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

18th Oct '16 by Paul Scott

48 comments 23919 reads

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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tads

18th Oct '16

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?

herbie47

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.

ericb

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.

WhaleHQ

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

Paul Scott

ericb,

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.

Paul.

Trident

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

Ramridge

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% .

Techno Trousers

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.

TT

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

Gear4Music (G4M)

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Paul Scott

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