Small Cap Value Report (20 Nov) - JDG, BON, AVON, HYC

20th Nov '13 by Paul Scott

17 comments 18208 reads

Good morning! It's a quiet morning for company news today. With the market set to open in about 20 minutes at 8 am, we're looking at the FTSE 100 forecast to open down about 18 points at 6,675, after a lacklustre session in the US last night. I was watching the financial channel, CNBC last night, and the hot topic everyone is discussing is whether shares are now overvalued, after such a good run? Opinions differ on this, and I can see the arguments both ways.

I always listen up when Warren Buffett speaks about anything, and he currently believes that share prices are not obviously overvalued, but "within a zone of reasonableness". In the more bearish camp is Carl Icahn, who wobbled markets recently by expressing concern over markets reaching record highs (although it's pointed out that he has been a perma-bear, and hence wrong, for many years).

A very interesting graphic that I stubled across, showing that the overall US market forward PER (my preferred valuation measure) has become more stretched recently is here, and is well worth a look. This chart shows that on valuation, the US market has now reached the same PER as at the peak in 2007. Although as you can also see from that chart, the reason markets fell in 2007-8 was primarily because earnings collapsed due to the major financial crisis & Recession, or at least share prices fell as the market anticipated the collapse in earnings which then occurred, and recovered as earnings recovered.

Another interesting graphic I found was this chart of US broker margin debt, which peaked at previous market tops. Allowing for inflation, this looks to me as if we're in the final stages of a bull market, so this confirms my view that we probably have some way to go upwards still before we have a correction.

I tend to Tweet any interesting titbits like the above that come my way during the day, so if you wish to follow me on Twitter (which is incredibly useful for investors, if you choose good people to follow) my Twitter handle is @paulypilot for anyone interested.

However, it all depends on what economies do overall. If you think we are at the beginning of a multi-year recovery in major economies, then higher PERs are perfectly justified, as…

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MrM

20th Nov '13

Hi Paul,

Regarding valuations, there is a fairly big difference between the US and UK markets. At the moment, the US PE is 18.85 (from the wsj) and 16 forward. The FTSE is about 14.7 trailing, which is about the long term average, and cheaper than the US.

Robert Shiller has a very useful graph showing the correlation between valuations and returns, basically people who buy shares when they're expensive have a rough time, ie 1929, 1973, 2000. Buying shares when they're cheap, ie 1920, 1933, 1980 ("The Death of Equities") shows unusually high returns.

http://www.forbes.com/sites/davidmarotta/2012/04/30/the-shiller-ten-year-pe-ratio/2/

Cheers

maillotàpoisrouges

I had a look at JDG in depth in July at £13. Have held since £8. If Scientifica were part of 2013 FY results i worked out that EPS could be as high as £1.20 if you factor in the historic growth rate for JDG and Scientifica combined. I think the real PER (forward) here is closer to 15. I agree though that at that level there is not much visibility for a re-rating upward. I sold my initial outlay at £18, but kept my profit as a free carry.
Cheers

jjis

Following on from MrM re UK being cheaper than the US - see the recent market valuation piece for the UK from John Kingham at UK Value investor here: http://www.ukvalueinvestor.com/2013/11/ftse-100-valuation-for-november-2013.html/
which points out that the CAPE is around average.
Also see the following interesting article about the dangers of market timing.
http://www.fool.com/investing/general/2013/11/12/why-its-so-dangerous-to-time-the-market.aspx

The real key to making money in stocks is not to get scared out of them.
--Peter Lynch

kenobi

Re your comments on house price bubble and help to buy, I can't help but agree, it's shocking, but to be fair only really in the south east where the housemarket is and has been very healthy/on fire for quiet some time already, so to stoke it up like this is ridiculous when prices are already at an all time high. It's a shame they didn't do this a few years back. Or if they want to do it now, perhaps a more reasonable approach would be to exclude the south east (admittedly tricky to define where this ends), and perhaps limit the top to say 400k.

I'm a bit miffed having recently been told that our child benefit was not affordable to now see that giving deposits to people buying 600k houses is entirely affordable. As you say, all to win the next election. All talk of rebalancing the economy is gone lets inflate the property market again, and remember it never fell as much as other parts of the world, so many places are already at all time highs.

I hope they pull this scheme soon, as confidence has returned and projections of economic growth show that the momentum is now there, so pumping up housing is the last thing we need. Initial movements up on interest rates are required to stop inflationary problems later.

K

bsharman

Excellent articles jjis - thanks for posting here.

PhilHofGrowYourDough

Hi Ed,

Any chance that Schillers CAPE ratio could be added to the system? (Along with the million other features requests :-))

Thanks in advance
Phil

Devlishcunning

Good Morning Paul,
As its a quiet morning have you got the time to tell us about VOLEX now that the 2 day period is over?
Many thanks
Geoff Clark

jraitt

Hi Paul.
Did you get to Mello yesterday? Any comments on CRAW?
As always much appreciated
regards
John

Beginner

Hi Paul
I just noticed you have bought into Daniel Thwaites (OFEX:THW) . A good move I think. A well-managed business with considerable assets and a good dividend. They have also relatively recently been supplying not just the multiples, but also the Makro chain of cash and carries (as was). The geographic spread is now also improved after contraction in the 1980s. A defensive play perhaps? (Might I recommend the 'Tavern Porter' if you fancy indulging in the product and boosting the profits? I will continue to support this company in the most enjoyable but least professional way). Thank you for today's report. Cheers!!

rmillaree

Geoffclark
ref Volex

If you look in the comments section of yesterdays and mondays report you will find some comment by Paul in relation to Volex.

SevenPillars

I believe that the reason why Help to Buy is considered "affordable" by the Government is because it goes under off-balance sheet financing and joins the other £1.2 trillion, or thereabouts, of UK Government debt. That's why they can suddenly find £12 billion of new out of thin air money for people who want to buy homes, while making a big deal about cutting back housing benefit which comes under current spending. They assume that eventually people will pay back the Help to Buy loan. They might even make a profit on it as interest kicks in after 5 years. If you pay it back within 5 years it's effectively a free loan. If you don't pay it back the Government/taxpayer owns up to 20% of the defaulters home.

It's also why it will probably be easy to extend Help to Buy in the future, perhaps 25%, 30%, 50% deposits if prices go too high? Wouldn't put it past them. The Government will end up buying houses for people before they are prepared to see house price falls.

clissold345

Hi Paul, in your third paragraph it should say: "A very interesting graphic that I stumbled across ...". Regards, Chris.

Ramridge

In addition to Bonmarche, today was the first day of dealing for Advanced Graphene Materials (AIM:AGM). They are really at the cutting edge of technology. Graphene is a carbon based substance which has fantastic electrical, mechanical and thermal properties which qualifies it as a potential disruptive technology.
So as an investor, should I be piling into this? Having read the admission document, the bottom line for me is no. The company is at the early stage of developing the R&D model into a commercially viable proposition. Scaling up the production of graphene nanoplatelets using their method is in uncharted territory. The potential demand for this product could be enormous, but today the global production capacity exceeds demand. The company's revenue last year was a measly £11k, whilst cash burn was £800K p.a. and rising. The IPO is raising a net 10M pounds. The company admits that this may not be enough should they have to increase capacity beyond around 10 metric tonnes p.a. of this stuff.
Risk/ reward ratio? Potentially huge rewards in the medium to long term, but investors will have to pay upfront for unquantified (and unquantifiable) costs for a considerable time. A lot of pain for rewards which may or may not materialise. I am usually a sucker for new frontier technologies, but I will pass on this one. But guys, please DOYR.
Regards, Ram

cig

The FTSE is a bit misleading because it's heavy in miners and dodgy oligarchs' vehicles that have a low rating at the moment. If you normalise those differences, the ratings between comparable companies are closer.

Well, if it goes far enough, they'll just end up owning a lot of houses when the ensuing bubble deflates. Maybe the Tories are unwittingly starting the largest council housing programme in decades, cofunded by the private sector (the people who will lose their houses and deposits in a downturn will effectively part-fund these new council houses).

Edward Croft

Thanks for mentioning the webinar Paul. It was the busiest one yet, with about 200 joining which I thought was pretty good for a weekday and v. little promotion. I think I will have to slow things down in future as on playback I realise I do rattle through things quite fast - it's so hard to fit it all into one hour.

Nonetheless there was some great feedback and we hope to have the recording up within a few days.

Paul Scott

Hi John,

Yes I did go to Mello yesterday, but I go mainly for the social aspect, so wasn't interested in the Crawshaw (LON:CRAW) presentation. Also, I wanted to keep some friends company downstairs during the presentation, who were not able to get up the stairs due to practical issues of access/mobility which unfortunately cannot be avoided with a small venue.

However, one of our regulars, Terry, has published an excellent report of the CRAW presentation here.

Regards, Paul.

Small Cap Value Report (20 Nov) - JDG, BON, AVON, HYC

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Paul Scott

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