Small Cap Value Report (25 Jun) - LOQ, PLA, KBT, IOF, TRI, BYOT, ACM

25th Jun '13 by Paul Scott

5 comments 18707 reads

Good morning. It looks like we should get some respite today from the considerable market falls in the last month, triggered by the Fed saying they would be looking to wind down QE. There was another big rally in the US markets last night, although as previously it didn't hold to the close. FTSE 100 futures are indicating that our market will open up strongly around 50 points at 6,076.

It seems to be the resources sector that's bearing the brunt of the falls, and indeed I'm beginning to hurt on my recent punts in this sector (Medusa Mining (LON:MML) and £AGB), which are about 7% and 20% down on my average entry prices only about a week ago. Ouch!

Results from Lo-Q (LON:LOQ) are for the seasonally very quiet winter period, when most of the theme parks they supply with virtual queuing systems are closed. So turnover rose from £3.7m to £5.6m, and the underlying loss worsened from £1.1m to £1.6m. They have also moved from a net cash position of £5.3m to net debt of £1.8m due to an acquisition.

I don't think anything much can be gleaned from these results, since H1 represents just 12-15% of annual turnover, whilst fixed costs continue being incurred. Surely it would make more sense for the company to pick a year-end date which creates roughly equal H1 and H2 performances?

The outlook statement & narrative are more important, and there are some nuggets in there which might keep the bulls happy with the very high market cap. The "accesso" acquisition is said to be trading ahead of initial expectations. Also, they confirm full year expectations, which is for 16.5p EPS. So at 547p that puts the shares on a PER of 33 times this year's consensus forecast! Clearly the company needs to beat expectations, not just meet them, to justify that sort of rating. It's a nice growth company, but it remains much too pricey for me.

Plastics Capital (LON:PLA) announces its preliminary results for the year ended 31 Mar 2013. They look reasonable, given the weak economic backdrop in the UK & Europe. Turnover is slightly down by 2% to £31.4m. Adjusted profit before tax is down 12% to £3.3m,…

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SevenPillars

25th Jun '13

Interesting points about stop losses.

I recently experienced the type of spike down which you mention which took out a 10% stop on a smaller company which I had a small spreadbet open on. What made this interesting is that the company itself was not particularly volatile and it's upward trend had been steady, history showed that it rarely moved that much at all at least not quickly. There was a sudden spike down of around 10% which lasted for all of about 10 minutes soon after the open. Then the price went back to where it was before, almost as if nothing had happened. At first I thought it might be an error as it didn't show up as a price move on any charts other than the spreadbetting package, but when I checked a different site for the price moves for the day it was recorded as having happened, so who knows who was at work at that time? Annoying to be taken out like that, especially when the price reverts back to where it was before, in this case about 10 minutes after it happened. In this case, historically a 10% stop looked more than enough, but it just shows that anything can happen in the world of smaller companies.

Stops are often placed around or just below potential support points on charts. It is not obvious from the Iofina chart which support points would have been aimed for by someone trying to take out stop losses as depending on the time frame traded, a fall of that magnitude would have taken out most stops at support levels created over the last 6 months. It more or less took the price down to the 110-120 support range from Jan this year.

Do you use stops at all? The main problem with spread betting and not having stops is the sudden drop that doesn't come back, that's when the losses that a stop would have saved you from suddenly mount up. At what stage might you decide to give up on trade if it goes against you?

Paul Scott

Hi SevenPillars,

These bizarre intra-day spikes down nearly always happen in stocks which are popular with PIs using Spread Bets. So it looks to me like a deliberately targeted attack on these positions, by someone who knows they can trigger peoples stops.

That's why I never use stops on Spread Bets. They are totally illogical anyway. You should be selling after a big rise, not after a big fall!

Personally I only ever spread bet on companies with good solid earnings & balance sheets, and which pay dividends. They tend to find good support even if the company does issue bad news.

More importantly, I never use spread bets for highly speculative companies, they are just not suited to that. Far better to buy speculative shares outright, then you cannot be stopped out. The most important thing is to weigh up risk/reward before you buy them, and calculate what the maximum potential downside is. I do that for every share, whether buying them, or Spread Betting on them.

So depending on the company, I would usually estimate the worst case scenario to be a 30% drop in the share price (for my type of value small caps that is usually ample). Then I work backwards from a figure of £x that I would be prepared to lose in the worst case scenario, and it not be too painful to my portfolio overall. That then determines my position size.

Leveraged products are so dangerous, and simply are not suited to illiquid shares, and speculative companies. Also, people use far too much gearing. One should always consider the underlying value of the position, so instead of saying it's £100 a point on Iofina at 150p, think about it as £15,000 that you are risking, as if you had bought £15,000 worth of shares. Often you will then find that you've wildly over-sized the position.

This is the stuff that got me into trouble in 2007-8, when I had massively over-sized leveraged positions in illiquid stocks. Then the world went into melt-down, and I couldn't get out of the positions. Total nightmare.

However, when operated with strict controls on limited gearing, care in position size, diversification into a basket of stocks, and only selecting sound companies, it actually is possible to run a Spread Betting account very profitably. Very few people manage it though, but with the right rules in place that you stick to, it can be done.

Regards, Paul.

it_trader

An interesting strategy would be to reverse this, and determine where the stop losses are and place buy orders there! Any spike downs will cause you to buy, and then be in profit 10 minutes later!

I'll let somebody else try this out though ;)

timarr

Just in passing Paul is right about the round number thing and stop losses, I wrote about it here: Irrational Numbers and Stop Losses. It's known as price clustering: people just like round numbers it seems.

marben100

Hi Paul,

Surely it would make more sense for the company to pick a year-end date which creates roughly equal H1 and H2 performances?

I don't think it's possible for the company to do that. AIUI LoQ makes the bulk of its theme park revenues from just a few popular weekends, when the parks are packed and queues for rides can be horrendous.

Cheers,

Mark

Small Cap Value Report (25 Jun) - LOQ, PLA, KBT, IOF, TRI, BYOT, ACM

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