Small Cap Value Report (18 Dec) - WAND, TLDH, LZYE, DEB, INB
Good morning! Apologies for being a bit late today - this was due to having several too many sweet sherries last night with one of my brokers, who kindly ventured down to Hove for our annual Christmas dinner. I do believe in getting my money's worth, so no turn was left unstoned!
We actually got thrown out of the Pub, for "slurring too loudly", and audibly swearing. We contested this summary justice, as we were the only people in the Bar, but the Manager's decision was final unfortunately. It was probably for the best.
So it's an unusually brisk canter through this morning's results, and there are thankfully very few published today. I've noticed that a lot of highly rated, speculative stocks have really come down to earth (or part of the way anyway) in the last couple of weeks. I tried to get a borrow on WANdisco (LON:WAND) (as reported on Twitter on 3 Dec) in order to short it at 1524p, but unfortunately my broker was not able to find any stock for me to short against. Pity, as it's dropped to 1215p (down 20%) in the last fortnight. The valuation still looks bonkers to me, at nearly £300m. Turnover is growing, but so are losses, so the market cap looks wrong by a factor of more than ten to me. Although I don't understand what they do - I only look at the figures.
The convention here is that I won't mention stocks that I have actually shorted, as apparently it upsets some readers too much - who haven't grapsed that anyone is perfectly entitled to go long or short, and that shorting is an essential part of a healthy market, as it keeps a lid on speculative valuations, and thus pricks bubbles as they form.
That said, shorting is not something I generally do, as timing is everything, and if a share price is already wrong by several hundred percent, there is little to stop it getting even more wrong - just look at the TMT lunacy of 1999-2000, where £trillions of wealth was spuriously created out of thin air, and then vanished again during 2000-2002 when the bubble burst in Mar 2000. I'm hearing a lot of echoes of that period right now actually, so am treating those sounds as a warning to be careful, and am standing close to the exit on my more speculative positions.
Another market cap that rellies on jam tomorrow, is Top Level Domain Hldg (LON:TLDH), currently valued at over £100m at 16p per share, despite only generating £0.4m in turnover last year, and a £3m loss. I can't make head nor tail of their update today. Looking at their interims to 30 Jun 2013, turnover fell to just £7k, with an operating loss of £1.9m. So they seem to have a mountain to climb just to get anywhere near breakeven. Investors must be very certain about the story here, to attribute it such a high valuation. Not my cup of tea at all.
We are reminded of the dangers of a weak Balance Sheet (and the high risk associated with overseas companies listed on AIM) with today's announcement from LZYE (LON:LZYE). This is a Hong Kong based childrens' activity company. The shares have been a disaster for anyone daft enough to own them, having dropped from 10.6p to 1.1p in the last year. They are down 42% today alone, with a statement indicating that a Chinese investor is looking at buying shares at 1p, and if that deal falls through then additional funding will be needed from a major shareholder. Looks an absolute crock.
This might be a good time to look at retailers' shares. The unusually mild weather means that sales of clothing are likely to have been slow. However my experience in the sector is that, whatever the weather, big sales always happen before & after Christmas. In particular, the boom in sales gets later & later every year, and the week immediately after Xmas gets bigger & bigger. So there might be a relief rally after Xmas in retailers' shares. Even if they do have a slow December, so what? It might hit profits this year, but they will bounce back next year. Plus in an improving economy, consumer spending should rise, although that's likely to be a middle class thing I reckon, as they are the only people likely to see an increase in disposable income in the foreseeable future.
It's not a small cap, but I particularly like the cheap valuation at Debenhams (LON:DEB), and their rapid online sales growth is impressive. There's a chance that investors might sit up and take notice at their substantial online business, and its affluent client base, which could perhaps drive a re-rating. That said, the shares have been very unkind to me so far after buying in recently at a spectacularly ill-timed 102p (they are now 81p). There could be a profit warning on the way, so I'm bracing myself to ride out such a possibility.
Interbulk (LON:INB) has published it results for the year ended 30 Sep 2013. Their shares are down 8% to 6p, valuing the company at only about £26m. However, it has a dreadful Balance Sheet, with net debt of £69.5m, and tangible net assets are negative to the tune of almost £38m. That's not an investable situation in my book.
Note that the interest cost of £5.8m consumed most of their £8m operating profit. The £15.1m exceptional items are mainly non-cash impairment of goodwill, so that's OK. The danger is that rising interest rates could prove calamitous here, so I'd want to see the Balance Sheet repaired with a substantial equity fundraising before considering investing in this.
That's it for today. Sorry I was late - will be bang on time tomorrow, as I have a long trip for another Xmas lunch to attend. It's a hard life!
Regards, Paul.
(of the companies mentioned today, Paul has a long position in DEB, and no short positions)
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24 comments
And Next are upping their guidance.....
Oh dear! Doesn't look like long Debenhams (LON:DEB) , short ASOS (LON:ASC) was such a good Christmas tip "DYOR" after all!
Glad to have steered clear of these two car crashes!
Debenhams (LON:DEB) looks great value to me after today's profit warning, which wasn't as bad as I had feared, and had been widely known about in advance (hence the recent departure of the FD). So I shall be buying some more later this week. After all, this game is all about BLASH! The exciting thing about DEB, is that they have a very strongly growing, and significant-sized online business. The value of that is currently being obscured by the physical stores. At some point though, the market will wake up & realise that DEB is one of the top online fashion retailers in the UK, and also pretty much the cheapest.
As regards my short on ASOS (LON:ASC), I opened it in the full knowledge that it would be impossible to time to the exact top, so am perfectly happy to absorb any drawdown on it, up to & including about £75 per share. So a drawdown from £52 to £61 is of absolutely no concern to me whatsoever.
I've never claimed to be able to time the market. Perhaps as you clearly don't seem to understand that, nor the ethos of DYOR, then you should go elsewhere and read comments from traders, rather than longer term investors such as myself?
Hi Paul,
I agree that Debenhams (LON:DEB) looks cheap at the moment and it currently occupies around 2.5% of my portfolio.
My concerns were that the FD has been shown the door and there's blood on the boardroom floor, makes you wonder what has gone on behind the closed doors?
Next, the slip in online sales and margins, still decent growth but less than previously reported, a trend downwards??
Finally, the fact that John Lewis and HOF seem to have had a decent Christmas, again gives cause for concern....is this a company specific issue?
I believe that next reports tomorrow, I'll be watching.
Not sure if I'm a buyer or a seller until I can make a proper assessment.
Best,
Sully.
A pub offering free beer would get a long queue in front of the door but it's not a sustainable business model. And the number of preorders is not a good hint of the number of interested people, as some script kiddies will inevitably book (it's free!) all the words in the dictionary, etc.
Can you name a single well known airline that uses. aero? On the face of it it's a good idea, but it's been available for some time and nobody is interested. Same for the whole batch of tlds introduced during the last round.
Paul - re TLDH - on the face of it what you write is correct, reality has a long way to catch up with the valuation. However, dare I say that you have been a bit lazy and that just a modest amount of research would have shown you why the price is where it is.
The internet is in the process of major change. You and I have grown up with .com and .co.uk but over the next few years there will be over a thousand new top level domain names. .London, .Miami, .horse, .best etc. I don't know how much impact it will have on existing domain registrations but I can certainly see that going forward people will benefit from a better chance of getting the domain name they want. PaulScott.best is available for registration now.
TLDH has been bidding for top level domain names and will benefit from every domain name registered using the names they win. The bidding process itself is lucrative because winners have to pay the losers! It gets better because they also manage registrys for other top level domain name holders....
....there is no way to determine what revenue will come in or how fast. The process is a bit slow and is being staggered (I don't know why).
Anyway....TLDH will be the 4th largest owner of top level domain names and the investor assumption is that they will have an annuity type income coz we all re-register our domain names. They may never be the same size as Verisign (owner .com) but they will be of some size if if if - or when when when - people register these new endings.
In my opinion I think TLDH will be bought within a few years....the question is what multiple of that annuity income will be paid?. We don't have any numbers to work with so it's all guesswork but in my very humble opinion as TLDH moves towards revenue phase (registrations have started), the valuation may very quickly not look as stretched as it does today.
Perhaps you could spend half and hour doing some research and see if your view changes.
S
The problem here is that this is a 1996 business model. Now everybody looks up things via google or bookmarks and nobody cares about top level domains. And those who do care don't want their habits (most stuff in country domains or .com) disturbed. And an increase in supply is not exactly going to put pressure on prices, and makes domain squatting (people buying speculative registrations they don't use) even less profitable, so the entire domain market may shrink in dollar terms.
Well, that's a valid view but 1&1 shows that 4.25m people already disagree with you. Of coursewe can't verify that number, nor do we know whether all those people will pay up when the domains go live but it does show some interest. And don't forget that there has been precious little publicity to date.
http://www.1and1.co.uk/new-top-level-domains?ac=OM.UK.UK274K26125T7073a
Hi Sue,
Thanks for your comments.
I only do a quick review of the figures here, so will often miss nice growth stories.
All I would say with different domain names, is that historically they have been tried, and have been proven virtually worthless. I registered pilot.info many years ago (10 years or more) and there was minimal interest in it. So little in fact, that I gave it up for free.
What has changed? Loads of alternative domain names have been tried, and all have failed. .tv, .eu., etc.
All you need is .com, and lots of hits, and you come up top in Google.
Happy to be educated, so pls go ahead. In the meantime, I'll wait for profits & cash to value this company.
Regards, Paul.
Cig/Paul - yes, historically you are correct but things change. I've had doubts about these new top level domain names myself but on balance I think I accept that change is coming. Too much money has been spent for this to fail. Huge sums are changing hands to secure the domain names...so I think what's going to happen....indeed I have been told this is going to happen, is that search engine algos will be changed. If you search for a builder, or whatever, in Hampstead those with .builder will come up before .co.uk/.com.
Anyway, I was a buyer around 8p in 2011 and sold for a loss. I came back to it in 2012 and have traded in and out; with my best buy at just over 5p. I sold at the recent top and am buying back in, albeit slowly, because the one thing that isn't clear is the exact time-line for launch.
Anyway, I know we have different investment strategies....so let's meet again here in six months and see where we are.
S
If your timeframe is six months you can do well, you just need to find greater fools to sell to. I have no opinion on this, it's just the long term prospects that are abysmal.
There is little chance that google will change the algo favourably, on the contrary if people start to do search engine optimisation based on new top level domains, they will weight them down. Google's very survival is dependent on winning the SEO arms race so they're unlikely to allow people to own their ranking the way you suggest.
As for "too much money has been spent for this to fail"... come on.
Google is reported to have applied for 100+ new top level domains....obviously some excitement there then!
Of course they won't allow people to own their own ranking...that wasn't what I was suggesting at all.
I don't think you have a concept of how much money has been put into this.....it's not the same as .info, .eu etc.
Anyway, it's been good to chat...we really do need to wait now to see what happens over next 18 months.
S
Paul thanks for another insightful article.
I do take your point about being very wary of companies with high valuations and no profits... or even no revenues! It's all about whether one is a 'value' or a 'growth' investor though... obviously you generally tend towards the former.
I am currently holding Quadrise Fuels International (LON:QFI), which has a £300M valuation with zero revenue, which I admit does make me nervous (having held since 5p is a bonus though :-) ). However on a 2-year timeframe it could be only on a P/E of 8-10 or so, and may even start paying a maiden divi then... and on a 4-year timeframe could be on a P/E of just 2. Quadrise Fuels International (LON:QFI) is also playing with the big boys, literally some of the biggest companies in the world, and has strong IP protection and exclusive agreements etc.
I would agree with you that a high percentage of companies in this sort of situation are due a nasty shock. But as mentioned above, companies like ASOS or even Twitter are perceived to have such a huge brand, significant market landgrab and/or IP protection, and massive online presence, that investors are prepared to pay upfront for future growth on a 3-4 year horizon or even longer. I suppose institutional buyers who are looking for eventual divis and are quite happy to wait, may buy shares that are overpriced for today's revenues, especially if stock is tight and there is not much likelihood of a discounted placing.
All very interesting,
Have a great Christmas and thanks for all your articles in 2013!
Cyber
Merry Christmas from Debenhams. Ho! Ho! Ho!
http://uk.advfn.com/newspaper/lou-gutheil/23397/merry-christmas-from-debenhams-ho-ho-ho
Yes it looks like unfortunate timing with DEB, down another 4% as we speak - I wonder what bad news if any is on the way or whether people are just nervous of the XMAS trading
Hi Paul,
Just wondered what methods you use to go short? Do you have a preference and any views on say a spread bet or CFD as a method? Are you able to short simply via a quality full service broker?
Best,
Mark
Hi Mark,
I'm not really the best person to ask re shorting, as it's very unusual for me to short anything.
Indeed my current 3 short positions are the first I can remember doing for several years.
But personally I find that Spread Bets are a convenient method for shorting. Although as always, with SBs you have to be terribly careful with gearing - as you can be right about something in the long run, but forced to close on a short term adverse price movement, if you use too much gearing. It's safest not to use any gearing at all - there's no obligation to use gearing with a SB a/c, it's entirely optional.
Cheers, Paul.
If Debenhams would only cut their dividend and repay some debt instead,that would be good for the company long term.True,the shares might take a short-term hit,especially as high-yield funds might sell - but that would present a decent buying opportunity for you and I.Sadly,it's unlikely to happen.
Debenhams bullies suppliers. Imposes 2.5% discount on existing contracts according to The Times.
Maybe their Xmas sales or margins under pressure? But this is far from being positive news. Suppliers might hit back.
Hi Rick,
Imposing retrospective discounts is a very unfair practice. It doesn't work in the long run, because suppliers just bump up prices to compensate for it. The best way to operate, in any sector, is to work in partnership with suppliers, with open book pricing, and allow them enough profit to make them want to deal with you & give decent service. Screwing them down to nothing just incentivises them to cut corners, which will end up hurting product quality & brand reputation.
Cheers, Paul.
Your last paragraph shows why I thought it was wrong to short ASOS. I don't understand why you would ignore John Maynard Keynes quote from at least 50 years ago that ""the market can remain irrational longer than you can remain solvent". ASOS is increasing sales at more than 15% on last December apparently. People respond to that sort of number, even when something is very overvalued.
If you are only interested in the figures you should look at What works on Wall Street. The tables clearly show that the momentum of high relative strength low price-sales ratio stocks (or if short, high price sales ratio and low relative strength ) pays over the very long term (60 years, rebalancing every 12 months). I wouldn't buy ASOS now, but I wouldn't short it. Equally WAND is probably a better candidate for a short now it is moving down, but I would want to wait until it hit a yearly low AND the figures and predictions were failing to come through as expected. The trouble with that sort of stock as a short is they are at least a growth stock - shorting is aboiut concentrating on the real donkies balance sheet and revenue growth-wise.
Hi FunnyMoney,
I take your points, but my short on ASOS was very much sized with the possibility of being considerably wrong for a time in mind. So I very much CAN stay solvent, pretty much whatever the share price does. I wouldn't think of closing even if the price rose to say 7500p+, as it's impossible to time these things exactly right. But I'm increasingly convinced that I am right - the valuation is complete lunacy. Great business, but ridiculously over-valued. A sensible price is sub 3000p in my view, and sooner or later that's where it will end up - you can't defy gravity forever. Famous last words!!!
Regards, Paul.
Paul
I'm interested in your convictions. (I don't mean the ones for being drunk and disorderly!)
If you think a share is going to increase in price, and you buy it, that's a salient piece of market information. (More so than if it came from the average bloke being thrown out of a pub.) If you think that a share price is going to decrease, and you short it, so is that.
What's the difference? I for one am always very interested to hear your thoughts, positive or negative. One more piece in the puzzle of what to invest, or disinvest, in.
Should I not comment again before next week, have a great Christmas, whatever misdemeanours you get up to! And thanks for all the insights.
Kevan
Hi Kevanp,
My opinions on stocks are not price sensitive information. It's just one person's opinion. Sometimes the market agrees, and sometimes it disagrees. That's it really.
Wishing you a merry Christmas too.
Regards, Paul.