Small Cap Value Report (27 Jan 2014) - ABM, SRT, PRV, AMO

27th Jan '14 by Paul Scott

16 comments 23276 reads

Good morning! It was quite a wobbly week last week, and with the main US Indices continuing to fall after London closed on Friday night, more jitters should be expected today. Although I note that the FTSE 100 Future has recovered fron an overnight low of down another 120 points, to currently (07:16) being down 38 points, indicating a start at about 6,618.

I see a pullback as being both necessary and healthy - there has been an element of euphoria in the market of late, which needs dampening down, otherwise a bubble builds up with speculative valuations, and we all know how those end.

I am hoping that there will be some good buying opportunities this week, as hopefully some weak holders in good quality small caps will panic and sell at a daft price, so I can deploy my reserve cash and grab some bargains. I don't believe there will be a crash, but a correction is certainly needed. It's true that many shares are currently expensive, and valuations need to come back down to reality in some cases. However, with the macroeconomic picture now looking brighter than at any time since 2007, warm valuations on a PER basis are in many cases justified, since earnings could & should rise rapidly for cyclical companies.

Note that previous market crashes (e.g. 2000, 2008) have occurred at the end of a sustained (5+ years) period of economic buoyancy, and in anticipation of sharply falling corporate earnings. We're currently in a situation that's the opposite of that, with a recovering economy, and probably being at the start of a good period of economic growth. That doesn't strike me as a likely time to have a bear market.

Albemarle & Bond Holdings (LON:ABM)

I've repeatedly warned readers here that the situation at Albemarle & Bond was looking extremely dicey - with a mass resignation of Non-Execs in early Dec 2013, and current trading being at an EBITDA loss, it seems clear that the most likely outcome is probably a pre-pack Administration, which would probably leave nothing for shareholders (since in a pre-pack the profitable bits of a business are usually sold for peanuts, and the proceeds used to repay the Bank.

The company seems to be be moving closer to that today, with an

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corrsfan

27th Jan '14

i suppose the case has been mentioned already that in a stronger economy that we shouldn't need as many pawnbrokers etc, which is probably why noones buying them. No doubt the people who may have considdered buying them will wait for this pre pack thing to happen,and get it for < 3p/share.

Camtab

Despite the stronger economy interesting that gold shares have been rising of late.

MichaelFBS

Paul I hope you are right when you say

'warm valuations on a PER basis are in many cases justified, since earnings could & should rise rapidly for cyclical companies.'

And yet in the FT this morning

http://tinyurl.com/kdnuye7

'The UK’s largest quoted companies issued more profit warnings in the fourth quarter of last year than in any three-month period since the depths of the financial crisis.'

corner22

Hi Paul

Did a quick google of Amino Technologies and what they do. They are concentrated on providing hardware, and related support services, for IPTV and OTT technologies - or Telly over the Internet to the likes of you and me. This is a blue-sky market place but, in my opinion, it has strong potential for becoming a mainstream competitor to cable/satellite/freeview. This opinion is based on the premise that our TV viewing habits are likely to become cloud based in the future, delivered over domestic broadband connections (not just my opinion - seems to be the consensus in this industry).

Conclusion - yes Amino are in a growth market place. But the real question is: Will they will be one of the winners or the losers?

Paul Scott

Hi Purpleski,

Yes I saw that article, but it goes on to say that a lot of the profits warnings were in the resources & retail sectors. Exclude those two sectors, and the picture is much more rosey. I'm seeing most companies meeting market expectations at the moment, in these reports.

It's all about valuation though - in my view, providing you never over-pay for any share, then long term you should do very well. I'm happy to mildly underperform in a roaring bull market like we've had in recent months, but knowing that my capital is safe when valuations reset to more sensible levels. Crucially also, it's only people with cash who can pick up the bargains when the market does correct!

Cheers, Paul.

cig

But is there a place for set top boxes? Some of that internet TV viewing will go direct to devices (tablets, mobiles, etc) and the remaining living room TVs will probably soon all come with built-in internet functionality, so no need for set top boxes apart from a shrinking legacy market.

oldnotbold

Hi Paul, you didn't comment on EKF Diagnostics today. It put out a solid if unspectacular end of year trading statement, sales up 21% (and accelerating y-o-y), and EBITDA up 40%. Stock is undeniably expensive, and there are enough acquisitions and deferred considerations to cause concern, but the technology is pretty interesting. It targets diagnostics (chemical reagents and analyzers) for the two massive markets of diabetes and blood, including DNA analysis to find cancer via blood samples (rather than invasive surgery).

In a market where most stocks look fully valued, I find these sorts of stocks quite interesting. The upside from companies like this and Angle seems large enough to roll the dice with a portion of the portfolio.

Meanwhile, it's good to see markets coming off. Let's hope some value comes through in the next few days/weeks, although the uber-bullishness on the notice boards depresses me. On a Quindell noticeboard they're organizing a dinner in Monaco for the winner of a stock price competition, with plenty of the completely unsubstantiated predictions for the stock price being 3-4x the current price. Bull market stupidity marker.

bsharman

Hi, I have been looking around for potential value this morning and have noticed that Molins has come down from about £1.90 to £1.64 fairly rapidly.. There doesn't seem to be any nasty news which has caused the fall. I know that there is a pension deficit here having attended a presentation before Christmas. However they have cash on the balance sheet, no debt and are on a PE ratio of 7.6 for 2014. It scores very well for value (98) quality (78) and momentum (76 - although that is probably taking a hit right now...) My question to more experienced traders and investors is this: if you see a company which does look good value but where the share price is in freefall, what strategies should one use to know when to buy? I have been burnt a few times (in the short term) catching falling knives! Do you look at levels of support - or use more technical analysis for example? Thanks.

Mark Tughan

Hi Paul, and Purpleski,

I am concerned too about the situation as regards corporate earnings. It is the case that we are in a stronger and recovering economy, but I am also reading a lot about how corporate profitability/profit margins generally are at a cyclical high, and that mean reversion is not just expected but inevitable. Many articles I see are US centric, but I think one should be mindful that net profit margins, at the macro level, have a strong history of mean reversion.

I am now alert to the possibility of a 10-20% correction, to blow off the froth, and have sold off to raise cash to take advantage.

garbetklb

Hi bsharman
I've held Molins since about 60p, so one of my better investments. I noticed the price drop last week and had a quick sniff around.
My best guess is that it's not a company specific issue, but reflects whatever is going on in the USA regarding the introduction of a new testing regime, which is expected to benefit Arista Labs - Molins subsidiary. Presumably the news is of a delay? Nothing obvious from a brief search on Google.
Would be interested in anything anyone else digs up. Thanks

The score doesn't capture that its market is possibly shrinking (disappearing?) to electronic cigs, and they're leveraged as an equipment supplier (no need for new kit when volumes are going down).

Fair point. I think there is room for set top boxes in the market, but perhaps the likes of TiVo and Humax are in a better position to dominate that arena.

serg

Their major problem is we could list Google, Apple, Sky, Virgin Media, etc among their competitors. Worst for them still is that if you own a Smart TV you most likely don't need their products.

Reynart

I attended that Molins presentation at Equity Development before Christmas, and it was what persuaded me to sell. I thought the management team seemed complacent and rather too well paid. It would make a great take private candidate under a really incentivised team though. And I am a great admirer of the chairman, so I am sure she will create value in due course.

kevanp

Trying to make sense of the logorrhoea on the Amino website is not easy. I am left thinking that this might be a company with a great future, but feeling distinctly uneasy that I too cannot get a handle on it. I'm not even sure who their customers are, but they don't appear to be the public (who buy the TVs with integrated internet capability, or the TiVos, Apple TVs, and Humaxs etc). I get the impression that Amino Technologies (LON:AMO) supply "solutions" to corporate customers, including hotels, where a low-cost internet interface combined with a low-cost video monitor is going to be an attractive proposition compared to consumer-specification, internet-ready televisions.

On the other hand, I may be completely wrong. I can't help but feel though that this is no way to make an investment.

Can anyone explain clearly what exactly Amino offer, and to whom?

whitmad

9th Mar '14

Re; AMO's future prospects. Given that IPTV is a technology that is taking off in a big way, you would expect a successful player in the field to show significant growth. I'm very much put off by the lack of revenue growth. Are they losing out to competitors? Their website describes three different markets - network providers, hospitatlity (TV distirbution in hotels and hospitals), and enterprise. These last two are perhaps a little more niche - it would be informative to see revenues broken down into these three segments to see how they have been evolving.

I see them tagnating in an expanding but competitive market so will steer clear unless they show real signs of growth.

Small Cap Value Report (27 Jan 2014) - ABM, SRT, PRV, AMO

Albemarle & Bond Holdings (LON:ABM)

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Paul Scott

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