Small Cap Value Report (16 Dec 2015) - BON, TUNG

16th Dec '15 by Paul Scott

26 comments 20231 reads

Good morning!

The UK small caps market feels very strange to me at the moment. It seems to be over-reacting to both good, and bad news. So companies which disappoint seem to be punished with a big, often excessive, and prolonged sell-off, whilst companies which report good news seem to keep going up, far beyond what seems a normal, or reasonable upside reaction.

So the market seems to be getting very polarised - growth companies now seem terrifically expensive to me (so inevitably some will crash in price if anything goes wrong), whilst companies where there is any temporary bad news are being sold off really aggressively - I'm starting to see some really interesting bargains appearing, if you're prepared to look through temporary bad news.

There are also completely spurious spikes down occurring in a lot of smaller companies at the moment, which is really perplexing, but probably due to lack of liquidity, and a high number of market participants using trend-following strategies.

Utilitywise (LON:UTW) was a good recent example of extreme volatility - the price rose from c.180p to c.200p on recent results, but then turned round a few days later, and plummeted from c.200p to c.120p. Then it bounced on a positive AGM statement this week to 171p today. Utterly bizarre stuff - it's presumably down to short term traders stampeding in & out of stocks as a group.

This makes a mockery of any sort of charting analysis of course, as it's increasingly looking as if the traders who are moving prices don't know anything about the company concerned, or how it's actually performing. This is encouraging in a way, as it means that share price falls are not necessarily a cause for concern, but could actually be good buying opportunities. Therefore I'm focussing my attention now on using spurious spikes down to buy companies that I like.

Often the right thing to do is the complete opposite of what your emotions are telling you to do, so it's important to overcome the fear associated with buying when things look bad - but crucially, only for fundamentally sound companies, not speculative ones.

Mild weather

Which brings me on to the exceptionally mild weather. I can't remember the autumn & early winter ever (in my lifetime) being this mild, it's still almost T-shirt weather, 9 days before Christmas. That will undoubtedly be causing chaos for fashion…

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Paul Scott

16th Dec '15

Jane,

Yes that's true, but the outlook comments from SuperGroup today suggest that they are still doing well. I did check that before commenting! ;-)

Regards, Paul.

Ramridge

Re. SuperGroup (LON:SGP) , Supergroup's earnings are very weighted toward the second half ( as they should).
From FY2015 accounts:
total underlying & diluted eps = 58.8p, (HY1 = 11.8, HY2 = 47.0)
So with a mild winter this year, they need to run hard to make up 2016HY2 earnings.

All IMO & DYOR

tjl

I'm not long long (or short) (LON:BOO) but apropos many posts on the subject I can say my 15-year-old daughter seems to constantly swiping through clothes on the Boohoo app on her iPhone.

daveinthelakes

I am wary of clothing retailers in general as the trend emanating from the USA of younger people spending more of their cash on experiences such as eating out, holidays etc and their retail spend more oriented to tech than fashion is likely to become an ever increasing factor. The retailers who may benefit from this are those in fast fashion which could bode well for Boohoo?

Hi tjl,

Indeed that's exactly what Boohoo.Com (LON:BOO) is trying to do - it's impulse & frequent purchases of cheap but fashionable clothing, for the core customer who is 16-24. It's a very different business model to the High Street stores, because BOO doesn't pre-plan a range and buy in bulk (thus creating problems of stock overhangs if the weather is unseasonal, etc).

Instead BOO puts up to 100 new product lines on its website every DAY, which is phenomenally high, and then it repeat buys the ones that sell well. Initial buys are just a few hundred in quantity, so if an initial buy doesn't sell well, then there is only a small amount of stock to shift at a reduced price.

This largely unique business model should enable BOO to have avoided most of the pitfalls of being over-stocked with the wrong type of garments, although they won't have completely side-stepped current weather issues, because they will have had to pre-buy some winter clothing for the peak selling period over Xmas & New Year.

It will be fascinating to see how all this pans out, but for me, the business case for BOO is very strong, and it's certainly not one that I'm worried about.

Investors think so short term now, it's crazy. It's almost as if the market seems mainly populated with short term traders, trying to anticipate small movements in prices, rather than taking the long-term, bigger picture view. Still, that should create buying opportunities, as people panic sell good companies on short term worries.

Regards, Paul.

bobo

Bon Marche is not a fashion retailer, just a clobber shifter

Write us up a report on LON:BOO Paul ;)

andrea34

BON down 30% not justified? Maybe it is... it's YET ANOTHER example of a company that has recently come to the market and is already exhibiting disappointment. I am sure the departing executive has done VERY well out of their float.

andrew guppy

Hi Paul,

I am new follow of your posts and they are an excellent read.

Do you have a portfolio of shares you hold in a spreadsheet format that you keep your followers up to date with?

You mentioned about a subscription service and I I sent an e-mail to Stockopedia but I am not sure if they passed it on?

Regards,

Andrew

cig

Paul has a website: http://qualitysmallcaps.co.uk/ including a very informative "bargepole list", which is probably more useful to understand his thinking than a positive list. Publishing a holdings list as a celebrity investor who is not a tipster tends to attract the wrong kind of attention.

Hi Paul -
Re. Tungsten (LON:TUNG) I think you hit it on the nail with your last sentence. The company has no business model and therefore it is just burning £20 notes at a rate of knots. You can't invest in a company that cannot demonstrate how it can make a profit, let alone by when.
Regards, Ram

Cisk

Hi Paul, couldn't agree more with you on your last sentence.

I was reading the ADVFN board on Marston's (LON:MARS) the other day - there's someone on the who said 'told you so' when he predicted the shares would let off some steam after a good recent run (including some good results), and then said they would tread water until the traders were back into the stock, which wouldn't happen until the new year.

They did come off a bit, but low and behold they're up smartly today, over 3% at time of looking. I'm not saying it just to disprove the poster on the board, rather to support the fact that I leave trading to traders, I buy because I like the fundamentals of a company and believe in its prospects.

Short term market noise is what it is - it's just rather sad that so many devote so much effort into maximising profit on short term share movements rather than being in it for the long term.

Brackendale

French Connection also put something out the other day saying they expect sales through this period to be good, which doesn't square with the concerns about mild weather. Hope they are right - I am certainly not looking for yet another "buying opportunity" with those shares!!

Hi Paul, That seems like a great model but what I don't understand is why Boohoo's ROCE is half of, say Ted Baker. Surely they should be well above that with this lower risk business model and much less capex? If it is all marketing spend, that is surely an issue?
Thanks

Laughton

Worth a read to all those interested in Boohoo.com - http://fashionista.com/2015/12/boohoo

Hi Brackendale,

Well Boohoo.Com (LON:BOO) has a cash pile of over £60m, so that might suppress its ROCE perhaps?

The marketing spend is an interesting topic. BOO makes a ridiculously high profit margin before marketing costs, something like low to middle 20%'s. It then decides, as a policy decision, how much it wants to spend on marketing, so it's fully under their control (which I really like).

So the CEO can effectively dial up whatever profit margin he wants between 0% and (say) 22% of turnover, by adjusting marketing spend accordingly. That gives tremendous control. Obviously the more they spend on marketing, then the faster the business grows, and the more they shout down competitors & gain market share.

So really, looking at conventional metrics can be a bit misleading, whilst BOO are in the rapid growth phase.

Capex - again, BOO can control this completely. They are buying up warehouses (very cheap!) in the Burnley area, adjoining the existing site, and have gone multi-floors, so basically the business is already geared up for annual sales of £500m+ from its existing logistics site (i.e. more than doubling of existing sales).

After that, there is the question of whether to automate the warehouses. It's big bucks to do that, so the company wants to keep its options open, as well as having some "rainy day" money, hence the £60m+ cash pile. That might suppress ROCE, but I'm not generally a big fan of ROCE, I think it can mislead in some cases, although I appreciate it's a useful metric to consider, along with all the others.

Regards, Paul.

jimbobjames2002

Thanks for the link - shows how savvy Boohoo are when it comes to trying to break into the American market. There's also really impressive Google Trends figures for Boohoo over the course of the last 12 months. I tried to post a link but I got an error message - basically just go to Google Trends, type in 'Boohoo dress' or Boohoo skirt' or any other likely searches and see some nicely improving charts.

IMO even with a bit of warmer weather I think Boohoo will do very nicely in their next set of figures.

17th Dec '15

Hi Paul,
The cashpile! Completely forgot. I will put that down to being distracted by christmas shopping. Do you know, I think you have convinced me - or should I say piqued my interest - on Boohoo? Will now look into it properly, thanks for the help.

Thanks for link Laughton

janebolacha

3rd Jan '16

Here it is, what we've all been waiting for, perhaps another future investment "opportunity" from the people who brought you the (cough) revolutionary, transformative, innovative Tungsten Corporation:

http://www.telegraph.co.uk/finance/newsbysector/energy/12072682/Britain-to-share-more-electricity-with-France-and-Ireland-under-new-City-scheme.html

"Mr Truell is raising £200m to fund initial work on the new projects"

I wonder how much of his own money "Edi" is putting into this one.
How can he still show his face in the City?
How can he still be taken seriously?

Small Cap Value Report (16 Dec 2015) - BON, TUNG

Mild weather

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Paul Scott

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