Small Cap Value Report (7 Oct) - WTM, DGB, GHH

7th Oct '13 by Paul Scott

9 comments 16511 reads

Good morning! Firstly, a quick report back on my Half Marathon yesterday in London. It went amazingly well, and although a physically very painful experience, was really worthwhile, as we've raised a fantastic £2,273 (incl. Gift Aid) for Scope, from 63 donors, the overwhelming majority being readers of this blog - so well done you, and thank you!

I've written up a rambling, mile by mile report of what it was like at the time, on my updated fundraising page, and of course it's still open for donations - so I know some people wanted proof that I completed the course, sadly it appears there is no photographic evidence, but I was "chipped" - will copy paste the details when their website is responding. I won't be bothering you for any more sponsorship until December, in readiness for January's "DryAthlon", and the Brighton Half Marathon in Feb 2014. I think 2 or 3 things each year is about right.

Looking at this morning's results, it's another quiet day. There are only about four results/trading statements of interest to me, so let's start with the "international engineering and environmental consultancy", Waterman (LON:WTM). It has issued preliminary results for the year ended 30 Jun 2013 today. As is the fashion, they present a number of different performance measures, so it is getting increasingly confusing for investors as we have to make a judgment as to which one is the most relevant for valuation purposes, and which presents the underlying trends best.

I really hope the accounting standards people are looking at this area, as things are getting increasingly out of hand, as the boundaries are relentlessly pushed by creative management, and PR people, such that no matter how bad things are, there always seems to be a way of presenting it positively! Along the lines of, oh dear my arm just fell off, but this has made me appreciate my other arm all the more, and I have developed a range of new skills for my remaining arm, etc.

I've not reported on Waterman here before, but do recall thinking it might make a good cyclical recovery investment. Their market cap at close of play on Friday was £14.9m, so that will have risen about 15% today to about £17m, on a share price currently of 56p. Here…

Unlock with Email

Unlock with Google

Already have an account?
Login here

brigandchief

7th Oct '13

Paul

Agree with the propesity of some companies to have to drive their reporting through PR and BS. I was, a long time ago, given the job of turning around a very antideluvian division in the UK, part of an American Group. I had to produce a monthly summary and after recording that the sun had shone, the employees had shown up for work and we had written off a £ million in obsolete inventory, I bemoaned the lack of good news. A few days later the President called me, "don't worry about the news, you are doing it cash even and that is fine by me". His eye was always on the cash in and cash out of the group and he was after all worth about $5 billion at the time. So sometimes plain speaking is all the investor needs!!!

Cheers David
PS Congrats on the marathon

rivaldo

Paul,

Quick comment re VLK - Edison only forecast 3p EPS for this year. The EPS figure you quote is for next year (2014).

Cheers (and well done from me too re the marathon)

Paul Scott

Hi Rivaldo,

Sorry you are correct - the 4.2p EPS forecast is indeed for calendar 2014, my mistake - I will amend the article accordingly.
Although I'm thinking in terms of 2014 figures being current now, as we're only 3 months away from 2014 starting, so the market's focus is increasingly turning towards basing valuations on 2014 numbers.

Cheers, Paul.

PhilHofGrowYourDough

"It baffles me the way most investors prefer paying more for their shares! In all other aspects of life we jump at bargain prices, but it seems with shares, people like to buy into a rising trend, hence actually like to pay a higher price - that's one of the bad habits that it's essential to un-learn in my view, if you are a value investor"

Perhaps Robbie Burns isnt considered a value investor however this graph gives compelling evidence for combining quality, value and momentum. I'm sure many fund managers would give their eye teeth for such a smooth graph.

Also I'm curious to know if you buy value beans or Heinz? If the latter ... why?

Food for thought

Cheers

Phil

cig

The graph for the naked trader screen is misleading because it shows the FTSE 100 as an index! And that's mostly a fluke, as small caps don't outperform large caps by that much reliably.

A small cap index would have very similar performance (both 75% since inception with less than 1pc difference), hence most of the performance comes from the "small cap ex IT" criteria. Difficult to compare on two separate charts but the complete screen is possibly a bit smoother, so some benefit possibly, but only in risk adjusted term, not raw performance.

Re "cash on the sidelines": an alternative to that is "ready to sell" positions, e.g. keep a list of your "worst" positions, that you decide in advance would be the one you could sell if a new opportunity came up.

Then when an opportunity does come up, it only takes a few minutes to find something to sell from the ready to go list, and given you're usually exploiting stock-specific opportunities, you're almost always going to have something whose price hasn't moved the same way as the opportunity's.

I keep a track of the shares I'm ready to dump out of my portfolio, but the trigger isn't the drop in the price of a stock i'm watching, it's a breakout or above a significant threshold.

Fascinating isn't it ... I keep a list of stocks of high quality, cheap (either in terms of value or growth) waiting for them to make a significant break up out of a trading range. We dont all have time to pour through stock releases and to watch company news every day so we cant be the genned up value investor that works on the premise that they have all of the information that Mr. Market has and as such you can make a informed decision. I know I don't have the time to do that. So I want to back high quality cheap stock but only when the market has decided that it also thinks the stock is a winner too and integrating charting helps me to do that. I strongly believe that even as a value investor that constantly sits on the stock news that there are times when Mr. Market knows something you dont. This was apparent to me when I was a subscriber to a stock tipping service from another well known UK based investor community. The service chased down the share price of a high quality currency manager determined to buy into the dream of a turnaroud with a long term buy and hold strategy. Each earnings release included decreasing client numbers, reduced earnings,etc. Now subsequently they have recovered somewhat, but why keep catching a falling knife? Surely it makes more sense to keep your capital away from a stock with a negative sentiment and even better to have it invested in a stock with positive sentiment. You can always track a good stock with ugly sentiment and buy on the up, ready to drop it quickly if it turns ugly again.

Perhaps this fundamentally rests on your ability to analyse a company's prospects? No doubt cig & Paul can perform a critical analysis on a stock far more effectively than I can or ever will be able to do. Therefore I'm less able to trust my analysis and by having the market lift a stock gives me confidence in my selections. In fact there is a part of me that doesn't want to be able to read a set of accounts. If I could find a way to invest without having to do this I would. I love the way the Stock Reports are presented here, the screens too and perhaps Stockopedia allied with my basic charting allows me to do that. The addition of a Company Accounts traffic light to the Stock Report would be a massive bonus. Red for big red flags, Amber for some issues further research required, Green for looking good.

Anyway enough rambling

Hi PhilH,

Interesting post, thanks for sharing it.

There are certainly many different ways to skin a cat, and a value based fundamentals approach isn't the only one. I know some very successful investors who combine companies with good fundamentals, with using charts to help time their entry - which is what you do too, by the sounds of it.

It can be painful to buy into a falling share, but the moves upwards can be so fast, that if you blink you miss it. Take Trinity Mirror (LON:TNI) last year for example. The stock stopped falling, and settled at 25p, and stayed at that level for almost 3 months, so it was pretty obvious that it had bottomed out, and that the valuation was bonkers cheap.

However, when the re-rating began, it went up more than 60% in just two days, so if you have missed that initial rise, you missed a significant amount of the re-rating.

Takeover bids are another aspect where you have to be in the stock to benefit from a bid approach. So people sitting on the sidelines waiting for a re-rating miss out.

Personally I think there are degrees of cheapness, such that I will open a small long position on a stock, even if it's in a downtrend, in the hope that it might be near a low point, and am not that bothered if it drops another (say) 10%. In which case I would just buy more, having of course made sure that my research is definitely right first! Then if it carries on falling, I would buy more & more, until it becomes a bigger position, which reflects the improving value.

That approach works great when you get your research right, but can be very damaging when you get your research wrong, so I think it's essential to limit the maximum % any stock can be of your portfolio. To my mind, something like 15-20% is a sensible limit, and even then only for sensible, Value/GARP stocks.

Story stocks should in my view only ever be a small percentage of one's portfolio, as so many of them fail to deliver in the long run.

Most people who lose money in the market do so because they've used too much gearing (been there, done that!), and/or over-pay for growth, especially with story stocks. Combine those two mistakes, with a lack of diversification, and you end up with a highly toxic mixture.

Cheers, Paul.

8th Oct '13

Hi Paul,

Thanks for your considered reply. I recognise that my style means that I might miss out on the quick recovery of bombed out stocks or of takeovers, however perhaps my style wont have allowed me to have spotted their potential in the first place. So be it. I say stick to what you're good at and know if you miss an an opportunity others will arise.

Thanks again
Phil

Small Cap Value Report (7 Oct) - WTM, DGB, GHH

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

9 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...