Small Cap Value Report (20 Nov 2015) - IDEA, CTO, HAL, COG

Friday, Nov 20 2015 by

Good morning!

I am sorry to read the news that investing legend Jim Slater has died, aged 86. His book, The Zulu Principle was one of the first investment books that I read, and it was instrumental in my decision to focus almost entirely on UK small caps. Rummaging through my bookshelf, I can't find it, so will have to buy another copy, as it's probably about time to refresh my memory.

I hadn't realised that he had such a dramatic, and at times controversial business career, as that was mostly before my time - there is an interesting obituary in today's Telegraph. Certainly he was a major figure in the investing world, and of course is followed by his son, Mark Slater, a highly respected fund manager and commentator in his own right. Mark's insights are always worth listening to - my condolences to him.

Several people have asked me to comment on price movements of individual stocks. I don't usually do that, as these reports are focussed on flagging up, and commenting on trading updates and results statements from interesting smaller companies.

However, I have noticed that this week in particular, there have been some unusual wobbles in quite a lot of small companies, so it looks as if a bit of profit-taking is going on. My observation is that, when you see similar wobbles going on at lots of companies, especially ones which had previously been quite buoyant (e.g. Trakm8 Holdings (LON:TRAK)  or Somero Enterprises (LON:SOM) ), then that can be a good time to top up, if you like the company. (disclosure: I hold a long position in SOM).

If an individual share is dropping for no apparent reason, whilst everything else is strong, then that's more of a concern, as it could indicate that an insider is selling ahead of bad news. However, when lots of things are all going wobbly simultaneously, then there is less likely to be anything stock-specific going wrong, so that scenario gives me more confidence to buy the dips on individual stocks.

That said, I do think that the valuations of a lot of fashionable growth stocks, are now getting into fairly bonkers territory (or have been for a while). If you have to assume that a company will execute to perfection for the next 2-3 years, to even begin to justify…

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Ideagen plc is engaged in the development and sale of information management software to businesses in various industries, and the provision of associated professional services and support. The Company is engaged in supplying governance, risk and compliance (GRC) solutions primarily to the healthcare, transport, aerospace and defense, manufacturing and financial services sectors. The Company’s portfolio products include Q-Pulse, Coruson, Pentana Audit, Pentana Performance and PleaseReview. Q-Pulse, which provides quality and safety management. Coruson,which provides cloud-based software solution. Pentana is an auditing software within its internal audit.It has operations in the United Kingdom, European Union, the United States, Middle East and Southeast Asia. more »

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TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

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HaloSource, Inc. (HaloSource) is a clean water technology company that develops and manufactures products for water treatment markets. The Company’s technologies are based upon polymer chemistries that can be applied to commonplace synthetic starting materials (such as polystyrene, vinyl, polyester) in a range of applications. The Company operates in two segments: Drinking Water (through its HaloPure brand) and Recreational Water (through its SeaKlear brand). It is engaged in providing drinking water purification solutions. HaloSource markets its products under its brand names of HaloPure, SeaKlear and AquaPill. The Company offers various products, such as HaloPure Disinfecting Pitcher, HaloPure Pitcher Cartridge, HaloPure Bacteriostatic Water Cartridge and HaloPure Ceramic Candle Insert. It offers various technologies, such as HaloPure Disinfection and HaloPure Adsorption. It offers HaloPure Disinfecting Beads, which helps in killing bacteria and inactivates virus on contact. more »

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13 Comments on this Article show/hide all

paulhunt999 20th Nov '15 1 of 13

I read Jim Slater's book just a couple of weeks ago. I have been investing for several years and found many of the principles of his investing strategy still very relevant to today's investor although it was written in the early 90s. Interesting to see what has happened to some of the companies mentioned. Polly Peck was the Evron and to a much lesser extent the Globo of its time. Highly recommended.

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Nicowilson 20th Nov '15 2 of 13

In reply to post #112518

Agreed. Excellent book. Very well written, and still applicable today.

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dosh 20th Nov '15 3 of 13

Three of Jim’s books sit on my bookshelf: Company Refs guide, The Zulu Principle & Beyond the Zulu Principle. I learnt so much from Jim’s work back in the mid 90’s. A couple of gem’s that remain engrained into my investment approach are cash flow per share greater than EPS and the importance of ROCE. Also the man to popularised the PEG which is widely quoted today.

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andrea34l 20th Nov '15 4 of 13

Presumably Somero's share price has dropped on China concerns... even though it is a small percentage of their turnover...? Is it a worry that Polar Capital are reducing their holding or that a non-exec has made a couple of recent sales? Interims were very good and, on the face of it, the shares seem amazing value compared to a lot out there.
Alas, my main online broker (Share Centre) won't let me deal in the shares :-(

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ed_miller 20th Nov '15 5 of 13

R.I.P. Jim Slater: teacher and inspiration to a generation of investors. Reading Jim's books, I knew I could do it and was equipped with a system and foundation to actually go and do it.


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simoan 20th Nov '15 6 of 13

In reply to post #112533


You can never know why institutions like Polar Capital are selling down but it's clearly not judged on fundamentals as they have been offloading shares all year despite great results and very positive trading updates from the company. I always find it useful to look back through RNSs: These show that last December Polar held nearly 8 million shares and as of 16th October they were down to 4.4 million, so they have dumped 3.6 million shares into the market in 10 months which is a pretty significant overhang for a share with an average daily volume of only 35K.

It's always worth looking at other companies results in the same industry as part of your research. One of my other holdings is Keller Group which like Somero has a significant amount of revenue from their US business. Here's what they said about the US construction market only last week:

The ongoing improvement in the US construction market continues to contribute to good results from the Group’s US businesses as a whole. Case and HJ, both of which have strong positions in their regional markets, have performed well whilst Suncoast continues to benefit from the increase in housing starts.

Hope this helps! 

All the best,Si

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aiminvesting 20th Nov '15 7 of 13

In reply to post #112533

I hold Somero Enterprises Inc (LON:SOM) and I am not too worried as US market should drive growth and Directors are relaxed about China. However, it should be noted indeed that the Non-Executive Chairman recently sold almost 40% of his holding, for a sale worth about 78k. It will be interesting to watch developments here...


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John Eustace 20th Nov '15 8 of 13

If you are going to replace your copy it's probably better to get Beyond The Zulu Principle. It's a 2010 update of the original.

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deucetoace 20th Nov '15 9 of 13

In reply to post #112584

Although it is worth mentioning he is 80. I hold this and agree the KLR update gave more comfort on top of the interims as the US is their major market

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John Eustace 20th Nov '15 10 of 13

I'm not so sure the move to the cloud means organisations will change software more easily. Changing the packages that an organisation runs on is always a major risk and uses up scarce resource. I have always been amazed how few people in an organisation know more than how to press the buttons they need to do their jobs.
The people you need to make a successful switch are the most valuable ones and they are always in demand for other projects. Then there's the cost of retraining everyone.

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andrea34l 20th Nov '15 11 of 13

In reply to post #112581

Thanks Si (& Thomas)

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Paul Scott 20th Nov '15 12 of 13

In reply to post #112593


Fair points, but I was specifically only talking about small companies, or even very small companies. I've discussed with several small companies lately, how they've found it much easier to outsource IT, and base everything in the cloud. That may not be the case for everyone, but things do seem to be going that way for many very small companies.

Regards, Paul.

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John Eustace 21st Nov '15 13 of 13

Not an issue for Ideagen though? From what I know their customer base is larger and in regulated sectors.

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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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