Small Cap Value Report (8 Nov) - GBO, TNI, BPI | Paul Scott

8th Nov '13 by Paul Scott

43 comments 31481 reads

Good morning! It's Friday already, and my news feed is extremely quiet this morning for small caps. Plenty of news overnight, including a horrendous-sounding storm in the Phillipines with winds up to 195mph apparently. The US markets had their first significant wobble for a while, so as usual this feeds across to the UK, where the futures are indicating that the FTSE 100 will open down around 40 points at 6,654. At some point excitable investors in small caps are going to realise that share prices can go down as well as up! That's certainly true of story stocks on crazy valuations, where I'm expecting some major corrections at some point. However, a correction doesn't worry me with my portfolio of solid value & GARP shares - you just have to take the occasional 10% portfolio correction in your stride, and use it as a buying opportunity, selectively.

I was thinking back to what happened when the Tech, Media & Telecoms (TMT) bubble burst in Mar 2000. Despite the Indices crashing, it was actually a very good time for value investors - many great businesses were bombed out in price during the TMT boom, especially cash cows like retailers & house builders, as so much money was sucked into TMT stocks, that people indiscriminately sold down their holdings in much better companies, in order to raise cash to buy junk.

This time round we're not seeing that - in fact everything apart from resources stocks are going up - both trendy tech stocks, and value/GARP stocks - they're all going up. So it's harder to find bargains, but there are still some to be found - I'm not having any difficulty finding new, good value positions to open, but it's requiring more research, and generally they are at the sub-£25m market cap level.

In my core portfolio, which is £25-250m market caps, I'm not altering my strategy, and if there are no conviction buys available, then I'll sit and wait in cash. Opportunities can arise in the blink of an eye, so it's essential to be ready, with cash in hand in my opinion. Probably the most important aptitude for any investor to learn, is to be comfortable holding cash. Most people are permanently 100% invested, and that means you'll be hit hard by bear markets.

Whereas people who are disciplined enough to move gradually into cash as markets become…

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SevenPillars

8th Nov '13

I think the comparison with the tech boom days is a slightly false one to make at this stage. There are crazy valuations about today, but it is all relative. From what I remember of the tech bubble everything was going up crazy in that sector for some considerable time, while yes, "old" economy stocks got left behind. If this were the tech boom days again, Globo would probably be around 300-400p by now. It wouldn't be worth anything like that, but that was the case with 99% of tech stocks back in 1999.

The case can be made for many overpriced growth or momentum stocks today, but there again, value investors are always going to say that once things get ahead of themselves. It's certainly a bull market, but bubble prices? In individual companies yes, but I don't see a mass across the board mania just yet and while indices are heading towards new highs or breaking them, some have a long way to go just to catch up with inflation.

Paul Scott

Hi SevenPillars,

I'm seeing plenty of examples of over-exuberance, but not yet mania.
So my view is that we're probably in the final third of this bull market, but it could last for another year or two, in which time spectacular gains can be made - providing people see it for what it is, and bank the gains before the music stops.

So just to clarify, I'm not comparing where we are now with the insanity of early 2000 (the peak of the TMT boom). However I am saying that there are some uncanny similarities with perhaps late 1998, early 1999, in some stocks.

For small caps overall, I definitely wouldn't buy the market generally - valuations are too high. But selectively there are still some good bargains on an individual stock level. So I don't think we'll get any general boost from the market overall rising in small caps (which has soared in the last 18 months - rebase it to the same as the FTSE100, and small caps are knocking on the door of 10,000!)

Cheers, Paul.

StrollingMolby

For interest (though not a small-cap)... there's a ~30% special divi coming at Bumi (LON:BUMI) once the seperation from the Indonesian entities the Bakrie Group and Bumi Resources is complete - defined as 'near-term.' The ownership and management issues may be coming to an end, to draw an end to the embarassing corporate governance issues arising when the company obtained a Premium Listing when floating.

The Separation would also benefit Shareholders in the following ways:

-- the Bumi Group will receive US$501 million (less transaction costs) in cash. The Board intends to return at least US$400 million of this cash, equivalent to approximately GBP1.03 per Ordinary Share, to Shareholders in the near-term.

Small Cap Value Report (8 Nov) - GBO, TNI, BPI

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Paul Scott

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