Small Cap Value Report (22 Jun 2015) - THT

Monday, Jun 22 2015 by

Good afternoon!

I recorded a new audiocast yesterday, with Paul Hill, a successful value investor, and analyst. It's in two parts, because the phone call failed part way through. Warning - it's very long, as we covered loads of material.

One of the things we discussed is the surge in M&A activity, and also how pension deficits no longer seem to be the poison pill to block takeover bids that it's generally assumed they are. So bizarrely, two of the companies with the worst pension deficits in the small caps area, AGA Rangemaster (LON:AGA) and Thorntons (LON:THT) have both now received bid approaches.

I am increasingly coming round to the view that we are now in the last, euphoric, stage of this bull market. High levels of M&A activity is one sign of that, as are increasingly stretched valuations, indeed crazy valuations on blue sky & fashionable sectors (especially in America). Plus there are other signs of euphoria here in the UK - e.g. shares shooting up on newspaper and magazine tips, and large, spurious speculative rises in micro caps on no news.

It all points to a market that is seriously over-heating in some areas - which I suppose it was bound to eventually if interest rates remain close to zero for long enough - if people can borrow at almost nil cost, they will often allocate capital badly, chasing returns that would not normally be economic, and speculating wildly on things they know are over-priced, in the expectation that they will be able to sell before the crash.

I reckon we're heading for a major market correction or crash at some point in the next (say) two years, as it's all beginning to feel a bit like 1998-99 again - and remember what happened when the bubble burst in 2000-2002 - carnage for speculative stocks, but quite good for value stocks of course.

Thorntons (LON:THT)

Share price: 144.5p (up 42% today)
No. shares: 68.9m
Market Cap: £99.6m

Recommended cash offer - it looks as if the Ambassador will be spoiling us with pyramids made from Thorntons chocolates now too, not just Ferrero Rocher!

Ferrero International S.A. has bid 145p in cash for Thorntons shares. They're not mucking about either, and have already bought about 30% of the company by…

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14 Comments on this Article show/hide all

bsharman 22nd Jun '15 1 of 14

I agree that we are heading for a correction/crash and have moved into 50% cash over the past 6 months to hopefully pick up some bargains, when or if this happens. Having just read UK Value Investor's article 'FTSE 100 forecast and valuation' the CAPE of the FTSE 100 is slightly cheap at 12.6 compared to the average of 16. The conclusion to this article is that the fair value of the FTSE 100 is 8500. This seems to contradict the idea that the market is overvalued but on the other hand it does seem very difficult to find value situations. Market crashes tend to come out of the blue but it seems like everyone is expecting this one... Does that mean it's more or less likely - I don't know! Many people are sitting on the sidelines waiting... Perhaps and probably the healthiest thing to happen would be a short sharp correction of say 10-15% (caused by interest rate rises, greece or a 'black swan' event) therefore giving the opportunity for money sat on the sidelines to be re-employed...??

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Ramridge 22nd Jun '15 2 of 14

" I wonder which companies will be the next targets? "

Simon T of IC's answer this morning is potentially : Ensor, Bioquell, Inland Homes and Pure Wafer

Far for me to disagree, as he is currently on a roll.

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kenobi 22nd Jun '15 3 of 14

One thing that could push us into a crash of sorts would be a grexit from the euro, or even from the eu, things seem to be getting nowhere, with I guess a slightly more positive bias over the week end, that wouldn't be so out of the blue. Normally I agree these things do seem to happen from nowhere.


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herbie47 22nd Jun '15 4 of 14

In reply to post #101531

Are Ensor and Bioquell not already subject to bids?

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Camtab 22nd Jun '15 5 of 14

I am not sure the Grexit card isn't over played. The market has been aware of it for a long time and doesn't seem to react in a meaningful manner. Equally I recently saw a Goldman Sachs chart somewhere which suggested current CAPEs were nearer 27 times. I am in agreement I think one of the issues is the market has forayed above the 7000 mark but it hasn't held it. I think this is because companies generally continue to look toppy with few real stories left. Sooner or later momentum runs out and we have to find a lower level. I think the key will be when bond yields start to move upwards......but no ideas when that will be.

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herbie47 22nd Jun '15 6 of 14

Yes it does not seem to stop take overs, Nationwide Accident Repair Services (LON:NARS), was another that had a large pension deficit.

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herbie47 22nd Jun '15 7 of 14

In reply to post #101542

The Golman Sachs Cape was for the USA market?

The FTSE has not gone up for 15 years, with inflation then that may make it reasonable value.

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Ramridge 22nd Jun '15 8 of 14

Re. Frothy Stock Markets.  IMO what really matters is what is happening in the US. Because the UK simply follows when things get ugly, percentage point by percentage point.


The table above is about 3 months old. I don't think there is a sane US analyst who would disagree that the US is in frothy territory.  There hasn't been a US stock market correction (i.e. a fall of between 10% - 20%) for around 4 years when the long term trends suggests a correction every 1.5 yrs. 

So the question to me is how best to prepare for it. What is the best strategy and when to put it in motion. 

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bsharman 22nd Jun '15 9 of 14

In reply to post #101551

According to the Value Investor article the CAPE on the FTSE 100 is 12.6 at the moment. Are those figures for the whole market? I agree that the markets in the US do look overvalued and should be due a correction. Even Janet Yellen has stated that US equities are fully priced. In terms of strategy, I bought £XSPF as a hedge. This isn't working at the moment but gives some protection if there is a fall in the US.

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tiswas 22nd Jun '15 10 of 14


Do you have any figures for the Euro markets, I would be particularly interested in the DAX?

Or a link?


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Ramridge 22nd Jun '15 11 of 14

In reply to post #101554

Guys -
I got my data from the following Daily Telegraph article dated 6/6/15.

Source: Datastream/ Hargreaves Lansdown

The whole picture depicted as a wheel makes very interesting reading.

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Fangorn 22nd Jun '15 12 of 14

Thornton's has been a sitting duck for a while - the chocolate offering simply isnt good enough when compared to the likes of

Pricier, but well worth it. Puts Thorntons to shame frankly with their very inferior offering.

"I reckon we're heading for a major market correction or crash at some point in the next (say) two years"

Suspect it will be earlier than many think..first interest rate raise, even for a lousy quarter point, will set the alarm bells ringing. UST/Gilts/Bunds and similar from rest of Europe are so overvalued it beggars belief. Once the interest cycle has turned,and its imminent, this traditional safe haven will sell off rapidly..

Greece will merely see the can kicked down the road yet again...but all this means is when the proverbial finally hits the fan, the impact will be far larger than if it had been dealt with properly now.

Greece needs to leave the Euro, devalue, start afresh.Two bailouts so far and its a country still in dire financial trouble. Much of southern Europe will follow...the economic straitjacket required means full political union is required for the EU project to have any chance of success - and losing complete sovereignty is something the citizens of most countries will simply not accept - unless of course they're so dependent on the EU slush fund that they'll have to bat on regardless.

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underscored 22nd Jun '15 13 of 14

In reply to post #101551

“Generals always fight the last war”. Mega bubble in China, and Chinese stockmarket does not get any mention. Are they too small an economy for that to be important?

Not sure how a credit bubble can be slowed without popping, but then maybe Red Centralized Capitalism is something new?

My guess is that the future will rhyme with the past and the enormous China bubble is the current risk to the system, whilst everyone is watching the last War USA/EU.

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Ramridge 22nd Jun '15 14 of 14

In reply to post #101566

Hi underscored - maybe this chart puts in perspective the dominance of the US stock markets ?

Any sign of market correction or crash in the US stock markets will immediately affect all the minnows you see in this chart.  The converse is not necessarily true.


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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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