Small Cap Value Report (18 Jan 2016) - BRY, PMP, SOM, UNG, CTG, IGR, BJU

18th Jan '16 by Paul Scott

30 comments 24813 reads

Good morning!

Unusual market conditions continue. I did a lot of reading over the weekend, and if you're not careful, you can end up frightening yourself into selling everything!

I saw an interesting graph, showing that earnings expectations for US large caps have been steadily trending down in the last quarter, from approx. 5% up, to now slightly down. Combine that with China, a dramatic fall in world trade (the Baltic Dry Index is now at an all-time low apparently), distress in the Junk Bonds market (and possible contagion?), the collapse in oil price, and there are plenty of fundamental reasons to be worried.

Therefore I'm not dismissing this market sell-off as just another dip. I reckon "buy the dip" may not work this time, but who can say? If the US economic data turns positive again, later this year, then markets could well get back on track.

Most of my small caps are UK-centric, and focussed on consumer demand, so that should be relatively safe, for now anyway. Also, historically a low oil price has stimulated the global economy, so this might just be a passing soft patch. That's my general feeling right now, but I'll be watching closely for signs of anything more serious happening.

Mello

Last call for Mello Beckenham tonight. There are 2 very interesting companies presenting, so well worth attending, namely IQE (LON:IQE) and Flowtech Fluidpower (LON:FLO) .

Brady (LON:BRY)

Share price: 58.5p
No. shares: 83.0m
Market cap: £48.6m

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

Trading update - for the full year 2015. The background here is that the company said everything was fine on 7 Sep 2015, but then served up a profit warning on 1 Dec 2015, sending the shares down heavily to just 37p. I blasted the company in my report that day.

However, to his credit, the CEO Gavin Lavelle faced the music, and answered investor questions in an interview with me on 21 Dec 2015 in audio form or transcript.

The key thing with a profit warning, is to get the bad news out, and in full. So far anyway, that seems to be the case here, with today's update steadying the ship (i.e. no more bad news);

Highlights:

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Rusty2

18th Jan '16

Hello Paul, talking of Flowtech Fluidpower (LON:FLO) I see they put out a quite good trading update today.

You could be right about Portmeirion (LON:PMP) being taken over by a US company, similar to Aga in some ways. I thought you had sold your holding? My concern is how recession proof they are?

jimbobjames2002

Agreed on Somero Enterprises Inc (LON:SOM) Paul, I’m invested, but can’t summon up the courage to buy more in this climate – cracking company though.

I must admit, controlling the fear is proving very difficult at the moment. I’m trying all that I can to be rational and take emotion out of it, but I guess it comes down to whether this is a genuinely bearish phase that will last or just a blip and buying the dip will suffice.

Can’t say I‘m buying the dips at the moment, I think I’m more likely to sell into the rallies instead to build up a cash position. I only had about 5-10% of my portfolio in cash during 2015, so I’ve been selling before I can buy again. I know buying at the bottom is incredibly difficult to do, but I just want to take some risk off the table at the moment and preserve some of the gains from last year. You can’t go hunting for bargains without some cash in your wallet first!

Also Paul, thanks for asking my question to the CEO and CFO of Proactis Holdings (LON:PHD) last week – excellent interview and another really good long-term prospect, I badly want to buy some but think I’ll wait until we get a clearer picture of where the markets are heading first.

Cheers, James

ACounsell

Paul,

A bit off topic but related to your interviews with CEOs. On December 17th you did an excellent interview with Mark Cambridge at Zytronic (LON:ZYT). He was very positive and the general feedback was very good on what he had to say. In the month since then the shares have fallen c. 20% - I hope your interviews are not the 'kiss of death'. Any thoughts on this significant fall in price?

peterthegreat

I am amongst the small minority of investors inspired by the strategies of a few famous investors who regard mood swings in the market as being irrelevant to investing because you can not predict what the market will do next. About 7 years ago I selected a portfolio of companies which are resilient, so they will survive market turbulence and recessions. Although their share prices may fall heavily, they will bounce back when more favourable conditions return. I selected many of these on the basis of how their businesses (as opposed to share prices) performed during the last collapse of 2007-8 and previous recessions. Quite a few of the smaller ones have significant family ownership so they are conservatively run and have been around for a long time. I hold these companies indefinitely unless something fundamental happens to change the nature of the business (rare). In some ways I am heartened to see that relatively few investors and fund managers adopt this approach as I am effectively going against the herd instinct which I would take as a good sign. Needless to say, I do not have a clue whether the market as a whole will go up or down in the short to medium term, although I do find it interesting to read the views of others who analyse such things, so thanks for the comments about market behaviour.

Happening to quite a few high flyers lately, check out iomart (LON:IOM), Tristel (LON:TSTL), Trakm8 Holdings (LON:TRAK), Ab Dynamics (LON:ABDP), think most is profit taking after a good run and the market situation.

Novice Investor

Hi neils,

How long have you worked for Somero?

Not that I disagree with a word you've said.

Sure, if China was firing on all cylinders and the US economy was flying, it would be great; but how much of China's demand for flat concrete floors do we need to do very well indeed?

Even though SOM is cyclical, I really don't see the SP dropping precipitously, as happened at the end of the last cycle. My bigger worry is a lowball offer at just the wrong time.

NI

JollyBiologist

Plus Mr Bearbull in the IC had a go at Zytronic recently, arguing that the recent results had only added about 10%to the value of the company and that he expected them to come back. I just admit I didnt follow the logic of the article, so ignored the advice - more fool me.

andrea34

Peter,

I think your strategy to investing is somewhat similar to a Warren Buffett principle - one buys shares in a company because it is a good company with a good track record, not because the price has specifically moved in one direction or another.

In the current market I guess it's brave to watch the share price of a good company mauled by the bears and drop a lot of percent...

Regards,

Andrea

I did not see that as I'm no longer subscribe to IC not that I followed Mr Bearbull, I would not take that much notice of IC they get some tips right and some wrong. Had a quick look and Mr Bearbull was negative back in May 2015 saying they were overvalued them when the sp was 300p. Another tip in IC says buy last December.

Funnymoney

I read this 20 years ago. If you are in a bull market then it is brilliant. You need patience to only buy the breakouts of high eps high relative strength stocks and you need to learn to sell if it goes to a 10 percent loss. Most people struggle with both because they don't like to buy something at an all time high or admit when they are wrong and sell when they are losing money. If you can't do the latter you will lose alot. I'd recommend cutting half first if you are struggling with accepting you are wrong - when I do this I normally sell the rest two minutes later because the action of the first sale makes the second one easier.
The psychology of the cup and handle is that the shares have gone to a high and then moved back to clear out all the light holders - after the breakout most people hate to buy at a new high, but the stock doesn't care about them. Don't ever chase a stock up though - there is usually only one day where you can buy it and if you miss it you must move on.
Lastly, use Stockopedia to identify likely frauds ( and you can check on ADVFN to see if it is a BB favourite - if it is, it is often a crock which will fail).

Re "more fool me", I wonder if anyone uses stop losses here, rigidly or otherwise...? If one did, one would have likely sold ZYT by now. I needed to raise a bit of cash in the last couple of weeks, so I sold off some of my recent rises near their peaks - I originally bought ZYT at 339 and sold at 425, not when a stop loss was broken but when they wobbled a little just before Xmas... and today I could have bought 18% more of them than I had before at 339 again; my stop loss would have been around 380. Similar thing with TSTL.

Of course, I don't get it right all the time by any means (otherwise I wouldn't be at work typing this!), and that's not the point of what I am saying (as I have, for example, continued to hold PAG despite the recent mauling)... but if one obeyed all ones stop losses then I guess one would have sold quite a lot of stuff by now and a fair amount of it could be bought back again at some point if one felt brave enough....

NeilS

Hi NI
I have no connection to SOM. I just happen to have invested for the reasons I outlined -plus the fact that the shares are very good value and have a nice yield.

As you quite rightly point out they don't need huge uptake in China to do very well but they are also working in India too.

cheers
neils

Michael Billingham

Any thoughts on the reasons behind the 10% fall in Penna shares today?

jonesj

Hi Paul,
Ref: Daily Mail Tips
I am also astonished to see publishers making stock recommendations with no reference to current valuation.
I suppose it's one of the consequences of requiring regular recommendations & short articles.
To be honest, newspaper stock recommendations seem much less common than they used to be & I think that's a good thing, as it's usually impossible to see their logic for making the recommendation. Which means I prefer to ignore them.
There are other bad examples. An American subscription tip sheet was recently passed to me. That covered 3 companies, over 4 sheets of A4, yet there was not the slightest hint of a reference to any valuation metric.

It's quite refreshing to visit this site and see the job done properly.

In common with many shares that have done well there is bound to be some profit taking in the current market conditions. Also other recruiters have been hit lately, see Empresaria (LON:EMR) and Staffline (LON:STAF), a slow down or world recession is not good news for them.

Catstycam

"Unusual market conditions continue. I did a lot of reading over the weekend, and if you're not careful, you can end up frightening yourself into selling everything!".

Agree completely Paul. It doesn't help when the likes of RBS suggest that is exactly what we do. That to me creates panic and leads to more investors selling creating more panic etc. It just makes the situation worse. Although entitled to their view I think it was rather irresponsible. It is rather like being onboard ship and someone shouting "fire, abandon ship!", before the fire is assessed and whether or not it ould be contained and extinguished.

Twice now in the last 18 months, I have sold pretty much everything only to look back a couple of months or so later to realise I had made a mistake and ended up either buying back in at a higher price or watch a stock reach new highs. At the time it all seemed doom and gloom. Listening to the commentaries the market was in dire straits with everything to worry about and nothing to cheer. Problems in the Euro zone, Chinese growth, Greek debt, fiscal cliff, general election. Each and every one seemed good reason to get up and sell out. Now we have the falling oil price (thought that was generally good news) and looming on the nearing horizon the UK referendum on our membership of the EU.

I have reduced my holdings over the last couple of months to a number which it is easier to follow and keep an eye on. What is so frustrating is to see what I believe to be very largely good quality, profitable companies, paying dividends, having their share price hit for 6, along with very many others. It seems if our shares haven't been hit last week, yesterday or today, then hold on, they will probably get hit tomorrow. Companies in sectors which we would think would not be affected by the Chineses lack of growth or the oil price have not been immune. It is possibly coming to the point in time when selling is less attractive because the share prices have fallen far enough to become more of a buying opportunity rather than selling. To need nerves of steel right now is an understatement. To see ones profits pretty much wiped out in a matter of a few days is akin to coming home from work to find we have been robbed.

The last thing we need now is to talk ourselves into another recession or bear market, for it to become a self fullfilling prophecy. "Be greedy when others are fearful!", oh, if only it was that easy!.

CM

Pterosaur

22nd Jan '16

I see someone dumped 3.5 million UNG at 7.48p tonight at 1740 - that's £261k which is over 1% of the total capital value of the company. Stockrank 97 and no news I can find. What's up?

DWit199

23rd Jan '16

I think the UNG recent trading update was a veiled profit warning.

"The Board currently expects turnover for the year ended 31 December 2015 to be broadly in line with the prior year"

I would interpret that as meaning less than last year. They then go on to talk about "adjusted" profit being in line with expectations without defining those expectations. Looking at Stockopedia estimates for a 20% increase in eps, perhaps somebody thinks those expectations are unrealistic considering the likely fall in turnover.

25th Jan '16

It was a director, for a property acquisition. He still has over 11m shares. Another director bought 240,000 shares at same time and 7.5p.

I see David Stredder has a large stake in this company.

themagic85

10th Feb '16

Regarding Somero Enterprises Inc (LON:SOM) I notice that a large part of their receivables balance is made up of just 2 customers; 10% in 2014, 36% in 2013 and 29% in 2012.

If these two customers are US based I would assume that if they are able to continue to grow sales in the rest of the world in relation to the US that this number would reduce as they increase their customer base.

Does anyone have a view of who these are? It seems to represent a fairly big risk on what is otherwise a very strong balance sheet and also potentially a risk to future revenue should anything negative impact these two customers.

Small Cap Value Report (18 Jan 2016) - BRY, PMP, SOM, UNG, CTG, IGR, BJU

Mello

Brady (LON:BRY)

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Paul Scott

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