Small Cap Value Report (30 Oct) - THAL, ABM, UTW, QRT

Wednesday, Oct 30 2013 by

Good morning! The American markets hit all-time highs last night, and with the S&P500 now up almost 27% since late Dec 2012, this is all starting to feel a bit crazy. Therefore I'm preparing myself for a sharp correction, which must be due at some point, and the stocks that will be hit hardest will be the over-priced growth/story stocks where price has detached from value.

We've seen with Globo (LON:GBO) how flaky these things are - yes it was subjected to a bear raid from Evil Knievil & others, but it seems that few investors had much conviction in the valuation, as they stampeded for the exit once it began falling, thus doing the job of the shorters for them. Whereas with the relatively safe, solid Value/GARP shares that I focus on, when they fall sharply, investors like me just buy more, as we know our research is correct, and that falls are buying opportunities. So the Bulletin Board maniacs hurling abuse at shorters should be questioning their own skill and actions, as well as the scare tactics of the shorters.

Also, as a long term investor, I am perfectly comfortable with the fact that every now and again my portfolio will take a (say) 10% hit on a market correction. It's not a problem, as my long term portfolio is not geared, indeed has surplus cash on the sidelines, waiting to buy the dips. Small caps can provide fabulous buying opportunities in a market correction - it only takes one clumsy seller, and you can see a small cap down 20-30% for no fundamental reason. If it's a good solid company, at an attractive price, then that's an opportunity, not something to worry about.

I also run a more racy, geared personal portfolio with generally shorter timeframes, and I'm increasingly worried about that, so have bought some insurance with S&P500 Put Options, and am easing back on a few position sizes, to ensure the gearing is not too high. What is too high? Personally I've found that 1.5 to 2 times equity is normally OK (other than in a proper bear market, where no gearing is the only safe option), if it's spread over plenty of different stocks, and they are all safe, solid companies, usually dividend paying & with net cash. Given how frothy the market is now though, I'll…

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Thalassa Holdings Ltd is a holding company. The Company is focused on providing marine geophysical services, autonomous underwater vehicle (AUV) research and development and homeland security and real estate services. Its directly owned subsidiaries in the energy services industry include GO Science Group Ltd (GO), which is an autonomous underwater vehicle research and development company with a subsidiary Autonomous Robotics Limited. more »

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Utilitywise plc is a United Kingdom-based business energy and water consultancy. The principal activity of the Company is of an intermediary for energy supplies to the commercial market. Its operating segments include Enterprise and Corporate. The Enterprise segment is engaged in energy procurement by negotiating rates with energy suppliers for small and medium-sized business customers throughout the United Kingdom, the Republic of Ireland and certain European markets. The Corporate segment is engaged in energy procurement of larger industrial and commercial customers, often providing an account care service and offering a range of utility management products and services designed to help customers manage their energy consumption. It provides energy management services, including procurement, energy reduction and audit, carbon offsetting, smart metering, water brokerage, design, manufacture and supply of timers, controllers and building management systems, and the Internet of Things. more »

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38 Comments on this Article show/hide all

emptyend 30th Oct '13 19 of 38

In reply to post #78606

It wasn't compulsory.... ;-)

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fek47 30th Oct '13 20 of 38

The quality of debate on Stockopedia is nothing short of fantastic - today's discussion probably the best I can remember. So long as we avoid mentioning our old friends Quindell and Globo of course!  I don't know why anyone bothers with ADVFN any more - stupid people posting, and visually the page is a mess - looks liek something from 15 years ago (unlike the beautiful, web 3.0 design we have on Stocko!)

I really can't make up my mind. A number of holdings in my portfolio have now reached prices which I wouldn't even comtemplate paying for those stocks - so do I sell now and say thank you kindly to whoever will buy them at silly prices? Or, do i stick with them and hope that even sillier people want to get involved in the party, and push prices yet higher?

Not sure....but I certainly have an itchier 'sell' finger at the moment than I do 'buy'...

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EssexPete 30th Oct '13 21 of 38

I agree with you Cisk,

Rich Dad Poor Dad by Robert Kiyosaki changed many of my views on life and how best to save and invest. I wasn't as keen as him to get involved in property, but his advise to join a network marketing company for the education and income stream it would create was spot on. TEP has been a 10 bagger for me and is showing no signs of slowing down. Just goes to show, reading one book can completely change your life.


Website: Utility Warehouse Discount Club
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mrmodha 30th Oct '13 22 of 38

Great conversation - as a relatively recent investor, it is interesting to read "seasoned" opinions on where the market is. Having done plenty of research, and then drip feeding into the markets, I think as long as you do your research thoroughly and invest a considerable % of your portfolio in long term positions with solid cash generating businesses, you will cover yourself regardless of the madness around you.

As an aside, as one of those who counts as a member of the "young generation", I resent the sweeping generalisation that we all just live for the moment and not think about the future!! It may be true for a lot of people but a significant minority DO care, and DO make provisions for the future.

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johnrosier 30th Oct '13 23 of 38

Just a bit of fun but FTSE 100 since inception in January 1984 with trend line. I wouldn't give up on this bull market yet!

In all seriousness I prefer to worry about the stocks I hold, rather than the markets where timing is notoriously difficult.

Still quite a lot of stocks turning up on the "JR VGM" screen for me to look at in the next week or so!

Website: JohnsInvestmentChronicle
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Leven 30th Oct '13 24 of 38

Awesome discussion today...IMO best forum on the net for UK stocks...agree that pockets of value still exist (they always do) such as the small/mid-cap E&Ps mentioned above (quite like the look of HOIL myself).

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Paul Scott 30th Oct '13 25 of 38

In reply to post #78619

Hi mrmodha,

You said;

"As an aside, as one of those who counts as a member of the "young generation", I resent the sweeping generalisation that we all just live for the moment and not think about the future!! It may be true for a lot of people but a significant minority DO care, and DO make provisions for the future."

Absolutely, but as you admit in your post, younger people such as yourself who are planning for & making provision for retirement are a minority. That was exactly my point - the broad mass of what might loosely be called the working class, are not making any provision for retirement at all, whilst only some of the middle class are.

That's going to be a massive problem in say 20-30 years' time, where most pensioners will need additional taxpayer support beyond the basic state pension.

I blame politicians from Gordon Brown onwards, along with the financial sector itself (which let's face it, is full of greedy, self-serving halfwits) who destroyed the public's confidence in pensions, and saving generally. So many people don't bother saving for the future, knowing that the State will have to support them when they retire into poverty.

Also, people have a mindset of believing that their home is their pension. That's fine whilst values remain at artificially high multiples of salary, but I believe mean reversion will happen at some point, and as we saw in 1998-1996, prices can dramatically plummet, and I can remember a lot of friends who bought property in the late 1980s being significantly underwater with negative equity, and working to the bone to make the mortgage payments to keep the roof over their head, which by that time was worth 30-50% less than their mortgage! It took a good 10 years for that to wash out of the system, and people today have forgotten.

If interest rates are forced up by a run on the pound (QE won't work forever), to a level of say 10%, then it will cripple millions of households. It's not difficult to imagine in those circumstances house prices falling by 50% generally, and considerably more in London. I'm not saying that is a likely scenario, but in the range of possibilities I'd say it's a 10-15% chance of happening in the next 5 years. In my view people generally are placing far too much certainty on inherently over-valued residential property, in the South at any rate. Those prices have to come down, substantially, when interest rates rise. And given that prices are set by the marginal transactions (only about 3% of the total housing stock changes hands each year), those prices can collapse if/when we get a tidal wave of Buy-To-Let landlords panic selling, as they see their capital value melting away. Marginal supply will shoot up, buyers will be scared off, and you have a recipe for disaster.

Current Govt policy towards the housing market is totally irresponsible, and a dangerous gamble in my view.

Regards, Paul.

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red 30th Oct '13 26 of 38

Sounds blindingly obvious, I know, but nothing will degrade one's long-term returns than attempting to time the market and no-one, as far as I know, has ever timed the market consciously and consistently.

The alternatives to timing the market are (1) to buy securities that are mis-priced no matter what the implied equity risk premium is attached to the broader market, or (2) to buy shares in good businesses with the intent of holding them for 10, 20 or 30 years.

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Edward Croft 30th Oct '13 27 of 38

In reply to post #78630

You can always time the market. The trouble is that nobody ever has any cash at the bottom, or any sense at the top.

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fredericktug 30th Oct '13 28 of 38

If you need no clearer signal that we are already well into bubble territory in certain spheres - I have just seen a business plan / prospectus from a crowd funding website, where a ssas/cloud accounting business, still loss making after 5 years, turning over under £500k (historic, though claiming now to be at £60k per month) is available to investors at a pre-money valuation of... £18 million.

And this is not the only crazy valuation I have seen on other crowd funding sites.

I really wonder if this could even be the next financial scandal. I'm all for separating the fool from his/her money but this is beginning to resemble a turkey shoot.

I am reducing exposure to the quoted arena, a blow off cannot be far away.

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johnrosier 30th Oct '13 29 of 38


Gordon Brown and Sir David Tweedie are responsible for ruining what was great British asset; final salary defined benefit pension schemes. You can't blame companies for closing down these schemes when "mark to market" leads to so much volatility in the asset value of the pension scheme and normally hits rock bottom at a time that the sponsoring company's profits are at a cyclical low!

When I managed these schemes in the late 80's/early 90's we held typically 60% in UK equities. Nowadays I think it is around 10-15%. The only bullish thing about this is institutions don't have many UK equities left to sell and may start switching out of bonds and back into equities. This might just give this bull market more of a secular feel to it rather than just cyclical!

Website: JohnsInvestmentChronicle
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red 30th Oct '13 30 of 38

In reply to post #78631

The flipside is having too much cash too early: Klarman et al have basically sat out the biggest rally in 10 years because they thought that equities were already overpriced last year. That, too, has a cost that's worth counting.

Perhaps it reflects my own biases but it seems to me that the truly outstanding investing records have been put up by those who, like Greenblatt's Gotham, ignored market sentiment altogether and just bought deeply discounted securities with definite near-term catalysts.

I figure that most of us are small enough investors that we should be able to find enough of those to constitute a portfolio. Market sentiment, interest rate policy, etc are , in my view, for the funds with hundreds of millions (or billions) in AUM to worry about.

For example and just to make my thoughts more concrete, in my own portfolio I have
(i) one net-net that's turning its inventory into cash which it will return to shareholders,
(ii) one pro-cyclical business that is exactly offset by a counter-cyclical business (and both of them have highly marketable & severable assets that are worth more than enterprise value)
(iii) three businesses that should be showing 20% to 30% FCF yields in 11 to 24 months time when the catalysts take hold
(iv) one forever stock
(v) 20% cash, just in case I find the perfect security

I don't think that it will make a blind bit of difference to the value of my portfolio whether the cost of equity is 7% or 11% .

There are certainly other ways to succeed in the market but this approach saves on from having to think about market sentiment.

The one way to put oneself at the mercy of the market is to buy a stock that one thinks should be trading at 15x instead of 10x. That's the game that most fund managers play and it rarely leads to a deliriously happy conclusion :)

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lightningtiger 30th Oct '13 31 of 38

I am holding THAL . UTW is on my hit list, a definite buy from me. Good to here another TEP fan a happy bunny & still a buy from me.
Out of my 20 stocks 14 are in with one screen or another with Stockopedia.
Sorry to here Paul, you have bought SOCCO today, I wish you well, but Socco is not for me until it moves up like GLOBO has done, with a sharp correction because of it being overvalued. I am still holding GLOBO, in spite of a definite stop loss sell. This is of course a very risky thing to do, & I do not recommend it. However the previous trend was strongly up, so balancing the scales of growth way in excess of 100%, a setback of about -30% has to be taken into account. I am expecting it to come back with a short period of time. like DART group.
Same sort of thing, different company.
I guess it is all about confidence, what you are happy with. Consider the different sectors & overall which are good. OIL not for me thanks.
Cheers from Lightningtiger

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Edward Croft 30th Oct '13 32 of 38

In reply to post #78603

bsharman, Regarding QUPP. I nearly bought it in 2011 when the numbers were unbelievable. The F-Score was off the scale and it seemed to be beaming green from every angle that hits my buttons on the valuation and quality angles. Sometimes these things can be too good to be true, and my instinct was not to buy but wait as I wanted to see how the post-Larsson period went. The management is by all accounts terrific but taking a 1 author company to a multi-author company is a very difficult transition. The profitability metrics (ROCE/ ROE etc) have nose-dived in last couple of years and scanning the fin summary shows that they are getting low on cash. It seems they've paid out almost £3.5m in dividends the last couple of years... which has drawn down their cash resources considerably. On a TTM basis it looks like they were down to the last £310k but admittedly they have no gearing and £12m or so tied up in Working Capital.

I really haven't followed QUPP's story the last couple of years, and I imagine the prospects are v. v. based upon whether or not they've managed to invest in good pipeline. One thing that I would like to see is some buyers get behind the stock as evidence that the crowd can see things moving forwards. It's been 2 years with the price heading south which is never a good sign.

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StrollingMolby 30th Oct '13 33 of 38

In reply to post #78634

If you need no clearer signal that we are already well into bubble territory in certain spheres - I have just seen a business plan / prospectus from a crowd funding website, where a ssas/cloud accounting business, still loss making after 5 years, turning over under £500k (historic, though claiming now to be at £60k per month) is available to investors at a pre-money valuation of... £18 million.

And this is not the only crazy valuation I have seen on other crowd funding sites. 

I really wonder if this could even be the next financial scandal. I'm all for separating the fool from his/her money but this is beginning to resemble a turkey shoot.

The horse may already have bolted before the barn door is shut, but in an effort to prevent future excesses in the crowdfunding area, the FCA last week issued a consultation paper on proposed changes in the loan-based and investment-based crowdfunding platform space.

The proposals include introducing regulation to certain crowdfunding activities for the first time.  New measures look similar to more conventional asset management firms with Retail clients, and include:

  • a prudential resource requirement for loan-based platform firms of a minimum of £50k + plus a volume-based measure on a tiered basis of loaned funds;
  • client money rules;
  • 14 day cancellation rights;
  • information disclosure;
  • financial promotion rules;
  • periodic reporting;
  • access to the Financial Ombudsman Service;


The rules will come into force in April 2014, with three years for firms to fully comply with the prudential requirements.  There will still be scope for rogue firms to operate in this space but the new rules will considerably increase consumer protection, which is to be applauded.


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lightningtiger 31st Oct '13 34 of 38

Am I glad that I am out of the insurance business. I learned a lot in the 14 years and all the rules & regulations that go with it. Having seen interest rates go up to 18% I think, people were handing back their house keys to their lender. They had had enough. I can remember a couple wanting a mortgage, more than was sensible amount. I was not prepared to do it for them. About 18months later a frantic telephone call from their parents. The couple had just 72 hours to come up with the money or be re possessed. There was a small child & in spite of 3 jobs, the money could not fund the mortgage. With only 72 hours left, it was impossible to do anything to help. Had I have known a bit earlier, he was on emergency tax because he had 3 jobs that extra tax prevented him from being able to fund the mortgage. If the emergency tax could have been sorted out earlier they would have just been able to cope.They lost their house through lack of knowledge.

Now mortgage money is cheap to borrow. The figures : £200K @ 5% say = 10K/year but at 18% = 36K/year.
Annuities now are at a really low level. The big problem is we are all living longer on pensions & there is not enough people working to fund them.
I just heard on the news tonight that about 3 trillion trades go through every day with currencies being traded. That sort of figure has its effect on one of my stocks Plus500 that I spotted from Stockopedia. We need to keep our eyes peeled to what is happening.
I am really looking forward to close of business tomorrow because since the end of September, the profit from my portfolio has really surprised me. All I am saying is %age increase in this month is in double digits, & the first digit is not a 1.
I still have not read up on all the lessons of Stockopedia yet either.
Cheers from Lightningtiger

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Paul Scott 31st Oct '13 35 of 38

In reply to post #78639

Come on john,you can do better than that load of drivel. It was nice to meet you at theinvestor event recently, but that's a crap post. Try harder please. No offence, but I demand better standards here. let's keep the drivel on advfn.

Regards, paul.

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Paul Scott 31st Oct '13 36 of 38

In reply to post #78644

Pls ignore my last reply, as the original post seems to have improved considerably, so I withdraw my objections!

Regards, Paul.

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lightningtiger 31st Oct '13 37 of 38

Thanks Paul, I shall try harder, you are forgiven. I have just doubled up my holdings with GLOBO.

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Monevator 1st Nov '13 38 of 38

In reply to post #78596

All makes sense to me!

I think if you look towards the top of the size scale there are still apparently cheap to fair value companies around. E.g. BP, MRW or SBRY, GSK, maybe a RIO or BLT if you believe the economy isn't going to completely roll over (as opposed to the market just go through a wobble).

Nice yields and P/Es around 10 or less (way less in the case of BP, which is one of my favourite big caps although admittedly it has just had a bit of a spurt).

All the best!

Blog: Monevator
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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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