Small Cap Value Report (18 Dec) - WAND, TLDH, LZYE, DEB, INB

Wednesday, Dec 18 2013 by
14

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…

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WANdisco is a distributed computing company. The Company, provides a LIVE DATA platform, WANdisco Fusion, powered by its patented Distributed Co-ordinated Engine, DConE, technology. WANdisco Fusion enables the replication of live data to the cloud and on-premises data centers with guaranteed consistency, continuous availability and no business disruption. The Company offers a range of products, which solve critical data management challenges prevalent across cloud computing, big data and the source code management markets. The Company’s geographical segments are North America, Europe and the Rest of the World. Its products are used for disaster recovery, migration to cloud, hybrid cloud, analytics infrastructure, multi cloud, Internet of things and security and compliance. more »

LSE Price
660p
Change
3.8%
Mkt Cap (£m)
288.7
P/E (fwd)
n/a
Yield (fwd)
n/a

Minds + Machines Group Limited and its subsidiaries own and operate a portfolio of generic top-level domain assets (gTLDs). The Company operates in the domain name industry and provides end-to-end domain services. Its segments include Registry ownership (Registry), including applicant of top level domain name from Internet Corporation for Assigned Names and Numbers (ICANN) and wholesaler of domain names of those top level domain names; Registry service provider (RSP) and consulting services (segment B), which includes back end service provider for a registry, and Registrar (Registrar), which includes retailer of domain names. Its portfolio is focused around geographic domains, such as .london, .boston, .miami and .bayern; professional occupations, such as .law, .abogado and .dds; consumer interests, including .fashion, .wedding and .vip; lifestyle, including .fit, .surf and .yoga; outdoor activities, such as .fishing, .garden and .horse, and generic names, such as .work and .casa. more »

LSE Price
7.2p
Change
 
Mkt Cap (£m)
57.4
P/E (fwd)
20.6
Yield (fwd)
n/a




  Is LON:WAND fundamentally strong or weak? Find out More »


24 Comments on this Article show/hide all

rick 18th Dec '13 5 of 24
2

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.

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Paul Scott 18th Dec '13 6 of 24
3

In reply to post #80023

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.

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AlanJenkins2 18th Dec '13 7 of 24
1

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.

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fredericktug 18th Dec '13 8 of 24
1

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

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Paul Scott 18th Dec '13 9 of 24
1

In reply to post #80026

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.

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mikehunt 18th Dec '13 10 of 24
1

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

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cyberbub 18th Dec '13 12 of 24
3

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

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Susan Marmor 21st Dec '13 13 of 24

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

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cig 21st Dec '13 14 of 24
3

In reply to post #80103

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.

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Susan Marmor 21st Dec '13 15 of 24

In reply to post #80104

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

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cig 21st Dec '13 16 of 24
3

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.

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Paul Scott 22nd Dec '13 17 of 24
2

In reply to post #80103

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.

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Susan Marmor 22nd Dec '13 18 of 24
1

In reply to post #80112

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

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cig 22nd Dec '13 19 of 24

In reply to post #80113

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.

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Susan Marmor 22nd Dec '13 20 of 24

In reply to post #80115

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

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fek47 31st Dec '13 21 of 24
8

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!

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Paul Scott 31st Dec '13 22 of 24
8

In reply to post #80193

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?

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Sully8786 2nd Jan '14 23 of 24

In reply to post #80194

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.

Company: Dave Sullivan - Talking Stocks
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Sully8786 3rd Jan '14 24 of 24

And Next are upping their guidance.....

Company: Dave Sullivan - Talking Stocks
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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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