Small Cap Value Report (26 Aug 2015) - IGR, HSS, LTHM

26th Aug '15 by Paul Scott

37 comments 27784 reads

Good morning!

At last we have some interesting company results and trading updates, so I'll be able to get stuck into some proper reporting, rather than waffling on about chaotic market conditions!

US markets

The amazingly strong recovery that we saw yesterday, fizzled out in the US markets in the last hour, as you can see from the five-day chart below of the S&P 500. It has bounced strongly this week, twice now, but closed last night's session at or around the lows (of around 1870) which have been hit three times now this week. So traders are looking to see if this level holds again. If it does, then the market will have probably put in a bottom, and it will be time to gear up & go long. If c.1870 doesn't hold, then we might see another lurch down, who knows? So far, so good this morning, with the S&P futures currently at 1900 (at 9:12 am)

This chart is the last five trading days, from Wed 19 Aug 2015, to yesterday, Tue 25 Aug 2015. So you can see the two big plunges on Mon, then a big bounce followed by another big fall, on Tue (yesterday):

I'll stick my neck out, and say that I reckon this could be the low point, and I'm leaning a bit towards a decent recovery from here. Although that's purely a hunch. Why? Because the economic recovery in the USA is looking good now, inflation is low, and lower oil is feeding through into more consumer spending. When the American economy grows, it tends to pull the rest of the world up too. Cheap oil has historically always been good for growth too - fairly obviously, as it gives people and companies more money to spend, more than offsetting the reduction in capex by oil companies.

Stock markets fundamentally go up & down because of expectations about future company earnings. So markets crashed in 2007-8 because the market realised that corporate earnings were likely to drop heavily, which they did. Then markets recovered, as the financial crisis stabilised and corporate earnings began to recover strongly.

So I don't think there is any particular reason for shares to have another big move down, unless the market becomes convinced that earnings growth is stalling, or even likely to go into reverse. It's obvious why resources stocks have sold off, but it's difficult to…

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Camtab

26th Aug '15

Thank you Paul and Herbie. Paul your reflection is interesting in that I have unwittingly changed my investment approach. I have found too often in the last year stocks running up and showing a decent profit, which I should have taken and didn't only to see it disappear and me kick myself. This has been a characteristic of the recent "stable" background markets have had. I shall take your advice and return to the longer term. It does leave me with a question though, if I create a trading account what in your opinion is the minimum sum one should begin with? I am presuming because the duration is shorter (and therefore risk is greater because decision becomes right or wrong) the investment size is smaller. Equally the choice becomes one of where my skill lies, am I good at reading prices or am I good at company analysis.

Flackwell

Love the introductory quote

At last we have some interesting company results and trading updates, so I'll be able to get stuck into some proper reporting, rather than waffling on about chaotic market conditions!

And then exactly how many paras follow on the US and chinese markets + boom or bust prior to that very same 'proper reporting' ?

Steve L

What a super, well written article. Many thanks.

Paul Scott

Hi Camtab,

If anyone I knew told me that they were going to try trading the stock market, I would strongly urge them not to! Very few people have the ability to consistently beat the market over the long term, and spread betting accounts are a money pit for the vast majority of clients. That's why the Govt is happy to leave them tax-free - as the overwhelming majority of clients lose money overall.

I once asked my a/c manager at a big SB firm how many client accounts were worth following, as the people consistently made money. His reply? Six! (out of many thousands of accounts).

Momentum trading has worked brilliantly in the last few years, but I suspect we might now be coming out of that period, into more sideways markets, with a lot of volatility. If I'm right about that, then people who have traded the upward momentum in recent years may now find that approach becomes loss-making - as they will buy things that are rising, only to be stopped out when they fall back again.

I don't think there is any substitute for buying good quality companies at reasonable prices, with a good outlook. That's what I try to do, but obviously sometimes I'm wrong and sometimes right, because the future is unknown. It's also very much the Stockopedia approach, with StockRanks, which is I think a brilliant system that screens for good quality, improving stocks, and steers us away from over-priced junk.

Although there are lots of different ways to make money. A wise friend of mine said to me, "Just do more of what works!", so I have that pinned on the wall next to my PC!

Cheers, Paul.

janebolacha

Simoan,

SUGGESTED HEADLINE (facts presented otherwise):

"Chinese investors still have two-thirds of the gains they have made on the Shanghai stock market over the last eighteen months"

So immature, inexperienced, greedy gamblers have lost only one-third of their gains, having still blindly and luckily (and perhaps undeservedly) doubled their money.

Sorry but why the kneejerk panic in the West at a time when our own economies now seem set for steady recovery?

Yes, if investors still have exposure to China in resource stocks, mining stocks, banks, luxury brands, heavy exporters, etc, doing business with China, despite all the warning signs that have been showing up for months now, well, what can one say other than "bad call, you pay the price"?

Yes, I do appreciate the risk of contagion but this is, imo, definitely not a re-run of 2008-2009 when the problems were centred in the West and affected just about everyone in Western countries.

So, yes, I do see this as a cautious buying opportunity.

zoolook

BQE Bioquell have reported interim results this morning and is a company you have commented on before without any enthusiasm but it is a special situation now you might be interested in. They are now sitting on £47million cash largely from selling one of their businesses and looking at returning cash to shareholders and also selling remaining businesses. Market cap is £56million.

Rusty2

My opinion, its little to do with the Chinese stock markets which are like casinos anyway, however many investors there are new sucked in by the large gains, they have lost lots of money, some seems funded by the banks. I believe its more to do with the Chinese economy which is 2nd largest in the world I think, if that suddenly goes into recession it will affect the west. As its a large market many companies will have exposure to it, directly or indirectly. The largest exporter to China is the European Union. The USA were going to put up interest rates but that now seems to be delayed.

There are actually quite conflicting views on whether China is going into recession or is simply starting to make, rather bumpily, the transition to a middle-income, medium-growth services and consumer economy that other countries have made in the past.

Here's an extract from an article I read today on seeking alpha:

"In the last two days, we have had multiple reports by companies that actually do business in China. The data reported do not depend upon a Communist government's biases. Anything said can either be immediately confirmed by official US filings, or soon will be. I watch for this information like a hawk, scrolling back on TIVO to get the full story.
•Apple (NASDAQ:AAPL) CEO Tim Cook reports that business has never been better in the Chinese Apple stores, and that new connections are at a record rate. (I know that deniers want to attack him for saying this, but we will all know soon whether or not he lied. Do you really think so?) This is confirmation of the consumer demand.
•BHP Billiton (NYSE:BHP) CEO Andrew Mackenzie stated on CNBC that internal data confirmed the official claims of 7% growth. He quietly and patiently explained to a skeptical and aggressive Cramer that the company had been trading with China for 20 years. Its internal indicators worked just fine in past periods and showed 7% growth right now. He cited supply chain evidence. See the full interview.
•DHL CEO Stephen Fenwick made similar comments in his interview, saying that business in China was good and fears were overblown."

http://seekingalpha.com/article/3466556-what-every-investor-must-know-about-china?ifp=0

Are these people telling lies?

I read all kinds of contradictory stories about the situation in China.

Whatever the situation is in China and its future, my point remains which is that making investment decisions in a climate of ignorance, fear and panic is perhaps not the wisest thing to do.

My reading of it Herbie is that investors are concerned about the level of investment from Global Banks and the impact of declining growth on that despite increasing levels of investment. That is to say investment in non productive assets. Another financial meltdown couldn't be supported by Govts or Banks.

Jane,
Thanks for that information. Yes I was thinking about Apple as China has now taken over the USA for phone sales, so it is rather exposed to a Chinese recession. I guess at the moment things are ok, as these things are probably bought on credit. Anyway the fear in the west is China is slowing down, why did they cut interest rates? Also concerns about their banks.

Yes good point. The problem is if there is another banking crisis what do Govts do, cant cut interest rates as they are so low already.

hayashi22

Superb reportage re HSS. Anyone looking at an IPO should consider two main rules;
1. Never get involved in a private equity sponsored IPO
2. Never get involved in a private equity sponsored IPO.

Personally I am of the opinion they will have to grin and bear it. King Canute found out what happens when you try to hold back an unstoppable force. The interventionism so far has made asset holders richer and everyone else poorer. Accepted it would be horrible. The only way out of the current demise is inflation which will be horrible also. Problem is politicians can't deal in horrible, doesn't tend to win votes so we keep kicking the tin down the road.

Ramridge

Hi Jane -
What we know is China's history of manipulating economic data that it puts out to the world. We are debating now if the 7% growth rate is believable or not because past history tells us that China has been guilty of massaging the figures. Here is a good article from the Economist on this issue:

http://www.economist.com/blogs/freeexchange/2015/07/chinese-economy

Only time will tell us if the doubters are right. If the Chinese economy is indeed slowing down, then the impact on all major economies and hence stock markets will not be trivial.

brucepackard

I haven't taken up any private equity IPOs. I can't believe that PE is going to be able to float anything for the next 10 years. Surely there comes a point when retail investors and even the dopey of the dopiest fund managers say
"Enough. The rule of thumb is: whatever PE is selling, I'm not interested."

bsharman

Hi Paul. It is at times like these in which value investors lick their lips at the value being offered in the summer sale. Somewhat fortunately I was dramatically reducing my portfolio size over the past year. I would like to say that was entirely because I expected a correction or worse but in reality it was because i'm moving into a more 'liquid' market (if you get my meaning!) Anyhow there were quite a few alarming statistics i was aware of leading up to the Chinese crash, one of which is a report i read on the number of retail broker accounts that were opened in China in the Spring - 2 weeks in March 2.8 MILLION ACCOUNTS WERE OPENED and in April 4 MILLION NEW ACCOUNTS WERE OPENED!!! I found this quite shocking and was a BIG red flag! Conversely as a stock picker it's also good to see the stock markets being mentioned (for the wrong reasons) on the radio 2 news and as headlines on most of the TV broadcasters and newspapers - A very good indicator that we are near to the bottom (along with more technical indicators such as the VIX and RSI) - If I had any cash that wasn't going into the beer business i'd be buying selectively now and concentrating on good cyclical mid/small caps with exposure to the domestic economy. It's a pity that i'll have to sit this one out but i'll be back soon when (hopefully) I start selling some beer (and competing with the likes of Greene King (LON:GNK) and Marston's (LON:MARS) lol!
Cheers,
Ben

snickers

About the difference between finance and other domains of knowledge: finance is constantly altering its own reality. Innovations and reform of institutions change the environment the institutions are trying to control. Of the other domains you (Paul) mention maybe only Medicine can also do this: antibiotics are changing the nature of bacteria, and we'll see a crash if they fail.

I took a history of finance course by Robert Shiller, and he was optimistic that there is actually a slow improvement in financial knowledge. But he looks so sheepish and apologetic it's hard to know if he really believes that.

underscored

http://www.ted.com/talks/yuval_noah_harari_what_explains_the_rise_of_humans

We are always making our own narrative based realities. Sometimes the fundamentals interrupt, then a new narrative is needed.

Catstycam

Excellent analysis of the US and China Paul. Good reading with some very valid points. It does seem that we all probably do need to get badly burnt before we learn lessons. These days I seem to get singed rather than the full cremation. Maybe it will just be boring if we don't make the occasion mistake, although I am happy to give it a go.

2nd Sep '15

More evidence that China is slowing down, this time German car manufacturers, I guess the big ticket items will get hit first. Also from 21 August "A detailed breakdown of China's PMI survey showed conditions deteriorating on almost every level in August. Factory output sank to a near four-year low as firms laid off more workers, while domestic and export orders fell at a faster rate than in July."

Sure some companies will still be doing well.

Small Cap Value Report (26 Aug 2015) - IGR, HSS, LTHM

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Paul Scott

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