Small Cap Value Report (28 Jun 2016) - ITQ, NFC, SEPU, UNG, ANP, HMLH, CPR, FJET, CBUY, CHRT

Tuesday, Jun 28 2016 by

Good morning!

Looks like we might get a bit of respite today, as the Futures are up overnight. What a terrible day yesterday - one of the worst I can remember in my c.20 years active investing. My portfolio took an absolute battering.

So what's going on? Well clearly it's more than just the immediate impact of the Brexit vote. The market is now actively pricing-in an economic downturn. This normally happens over months, at the end of the economic cycle. However, this time it seems to have happened in 2 days (or more, who knows?) - due to the catalyst of the (unexpected) Brexit vote.

It's been carnage for shares in housebuilders, banks, recruiters, real estate, retailers, and some other sectors. Plus we saw random, panic selling yesterday too.

Just to clarify, I'm not interested in the politics of Brexit in these reports per se. We've had the Referendum, and I accept the outcome. My only interest here is to try and work out what happens next, and how it's likely to affect the economy, and therefore share prices.

As investors, the whole concept of what we're doing is trying to predict the future. We buy shares that we think will be future stars (and hence go up in value). We sell shares if we think they're likely to go down. Different people have different timeframes & methods for this process. Essentially though, the concept of investing is all about trying to predict the future.

You can't do that without taking a view on the likely consequences of Brexit. You don't have to agree with my opinions, and I welcome a sensible debate in the comments section - but please no more endless repetition of all the pros & cons. We've done that to death already. Let's try to keep the discussion to what happens next, and how that might affect shares, sectors, etc.

Economic downturn?

It's looking increasing likely that we're now going into an economic downturn. Whether that turns into a recession (2 or more quarters of economic contraction), I don't know. At the moment, my thinking is that it's probably likely to be a fairly mild downturn, because interest rates are likely to remain at rock bottom. Also, the banks are now relatively well capitalised, so I don't currently see a risk of another credit crunch. As above, form your own view, this is just mine, and is subject to change of course,…

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InterQuest Group plc is a United Kingdom-based specialist technology recruitment company. The Company offers permanent and contract recruitment in various markets, such as digital, information security, analytics, telecommunications and change management. Its segments are Niche, which includes recruitment practices focused on analytics, business intelligence, cyber security, Internet of things, telecommunications and risk; ECOM Recruitment Limited, which is a recruiter in the digital market space; Enterprise, which includes Recruitment Process Outsourcing services together with legacy client relationships with customers in the financial services and retail sectors; Public sector; Business Change, which is a candidate centric spot business focused on change management and providing the Company with an alternative route to market, and Other. The Company's subsidiaries include InterQuest Group (UK) Limited, Contract Connections Limited, Contract Connections B.V. and InterQuest Asia Pte. more »

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126 Comments on this Article show/hide all

JTG 28th Jun '16 107 of 126

In reply to post #139940

Hmm, well, I only just put it up and it takes 5 sigs to get going. They have to be simple, so it just says:
"My petition:
Use government resources to co-ordinate a modern Buy British campaign.
We can make and grow world-class produce and services in the UK. Buying British is the most effective way to avoid recession now and spur long-term GDP growth regardless of EU membership."

It would make a difference.
Do try again if you like, or wait till tomorrow, by when I hope my family will have endorsed it!

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OsullivanB 28th Jun '16 108 of 126

I see that the Spectator article was by Julie Burchill.

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Blissgull 28th Jun '16 109 of 126

"Buy British?" Probably be called "racist" today.

What we really need is an "Employ British" campaign.

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purpleski 28th Jun '16 110 of 126

Hi Paul

Probably too late in the day but do you have any thoughts on this report in The Indy:

Saying that due to weakness of the pound EA's have seen a significant increase in enquirers.


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PJ0077 28th Jun '16 111 of 126


Could you two not exchange emails addresses & conduct your debate elsewhere?

And if you do insist on cluttering this message board, why not try & make your comments relevant to the subject matter: Small Cap + Value + Investing.

You may as well be debating the football results or the weather for all the relevance of your content above.

Good evening.

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LovelyLovelyGorgeous 28th Jun '16 112 of 126

In reply to post #139961

or meet at the pub and have a big man hug over a beer !

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underscored 28th Jun '16 113 of 126

In reply to post #139793

Why does financial sector growth crowd out real economic growth?

In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. We begin by showing that by disproportionately benefiting high collateral/low productivity projects, an exogenous increase in finance reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labour works in finance, the financial sector grows more quickly at the expense of the real economy. We go on to show that consistent with this theory, financial growth disproportionately harms financially dependent and R&D-intensive industries.

Most good STEM grads from my age group are in The City.

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GgOil 28th Jun '16 114 of 126

In reply to post #139520

You are glad for thousands of British jobs to go? I really do not understand why you would say something like this?

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Paul Scott 28th Jun '16 115 of 126

I'd appreciate it if people could limit posts here to things that are actually interesting. Also numerous posts from the same person is incredibly boring & actually quite disruptive.

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ericb 28th Jun '16 This post is under review

In reply to post #139976

Just like ADVFN !!

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Edward Croft 28th Jun '16 117 of 126

In reply to post #139946

There have been a considerable number of complaints about off-topic posting on the SCVR.

Fangorn and Herbie - I'm requesting that you both conduct your Brexit discussions on a separate dedicated thread from now on - there are plenty out there.  Interesting as your comments are, the SCVR is a "Small Cap Value" focused blog.

Your off-topic posts are effectively pollution of what is usually a highly stock focused debate on Paul's blogs.  Please let the community discuss stocks and stock markets here. 

Some have been asking for posting rights to be removed, which is an over-reaction. I'm sure everyone can act like grownups and self-moderate.

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Fangorn 28th Jun '16 118 of 126

In reply to post #139976

Some of us have been brought up to believe that not replying to someone who corresponds with us is simply rude.

If the conversation continues, with othes interjecting, what is one to do - not reply? Ignore them?

You want to stop discussion because the people engaging in said aren't to your satisfaction

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Fangorn 28th Jun '16 119 of 126

In reply to post #139982

I'm happy to do that.

As people are surely aware, you get invovled in a discussion and before you know it, there are numerous back and forths.

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Fangorn 28th Jun '16 120 of 126

In reply to post #139979


Third time of asking......

So what's your beef with me as you seem to be hounding me across various sites?

Don't think I've ever interacted with you so at least do me the courtesy of explaining what your issue is...

I've not been banned from Advfn either. Keep smearing though wont you. Who knows why.

Perhaps you could explain?

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Edward Croft 28th Jun '16 121 of 126

In reply to post #139988

Fangorn - thanks.

It's not that the conversation isn't worthwhile. It's just in the wrong place. It's very easy to start another thread and invite someone to join you on it, and it's more respectful to the rest of the readers.

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Aislabie 28th Jun '16 122 of 126

In reply to post #139970

Thank you for the reply and reference to your paper. I have at this stage only skimmed through and recognize it will take more than that to really get to grips with it.
Two aspects seem to be addressed. The competition for financial resources and the competition for people.
The competition for funds seems to revolve around pledge ability and my experience is that for well managed companies and those having good financial controls the city is almost unreasonably generous, resulting in higher borrowing and longer payback than used to be seen as prudent. Additionally the increasing depth of this financing ( private equity, public offering, crowd funding and private placing of public shares) has resulted in much less collateral base requirement and more lenient repayment adjustment.
However it is also true that the UK has had many companies that to put it kindly are not well managed and despite feeling that they are deserving causes they are actually grossly misunderstanding the financial dynamics of their business. Financial institutions have got better at spotting these, but are still generous and the amount of money lost on AIM supports the view that many companies got away with some appalling projects.
So I am suggesting that low collaterals projects have received and have available at least as much finance as they can handle ( and not infrequently rather more)
The people aspect is different and there is much more than anecdotal evidence of STEM grads in finance. I believe the U.K. Non-finance industry has been poor at managing such grads. Foreign companies seem to be much better at offering a STEM grad a path to successfully exploiting their knowledge while retaining an upward path with high level recognition and appropriate salary.
I believe there are still too many UK companies where a move to higher levels requires becoming a manager, losing both satisfaction and technical skills for an unwanted position.
UK companies say they are short of STEM grads but do not make it attractive enough to join them.

If your position is correct then with less positions available in finance the STEM grad will in a sense be forced to accept a less attractive position engineering widgets at a lower return on capital. There is something wrong with this picture.

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underscored 28th Jun '16 123 of 126

In reply to post #140000

Or the pay disparity is unbridgeable. Also consider many enter stem as it is a attractive to finance. I have post grad friends that are sick of teaching them

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Fegger 28th Jun '16 124 of 126

In reply to post #140006

Having been employed in banks and several other companies the problem comes down to the City in general being overpaid. On any basis including skill contribution to the economy they dont deserve the remuneration levels paid. And the graduate recruitment situation reflects the general overpayment.

The problem could be addressed by much more publication and scrutiny of what they actually earn. But this is unlikely to happen.

And we can also see how the vicious circle affects investing where investment managers dont challenge excessive boardroom pay as they identify with and look to achieve similar or greater pay themselves.

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underscored 28th Jun '16 125 of 126

In reply to post #140009

And so the country tears itself apart instead. The City has become the problem. Will not be sad to see it go

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JTG 29th Jun '16 126 of 126

In reply to post #139955

Dear Blissgull

Employ British is what I did. But that act is itself susceptible of being called racist. I simply come back to a simple core belief that without starting by creating primary value, there is no employment, British or otherwise, to bother with.

It is said that turnover spirals seven times through the economy (by virtue of income being mostly spent). Buying British at least gives one turnover to manage at the head of that spiral. I know many people voted Leave for many reasons. But if those British who voted Leave did so because they think we're special, then they'd better buy local if they want their future pensions and services preserved.


P.S. to bring it back on topic, anyone with suggestions on British manufucturing/farming/mining concerns to back now? There just aren't many in the public sphere that I know of. I know our company only survived the 2000s because we were private.

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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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