Small Cap Value Report (7 Jul 2016) - INL, BVS, SPD, MKS, PMP, HAT

7th Jul '16 by Paul Scott

42 comments 21898 reads

Good morning!

Several readers flagged up that a quote from a French Govt Minister in yesterday's report was not current, but 3 years old. I've not had time to go back & check yet, but assume you're correct, so my apologies for not checking the source more carefully. That's the trouble when you rely too much on Twitter, I suppose, and are in a rush. The occasional cock-up will inevitably slip through the net, so again apologies, and thanks for flagging my mistake.

I'm avidly reading trading updates from large caps, as well as small caps right now, as it's essential to get an idea asap about how businesses in various sectors are being affected by the current economic uncertainty.

Housebuilders

As mentioned yesterday, the housing sector in particular interests me, because I think there could be some good buying opportunities there. I am firmly of the view that the residential housing market continues to have very favourable characteristics - shortage of supply over demand, very cheap mortgage financing, and considerable support from Govt schemes such as Help to Buy.

Thank you to the reader who flagged up comments yesterday from Inland Homes (LON:INL) which are reassuring, as it is one of the few companies which has said something specific about market conditions since the Referendum vote - as opposed to the cop out of too early to judge which is being trotted out by most companies;

"In the two weeks since the Referendum vote, we have continued to see the same level of appetite from potential purchasers for our homes, which are at the more affordable end of the housing spectrum and are supported by strong fundamentals such as the current low interest rates and the Help to Buy scheme. While we are vigilant to the wider market landscape, we will continue to seek opportunities that meet our strategic objectives

So that confirms my inkling that demand for affordable new housing should remain strong, and hence shares in housebuilders outside London could be a nice place to do some discount shopping right now.

I note that the same reader left a caustic post-script to his comment, saying that facts speak louder than opinions! Whilst that is of course true, I retort that nobody can invest in the current market without an opinion on where the economy is going. The facts will then subsequently either prove or disprove our opinions.

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herbie47

7th Jul '16

I have followed the Naked Trader, I like his discipline, he keeps things simple, just one trade then runs that, treats everything separately. Stop losses work for him but I found 10% stop loss did not work for me, I was getting stopped out all the time. In this market it may be different. I think many have a problem right now. Some have held up well but others have crashed such as builders, airlines, financials and retailers.

truegent

yes although a few of my 'naked trader' trades were Breedon Aggregates (LON:BREE), Marshalls (LON:MSLH), Michelmersh Brick Holdings (LON:MBH), all of which i was in profit with, post brexit though i did sell all 3 around the 10% mark and boy and i glad i did, all 3 have gone down further. then theres Patisserie Holdings (LON:CAKE), i am WELL over 10% down now (bought at 343p), but still i hold, mainly because theres a pattisserie valerie in Nottingham and it i still VERY busy (i work in town and check regularly !).

so i hold this because i believe "oh its ok it'll go back up"...which of course contradicts the disciplined approach of 10% down and out !

head ache.

Andrew Evans

Historically, I've worked on the basis that, if you're adequately diversified, you'll win a few and lose a few so I've never used stop losses and it's worked OK. However, I went into Brexit fully invested as I assumed that most people would have the sense not to shoot themselves in the foot. The first 2 days post Brexit l lost rather a lot of money so, as soon as the market started to recover, I put stop losses in place and I review them every day. Over the past three days 75% of them have triggered. It has protected my portfolio, compared to my wife, who has not used stop losses. She has probably lost about twice as much as me in percentage terms.

I still remain uncomfortable with them. it feels very "unnatural" and as soon as the market settles down I'll probably stop using them again.

I don't hold any of those at the moment. I did hold Michelmersh Brick Holdings (LON:MBH) for a while but got stopped out back in February I think it was. I was looking at buying Marshalls (LON:MSLH) but not sure I want any more exposure to that sector at the moment. Burn's view is you can sell at -10% and then buy back again if they fall further and you still believe in the company. In this market it probably a good strategy.

i guess there has to be a balance at the moment between doing the 'sensible' thing and selling and taking the loss...but at the same time NOT selling out of FEAR...selling out of fear is one of the ultimate things to overcome psychologically (and it covered in naked traders new book)...it really is a fine line at the moment.

yesterday i sold Card Factory (LON:CARD) at 294p, literally the lowest point of the day ! now the markets have gone back up today it feels like i sold out of fear and im pretty annoyed with myself. but at the same time i was 10% down...so i sold.

Howard Adams

Ramridge

Many thanks for your observation, it prompted me to look into this as a potential signal for further risks.

From what I can determine, the sales of 30,000 shares on 15/6/16 consisted of 10k owned by the FD (Brett Phillips), 15k owned by his wife and a further 5k also owned by his wife.

This last 5k was sold to the chairman of the board of Portmeirion (LON:PMP) thus a holding which stays with a key company stake holder.

Also, from what I can determine, the FD still retains 61,745 shares which at a selling price of 850p (sourced from Hargreaves at time of writing) equates to a holding of £524.8k, still quite a substantial holding in Portmeirion (LON:PMP) for the FD.

Looking a little further I believe the FDs wife acquired at least 10k of her shares in 26/10/09 at 280p thus a selling price on the 15/6/16 at £10.1 would have been an attractive option.

So, it might be an alarm signal about Portmeirion (LON:PMP) as you point out, or in this case, it might have been personal circumstances triggering the 30k sale. But, an important point to keep an eye on given today's price drop.

Regards
Howard

JohnEustace

I rarely use automatic stop losses but I do run a manual trailing stop loss in a Google Docs spreadsheet that picks up the latest prices automatically. I set a stop loss on purchasing a stock, usually at 10% including dealing costs, and review it upwards if the price rises beyond a threshold that I also set on purchase. If the stop loss is triggered I get a big red cell in the spreadsheet that I can't ignore. For me, managing my own emotions, this is a good balance between panicking because a stock is down 5% one day and ignoring a serious downturn.

The best book on this topic that I have read recently is The Art of Execution by Lee Freeman-Shor. He says the worst error is to do nothing when faced with a loss. Usually you should sell and move on. If you really have conviction and believe the market is wrong, then buy more. But don't sit in the middle of the road dazzled by the headlights doing nothing.

Easier to say than do as I know to my occasional cost, but nevertheless I think good advice.

ill have to read that one thanks. best psychology book i read is mark douglas, but that one really works on giving you an 'edge' which i now have (or did have until brexit happened !)

BlueFrew

Avanti Communications (LON:AVN) announcing to the market at 1:45pm that it is effectively insolvent and needs to raise cash quickly (which has been apparent for some time now). But not to worry they assure us, this time the jam will be arriving tomorrow. Absolutely shocking behaviour from the management putting this trading statement out while the market is open.

(Disclosure: Short Avanti Communications (LON:AVN) )

Ramridge

Howard - Yes, these things are never black and white.

At the House of Commons' BHS enquiry, when asked by the Chairman what he thought of the proposed purchase of BHS by Dominic Chappell, the ex BHS Finance Head said he failed his "smell test".
If a Group Finance Director sells a substantial portion of his shares, look into it carefully, taking all circumstances into consideration, and then trust your "smell test" and act accordingly.

Ramridge

Thanks for that, I like the words "smell test" :)

Although I try not too, I know I can get sucked into data and get myopic. I'll remember your "smell test" now to pull myself back.

Regards
Howard

yes thats sort of what i try to do, i try to take this one step further and have a 3 strikes and you're out, so after the 3rd time of trying (and losing), i just get rid of the stock from my screen.

ap8889again

As a LTBH investor, stopping out at 10% seems daft, and just incurrs friction costs that will destroy you a couple of bucks + 0.5% a time.

Pick a really diverse portfolio and let it run. You won't make a quick million, but you won't have the stress induced health problems. Life is precious and short, too short to stress over minor moves up and down based on the groupthink of the day. Same goes for the mental effort required when short term trading in and out, especially based on stops.

Only a lunatic would rely on stop losses out of hours. Any major move in price will happen out of hours overnight, gapping down and ignoring your stop until the worst is done. Stop losses just give you a headache of "what next with my diminished capital". LTBH strategy is mentally less wearing as by the time you notice the 10% swing it will likely have swung back (or not ) and who cares anyway, when the perspective is over a lifetime of investing.

fifthcolumn

Hi truegent, I have the same thoughts as yourself and have often wondered what others think. I recently put a system/checklist together based on the Naked Trader and Stockranks. I am also an avid reader of Pauls blogs along with others on the site. I have sometimes felt that NT breaks his own rules and my own opinion is that if I thought a company was good enough to invest in in the first place then unless it has a sudden black swan event, why would I want to put a stop loss on it? I am quite prepared to take a paper loss so long as I have faith in the company, sometimes buying more if there is no real reason for the drop other than things like Brexit (which I think is more about fear than fact). My own portfolio has been very mixed and my new system has not been impressive.....YET! But I'm not running scarred as I've seen this kind of thing before. I'm sorry, I've rambled a bit but basically my opinion is to do your research, buy excellent companys and hold. Only use stop losses if you can't hold long term or if you are a trader rather than an investor.

aflash

Everybody has this problem!

Develop your own style!
Ignore the posters and writers who tell you the 'Only Way' is this or that.
If they are so good why are they writing about it and not investing?

If it is any help here are a few ideas.
Averaging down does not work Mathematically, the second or third purchase will always give an average higher than today's price. It is tempting when you are offered such a bargain and I take it up but make a few calculations beforehand.
If my average price after today's projected purchase is a price I think the share can reach in a 'reasonable' amount of time I go ahead.
So what is 'reasonable'? Again develop your own style. Some talk in years, some months, some days.

The other calculation comes with my initial position.
If I purchase a potentially falling knive, after a profit warning, for example, I buy a tiny amount. I am happy to pay brokerage several times to avoid having a 20-30% loss on hand which I can do nothing profitable about. Then when the second or third profit warning comes I place a much larger order.
It does not necessarily work. Even the Naked Trader admits to closing a position after three attempts.

The other method is Averaging Up which makes sense. Your initial purchase is the largest and you then buy progressively Smaller amounts. However it depends on timing your initial purchase very well.

It does not work well for me because if my initial purchase is excellent the phenomenons of Short Covering and Dead-Cat bounces from oversold positions come into play. I find myself with a fantastic short term profit on hand and I usually take it.
When I have held, the share often drifts and the profit does not improve significantly.

Hope this helps.

Lion Tamer

Hi truegent

My approach is that a big loss is a wake up call to re-evaluate my reasons for holding. I'll usually check my purchase notes, and compare to the revised figures to see what's changed. If it's a company I'll want to be holding in a few months or years time then I'll hold, because I know I'm terrible at timing a re-entry & the price will shoot up to above my sale price before I can say "where's my trading PIN". Occasionally I realise the original reason for buying is no longer valid, in which case I'll sell.

PhilH

Hi trueagent,

I think you have to ask yourself

1) Do I understand Paul's investment strategy?
2) Do I understand the Naked Trader (NT) strategy?
3) Does it make sense to attempt to integrate the two?
4) What am I trying to do?

For me, the NT strategy attempts to identify stocks that are exhibiting cheap growth, have a sensible debt profile, with a positive news history, a product or service that is going to drive the continued growth. He also then attempts to time the purchase so the stock is breaking out. That is is he's not just looking for earnings momentum , he wants price momentum too ... and for me that is why he uses stops losses. Because if his stock selection breaches his stop loss it means he's got something wrong and it's time to protect his capital for another opportunity.

Paul chases deep value, turnarounds, etc. and so his approach to investing is fundamentally different.

So you need to work out which approach is right for you.

Best of luck
Phil

thank you everyone for your input !

One other thought while I remember. The Naked Trader has a new book out. I have it on order but haven't received it yet. The title seems relevant - Trade Like a Shark.
https://www.harriman-house.com/tradelikeashark

i already read it :) i bought the book and you get a free ebook and i managed to read the ebook before the actual book arrived.

and im in the middle of the art of execution thanks for the recommendation ! its very good.

Small Cap Value Report (7 Jul 2016) - INL, BVS, SPD, MKS, PMP, HAT

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Paul Scott

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