Small Cap Value Report (25 Aug 2015) - JPR
Good afternoon!
I'm running a bit late today, as after the market going haywire yesterday, I decided just to ignore the market altogether this morning, and let it do whatever it wanted to do. I'd already decided that I wasn't going to make any changes at all to my long-term portfolio (as I ignore market volatility in that portfolio). Also I had taken my large cap long positions, in my separate short to medium-term trading portfolio, so didn't want to panic sell on any further downturn, so spending the morning in bed seemed a good way to achieve that aim!
China
What a lovely surprise to wake up to, seeing that there's been a really big recovery in the main markets, including (most importantly) the USA, and also a bounce in China. The catalyst seems to have been the Chinese Govt reducing interest rates, and relaxing deposit reserve ratios for its banks. The market had been looking for a reason to rally, and this was it.
"Buy the dip" seems to have worked, yet again! (for now anyway)
At the time of writing the FTSE 100 has recovered by 194 points on the day, to 6,098. Even oil is up 3%, amazingly, which of course is a major factor in driving the FTSE100, due to BP (LON:BP.) and Royal Dutch Shell (LON:RDSA) being the 6th, and the 1st largest constituents by market cap, and of course with other large cap resources stocks also being important parts, such as £BLT and Rio Tinto (LON:RIO) for example. Add in banks and pharmas, and that's a large chunk of the FTSE 100 already accounted for. So it's not a great index for we small cap investors to pay much attention to really.
I recommend rummaging through the constituent companies in the various Indices, which is really easy to do on Stockopedia - just hover over the "Home" option on the black menu at the top, then select "Browse Directory", then select whichever Index you want to look at. The companies in that Index are then listed alphabetically, and you can sort them any way you want - e.g. by PER ratio, by dividend yield, relative strength, etc. This is a good way to scan for new investment ideas, I find.
For example, the screenshot below shows the FTSE 250 sorted by dividend yield, as I'm currently looking for some high yielding mid caps to add to my portfolio:
So this sharp market correction has certainly reminded us all that markets can go down, as well as up! Note how quickly this downturn happened too. Is this the way things are now, with so much more computerised trading, stop losses, HFT, etc.? Maybe we just have to get used to the market occasionally delivering a short, sharp shock?
Limit orders
The big opportunity that I missed yesterday unfortunately, was the chance to put in some opportunistic limit orders, well below the market price. If you had done that on some big US stocks, you could have absolutely cleaned up yesterday. I bought Apple Inc (NSQ:AAPL) shares at about $100 as they look terrific value at that price, on fundamentals.
However, imagine if, instead of buying just before the flash crash at 14:30 as I did, I had put in a limit order to buy at say $95. This is an automatic buy order, which will only be executed if the market price drops to that level.
So next time the market wobbles, I shall be putting in opportunistic limit buy orders on liquid large caps, to catch any opening spike down in price, when computers apparently were ramming through trades indiscriminately at any price, e.g. due to leveraged punters being closed out of positions.
Strong performers
Another area I've looked at, is to see which small cap stocks held up the best in this correction. Two in my portfolio really stood out, where all the selling was just hoovered up by buyers in the background, with the share prices hardly moving. These were accesso Technology (LON:ACSO) and Boohoo.Com (LON:BOO) and Norcros (LON:NXR) .
In my view the refusal of these shares to fall much is very encouraging, as if all the sellers are being soaked up during a chaotic down market, then that suggests to me these shares are likely to go up significantly in the future. It shows that existing holders are committed to their shares (thus limiting supply), and that buyers are seeking out the shares, even in a collapsing market (i.e. strong demand). We all know what happens when there is strong demand, but little supply - the price goes up!
So this is a good area to think about, in my view - which of your shares held up the best in the downturn, and maybe should you be buying more of them?
Or alternatively, if you were scared witless over the last week, then now that prices have recovered, today is a better time to sell things you're not comfortable with. Indiscriminate, panic selling in a downturn is nearly always the wrong thing to do.
Right, on to some companies - not that there's much news today.
(I am updating this article in sections, throughout the afternoon)
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12 comments
Costain (LON:COST) held up pretty well yesterday, in light of everything else dropping. Quite a defensive stock too - huge order book, great order visibility for years, and in sector of infrastructure so not dependent on market sentiments. Unless those sentiments start to hurt the real economy, then the government starts to slash public spending, but that is a long cycle....
There is a piece of analysis by JP Morgan showing the FTSE All Share suffers an "intra-year" drop that averages 15.8% during any one year, but the returns over the whole year were positive in 21 of the 29 years.
Using Yahoo finance and my calculator, is seems that index has a fall of 15.4% from it's high. That's average.
Anyway, the decision for me is do I assume this is an average mid year decline, or part of a longer bear market? If the former, I would have been looking to invest 6 months worth of money or more.
In practice, I'm just investing 2 months money, so just an each way bet.
Clearly for China, it's much more than that. The Shanghai index more than doubled in a year & is falling back sharply, although it's still nowhere near where it started in May 14. The chart just resembles another bubble.
Data Sources:
1 JPM UK "Guide to the makets" January 2015, chart pack page 62. (Google is your friend)
2 I used Yahoo for the 52 week high and low, as both are in this calendar year, they clearly fit the JPM rules. [The google finance data was clearly suspicious as their 52 week high was about 10% above any point on their chart. Google was not my friend in this case].
Perhaps I should be using Stockopedia ?
A few i'm looking to buy hardly went down at all like Burford Capital (LON:BUR) and Finsbury Food (LON:FIF). A few others did not go down enough to reach my buy target price. Some others went down a lot like Empresaria (LON:EMR) and have not fully recovered, in fact some recruitment companies have not faired very well, Servoca (LON:SVCA) is still down. Spaceandpeople (LON:SAL) is still down. We will see what happens tomorrow.
Can someone give me one credible reason for AO World (LON:AO.) to have gone up yesterday and again today (albeit small percentages) ?
I was expecting this stock to be an early significant casualty in yesterday's general carnage.
I think many heavily shorted shares behave oddly on occasion , I think as a result of many Hedgie Shorters also having Long positions in other stocks on margin as well.
When the market falls out of bed when buyers are on strike it can make sense to lock in a short gain and reduce their overall gearing without selling out their long positions in a weak market.
Great post Paul thank you for your insight much appreciated.
Regards
Charlene
Thanks Paul that's another bit of Stockopedia that I now know is there to use. It's also been great to have your (and Richard Crows) thoughts on the market turmoil over the last few days.
As a boohoo holder I thought my next opportunity had come in big time so spent the day hovering over the buy button but the price never collapsed. Oh well. As you say a promising sign.
Hello Paul
Your commentaries during the upheavals have been most welcome - some sanity when there is little to be found!
My small-caps have had very mixed experiences over the past weeks. Zytronic (LON:ZYT) has been fairly resilient but Entu (UK) (LON:ENTU) has been hammered, despite the prospect for cheaper supplies. Overall, my portfolio managed to fall less than the FTSE100, but it's been patchy.
I am also a fan of limit orders and hardly ever buy direct. It's amazing what anomalies occur early in the morning, even in normal times. In general, it has added a few beneficial p to each purchase/sale. However, they can also be a bit of a liability - such as when a buy limit order for BRBY triggered 2 weeks ago on the first Chinese devaluation; I didn't just scoop up on a dip, I caught a knife at the start of its fall! Topping up now could certainly be an opportunity, though.
Colin
I guess the almost unanswerable question is whether the dramatic dip of yesterday was the worst of it or whether there’s more to come in the coming weeks or months. I’m leaning towards the latter, but as a test of nerve for my portfolio I’m quietly pleased. If there are choppy waters ahead, its nice to know the stocks I own will most probably survive any sell offs and thrive in the future. It certainly was hard to keep my concentration on my day job (as a graphic designer) in the knowledge that my portfolio was tanking! I guess if we can survive days like that we can survive most things.
I found it quite strange that on Friday most of my small caps hardly moved and then yesterday, on the second big down day, virtually all (apart from ZYT) were down 5-7% or more at one point. So it was almost like on the initial spike down everyone forgot about small caps!
I must admit I'm not convinced that such a short period of time illustrates much about the resilience or otherwise of my small caps in a more prolonged downturn. Experience has told me you never really know how many leveraged PI's are in some of these stocks until it really turns nasty... I mean over weeks and months not a couple of days. It only takes a handful of forced sellers to seriously move the price down.... That is my main concern. It's the reason I try to concentrate on big liquid large caps in these market conditions. In particular, it's good to find high quality companies that you've already researched awaiting an entry point 10-20% cheaper in the space of a few days - last nights beneficiary was GILD at $100. Cheap as chips :-)
Si
Hi Paul,
"Or alternatively, if you were scared witless over the last week, then now that prices have recovered, today is a better time to sell things you're not comfortable with. Indiscriminate, panic selling in a downturn is nearly always the wrong thing to do."
Absolutely - buy the dip, sell the spike.
What a mad few days, I imagine most of us were ready to hit the bottle last night but today is a welcome recovery and nice to see several of my stocks rising higher than they fell yesterday at the time of writing. I guess the almost unanswerable question is whether the dramatic dip of yesterday was the worst of it or whether there’s more to come in the coming weeks or months. I’m leaning towards the latter, but as a test of nerve for my portfolio I’m quietly pleased. If there are choppy waters ahead, its nice to know the stocks I own will most probably survive any sell offs and thrive in the future. It certainly was hard to keep my concentration on my day job (as a graphic designer) in the knowledge that my portfolio was tanking! I guess if we can survive days like that we can survive most things.
Two that I noticed didn't move much were Indigovision (LON:IND) and Bioventix (LON:BVXP). The former perhaps because anyone that wants out is out now and whats left are stubborn long-term holders? The latter did open a few percent down but didn't move much from there all day. Very low volumes on both throughout. I picked up a few more IND, fingers crossed that sentiment is on the floor now, one contract win or any bid rumours could have a positive effect and downside seems limited going by yesterday. As long as theres no more bad news!
It's a bit frustrating. I've been waiting for Bioventix to dip so I can buy some more....didn't happen though.