Small Cap Value Report (18 Oct) - AFS, GBO, HYNS, ABM, VLX

Good morning! It's Friday already, and an extremely quiet day for company reporting today. There's a profit warning from an AIM-Listed Israeli-based water filtration company called Amiad Water Systems (LON:AFS). They say that a slowdown in business is continuing, and that the full calendar year 2013 is likely to show revenues of $115-120m, and net profit between $4-6m. It's not a company I've looked at before, and generally I don't touch overseas companies that List on AIM any more, as so many have turned out to be disasters for one reason or another. So why take the risk when you don't have to?

Having said that, I very much approve of the way this company has presented its profit warning - by giving specific guidance to investors on what range their turnover and profits are likely to be. All companies should do this, as it removes a lot of the guesswork for investors, and hence enables us to make more informed decisions.

 

 

 

It was good to see a lively discussion here yesterday about Globo (LON:GBO), where opinion is very divided. Although I would say that the tone of the discussion fell well below the standards we're used to here - so do please try to keep all comments civil in tone, and avoid any type of personal abuse or insinuations. A good rule of thumb is try not to type anything unless you would be happy to say it to someone face to face.

Coincidentally, it was my local Share Club monthly meeting last night, and someone proposed Globo as a share we should buy! So I chuckled and told them how I'd spent most of the day battling with bulls of the stock who want to ignore the glaring red flags in the accounts, and get terribly fractious when these problems are highlighted. Funnily enough, we came close to buying a few as a trading punt - I explained my serious concerns about their accounts, but we agreed that it clearly has momentum, and that people with deep pockets have bought the story & keep pumping in more & more money. So the likelihood is that the shares could easily continue upwards in the short term. Of course that's not of interest to me in this column - as I am focused on long term value here, not short term price movements. Momentum trading can work very well, providing you don't believe the hype but instead treat it as a punt, and get out before the bubble bursts. It's not my thing, but other people might do very well using that approach, whatever floats your boat.

Anyway, it was the busiest day ever for my column, with over 6,000 readers, and the busiest ever discussion thread from one of my articles, so that was great - even if one or two new members do still need to be house trained!

 

The recurring theme at last night's Share Club was that we just couldn't find much in the way of Value. We looked at about 10 possible new shares to buy (mainly mid to large caps), but with each one we found ourselves recoiling at valuations mostly in the PER range of 15-20, and unremarkable dividend yields. We agreed that those prices just don't give a sufficiently attractive risk/reward balance.

I am still finding pockets of value in smaller caps, but most small caps are now fully, or over-priced in my opinion. So in my view it's now all about remaining disciplined about valuations, and keeping some cash on the sidelines for the inevitable correction. Also, with my own money I'm prepared to take a few small punts on slightly more racy things, if they look like good trading situations - we are in a bull market after all - but would not be comfortable doing that sort of stuff with other peoples' money.

 

 

 

 

There's an IMS for its Q1 trading from automotive repair manual publisher Haynes Publishing (LON:HYNS). It sounds fairly positive, but I can't see any reference to the key information of how profits are compared with forecasts. Also I can't see any forecasts for the company, so all in all a bit of an information vacuum - or rather they have given information on sales, but not profitability, which is missing the point a bit, in my opinion.

 

 

 

Sorry about this, but I really can't find anything else of interest. Other than to note that another bull market characteristic I've noted in recent weeks is that quite a few shares seem to be recovering well from profit warnings. In the last few years, when companies warned on profit, that would shatter confidence in them, and it might take six months for that confidence to return. Lately however, some shares seem to drop (say) 20-30% on the day of the warning, then immediately begin recovering the next day. This has happened with Anite (LON:AIE) this week.

The obvious conclusion is that, so long as these buoyant market conditions continue, it might be worth looking at profit warnings, and buying the dips, providing the company looks fundamentally sound, more as trades than for the long term. Whilst I'm a long term investor mainly, I'm certainly not averse to grabbing a quick 10-20% on something if it looks fairly low risk, you'd be crazy not to!

I did that recently with Albemarle & Bond Holdings (LON:ABM) actually - it's not a stock that I want to hold at all really, but for a quick in & out trade why not? It netted me 60% in two days, which certainly involved an element of luck with the timing, but it's not to be sniffed at. My initial concerns about their profit warning were overblown, and once I checked out their Balance Sheet properly, it became clear that the Bank were very likely to continue supporting the company, given its asset backing (stock and the large debtor book), so an opportunity to grab a quick rebound arose.

Other than that, I think it's newsflow which will drive the shares I'm in. Things like Volex (LON:VLX) have tried to break out on the upside, but stalled repeatedly, so I suspect we'll need a catalyst in the form of a (hopefully) more upbeat trading statement there before anything much happens. There's a chance that it could have one more profit warning in it, who knows? If so, I'll just ride that out. As long as the position size is controlled so that a (say) 25% drop in share price won't hurt too much, then it's just normal everyday risk which is an inherent part of the risk/reward balance with investing.

 

I'll sign off for the day and the week, and wish you all a pleasant weekend.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in VLX.

A Small Caps Fund to which Paul provides research services also has a long position in VLX)