Small Cap Value Report (18 Oct 2016) - G4M, AVON, DOTD

Tuesday, Oct 18 2016 by

Good morning!

More interesting news about the retail sector. I'm very fearful about this sector, and think it's generally best avoided at the moment. This is due to multiple headwinds - online is increasingly eating their lunch, plus overheads are rising fast (Living Wage, etc). The latest one - much higher input prices feeding through in 2017 due to weak sterling, could I think crush a lot of smaller retailers that have only just been hanging on. Plus margins are likely to be squeezed across the board, for all retailers.

This article makes some interesting points. There's evidence that consumers are tiring of buying "stuff", and are now prioritising holidays and entertainment (meals & nights out) ahead of adding to already groaning wardrobes.

All in all then, I reckon a lot of apparently cheap retailers could turn out to be value traps next year. So caution is definitely needed there. Which brings me on to probably my favourite GARP share at the moment, in a sector which is rapidly transitioning online.

Gear4Music (G4M)

Share price: 334p (up 5.7% today)
No. shares: 20.2m
Market cap: £67.5m

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

Interim results for 6 months to 31 Aug 2016 - if you follow me on Twitter, then you'll already know that this is probably my favourite GARP (growth at reasonable price) share at the moment. The company is an online retailer of musical equipment. It operates about 17 websites across Europe, with the UK being the biggest market. It's based in York, and has been established for about 13 years. The founder CEO is still by far the largest shareholder.

The stock market is attributing very high valuations to growth companies. I'm not saying that is necessarily correct (as I think some valuations are too high now). However, if you spot something with outstanding organic growth, then it can pay to pile into it whilst the price is relatively cheap, because the rating is likely to expand dramatically once other people also spot it. That worked brilliantly for us with Boohoo.Com (LON:BOO) between Jan 2015 and now, I know a lot of readers joined me in that one (which I no longer hold personally, as the price seems quite high now).

For me, G4M is not dissimilar, although it's more niche. So some people question…

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Gear4music (Holdings) plc is engaged in the online retailing of musical instruments and equipment. The Company sells its own-brand musical instruments and music equipment alongside with other brands. The Company offers over 1,500 products, which are sold under approximately eight brands, including Gear4music; Archer, which offers string instruments, such as violins, cellos, violas and double bass; Redsub, which offers bass guitar amplifiers and pedals; SubZero, which offers guitars, amplifiers, mixers, speakers and audio electronics; Minster, which offers digital pianos; Rosedale, which offers woodwind instruments, such as clarinets, flutes, oboes and piccolos, and Brass Instruments, which offers trumpets, trombones, tubas and French horns. The Company has developed its own e-commerce platform, with multilingual, multicurrency and responsive design Websites covering approximately 19 countries. more »

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Avon Rubber p.l.c. is a United Kingdom-based technology group. The Company specializes in respiratory protection systems and milking point solutions through its two businesses, Avon Protection and milkrite InterPuls. The Company designs, tests and manufactures specialist products and services. Avon protection is the advanced chemical, biological, radiological and nuclear (CBRN) respiratory protection systems for the military, law enforcement and fire markets. The milkrite InterPuls is providing complete milking point solutions to customers across the world. more »

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dotdigital Group Plc is a United Kingdom-based company, which is engaged in providing software as a service (SaaS) and managed services to digital marketing professionals. The Company offers dotmailer, which provides e-mail and multi-channel marketing automation platform with various tools that enable marketers to create, manage, execute and evaluate various campaigns. In addition to its automation technologies, the Company also provides multi-channel marketing consultancy and services for businesses seeking to manage customer acquisition, conversion and retention. The Company also has pre-built integrations with e-commerce platforms and customer relationship management (CRM) products, such as Magento and Salesforce. dotmailer helps in using contact data to design, test and send automated campaigns. The Company's subsidiaries include dotmailer Limited, dotsearch Europe Limited and dotmailer Inc. Through its subsidiaries, it is engaged in providing Web- and e-mail-based marketing. more »

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  Is LON:G4M fundamentally strong or weak? Find out More »

48 Comments on this Article show/hide all

whitmad 18th Oct '16 29 of 48

"Not sure about buying a group of developers either. I know that industry well and they are pretty much the least sticky staff you can imagine". I know that industry very well, and outsourcing development is what makes them not sticky. Many companies in many industries these days are suffering the rarely perceived hidden costs associated with the myth of the fungible developer - remember that the next time your bank's ATM network goes down or their payment system fails. By bringing it in house, they have a chance of improving things. If they do it right. The technology is key to these companies success. A risk factor to consider is that they may not do it right.

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Funderstruck 18th Oct '16 30 of 48

Paul ;
An interesting article; thanks for the headsup; they seem to be doing all the right things and emphasiing customer service including speedy safe delivery. When you meet with them please establish their view as to why they believe the price took off in Aug 2016 .The first annual report was then but Prelims were back in May 2016 but not a flutter until formalised. Please add a few notes to your blog on the meeting.

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Ramridge 18th Oct '16 31 of 48

Re. £G4M Here is an interesting tabulation showing how this company compares with EU competition. About 18 months out of date, but good enough for a general overview. 

Source: Admission Document.58062cbeb30aeg4m_EU_market_share.jpg

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Lennart 18th Oct '16 32 of 48

In reply to post #154954


Stockopedia thinks Earning Manipulation Risk is high.  4 red flags! The rise in turnover is extremely brisk.  Both important warning signs.  This may well be a Story Share.


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Jenny Williamson 18th Oct '16 33 of 48

I'm no expert on these things but when I started my children on musical instruments (violin/ cello) I needed to go to the shop to get expert advice on sizing- and as far as I'm aware professionals like to play an instrument before buying to get a feel for the sound/ tone/ comfort/ size etc. So I can understand purchasing amps etc online but this seems a little more complicated. I would imagine that shops who are willing to match an online price will survive.

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nurdin 18th Oct '16 34 of 48

Excellent article and your enthusiasm for this stock must be admired.However,it seems a very straightforward in musical instruments and then sell them on line.Where are the barriers to entry? Perhaps explains the low gross margins?

sorry to be negative

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JohnEustace 18th Oct '16 35 of 48

I think I will sleep better holding shares in Amazon than in a small competitor like G4M. I'm not optimistic that G4M can ever own the territory enough to drive up their margins without getting squashed by Amazon.

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ricky65 18th Oct '16 36 of 48

I'm surprised nobody has commented on the director sells yet.

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Golspie 18th Oct '16 37 of 48

On the BOO point. I remembere the Burntsfield fire when ASOS - which I was then considering- dropped like a stone to around 98 and I thought it was a busted flush., but we know what happened. Up 50X approx. Boo on that comparison has from the drop to 20p has a long way to go. Surely?

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Kelvin Prescott 18th Oct '16 38 of 48

In reply to post #154984

I think that the point about working capital movements is that they are not a loss at all, they are changes in the amount of capital held as inventory vs. cash. Its absolutely normal for a retailer with a Christmas season weighting to have more cash and less stock in February; and less cash and more stock in October... which is what the accounts state.

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rhomboid1 18th Oct '16 39 of 48

In reply to post #155050

Hi ricky65

Paul has commented in the updated article. I guess liquidity is generally thin so the only time to sell is when then the PR floodlights are on at results time.

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Paul Scott 18th Oct '16 40 of 48

In reply to post #155050


I've already update the main article to cover the large sells today.

The CEO has sold 400k shares, which is under 5% of his holding, so personally I don't have an issue with that - he still holds 39% of the whole company.

There's also a 75k NED sale.

By far the largest, 2m share sale is the exiting Private Equity former owner. They were already on their way out, so no issues with that either. It's only disclosed as a Director sale because one of the NEDs is an appointee of the PE firm.

So it's pretty much worked out as I expected - I stated this morning that the big seller was likely to be Key Capital Partners, which it was.

Regards, Paul.

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ricky65 18th Oct '16 41 of 48

In reply to post #155065

Paul, thanks for the reassurance. After the recent good run I'd probably have top-sliced myself if I were the CEO. Good call on the Key Capital Partners sell.

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Paul Scott 18th Oct '16 42 of 48

Just a quick thank you to everyone who posted positive & negative comments on G4M. It's great to have a sounding board here, where all views are encouraged, not just one-sided positive ones. I always think that, if you're long, listening to bears is the most important thing. You can only really be positive about a company once you've thought through all the negatives, and reassured yourself that they're not a concern (which remains my view with G4M).

Regards, Paul.

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warmerjo 19th Oct '16 43 of 48

I think people will view and test music instruments in shops, then go and buy on the Internet. Not nice for the shops, but that's likely to happen.

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garkum01 19th Oct '16 44 of 48

Paul, any comment on the valid point lenart raised about the stokopaedia earnings manipulation risk with regard to G4M

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warmerjo 19th Oct '16 45 of 48

I was under the impression that G4M was the sole specialist internet operator for music instruments.
Definitely not the case. Netherlands based Bax Shop for example also operates through a UK branch,
selling music instruments on the UK net at low prices. Makes me feel G4M could be up against stiff competetion from various overseas based specialist Internet sellers.

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Investor1942 24th Oct '16 46 of 48

I bought following your article 6th. September . I'm not complaining about a 60%+ rise in under 2 months.

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Bushranger 24th Oct '16 47 of 48

In reply to post #155194

The flip side, looking at the above chart, is that £G4M currently have just a small fraction of market share which does give a lot of opportunity for growth by eating into others.

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warmerjo 25th Oct '16 48 of 48

In reply to post #155740

G4M would need to eat into others a good bit to warrant current market cap, IMHO.

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 Are LON:G4M's fundamentals sound as an investment? Find out More »

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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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