until now, print & scan services have been covered under the HMRC Aspire contract with Capgemini. However, despite the Aspire contract being extended (see HMRC begins Aspire megadeal breakup), this was one of several areas for which HMRC said it would go out to market as part of a “phased exit”. Communisis is progressing towards a go-live date in mid-2017. With HMRC pursuing its “digital by default” agenda, technology is playing a key role. Communisis states it offered the “optimum technology solution”, including the deployment of document composition technology.
http://www.techmarketview.com/ukhotviews/archive/2016/12/15/communisis-wins-landmark-hmrc-deal
Boohoo - I hold shares - a long research note on BOOHOO today from N+1 Singer - their conclusion reads: "...regrettably we downgrade to 'HOLD'' and see better value elsewhere (Mysale)".
Re your comment on internet companies with disrupting technologies.
I came to a similar conclusion earlier this year. Until then I was hung up on PE ratios and wouldn't entertain stocks with 'too high' PEs. Well I broke that mindset.
You should add to your list AO World which is an interesting play at the moment. I googled to find out about customer satisfaction and to my surprise they beat John Lewis and Apple to be voted the best online retailer.
Declaration: I have been long with AO World and Just Eat since Q1 2016.
Hi Ramridge,
I'm not interested in AO World (LON:AO.) because it has no pricing power. Ultra low margins (so no operational gearing to speak of), generic product, it doesn't work for me.
Regards, Paul.
Interesting comment, Paul.
Just Eat and Purple Bricks also deal with generic products or services. In this instance, pricing power comes with ultimately dominating their chosen sector with a disrupting technology. The same argument applies to AO World.
Ramridge,
I completely disagree. You can't compare a box shifter of other people's generic products, like AO. with service providers like JE. or PURP.
PURP has gross margins of over 50%, that's way above where AO World will ever get to.
AO. has almost no operational gearing, whereas PURP & JE. have huge operational gearing. It's just not comparing apples with apples at all.
Regards, Paul.
Hi Paul
Not surprisingly, I totally disagree. We are clearly seeing this through different lenses.
So to use one of your favourite sayings, whatever floats your boat.
Regards, Ram
I agree with Paul, I have just looked at my local area for houses and Purplebricks has 1/3 of the sales which is quite surprising as I bet many people don't even know about them yet. I have always thought the traditional estate agent should have been replaced years ago by online selling. I think the next recession many of them will disappear. I can't see AO World (LON:AO.) dominating selling, there is too much competition from retailers.
Funnily enough Paul the way you talk about AO World (LON:AO.) today is similar to how you spoke about one of your favourite companies, Gear4Music earlier in the year:
"It's selling generic product (musical instruments & equipment), so the gross margins are very low ... this is a box-shifting business basically" [SCVR 4th March 2016]
Is Gear4Music really radically different from AO World ?
Hi PJ0077,
I deepened my research on G4M, including meeting management. Hence once I learned more about the company, it became clear that it was a great investment. It's more than doubled in a few months, so can't say I'm worried.
I discovered that the gross margins aren't bad (at 32%, higher than the published 26%), and that the company is achieving spectacular organic growth, in a niche where it has expertise developed over 13 years, against sleepy competitors. G4M's European growth is over 100%, organically, before it has even opened its new European distribution centres.
AO World is a lousy company, as it struggles to make 10% margins. It's a waste of time, as it tries to give better customer service too, which costs money (2 drivers, etc).
My views on stocks are dynamic - they constantly change, as I'm constantly learning. So it's no good referring back to my previous comments, and saying oooh that's inconsistent. Of course it's inconsistent, because I've developed my understanding. Hence every update will reflect my current view, which may be right or wrong, and may be different from my previous view.
Paul.
Re Communisis (LON:CMS) - well, numbers would have been very nice but I suppose they'll claim confidentiality. Maybe things are starting to look up here - big pension liability which should be slightly less of a concern now that interest rates appear to be heading higher.
CMS, from ADVFN thread:
>>Would be nice to know the amounts involved ...>>
CMS are a large (the largest?) customer of mail services, and there was something on the old thread about the preferential rates that allows them to negotiate. If they were to get paid the current 2nd class postage rate of 55p for each document, including postage (complete guess) then that would appear to add roughly £102 million to turnover, getting on for 30% of 2015’s revenue. Let's hope they've got their sums right.
Edit: I'm told that 30p might be a better guess. Sounds v cheap, given the size of much of the mail I get from HMRC, but If so, that would add roughly £55m to turnover.