Small Cap Value Report (24 Aug 2015) - BLNX

24th Aug '15 by Paul Scott

23 comments 16312 reads

Good morning.

The sell-off continues. My first words this morning were "Holy c***!" as I checked my iPad to see what the FTSE 100 futures were reading - down about 200 points to around 6,000. It even dipped a bit below that briefly. Who would have thought the FTSE 100 would be poised to start with a 5 again?

I interviewed astute trader/investor Richard Crow again yesterday (click here for the audio file, if you have a spare hour!) and he described the FTSE 100 as a "nonsense index", being so heavily weighted with resource sector companies, and groups with international earnings. So it's not a good proxy for how well the UK economy is doing, and as I mentioned here last week, the small and mid cap indices are doing much better than the FTSE 100 - which is why this correction doesn't feel that bad for small caps investors.

Small caps were seemingly detached from the meltdown until about Fri last week, and there's a lot of selling this morning again. I'm making a list of shares which are starting to look interesting to buy, but I can't really see any amazing bargains yet. So it's tempting to just sit and wait for better bargains, before deploying my reserve cash. I'm more tempted by some large cap bargains actually.

The big question is whether this is another "buy the dip" opportunity, or whether the carnage in China & emerging markets (stock markets & currencies), plus the resources sector, is now tipping the whole market into bear territory? I don't know the answer to that, since it depends on decisions which market participants have yet to make, but I think it's best to be prepared for either outcome.

Overall I reckon we're probably very close to a strong short term market rebound, but I'm not convinced it will last very long. I'm more nervous now than I have been in previous corrections, because there seem to be so many more things going wrong macro-economically around the world.

Still, for good quality, reasonably-priced small caps, this should all blow over, so personally I've not made any changes at all to my long-term portfolio. Actually, I think the buying opportunities at the moment are more in large caps, so I've been browsing Stockopedia's USA & Europe edition, and have this morning bought some BMW, and Intel shares. Both look good value to me (even…

Unlock with Email

Unlock with Google

Already have an account?
Login here

simoan

24th Aug '15

Hi Paul,

Interesting that you bought Intel. I think long term it will do well but short term I think the balance sheet could look a little stretched with the debt they are taking on for the Altera acquisition. Do you have different rules when buying large caps with respect to the balance sheet, or have you looked at it and felt the level of debt manageable even if the brown stuff really hits the fan?

Like you, I have started to compile a watchlist of quality small caps in case they get sold off irrationally in the coming days and weeks, but most have not moved much at all yet.

All the best Si

Ramridge

There are rare days when it is good to be colour blind...

WatsonNimrod

I just had a quick browse of my portfolio to see 52 companies in red, none in blue and one in green......

......The much maligned Shoe Zone!

underscored

Not me!

lucien2k

The big problem is all the uncertainty I think:

- Market artificially inflated in china (and seemingly falling like a rock, down 40% since June)
- Price of oil (is the US pushing this to cause problems for countries dependent on oil, Iran, Russia etc?)
- Inflated tech company valuations in the US
- Russia....
- Greece..... EU....

Hard to have confidence when these risks are completely outside of a company's control.

andrewdb

Paul, I got out of BMW when I read a lot of BMW's profits have been coming from China and the sales figures are being supported by the stock being pushed on the dealers there.
I bought Infineon in the basis it was in the same area but sold to multiple manufacturers (much good that did me)
so as always, dyor.

dasv

andrewdb, Paul - yes interested you bought BMW, Paul. I liked the co. even in 2007. But now, China weighting is a concern as andrewdb mentions.

Also Daimler is apparently up against a secular decline in global car sales.

Apparently a huge percentage of young people are not bothering to learn to drive and the shared economy makes car ownership less de rigeur.

Having said that BMW are brilliant at what they do.

CMWilliamson

Hello Paul

We are certainly condemned to live in interesting times! It seems to me that the falling knives are propelled by fear of negative momentum itself rather than any major shift in fundamentals. After all, we knew that the Chinese stock markets were irrationally exuberant, why should we be alarmed when they go through a much-needed correction?

I am rather distrustful of Momentum when it comes to stock selection as it is as sustainable as a puff of wind - and can reverse direction in a heartbeat. I know that Stockopedia back-testing of high M-ranks indicates some out-performance, but I must say I prefer to focus on Q and V characteristics. I'm sure that good shares will be/are being underpriced during these dog-days of August but, having caught a couple of falling knives recently (small Entu (UK) (LON:ENTU) and larger £BRBY), my hands are still in bandages!

I look forward to reports of your first words tomorrow - I hope!

Colin

jimbobjames2002

The sell off is approaching irrational levels at the moment, which hopefully will lead to a bounce in the short term. Can't believe how much the S&P 500 has fallen - I had a $1800 target over the long term - it's got most of the way there in the space of 2 trading days! I as speak its bounced a bit from 1833 to 1908, lets hope that signals the worst of it for the short term.

Catstycam

Some folk on bulletin boards are quoting Warren Buffett "be fearful when others are greedy and greedy when others are fearful", to justify buying into the falling market right now. I don't expect for one minute that WB would have bought in at the first opportunity. "In a few months time the shares will seem cheap at these levels", etc. Yes, they might, or then again, it may be more than a few months before the shares reach these levels again from a downside. I have sold out of most of my holdings today, rightly or wrongly to preserve some capital rather than possibly wait longer and not have any TO preserve. How do I feel?, disappointed but strangely (or not) a lot more at ease and likely to sleep better.

Paul Scott

Hi Catstycam,

That sounds like an emotional response to market falls. Why on earth would you sell low, in order to feel comfortable? Yet you felt comfortable (presumably) when those shares were high.

That all sounds the wrong way around to me. It's all about BLASH - buy low and sell high, not the other way around.

Market plunges like this are exciting - these are the times to be picking up great bargains!

Regards, Paul.

Hello Paul,
thanks for the reply. I understand what you are saying exactly. Yes, it could be perceived as being emotional. However in many ways it isn't. Too many investors get emotionally attached to their shares and don't sell when they should do. It may be the sort of shares they should never have bought in the first place of course, but holding when one sees the value disappear is not great, even with the better companies. Yes, I did feel comfortable when the shares were higher. There will be great bargains to be picked up for sure. However, I see more downside first, so low may get lower yet.

I am an experienced investor, despite what may be read into my post. The shares I have had are no longer in the high risk/high reward (usually no reward) companies. I set strict criteria before I invest, largely based on Jim Slater's Zulu Principle, Stockopedia and Robbie Burns. This criteria has very largely been successful on a majority of my holdings over the last no of years. On the face of it I could have sold out a fair bit higher than what I did, but none of us know when the best time is to sell; it is nearly always more difficult than the buying.

As I posted - I felt I needed to preserve some capital. We are not all in a position where we can sit and wait for the market to change direction. If a share falls 20%, it need to rise 25% to regain its previous level, 25% it is 33%, etc. I am not out of the market for good, or at least most unlikely to be. I am sitting on the sidelines to wait for a better time to re-invest.

"Markets plunges like this are exciting.........", ok, each to their own excitement Paul!. Not my kind of excitement; lol.

Thanks for the time you put into your comments. Appreciated. Good luck and regards

Catsty

Hi Catsty,

Well, whatever you're comfortable with.

I can't see the logic in your approach though, if I'm honest.
If a company is strong on fundamentals, and reasonably priced when you buy it, then why on earth would you want to sell it, if the fundamentals remain the same, but the price drops say 10-20%? Surely you should be buying more, because it's now better value?

Capital preservation is vital if you're using gearing, that's why I slashed my geared portfolio last week, as reported here - the key is to act early, BEFORE the big market falls, when things are starting to look wobbly.

But if you own the shares outright, then there's no compulsion to sell at all - you can ride out any downturn that the market can throw at you.

In my experience, people who are cautious, and sell out after a big fall, never have the confidence to buy back at the market lows. They sit on their hands and wait until the market has recovered, in order to feel confident, so miss all the best buying opportunities.

Anyway, good luck! Sorry for preaching, I've had a couple of tinnies! (well deserved after a day like today lol!)

Regards, Paul.

You're not preaching Paul, just coming from a different direction. You are right about cautious people (generally) not having the confidence to buy back at the market lows. Missing the best buying opportunities is a risk one takes. Yes, perhaps I should be buying more, understandable logic. Acting before the big market falls, yes, it would be great. If you are going to panic then panic early!. Lets see what the market throws at us.

I have a different approach to you, but respect your approach as an alternative.

Enjoy your tinnies.

Regards

Catsty

Likewise Catsty.

There are many approaches that work, so if it works for you, then keep doing it! :-)

Best wishes, Paul.

Roger Lawson

25th Aug '15

I see re Blinkx that 20% of shareholders voted against CEO Brian Mukherjee at the AGM today. I guess they have lost confidence that he is the man to turn around this business, and although I was not there, so have I.

28th Aug '15

Roger,

So, in a nutshell you were completely wrong on Blinkx (LON:BLNX) , and I was right.

Bad luck, it happens to all of us from time to time.

So perhaps accountants are not so useless at analysing software companies after all?!! ;-)

Regards, Paul.

Paul, I don't think the original argument was about the merits of your or anyone else's financial analysis of Blinkx. It was about whether the Edelman blog was a totally fair and accurate commentary on their business, and whether it was being financed and promoted by market shorters who wished to profit from damaging the company's public perception. In reality Edelman's comments and the publicity it obtained damaged the whole sector and resulted in falling revenues, margins and profits for Blinkx. They were also overtaken by a change in the sector to more focus on mobile and programmatic advertising which is less profitable at present. The CEO of Blinkx might be blamed for not making a more vigorous defence of his company and the industry at the time and his inability to retain the confidence of investors in how he was going to return the company to profitability. Hence my previous comment.

PhilHofGrowYourDough

post 20, lacks class imo and does nothing to encourage discussion. It's also ironic especially given that Paul has just realised a "big loss" on Twitter (a software company)

Phil

PhilH,

I think if you remember the history of Roger's posts, and his dismissive & sometimes very rude comments about my analysis on Blinkx, then my response above is mild, and indeed was intended as little more than a gentle ribbing. Perhaps that didn't come across well in text, but that was how it was intended anyway. (as evidenced by the smiley face I put in - which indicates that a comment is meant light-heartedly)

Of course we all get investments wrong, all the time. However, it's generally best to listen to the bear case, as this case proves - bears only short companies where there are serious problems, in my experience.

If you dismiss other people's opinions as rubbish (or "bullshit analysis" to use Roger's comments about my reports on Blinkx & Globo), and state that accountants have no idea how to value software companies, then you should expect to have a lot of egg on your face, and to use those eggs to make a nice humble pie, which should be eaten in considerable quantity when you're actually proven totally wrong!

Roger's a grown-up, he dishes it out, so I'm sure he can take it too (as indeed can I)!

Regards, Paul.

Small Cap Value Report (24 Aug 2015) - BLNX

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

23 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...