Small Cap Value Report (27 Jun 2014) - PHRM, HRN, CAP, SGI
Good morning! What can I say, other than a huge thank you to the lovely people who attended my Brighton investor event last night. It was an absolute hoot! I'm walking wounded this morning, so reviewing the RNS must take priority, albeit briefly.
So let's see what we have, and how much scorn can be thrown upon the usual nonsense that the combined brains of the City have created for us today! Here's a tip incidentally - if you want really good coffee, eschew posh places and instead buy Aldi Columbian ground coffee - it is superb. And it only costs £1.99 per pack. If I had to compare it with a share, I would call Aldi Columbian coffee the Portmeirion of taste, at a Portmeirion price. Translating that into English, that means superb taste, at a low price.
Right, back to shares, what horrors do we have to digest this morning?
Let's get the comedy things out of the way first;
Phorm (LON:PHRM)
$280k turnover, and an operating loss of $35.1m for the year ended 31 Dec 2013.
Moving on.
Hornby (LON:HRN)
At 76.5p it has a mkt cap of £30m. I have a bad feeling about this company, so let's check my previous notes on it. I don't know what people are expecting, but I'd be disappointed if I were a shareholder in this company on seeing the results this morning for the year ended 31 Mar 2014. It just doesn't look like a viable business at all - £51.6m turnover, and an operating loss of £4.1m. That has been squeezed down to £1.1m "underlying" loss.
I'd want a very good reason to even look at investing in this crock at any price above zero. Maybe that's too harsh on a P&L basis? There might be some Bal Sheet value. But why bother? Squeezing out value from a Bal Sheet is nigh on impossible in my experience.
So let's have a look at the outlook statement;
As 2014 continues, we will further review Group performance and capabilities. Improvements in manufacturing, new product development processes and sales and marketing capabilities around the Group are priorities and will receive immediate attention. As the stock situation that has held back the Group over the last few months is resolved, the opportunity to benefit from improvements in other areas of the business will rise in importance and become integral to our plan to return the Group to profitability. This process will continue through 2014/15/16 and we are confident that we have the brands, team and know how to bring the Company back to past levels of financial performance and beyond.
Trading in the current year so far is in line with the Board's expectations. The focus that is being given to clearing the older elements of stock is progressing, with Group stock currently some £1 million lower than at year end. Whilst the delivery of the transformation plan comes with execution risk, the Group has a portfolio of fantastic brands that if managed well offer plenty of potential for long term growth. I am looking forward to updating our shareholders on the progress that we are making.
So a load of meaningless waffle basically.
I value the equity in this company at zero, and in any previous recession the Bank would have probably put it into Receivership. Just an opinion. DYOR as usual. It stopped paying divis in 2012, so the business is now basically operating in the interests of job creation for the Directors & staff. Shareholder value is nil in my view.
Clean Air Power (LON:CAP)
Oh dear, not one of my better speculations. A Placing for £1m at 4p per share is announced today. That means they're one step away from going bust - "additional working capital headroom". Yeah right.
It's over in my view. I'll stick with the small amount in my SIPP, but this looks like the last chance saloon. It looked promising last year, but they're not delivering. It was taking too long. When things go quiet like this, then a small fundraising happens, then you can be fairly sure it's game over. I'm not going to throw good money after bad with this one.
It's funny how the psychology works with this kind of thing. I had a fascinating chat with some friends at the Brighton Investor Group ("BIG") about this last night - even when we know that it's game over, we don' t sell, but instead passively accept the eventual loss. Why is this? It's because of the emotional baggage connected with committing to shares. You can see this bizarre behaviour with shares like Quindell (LON:QPP) and Globo (LON:GBO) where people become utterly demented about the shares, and will suffer gigantic financial losses and still not recognise that they are wrong. Instead they misdirect their anger at people who are bearish on the stock.
It's a bit like politics, where you can conclusively disprove a particular point, with irrefutable evidence, yet the person who is wrong will continue to argue their incorrect opinion, despite being intelligent & proven wrong. Why? Because they are not being rational, and never will be rational.
So the conclusion is that we, human beings, are not rational at all. We just delude ourselves that we are rational. We are actually highly irrational, and most decisions are made on instinct rather than on evidence, and we just fit the evidence around a decision that we have already made on instinct. So when we are wrong, we will not accept that we are wrong, because our decision was not rational in the first place, so disproving it doesn't make the slightest difference.
Once you realise this kind of thing, it makes a big difference. And don't think for one moment that the big fund managers act rationally. They pretend to, but they are index huggers, and clever talkers, in the main.
I asked an experienced Market Maker who he respected in the fund management space, and his answer really shocked me - he said "none of them".
Stanley Gibbons (LON:SGI)
How did we get onto this? I'm just putting off the moment when I have to review the accounts of this stamp collector. What a lot of nonsense! Talk about a bubble - why is a Penny Black worth anything? It's just a tiny scrap of old paper. In 50 years' time not many people will even know what a stamp is!
So this business is complete nonsense in my view - worthless trophy assets being passed around from one fool to another with more money than sense, at bonkers valuations. When the bomb goes off, all these assets will be worth nil.
I'm not sure whether it's my foul mood, or whether the market has conspired to insist on sub-par companies only reporting today?
Anyway, I'm going to bring forward my late morning snooze to a mid morning snooze, and might resurface a little later, depending how comfortable the sofa becomes.
Regards, Paul.
(of the companies mentioned today, Paul has a long position in CAP, and no short positions)
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36 comments
Very enjoyable post and replies..
Have a read of Charles Ellis "winning the loser's game" ....so many replies ring true having read this book.
It's a great read and is a great source of self questioning for every investor on his/her approach. I rate this book, Benjamin graham, and john lee as a must, besides the b Hathaway annual letter.
Not mentioned in a while, but vislink looks better by the day, the cheaper it gets..
Talk about being irrational, I knew there were problems at Clean Air Power (LON:CAP) when the Finance Director left (the sxxxxxg ship?) earlier this year, but I did nothing and hoped for the best. He had been there eight years so why leave just as all the excitement of a launch in USA and Russia was about to happen? Then a lack of positive news flow. I would normally go the AGM to ask some questions...... but it was in Bermuda!!!
I really hope for everyone's sake this is not the end for this one. I see the CEO is putting in £28k of new money and the new FD £7k. As they say, it always seems darkest just before the dawn.
Re Stanley Gibbons (LON:SGI) - what have stamps, vintage cars and domestic property all got in common? Yes, all subject to bubbles and also all (can be) free of capital gains tax!
Happy Friday everyone!
Andrew
To be fair,stamps are still in usage and will always have their place in history,and the Penny Black has a sound claim to fame as collectables go.Stamps may well be overvalued as collectables and be in a bubble.Collectables in general tend to be popular when real interest rates are negative.
Shares in Stanley Gibbons have previously been recommended by the great Tom Winnifrith :]....
Interesting what you say
"I was discussing the issue of buying back into a stock with some friends last night, and we all agreed that buying back into something you have sold recently is nearly always a mistake. Don't know why, it just is."
I bought Sweett (LON:CSG) at 25.45, sold at 21.02, missed the climb to 50+p and bought back in at 52.32p. Look where that got me!
On stamps, gold, 1st editions old masters anything with rarity value whether that is investing, collecting or speculating I am not sure but I think stamps have proved to be a great store of value over the years. Whether the stock of dealer/auction house in stamps is a good bet I don't know but it is a different matter to what they deal in. The look quite highly valued and qualify for the Montier Cooking the books screen but
- they have been around since 1856
- have paid an increasing dividend since 2007
Hi Paul, as far as I can see you are dismissing SGI because you don't like what they trade in (stamps). As far as I can see SGI has some merit as an investment: eg they report £ 9.5m in cash, they are launching a new website, they own freehold property, they made an aquisition in Nov 2013. You should be analysing SGI's results like that well-known rational investor Paul Scott. Eg Is their balance sheet strong? Do they have sufficient working capital? etc. Regards, Chris.
Hehe Paul today's posts are fantastic. Speaking of asset bubbles - anyone seen prices of 'semi'-classic cars lately, like Peugeot 295 GTIs, Sierra Cosworths etc? Gone crazy. 70s sport cars gone the same way.
Don't get me started on property. You now can't buy a 1 bed flat (that you would want to live in) for less than 600k in Central London (think Bloomsbury, Shoreditch, Islington etc), a few years back that would have been around £350-400k. Market has gone bonkers and anyone who thinks it won't end in tears (IMHO) is completely misguided and crazy.
The thing about bubbles bursting is that most people never see it coming and think it will continue forever.
Stamps: the world record price was smashed a week or so ago, about £4.5m for, what was it called, the Patagonian Yellow, or something. It was pointed out that, relative to mass, this was the most expensive thing ever auctioned. So there.
I have an old stamp collection in my parents loft that i haven't seen since I was a child...when I next go back I'll dig it out and see if I have a Patagonian Yellow!
Hmmm - I used to quite like the look of Stanley Gibbons (LON:SGI) - I used to get sent the most beautiful stamps as a child from my grandfather - old school classic cars once per month - loved it. So I do appreciate the hobby even if I don't practice it.
But now the stock has gone all 'short selly' on the Stock Report. Issues with receivables and accruals apparently - so wide berth from me now.
Hi, A great commentary this morning Paul and I really must locate my nearest Aldi for my Colombian coffee fix. (I normally drink Sainsbury's Italian fair trade coffee, which is only about £2.50). I think you are being a bit harsh on Stanley Gibbons as the collectible market is massive - be it vintage wine, 1st edition books, antiques or stamps. Even gold is just a lump of yellow metal with no 'real' value! I'm feeling a bit down today because I'm not normally one to have a punt on a blue sky stock - I did with Clean Air Power (LON:CAP) because i like their technology and it seems to me that it could have a massive potential for them and for the companies using their systems: UPS and Sainsburys for example. There is lack of positive newsflow currently but I feel that they do have something but it's taking longer than anticipated for substantial orders to come through. Perhaps i'm deluded!!
P.S I'll try and come to the next BIG - It sounds like a hoot!
Hi Paul & bsharman,
I too have a small investment in (LON:CAP) Clean Air Power mouldering away in my portfolio. Once I was up 50% now I am down 50% - too squeamish to take the knife to it.
My mistake was not doing the research before investing. In theory CAP are selling a product that truck users should be queing up to buy - they're not.
It's not blue sky technology - it's been around for decades and has never created a big demand. There are dozens of companies (usually much larger and better capitalised than CAP) all trying to earn a living in the same marketplace - http://www.fuelsystemssolutions.com/ for one.
I now see no reason for CAP to prosper.
I live but will I learn?
Bonitabeach
Paul,
Thanks for a most enjoyable and informative evening. Please put me down for the next one.
Bob R.
Bob,
Thanks for coming, really enjoyed your company!
Next one will be late Sep or early Oct.
Regards, Paul.
Hoping to make your next evening Paul, I am along the coast in South Devon so will lmake a couple of days of it . Does anyone here know of similar events in the southwest? I am too busy in the summer so look forward to an Autumn event. I sold out of Stanley Gibbons (LON:SGI) some time ago having doubled - happy with that. Can see it has attractions for many but came around to your way of thinking on this one....
Hi Paul,
I don't collect stamps, did as a boy, and you're right it's a bit pointless, but isn't all collecting ? stamps are worthless, so are coins unless they're made of valuable metals, but then aren't all antiques ? ok a nice sofa or a nice table and chairs might have some use, but the value attributed to antiques is due to what exactly ? That they aren't making any more of them, and human like to collect things and attribute value to rare things ?
The interesting things about stamps (and coins) I would say is that I don't see many young people taking it up, there are so many other things to do/collect these days, my daughter has a huge collection of moshi monsters for example. And as you say how long before we don't use stamps any more ? and the collectors gradually disappear ? Surely you would expect this to lead to a dramatic fall in demand and then logically prices ?
I don't think this should put you off buying the shares in the short term if the numbers suggest a growing business at a reasonable price, but not one to tuck away, one to review regularly,
K
Great post Paul. It seems your rocket fuel coffee has got you straight from drunk to sober and OUT THE OTHER SIDE. Can you see everything with the green lines of The Matrix superimposed?
QOTW: "So this business is complete nonsense in my view - worthless trophy assets being passed around from one fool to another with more money than sense, at bonkers valuations. When the bomb goes off, all these assets will be worth nil."
Speculation ... involving pieces of paper ... anyone would think you were talking about share certificates in dubious, high-growth, no-dividend AIM companies. Has anyone done the one about Clean Air Power having to go CAP in hand to the market? I'll get me coat.
TFI Friday
Glen - I'm never drunk, just tipsy. Normally at weekends only, but we made an exception last night for the Brighton social.
One must always keep a clear head during trading hours, and there's no way you can process all those accounts & trading statements for >500 companies with a hangover - believe me, I've been there & done that, and it just doesn't work! A clear head is essential Mon-Fri.
PP.
Re Stanley Gibbons: Surely the ridiculous price of rare stamps is just another symptom of the irrational behaviour exhibited by all of us most of the time. Dare I say it, especially after copious pints of lager? Hope you're wrong for a change about CAP!
Paul
I was unable to attend last night which is a pity as I would have liked to hear what Simon Cleaver said about Synety. Any comments?
When stamps entirely disappear from everyday use, they are likely to become even more collectable and valuable. Nobody uses Greek amphora any more, and look at what they go for!
Agree completely about your comments on rationality. Charlie Munger is quoted as having answered the question 'What one quality accounts for your enormous success' with the answer: "I'm rational. That's the answer. I'm rational."
So difficult to do though - to think really independently while still relying on the same sources of information as other investors which includes their commentary!
I'm finding this morning's blog very entertaining! Thanks to you and Simon for the Brighton event last night - was enjoyable and I personally remain speculatively bullish on Synety. I'd recommend it to people in the south who are toying with the idea, to come along - At all these events I find everyone's with an interest is welcome, people lovely and generous in spirit/knowledge, and you don't have to be as experienced as Paul!
Thanks for coming Richard, we were struggling on numbers, so very grateful to everyone who came to my Brighton investor evening last night. Hopefully it was a fun evening, loosely linked to shares, but mainly involving eating, drinking & having a good laugh!! :-)
PP.
Very amusing post this morning Paul.
Keep up the good work, hoping to get to your next Brighton event.
Nick
"I'm just putting off the moment when I have to review the accounts of this stamp collector. What a lot of nonsense! Talk about a Ponzi scheme"
A Ponzi scheme is a fraud. Typically investors are promised higher than average returns and paid from the contributions of newer investors rather than from the performance of the underlying investment.
I would seriously doubt that Stanley Gibbons is running a Ponzi scheme and would suggest that such a comment might be actionable,
intuitive,
OK I accept your point that my use of the term Ponzi scheme was incorrect, I'll re-phrase that. What I meant was a bubble, where daft people bid up the price of an essentially worthless asset.
Paul.
Paul
Regarding your remark about Hornby and previous recessions - well my first job in 1980 as a trainee accountant for Cork Gully was the receivership of Hornby. Like model trains really, what goes around comes around!
PP, what a refreshing posting this morning, especially the bit about irrationality and hanging in to poor investments even though every signal says sell. I'm always telling myself to set stop losses - after all, you can always buy a share back at a lower price if the story improves- strangely I find that many investors tend not to buy back something they have lost money on previously.... Even when the company has been turned around.
Hope your head isn't hurting too much today
Regards
Reg
Morning Reg,
Actually my head is pounding this morning, after industrial quantities of lager last night, but sometimes you just have to keep going, like Macbeth wading through that river!
Returning were as tedious as go o'er.
I was discussing the issue of buying back into a stock with some friends last night, and we all agreed that buying back into something you have sold recently is nearly always a mistake. Don't know why, it just is.
Regards, Paul.
Paul,
I think you are spot on in your analysis of Hornby. I can only see net debt continuing to rise due to further trading losses and reorganisation costs, plus there are likely significant seasonal peaks in this sort of business. Looking at the numbers I was surprised to see capex of c.£4.1m, somewhat higher than depn of £3.6m - in my experience capex is the first thing to be chopped back when times are tough.
There's clearly value in the IP of this business but, as you say, no equity value. This is probably their biggest risk as the banks no doubt feel they can recover their loans currently but at some point they will feel their security is in danger of being eroded. Not a good situation for shareholders and very sad for anyone who ever built an airfix kit in their youth!
Best,
Mark
Coffee
For rich intense taste try Costco's own Expresso Blend Dark Roast whole bean.
Clean Air Power (LON:CAP): At least the directors are ponying up some cash for the placing. How much remains to be seen though...
Thanks Paul,
I don't drink coffee but for those who do...
https://www.aldi.co.uk/en/about-aldi/awards-endorsements/great-taste-awards-2013/product-detail-page/ps/p/specially-selected-colombian-ground-coffee-1/
Its even won an award.
Cheers, Martin
Hi Martin,
I was a self-made multi-millionaire until the credit crunch, so I've drunk the best coffee there is, living just a short walk from Higgins in Mayfair. The Savoy and the Dorchester were the most memorable coffees.
Despite being quite an ordinary lady, my grandmother used to trek into London every now and then to get a supply of blue mountain coffee beans, but she gave up in the end in disgust circa 1978 because she said that the Americans were coming over and buying up all the best coffee.
Putting all this to one side, I can honestly say that Aldi Colombian is AT LEAST as good as, if not better than everything mentioned previously. Hence why I mentioned it. Spectacularly good coffee, at £1.99 per pack.
You heard it here first!
Regards, PP.
Hi Paul
Yes, I have advised my wife to buy some. There's certainly nothing else you have mentioned so far this morning where I would want to be long :-)
Cheers, Martin
What I want for Christmas...
I just don't want the trains.