Small Cap Value Report (27 Dec) - IOF, CSFG, CNC

Friday, Dec 27 2013 by

Good morning! I trust everyone is fully charged up with Christmas cheer. The Santa Claus rally is still in full swing, although I can't help feeling that the market will jump at the slightest chance to have a proper sell-off in the New Year. We haven't had a proper correction for a long time now, and there are considerable areas of over-valuation now in my opinion, especially growth stocks, some of which are really on bonkers valuations.

Remember that a classic sign of a bubble is when people start detaching from conventional valuation methods, and just buy things because they keep going up. I'm not saying that kind of euphoria is evident in the entire market, but it's very clear that many growth stocks are now priced to perfection. So people speculating in that area need to be mindful that there is always a risk that such stocks will, sooner or later, come back down to earth with a bump. People who were not in the market in 1998-2002 should look back at the charts of trendy growth stocks back then. People who were in the market in 1998-2002 should refresh your memories as to what happened to your own portfolio at the time - the financial memory is about 15 years they reckon, so the timing is perfect for a re-run of the TMT (technology, media & telecoms) mania that we saw in the late '90s.

Mind you, these bubbles can keep going far longer than anyone imagines, as indeed happened 15 years ago. The bubble finally burst in Mar 2000, when it had sucked in vast amounts of money into many essentially worthless (or worth very little) growth companies, and left a trail of destruction which saw numerous shares drop 90%+. Many even went to 99% losses. I'm not saying we are in the same situation yet, but we're certainly in the early stages of the "euphoria" part of a bull market, in my view.

Whether to take cover, or to make hay when the sun shines? I think it's a good time to find the most credible, and reasonably priced growth stocks, and make some money on them. But personally I'm not chasing story stocks with negligible turnover but >£100m market caps - experience has shown that the vast majority of such hyped up story stocks fail to deliver.

Remember that I'm writing from a Value/GARP perspective,…

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Iofina plc is a holding company. The Company is involved in the exploration and production of iodine, iodine specialty chemical derivatives, produced water and natural gas. Its segments are Iodine and Iodine Derivatives, and Montana. The activities of the Iodine and Iodine Derivatives segment include the production of raw iodine, and the production of iodine derivatives and other non-iodine based chemical derivatives. The Montana segment includes the Atlantis Field project for the exploration and production of natural gas, iodine and water for use in various applications, and the Montana Water Depot project, which includes volumes of water retrieved, stored and shipped to customers in close proximity to be used mainly for fracking. It is also engaged in recycling of iodine using iodinated side-streams from waste chemical processes in Europe, North America and Asia. Its Wellhead Extraction Technology (WET) and WET IOsorb methods enable the co-production of iodine from brine. more »

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CSF Group plc is engaged in the business of design, construction and installation of data centers on an outsourced basis, ongoing support and maintenance and rental of data center space. The Company's segments are Data centre rental; Maintenance, and Design and development of data centre facilities. The Company's data center services include design and development of data centers, including project management, fit-out and integration of the equipment within data center facilities and other computer rooms, and data center tenancy solutions. Its other services include security services, bandwidth and managed data services, and co-location and hosting services. The Company's customers include companies involved in various industries, including banking, insurance, automotive, food and beverage, travel, manufacturing and information technology. more »

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Concurrent Technologies Plc is engaged in manufacture of embedded computer products for applications in the defense, aerospace, transportation, telecommunications, scientific and industrial markets. The Company designs, manufactures, sells and supplies high-end embedded computer products (boards) primarily on processors from Intel. Its products include processor boards, switch fabric boards, transition modules, carrier boards, graphics adapters, serial adapters, storage controllers and mass storage. Its products support various operating systems, such as Windows, Linux, Solaris, QNX and VxWorks. Its geographical areas of operation are the United Kingdom, Other Europe, North America and Rest of the World. The Company sells and markets its products in the United States, various European Economic Area (EEA) countries, Israel, China, India, Japan, South Korea, Australia and Singapore. It has design facilities in Bangalore, India, and sales and support in China. more »

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6 Comments on this Article show/hide all

Ramridge 27th Dec '13 1 of 6

Hi Paul - Seasons Greetings! You cannot remind people enough times of the dangers of a frothy stockmarket, as witnessed presently. A correction is due that is certain, the question is when and to what extent. Unfortunately we as human beings are hard wired to be optimistic. To put this in semi scientific terms, the world model we have in our brain is different and less risky to the reality around us. So people continue to invest in e.g. Asos when every form of analysis says otherwise. As a retired project manager i learnt always to have a Plan B. Well my plan B for my investment portfolio is in place. But no matter what you do, a major correction will hurt.
Regards, Ram

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danielbird193 27th Dec '13 2 of 6

Thanks Paul, hope you enjoyed the Christmas break. I agree that there are powerful disincentives for auditors to do a 'proper job' given the current appointment rules and the value of non-audit services provided by many auditors to the companies they audit. I don't think I agree that a committee of shareholders is a workable idea though - or perhaps it is for FTSE 350s, but in my view not for small caps where there is little institutional interest.

Do you not think there is a role for the exchanges here? Surely the Listing Rules could state that for the company to be admitted, they must agree to have their auditor appointed by an independent panel whose administration is done by the exchange itself (with other rules about rotation periods, non-audit fees etc). Investor confidence is crucial to the proper allocation of capital in our economy, and surely the stock exchange has an interest in promoting that as much as (if not more than) the investors themselves.

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idect 27th Dec '13 3 of 6

I'd just like to thank you Paul for your reports. I've only just started 'getting into' investing this year. I've been reading lots of books (most of which seem to contradict each other regarding the best approach to take - growth vs value!). I've found your reports easy to follow and I like the way you explain things. For a novice like myself, these reports are almost like to going to college and attending a tutorial, only yours are far more informative! Do you mind me asking what are the two websites you referred to where you look for brokers forecasts? Also, how much faith do you have in brokers forecasts? Once again, thanks for all your hard work.

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crazycoops 27th Dec '13 4 of 6

Paul, I completely agree that people taking highly leveraged positions on growth stocks is a recipe for disaster. I have been invested for a while in the example you quote, Iofina (LON:IOF), and unfortunately, the volatility has served to undermine what is potentially a great growth stock. Hopefully, expectations have been reset, people have learned their lessons and going forward the company can deliver on its compelling business plan.

Blog: Share Knowledge
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Paul Scott 27th Dec '13 5 of 6

As a post-script, Twitter shares are down 13% today.
Nobody really knows how to value it. So how reliable are valuations on smaller, less convincing tech stocks?

This is a market that's being driven by sentiment, on growth stocks anyway. In the short term, the market is a voting machine, in the long term a weighing machine.

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FREng 2nd Jun '14 6 of 6

The May 2014 AGM statement said that they expected the licensing issues to be resolved during June, so some action may be expected soon, one way or the other.

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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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