Small Cap Value Report (16 Jan 2017) - WAND, VLK, REDS, TAX, MBH, SQS, ASHM, OMI

16th Jan '17 by Paul Scott

55 comments 27324 reads

Good morning!

Today there will be one report. I'm (Paul) writing most of it, but Graham is likely to add a couple more sections later this afternoon. We often add more sections in the afternoon & evenings, so it's worth checking the previous day's report to see if there's anything that you've missed. The quickest way to do that is to bookmark the SCVR landing page, then glance down at the tickers, in the blue boxes, to see if any are of interest.

There's been more fun & games with forex over the weekend. I see that sterling briefly dipped below $1.20 first thing. Now that the uncertainty is out of the way over hard Brexit, it wouldn't surprise me to see sterling rally somewhat. Once people have certainty, they can plan accordingly. It's uncertainty that markets dislike the most.

Anyway, we're used to the drill by now. Weak sterling is good for the FTSE100, good for exporters & UK companies with overseas earnings. It's bad for importers. So as long as our portfolios reflect this, then we should be doing well. Also of course all the UK indices are at or near new highs, so everyone should be doing well. How long that will carry on for, who knows? It does all feel a bit toppy to me, but as long as companies are reporting positive trading updates, then I'm happy to run with them.

WANdisco (LON:WAND)

Share price: 269p (up 20% today)
No. shares: 35.1m
Market cap: £94.4m

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

Trading update - this former glamour tech stock has had a rough couple of years. That's because top line growth stalled, and heavy losses made it look as if the writing was on the wall. However, perhaps surprisingly, investors continued to pour money into it, in several fundraisings. Overheads were cut considerably last year.

So, as I mentioned in my last report (Oct 2016), the key to survival is to start generating some decent top line growth. Today's update delivers strong growth. It's the first genuinely positive statement I can remember from this company. Hence why I've dipped my toe in, with a smallish very speculative purchase this morning. If the facts change, I change my mind. Mind you, I can never really be sure with this company what…

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jonesj

16th Jan '17

The "poorest" in the UK now have amongst the highest living standards of the "poorest" anywhere in the world and at any time in history.
Those who choose to be permanently unemployed will have standards of living considerably above those of working people in many countries in the world and above what the average worker here enjoyed a century ago in our own country.
Looking forward, once we have burnt all the gas that's near to hand and allowed the world population to swell by a billion or 2 more, both food and energy costs will go up substantially. Incidentally, the government is borrowing irresponsibly to pay existing bills, so making it more difficult in the future.

It's not going to get any easier unless people work hard and we haver smart economic policies.
Those policies need to encourage work, investment and our own wealth creation. So you need low taxes and some kind of income gradient to actually reward work & enterprise.

Right now, there is so much taxation & welfare, many of our jobs are filled by incomers, whilst others intend to remain on the dole.

Since we are already running a large balance of trade deficit, the economy seems not to be competitive. Hence devaluations.

Transferring more money to those who are not helping the economy to be competitive is really not going to solve the problem.

Paul Scott

Hi Tabhair,

Also, I think there also has to be a certain irony that the stocks that Paul holds/held that are perceived to be value in his portfolio (SpaceAndPeople, Fairpoint, French Connection, etc) are those that have probably held back his performance if anything!

Exactly! Standard value investing really hasn't worked at all well in the last few years. In most cases, when you search for low PER, high yielding stocks, you usually end up buying something rubbish, which then goes on to disappoint repeatedly. So it wasn't actually "value" at all. It was a business in decline, and the forecasts were too optimistic.

I'm only interested in making money from the market, not rigidly sticking to a strategy that isn't working! Hence why I'm currently putting much more emphasis on growth stocks. As we've seen with Boohoo.Com (LON:BOO) and G4M, these have been fantastically profitable investments (both 5-baggers to date). I'm delighted that many readers of this column have enjoyed the big gains from these stocks which I flagged up here.

The trick has been to spot shares which are on track to beat market expectations on growth & earnings. This has led to enormous share price rises - from the double benefit of rapidly rising earnings (above forecasts, repeatedly), and expansion of the PE rating too. A beautiful combination!

When the current bull market tops out, I'll ditch my growth stocks, and move into cash.

Then when the next bear market bottoms out, I'll go value hunting again.

In my view, it's good to be flexible in your approach, if you want to maximise your portfolio returns in various market conditions. Right now, the market is going crazy for decent growth companies, with big potential upside. So that's what I'm focusing on, and it's working rather well! (for now, anyway).

I appreciate that WAND is more speculative than anything else I've gone for, and usually I wouldn't touch a loss-making company. However, as explained in the article, the big increase in bookings, and the big name clients, suggest to me that this could now be a good turnaround. Time will tell! It raised money quite easily last time, so that tells me the Instis buy the story. So it should be able to raise more money fairly easily again in 2017.

I think everyone secretly likes to have a little excitement in their portfolios, and why not, if you pick sensibly?!

Regards, Paul.

Modform

Paul,
I am quite bullish on WAND, I bought a decent position when you called it a dog that needs to be put down and the SP dropped below 100p. I believed and still do that their products for big data is head and body above the rest.

TAX, bought in last week in anticipation of better than expected statement but was quite disappointed with the rns. Again I think their products are very good, the fundamentals look compelling to me, low per, high recurring revenue of 90%, customer retainment of 95%, and profit margin of over 50%. Also the business growth fund, the guys behind VCP STY SAT have 10 million quid invested.

ricky65

Fair enough. I can see the appeal to short term traders (I note the chart breakout). Personally I don't see this succeeding long term. I don't see it turning a profit; its going to take a lot more than a breakeven Q4. WAND has been a serial disappointer for 5 years so I think it's odds on that it will continue to disappoint. Having said that I wish you and all holders good luck!

biloseli

I looked at Tax Systems (LON:TAX) in August. They make AlphaTax, which seems to be more or less a standard at larger accountancy firms. My wife used to work in one and used AlphaTax daily. She said it's pretty good. Big companies don't use e.g. Sage because you can't trace where a calculation has gone wrong, or deal with more complex situations.

My notes from August show 90% recurring revenue, which tallies with what my wife told me: that they get software updates every year to cope with the latest changes in the UK tax code. I was concerned that revenue growth looked to have stalled over the preceding 3 years, which suggested to me that everyone who was likely to buy it already had. Another yellow flag was: admin staff when from 4 to 7 in 2015, but support and development staff (presumably programmers) and - crucially - sales staff reduced over the prior 3 years. Again, that felt to me like a mature company with not much growth left in it. Like you, Paul, I didn't like the capital structure (debt, warrants and deferred shares).

The only bright spot I could see was the involvement of Gavin Lyons (formerly Accumuli, which was sold to NCC) coming on board. He seems to have a buy-and-build track record, but I noted at the time that his options on 3% didn't feel like much skin in the game.

I don't hold.

Hi ricky65,

I think WANdisco (LON:WAND) is displaying signs that it might have turned - the chart (which of course measures market sentiment) is looking positive now. The fundamentals (as reported today) are improving considerably (although it's still loss-making & cash-burning).

So personally my approach with this is to take a long position now, and see how things develop. It's in an up-trend now, on improving fundamentals, so I'm going to just run with it now, for the foreseeable future. If the fundamentals and/or the chart break down, then I'll ditch it.

So it could be a short term, or a long term holding, depending on how things develop.

I don't see any significant risk of it going bust now. Whereas people buying sub 100p were just gambling that it would be able to survive, despite appalling fundamentals. I think it's a much more sensible proposition now, for growth investors, not value investors.

Just to emphasise, it's only 2% of my fantasy portfolio, and my real portfolio. So not a conviction buy, more a speculative starting position.

Regards, Paul.

Interesting point.

Perhaps the concern extends to the increased risk of a breakup of the EU as a trading bloc? I expect most would view the EU's value as more than the sum of its parts.

No strong opinion; just thinking aloud.

ds1980

It always amazes me that people criticise this blog because they think it's the writers prerogative to reason everything they do and say. Imagine spending your own time writing something for nowt day in day out. Beggars belief.

Hi ds,

Thanks, but I do get paid a modest fee for writing these articles. Mind you, I mainly do it because it's enjoyable, and mentally stimulating. Also because writing down & publishing my thoughts about shares & thus opening them up to public scrutiny, really makes me think a lot harder about everything. Plus the reader comments are invaluable at filling in the gaps, and sometimes making me change my mind.

So it's all good! Even better now I have Graham helping out too, sharing some of the workload & letting me have guilt-free duvet days most Fridays :-)

Regards, Paul.

rhomboid1

Re Ashmore I much prefer a relative tiddler Impax Asset Management (LON:IPX) , cheaper on many metrics but more importantly growing AUM rapidly 12% in the last quarter http://www.investegate.co.uk/impax-asset-mngmnt--ipx-/rns/aum-update/201701100700087292T/ in an interesting sector ,

Thx for the supplementary commentary

Absolutely but criticising every move just grinds my gears that's all. Needed to get it off my chest. As an aside to this I'm a youngish 'investor'/'gambler'. Never read a book just a few forums. Couldn't tell you what a company does that I Invest in most of the time let alone it's PEG, PE RATIO or its net gearing etc. Not a Danny la rue. never read a rns, annual report or anything else. I'm 9 years or so into my first real investment life (relative pennies to most of you guys I'm sure) but have returned over 9% p.a. To date. I have no rhyme nor reason to shares I buy. I've never sold as the shares will be for the kids if they behave themselves but only when I'm gone. Lucky maybe in a rising market but I think I'm proof that investing doesn't need to be difficult or as complicated as people like to make out. No one knows what'll happen tomorrow so I see little point in guessing. Far better things to do although being out of work i should probably be doing more than watching the racing ( I don't sign on before anyone asks or take benefits )! Keep up the good work.

Paul, thank you for the replies. It makes more sense to me now. I can see the advantage of being fluid in one's opinion on a stock rather than rigidly sticking to one position. As you said, I think most of us secretly like a little speculative excitement. You've warmed me to it - who's to say it couldn't go on a great run back up to 1500p for a 5-bagger? I hope I didn't offend using the word "fickle" in my original comment. I think I misunderstood your idea of a bargepole stock as "never investable".

17th Jan '17

Hi Ricky,

Thanks for your reply. No offence taken!

Just to reinforce the point, my views on all stocks are based on all the information I have to hand about that company, at that particular point in time.

So when new information comes out (especially trading updates and results statements) that significantly changes the outlook for a company, then I change my view on it.

Based on its historic figures, WAND was a total crock. Very much a bargepole stock that looked like it would go bust when investors tired of pumping cash into it.

However, it looks as if things are changing now, based on today's update. I take the point of another reader above, that sales bookings will be higher than actual revenues. Nonetheless, WAND is at least starting to look like it could become viable. Indeed, if revenues are entering a strong period of growth, then it could become highly profitable, who knows?

Therefore, my stance on it has changed. It's no longer a bargepole stock, due to the positive update today, and the likelihood that it will be able to raise a bit more cash to make it to breakeven possibly?

I'll ask my broker to send me the updated broker notes.

Still speculative, and the market cap is very high in the short term. It's been a dismal performer in the past, so a degree of caution is needed, I think.

nicktudor

Have held SQS for a number of yrs - approximately 15% of rev's are UK generated, 55% of rev's are Euro denominated. Co is focusing on US expansion with 2 recent acquisitions, early days but signs are positive. They are conservatively managed (German) & modestly rated, 14.7x for FY17, brokers are bullish, most recent - Singer 865p, Panmure 771p. Always been a little bit off the radar but worth a look imo.

FREng

Ashmore (LON:ASHM) had roughly twice the ROCE and ROE in September 2013 compared with today (I have just checked the history on Stockopedia). Why has it reduced so much? The total share numbers are about the same.

herbie47

18th Jan '17

I notice WANdisco (LON:WAND) is up 33% today on no news.

smatthews1

4th Feb '17

I must admit I found this statement confusing, I don't understand why they report a 'falling output' when there is supposed to be a housing shortage? Either they are not a preferred supplier or the pent up demand in house building hasn't really materialised yet?

They also commented back in July it was a 'flat market'

Although they do comment the order book 'remains strong 5% ahead of last year'.

It seems relatively stable, though maybe this is for the longer term?

Sean

millen

Minor whinge: it would be so much more helpful if posters would say which share they're talking about rather than refer to a post 2 pages earlier, especially in a 'cold' thread.
Thanks

11th May '17

I really don't understand the fall in share price following the full year results. What's happening to SQS Software Quality Systems AG (LON:SQS) ?

I have no position, but this looks like a buy to me.

As I just said to smallcappy:

I really don't understand the fall in share price following the full year results. What's happening to SQS Software Quality Systems AG (LON:SQS) ?

I have no position, but this looks like a buy to me.

Small Cap Value Report (16 Jan 2017) - WAND, VLK, REDS, TAX, MBH, SQS, ASHM, OMI

WANdisco (LON:WAND)

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Paul Scott

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