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

tads 18th Oct '16 1 of 48

Was a buyer of G4M first thing this morning, must have been a big seller in the wings. All harmonious now ....lets hope they treble.

Regarding retailers what did you make of the phone conference with Crawshaws yesterday?

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herbie47 18th Oct '16 2 of 48

Paul, my main concern about £G4M is the margins are very small, there is also a well established online retailer in Europe in Thomann, they are quite large, 1,200 employees and over 7m customers.

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ericb 18th Oct '16 3 of 48

Panmure is G4M house broker, they have put out an upbeat note and increased the target price, yet they have been dumping vast amounts of institutional stock to easily led twitter, guru, pundit and blogger following private investors. A classic scenario of modern times.

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WhaleHQ 18th Oct '16 4 of 48

Surely amazon could easily obliterate them? That is what has kept me away, perhaps I'm incorrect?

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Paul Scott 18th Oct '16 5 of 48

In reply to post #154915


How do you know the buyers of G4M stock today are "easily led"? (answer: you don't, you just made an assumption).

Surely people are buying the stock because the company has just reported excellent results & outlook? That's why I bought more shares this morning. If an Institution wants to help out by feeding liquidity into the market, that's fine.

Have you read the Panmures note? If you do, you'll find that it's fact-based, and all perfectly reasonable. If anything, they're under-forecasting. So there's no evidence whatsoever to back up your claim that they're publishing bullish updates in order to facilitate a seller. Their last note flagged that forecasts would probably be raised. In fact, they inexplicably held forecasts too low before today, in my view.

I think sometimes people think it's clever to be uber-cynical. But one needs to get fully informed on the facts first.


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Trident 18th Oct '16 6 of 48

Isn't it all a bit A&O'ish? Unlike clothes how many pianos/drum kits do you need? Keen prices though!

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Ramridge 18th Oct '16 7 of 48

Hi Paul - £G4M  I share your enthusiasm about this company and today's results are outstanding. I have been building up a stake since July and topped up again today.
To take up your request for anything bearish to mention, the company is planning on opening two distribution centres/ hubs ove FY2017, one in Sweden and the other in Germany. That will require capital expenditure. However the figures are not significant in the scheme of things; unlikely to make a major dent to the bottom line.

The other comment I would make is that a high PE ratio for such stocks is not a factor to worry about, as you say. Here is a mathematical example to make my point.
- Say you have a stock with SP 400p and EPS 10p, making a current PE = 40.
- let's assume eps growth is 50% p.a. over next 2 years.
- so the forward PE after year 1 becomes 400 / 15 = 26
- and the forward PE after year 2 becomes 400 / 22.5 = 18
Another example of the magic of compound interest.

In the context of this stock, a 50% p.a. growth rate is not blue sky. Edison reckons their EU market share currently is only 1% .

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Techno Trousers 18th Oct '16 8 of 48

I agree with herbie47 above. Thomann has been around and quite impressive with decent prices for some time. I am also part of both of these suppliers target market, but have never bought from them, nor ever will do. Basically, if you are buying a musical instrument there is much more than just look and price to consider, and will travel to test/try the right gear. Online, no thanks.
So, maybe they have some growth to come, and so far, as Paul points out, growth looks good, but there is ceiling here, I guess. Having just looked at their site, I am wondering what, if anything, they are doing better than Thomann? Not for me.


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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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