Small Cap Value Report (27 Aug 2015) - CHH, XAR, FFY

Thursday, Aug 27 2015 by

Good morning!

US markets

Fears about China seem to be abating, and the US markets put in an absolutely spectacular recovery last night - the Dow was up about 600 points, one of the biggest ever points rises (although of course that accolade gets easier over time, as the base is larger, so a big points rise is now not so big in percentage terms. Still, it sounds good!).

What I found particularly interesting, is that the big US end of day slump on 25 Aug appears to have been triggered by a technical factor - apparently traders spotted that the sell orders for the close were astronomically high, so they front-ran that selling, causing a late day plunge. That factor then reversed overnight and fed into the huge rises reported yesterday, once it became clear this was a one-off factor (possibly driven by forced selling by margin traders, and/or ETFs).

Furthermore, with the S&P500 futures now at 1962, we have not only broken the highs from Mon & Tue, but also put in what appears to be a short term bottom. I have marked on the S&P500 chart below the points where buyers overtook sellers (the blue arrows), and where sellers overtook buyers (the red arrows):


My occasional audiocasts with successful investors/traders are popular, and the most recent one with Richard Crow is now also available in typed form - for deaf people, but also for anyone who prefers to read the discussion, rather than listen to it. Here is the link for that.

Richard always comes up with interesting points, and his hunch that the market would rally, looks to have been spot on, so far anyway.

One final introductory point - I updated yesterday's report with further comments on James Latham (LON:LTHM) and SkyePharma (LON:SKP) so please click here to revisit that full report.

Churchill China (LON:CHH)

Share price: 535p (up 15p today)
No. shares: 11.0m
Market cap: £58.9m

Interims 30 Jun 2015 - these are such easy accounts to interpret - the numbers are simple, the narrative is concise, so a pleasure to read. I'm running out of time today, so will just do quick bullet points:

Revenue only up 3% to £21.4m (hospitality up 6%, and 83% of…

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Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

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Xaar plc is engaged in the development of digital inkjet technology and manufacture of piezoelectric drop-on-demand industrial inkjet printheads. The Company's segments are product sales, commissions and fees, and royalties. It offers a range of industrial inkjet printheads and printhead systems, which are designed and produced to meet the customer-driven requirements of a range of manufacturing applications. Its primary markets include wide-format graphics, ceramic tiles, labels, packaging, coding and marking, three-dimensional (3D) printing, advanced manufacturing and decorative laminates. The Company sells its technology in component form (the printhead) to original equipment manufacturers (OEMs) producing and selling the complete digital printing solution to the end market. It partners and co-develops with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a total solution to the end user. more »

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Fyffes plc is a marketer and distributor of tropical produce. The Company operates through Tropical Produce activities segment. The Company operates through two divisions: Tropical Produce and Property activities. Its Property activities include its investment in Balmoral International Land Holdings plc (Balmoral), an international property company. Its Tropical Produce division is a distributor of tropical fresh produce, comprising three product categories: bananas, pineapples and melons. The primary activities of the Tropical Produce division include the production, procurement, shipping, ripening, distribution and marketing of these products. They are produced in Central and South America and distributed to the Company's customers in Europe and the United States. It owns and leases over seven banana ripening centers in the United Kingdom, Germany and Ireland and a melon distribution center in Florida. It offers product under Fyffes Blue Label brand. more »

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  Is LON:CHH fundamentally strong or weak? Find out More »

23 Comments on this Article show/hide all

vik2001 27th Aug '15 4 of 23

yes please Paul i echo that one of your reports on Fyffes be good to :)

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Graham Neary 27th Aug '15 5 of 23

Didn't know you were a technical analyst, Paul!!

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Paul Scott 27th Aug '15 6 of 23

In reply to post #105430

Hi Graham,

I was wondering who would tease me for including some very basic technical analysis!
I do think turning points in the chart (for very liquid markets) are important, as that shows the tipping point where the market as a whole changed direction. Although I'm not sure there is much merit to drawing lines between these points, but if enough people believe & act on something, then I'd be a fool to ignore it altogether!

I don't bother with the more complex technical stuff, as I've looked into all that in the past, and came to the conclusion it had almost no predictive power. Or rather people could only demonstrate a chart pattern with hindsight, and often not at the time when you need to know - i.e. in advance!

However, the chart is a measure of overall market sentiment, so at the moment that confidence appears to be returning somewhat, which was my main point - therefore I'm more prepared to open new long positions, add to existing ones, etc.

Regards, Paul.

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Randval 27th Aug '15 7 of 23

Hello Paul,

Thank you for your consideration of the deaf & hard of hearing.

The typed transcript of the audiocast is much appreciated.



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bobo 27th Aug '15 8 of 23

ffy below £1 good value, just look at that consistent divi growth

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underscored 27th Aug '15 9 of 23

Thanks for looking at Fyffes.

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Bouvier 27th Aug '15 10 of 23

I think technical analysis is misnamed. Fundamentally, it seems to me to be the study of patterns of buying, selling and pricing generated by humans' emotional response to various market situations. Plus there is a an element of self fulfilling prophesy thrown in.
That does not mean that it can not be used to predict likely price movements but "technical" suggests that there is some law of physics which is driving the price movements which is nonsense.

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Red leader999 28th Aug '15 11 of 23

First posting ever! New to stockopedia. So please forgive my naivety.
I guess when anyone thinks bananas the first name that fits is fyffes.
Established circa 1888 ..why then is this company on aim?
However it helps to dispel the myth that aim is the"Wild West" of investing.

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Paul Scott 28th Aug '15 12 of 23

In reply to post #105471

Hi Red leader 999,

Welcome to Stockopedia!

As regards AIM, here is my opinion - there are just over 1,000 companies listed on AIM:

- about half of them are total crap. I mean real junk, that will almost certainly be a disastrous investment.

- about a quarter are poor quality, but the odd one might be worth a look possibly, and

- the remaining quarter are quite good, to very good companies, well worth a look.

A very quick way to screen out junk, is to disregard all companies which have any of the following characteristics;

1) Nil, or negligible turnover,
2) negative cashflow, and/or heavily loss-making
3) no dividend
4) weak balance sheet
5) operations are overseas
6) "jam tomorrow" stock - ie. not an obviously viable business, especially a new technology
7) resources sector
8) excessive debtors
9) warning signs in the narrative - e.g. focussing heavily on EBITDA, not real profit, rampy-sounding story-telling by management, etc.
10) a possible need to raise more cash within 1 year

There are short periods when you can make fantastic spectacular gains by gambling on dodgy stocks on AIM, but the gains won't usually last long.

Thinking about it, we should construct an AIM Quality Index - where we create a scoring system to sort the wheat from the chaff.

Regards, Paul.

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Ramridge 28th Aug '15 13 of 23

In reply to post #105471

Hi Red

Here is an excerpt from a FT article on 19/6/15 :

“Over the past 20 years, £100 [invested in Aim] would have become £83, even with dividends reinvested,” said Prof Marsh. “But if you had put £100 into non-Aim smaller UK companies, you would have quintupled your money.”

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purpleski 28th Aug '15 14 of 23

Thanks Ramridge for the FT link. I had missed this. Very interesting. However if one back tested an AIM tracker based on Paul's criteria above, I wonder whether one would have more than quintupled your money?

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Ramridge 28th Aug '15 15 of 23

In reply to post #105481

Hi purpleski -
Thinking about it, I actually would be amazed that if you applied all 10 Paul's criteria to each of the AIM stock, you would end up with a quarter of the AIM stocks. I suspect it would be far less.

Second observation - about the FT article and the excerpt - this is of course looking at the rear mirror, past 20 years. Is AIM better regulated now so that future performance would not be as dismal? IMO recent experience suggests not.

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herbie47 28th Aug '15 16 of 23

In reply to post #105477

That maybe true but some people have made lots of money from Aim shares, Lord Lee has about 50% of his portfolio on the Aim.

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hayashi22 28th Aug '15 17 of 23

Where did you get that fact about LL-was it in his book? I'm not disputing it though it does look high.

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herbie47 28th Aug '15 18 of 23

In reply to post #105494

No it was in an article about his investments, I will see if I can find it.

Found this:

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hayashi22 28th Aug '15 19 of 23

Thanks for that herbie. I suspect that he has all sorts of pension pots so in fact doesn't have half of his total portfolio on AIM. He did have a very good run on some of his holdings getting taken over at one stage.Having 50% might also mean quantum rather than value. I have become less keen on AIM over the years for the reasons highlighted in Paul's excellent post no 12. But like alot of folk I do like the occasional punt!

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herbie47 28th Aug '15 20 of 23

In reply to post #105498

In April he had 8/20 but since then he has added 2 Aim Park and FW Thorpe I believe so maybe nearly 50%, yes you are correct I don't know the breakdown of amounts. But he is quite keen on Aim stocks, one reason is they are under researched. If you use Paul's check list it will weed out many of the dodgy ones, also use Stockrankings. Some that have done well recently inc. Dart (LON:DTG), and Staffline (LON:STAF)

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hayashi22 28th Aug '15 21 of 23

Thanks. Clearly if you have the inclination you can check out the performance of his holdings as listed in the Telegraph article. I used to own Dart -but sold too soon. A big beneficiary of lower fuel prices so it may still have legs.

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timarr 28th Aug '15 22 of 23

As John Lee is a sitting member of the Lords he has to declare his interests, including investments:

His most recent column in the FT explained his reasoning on AIM:

"Frankly most Aim stocks are of little interest to me — “hope and prayer” stories, near start-ups or semi-shells, questionable overseas flotations, exploration or biotech businesses — not the established, profitable, UK dividend-paying companies on which I focus. So how is it that of my 26 holdings, no less than 15 are Aim-quoted?"

The answer, roughly, is that if the fundamentals are right then it doesn't matter what market the stocks are quoted on. Companies like James Halstead, James Latham, FW Thorpe, Mattioli Woods, Nichols, Young & Co and many more are among some of the best shares the UK market has to offer.  I hold 20 or so AIM listed companies and I don't think any of them are likely to go bust (which is to state the bleeding obvious, I suppose).

Of course AIM is also full of dross but that's why it's AIM. The whole point of AIM is to provide a lower level of regulation and make it easy for companies to list. Arguing, as people often do after yet another scam is revealed, that AIM needs to be better regulated is to miss the point. If you better regulate AIM then it's just the main market, so scrap it completely. But if you're going to have AIM then you're going to have scams.

So it's buyer beware: if you invest in AIM stocks you really need to know what you're investing in and who you're investing with. As far as I'm concerned that rules out most foreign companies, most commodities stocks, virtually all recent listings and any company that's not got a decent balance sheet. Which probably reduces the investable universe of AIM stocks by about 90% ...


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Red leader999 28th Aug '15 23 of 23

Staying with the AIM theme thank you Paul for your response.
AIM quality index..bring it on Ed! pressure.

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 Are LON:CHH's fundamentals sound as an investment? Find out More »

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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