Small Cap Value Report (30 Oct 2015) - SHOE, SEE, SOLI, CAMK

Good afternoon!

Hardly any company news of interest to me today, so I had a lie-in after skimming the RNS first thing in bed, on my iPad! What I'll do this afternoon is circle back to a few companies whose results or trading updates that were overlooked earlier this week.

So if you're reading this on the 1pm email, please refresh this page later, as the report will gradually build as I post more sections throughout the afternoon.

Shoe Zone (LON:SHOE)

Share price: 202p (down 2.2% today)
No. shares: 50.0m
Market cap: £101.0m

Director selling - the CEO & COO, founders of the company, have sold 2.5m shares. That's undoubtedly a negative, however they still retain a very high shareholding, of 25.0m shares, about half of the company.

I'm in two minds about this - Directors should have plenty of skin in the game, but 50% of the company is probably still too high, as they can do whatever they want with the company at that level. There again, Directors selling is a signal that they'd rather use the money for other things, and it sells a signal that they think the shares are fully valued.

In a separate announcement, the wife of the CFO has bought £30k of stock, but that looks like a fig leaf to me.

Seeing Machines (LON:SEE)

Employee Benefit Plan - I see that there was quite a significant revolt against this at the AGM - 13.9% voted against. That may not sound much, but considering so many shareholders are not able to vote at all (due to nominee accounts, shares held via Spread Bets/CFDs, etc), then any vote of more than about 10% shows considerable underlying shareholder dissatisfaction.

So management should stop, and think again about this plan, which I've not looked at.

Solid State (LON:SOLI)

I see it's down another 65p to 467p, after yesterday's bigger fall on a profit warning. Having slept on this one, am still no further forward on how to value it. For that reason, even though it looks tempting having fallen a lot, I'm not yet convinced that it's a bargain - but it's certainly gone on my watchlist.

As a general point, I feel that this market is significantly over-valuing a lot of small caps right now, particularly ones which have only limited visibility on earnings, or where things can go wrong with major contracts (as in this case).

It's wrong to put small companies, with volatile earnings, on a PER of 20. That's just too high. The price needs to be lower, to factor in downside risk of something going wrong. Otherwise, risk:reward is skewed the wrong way.

Worse still, when something does go wrong, you suffer a double whammy - earnings forecasts are cut, but so is the earnings multiple cut too, combine the two and the share price can fall 50% from the highs, as in this case. Also, if you hold in any size, you can't get out during the fall, so you have to just sit & watch as the price collapses.

So overall then, I'm not comfortable buying into companies like this, unless the price is very attractive, and some upside potential thrown in for free, rather than being priced to perfection.

Camkids (LON:CAMK)

Cancellation of AIM listing - we wave good riddance to another China fraud today. I doubt many readers here got caught, as I've put out the most strident bargepole warnings on China stocks for several years now - again, you often hear warnings about the dodgy companies here first! (blowing my own trumpet somewhat!)

Although the Non-Execs seemed very plausible at CamKids. I think they were just daft, rather than involved directly in the scam.

Also noteworthy is that CamKids AIM listing is cancelled under AIM rule 1 - the requirement to have a NOMAD. This is now the normal way for companies to de-list. So it doesn't require a shareholder vote, and is therefore very dangerous. If the NOMAD decides to walk, and the company can't find another, then that's it - the shares are gone. Here is rule 1;

Once shares have de-listed, you technically hold shares in a private company, but let's face it, for Chinese companies you won't hear a thing from them ever again, probably (almost certainly). So it's a 100% loss.

Tom Winnifrith has done sterling work (whether or not you like his style) exposing numerous dodgy companies, management, and advisers on AIM. Whilst this is a good thing, it does mean that if you hold shares in something dodgy, then it's only a matter of time before the NOMAD is shamed into resigning. Then it's game over.

Warning about junior resources sector

I want to warn readers, that in my opinion, we are likely to see numerous junior resources companies de-list from AIM. There are so many of them, hundreds, and many simply have no reason to exist any more - they can't fund projects, as resources prices are too low, so the logical outcome is that many of these companies will run out of money, and de-list.

Therefore if you do speculate in this area, you need to be incredibly careful, as a lot of these things are likely to become 100% losses, sooner or later. Many were just stock promotions in the first place, with no real commercial prospects - a bit like most of the China AIM stocks, the original purpose was clearly to relieve gullible external investors of their money, not to enrich them!

I think you're crazy if you speculate in these things at all, but if you do, then there's only one thing that matters - cash. How much does the company have in the bank, and what is the rate of cash burn?

Many/most are going to be de-listed due to NOMAD resignations I expect. All the more so, because the number of NOMADs is shrinking, and many are realising (belatedly) that it's not worth the hassle, and reputational damage, to represent dodgy companies.

So the only sensible approach, for anyone other than experts in the sector, is to have an automatic bargepole for all junior resources stocks, unless perhaps if they are producers, and have plenty of cash in the bank.