Small Cap Value Report (9 Nov 2016) - STAF, ACRL

9th Nov '16 by Paul Scott

40 comments 18527 reads

Good afternoon!

What an extraordinarily exciting US election night last night. Trump has won! It felt to me almost like a re-run of Brexit, the way things panned out. Early on, the commentators on lots of TV channels were all saying how Trump would struggle to win key states. Then, as the evening progressed, Trump suddenly pulled into the lead in the key state of Florida, and bemused talking heads on TV had to start eating their words!

It had looked as if Trump was doomed a few minutes earlier, and I'd prematurely closed out most of my hedges against a Trump victory, seeking to limit the losses. So I scrambled to put those hedges back on, as quickly as possible, and thankfully scooped up a nice haul by the time I flaked out at c.4:30 am.

My thinking by that stage was that the market had reacted adversely to the shock of a Trump victory, but would probably stabilise quite quickly - as it did with Brexit (well, that took 2-3 days to stabilise). Putting aside the dreadful, divisive things Trump has said in this campaign, he's likely to be a fairly business-friendly President, I imagine. Also his more extreme ideas are probably (hopefully) just bluster, rather than firm intentions.

Therefore, I really don't see any reason for a major market sell-off now. More likely the opposite actually - a relief rally that the uncertainty is over. Plus Trump has made a conciliatory speech today that seems to have calmed nerves.

After Brexit, America is now the latest country where voters have stuck two fingers up to the political elite, and rejected their pro-globalisation agenda. You can see why too. Globalisation has just hollowed out manufacturing in the west, and sent the jobs to China. How is that a good thing for working class people who previously enjoyed stable, and relatively well-paid jobs?

Globalisation is great for the affluent middle class of course - a much higher standard of living from all the cheap consumer goods we import. Plus a plentiful supply of service sector staff from abroad, to cater for our every need - be it low paid waiters, gardeners, maintenance people, drivers, etc.

I can see why the working class are rebelling against all this, and to a certain extent wonder why it has taken so long?

Here is the link to yesterday's report, which I updated further in the…

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PAUL HITCHCOCK

9th Nov '16

very good point.it just makes investing so hard

FREng

The analysis of voter's views is interesting. Look at the swings in the right hand column (remember, Republicans are Red). http://www.nytimes.com/interactive/2016/11/08/us/politics/election-exit-polls.html

JohnEustace

A bit of post fact argument going on here.

1. There was no Brexit referendum exit poll.
2. The exit poll for the General Election predicted the Conservative win

kenobi

apologies you are right there was no brexit exit poll, but the latest polls showed 48:46 to remain,
https://ig.ft.com/sites/brexit-polling/ perhaps a few percent changed their minds on the way to the polls ? I very much doubt it.

there was one for the general election and it predicted a hung parliment. with the largest party the conservatives, still wrong, in exactly the direction I would predict.

http://www.bbc.co.uk/news/election-2015-scotland-32633029

As soon as I heard it, I said to my wife I bet that ends up as a conservative majority. i don't understand your arguement,
is it that the polls were right ? they got brexit, the general election and trump wrong, apologies that I confused the exit polls for brexit with the last we had,

A bit of post fact argument indeed

Ramridge

Hi Paul - Taptica International (LON:TAP) 's trading update this morning looked very promising - exceeding current expectations. I know you reviewed this share a short while back and were generally positive - the one red flag was that it is an Israeli company.
Would be interested in your view now.
Best wishes, Ram
Declaration : took advantage of the market jitters first thing this morning and bought some shares

fanmail

Grumpy - Dr Pepper is a great business and has been a great share. I think Terry Smith has a shedload from memory

ACounsell

Regarding Trump victory regardless of whether it is, or is not, a scream by the disenfranchised working classes against globalisation he won the vote of the electorate to quote Paul by saying 'many dreadful, divisive things' and 'blustering' on about many 'extreme ideas' which weren't firm intentions (e.g Mexicans building and paying for border wall, a total ban on Muslims entering the USA, putting Clinton in jail, etc. etc). These ideas were what the voters voted for and then he turns round and gives a nauseating, overly sentimental, acceptance speech which convinces the markets that all will be well and he really is Mr nice guy!

The markets seem to have recovered very quickly probably because the Republicans are generally good for business (i.e. lining the pockets of business people like Trump not the workers) but how will his supporters react when he fails to carry through his 'outlandish' promises. More echoes of Brexit and the reaction of the Brexiteers and the supporting press to the invoking of Article 50 fiasco currently making its way through the highest courts of the UK. Riots in the streets as Farage has suggested perhaps and with all those guns on the loose in the US I don't think I will be going any time soon!

Two other concerns about Taptica International (LON:TAP) to add to it being an overseas company listed on AIM.

1. There's a lot of hype about AI and Machine Learning. (If they start mentioning Deep Learning then head for the exit).

2. GDPR may be a major threat, given their claim to be using a wide range of data sources, as few of these sources will have a consent model that passes the GDPR requirements, and the GDPR penalties are severe.

JMLDutch

You seem to have a rather simplistic view; the polls failure could be due to many other factors than just people "lying". The large weakness of polls is making a representative sample of the voting population. The polls could have underestimated the turnout of certain demographics. Additionally, polls themselves can affect voter turnout.

E.g. "The IBD/TIPP tracking poll, which was the most accurate in the previous three elections, 2004, 2008 and 2012, in its final poll on 8 November had Trump two points ahead. The LA Times tracking poll had Trump consistently ahead since the end of October and in its latest poll on Monday he was ahead by three. The biggest difference apparently involved weighting – that is, the process of adjusting a poll’s data to make sure it properly represents the diversity of the population." Source: https://www.theguardian.com/business/2016/nov/09/e...

MichaelFBS

I prefer it when the comments on Paul's column stick to commenting on stocks but I am going to contribute by commenting on the Trump win!

I am not a fan of Trump but assuming that the people who voted him in have been left behind (though I struggle with this argument (59,353,999 voted for Trump as I write) what is the alternative. Rhetoric of the "make America great again" really does not give an answer.

For a moment assume that we put a brake on globalisation, by this I mean western countries apply large tariff barriers to goods produced by China, Bangladesh, India, Korea, Japan, Laos, Pakistan to name a few, we with withdraw banking licenses for non UK banks and the US and EU do the same.

Where does this get us. Surely this just pushes the costs of goods up the income scale so that less people can afford them. Surely the reason that Apple has offshored the production of iPhones is ensure a price that makes them affordable to more (not all) Americans? Surely if they were produced in the States this would drive up the cost of production, therefore the retail price, therefore making them less affordable.

I will accept that there are problems but I struggle to accept that they will solved by Mr Trumps "solutions". I suspect that when we live in a world where £FB has a market cap 8 or 9 times that of £GM but £FB employs 15,000 people and £GM 280,000 that the solutions are far far more complicated than those offered by Trump in the US and say Farage over here.

I for one do not have a solution but I am pretty certain it is not ending globalisation.

AnonymousUser252054

Misleading pollsters, fair enough, but there's another factor, as those who also follow Tom Winnifrith's blog will be aware. He found that the US polls showing a clear lead for Clinton were non-representative! Sounds bizarre but they were asking more Democrats than Republicans, as Tom ascertained. He was confident enough to repeatedly predict a clear Trump win when extrapolating from there.

Hot Socks

I'm sure I remember the exit poll for the 1992 general election showed a very clear Neil Kinnock/Labour win but in reality John Major and the Conservatives got home with a 20 ish seat majority. The only plausible explanation was that people were ashamed at voting for the Conservatives because the prevailing view at the time was that Labour were the nice guys. It was very hard at the time to find anyone who would admit to voting Tory. People lie to polls - just like kids lie in surveys when they claim to be hard drinking drug addicts who have done nothing since their twelfth birthday except frenetically have sex with beautiful women.

andrea34

10th Nov '16

Good write up on FLYBE Carcosa. I sold em at 70p and wouldn't touch em now.

The load factor in particular is appalling and, as I've said before, I consider that's because their seats are too expensive.

WIZZ results out this week were brilliant... bought em last week after the latest monthly update after having watched them go up and down for ages; RYA are also able to push their load factor up... to 95%!

Carcosa

wrt to WIZZ the primary downside is the very large forthcoming dilution to the shareholder base IIRC. Otherwise I agree with you; exceptionally efficient airline operationally.

Mark Simpson

Hi Carcosa,

I think you may be overly negative on Flybe. A few counterpoints:

- Re: EBITDAR - not my preferred metric personally but it does seem to be the industry standard for comparing airlines so it's not like Flybe (LON:FLYB) have just come up with their own metric and asking you to measure them on it they are simply reporting as per industry standards.

- Re: Load factor - this is weak mainly due to increased seat capacity. I did a fuller analysis here:

http://www.dangercapital.co.uk/2016/09/flybe-dog-is-value-investors-best-friend.html

Now ramping this up so rapidly does seem to be a strategic mistake given the current market weakness and is probably why Hammad was pushed but load factor weakness isn't unexpected during capacity addition. They are also specifically not competing with Ryanair Holdings (LON:RYA) but are flying shorter lower capacity routes where Q400 is cheaper - often road and rail is their real competition. They will never have the 95%+ load factor of Ryanair Holdings (LON:RYA) but that doesn't matter they will be quite profitable at 75% in their niche.

- Re: Costs: not sure a saving of 1.2% indicates maintenance deferral. In my industry we target far more that this as annual efficiency savings without impacting quality or performance. And fuel cost hedging is just part of the business - at current pricing this will be further cost reductions next year.

- Re: Q400 that is their plane of choice given it's flexibility and lower cost vs jets on the typical routes they fly. Now it is certainly possible that there isn't enough routes in Europe that suit the Q400 and the additional planes will be a future liability but that is hardly shown by one deal and short term performance in a weak market.

In reality I don't think it will take much for their turnaround. These results were actually better than I expected. They just have to stop adding seat capacity in the short term, let existing routes mature removing ones that don't and redeploying. This won't take 5 years however they are priced as if it will and herein lies the opportunity.

Cheers,

Mark

I agree, the problem is people have voted for the only person who offered any solution to the issues people are feeling. I agree I don't see how his solutions would help, and while superficially it seems that bringing iphone manufacture back to the US is a great thing, when you look at it, the manufacturer gets a tiny amount of the product price, Something like $12 from memory. The real value in each phone is the software, os and brand. All of which are done in the US. I really see no way that he could enforce this other than adding tarrifs. Mind you would it be so bad if the price of smart phones went up ? surely it would drive someone to manufacture the products locally at lower costs ? When I looked into it for example the iphone's cpu is made in texas and exported to china, a bit surprising. We have a society and we live in a democracy, we need to find a balance where we can all live, it's no good writing off a segment of the population and exporting the jobs they do to china, if we can't find them alternative more profitable work. Otherwise the state just has to take on that burden. If you're a car worker in the US and you fear for your job, is it any wonder that when trump comes and says, well if they move production to mexico I'll slap a 30% tarrif on the imports, you think that's a good thing ??? What alternative was Hilary offering ?

K

Paul Scott

11th Nov '16

Hi Ramridge,

I did have a look at Taptica, but just decided it was too not my kind of thing.
Israeli online marketing companies on AIM are best avoided in my view.

In this sector, things can rapidly go wrong. Indeed, Taptica said on outlook;

Whilst the Company has benefitted from significant uplift from mobile advertising and some positive seasonal trading in territories such as the US and Asia-Pacific, there remains uncertainty as to the growth trajectory in some of these markets into next year as the mobile advertising market enters a new phase of maturity.

What's that supposed to mean?

The way I look at it, people travel thousands of miles to list on AIM, and practically all of them end in tears. So give me one good reason why we should waste our time looking for an overseas needle in that particular haystack???

AIM has maybe 300 really good UK companies, and a handful of good overseas ones with a track record. That's where I focus my time & energy. To do otherwise is totally illogical.

Regards, Paul.

Hi Paul
Re. Taptica International (LON:TAP) Thanks for your reply. I guess each of us is looking at this from a different perspective. You have put your view and that makes good sense to me.
I take a different approach. The basic question I ask when I look at any share is, will this share give me a substantial gain over a time horizon of 6 - 12 months? By substantial gain I mean over 20%. I then look at the risk: reward ratio. The fact that it is an overseas company is just a factor that comes into the mix of considering the total risk profile and the probability of meeting my target.
Hence initially, my universe of potential targets is larger than yours but narrows down considerably because I will only spend time on major momentum movers.
Specifically in the case of Taptica, its business model stands up to scrutiny, and a technical analysis shows a strong set of growth and profitability, and a strong balance sheet. Others may disagree. But in all cases, time and the market are the true arbiters which will judge who is right and who is wrong.
Best, Ram

Fine, good luck with it. Whatever floats your boat.

P.

crees

19th Dec '16

did the interview with staffline ceo ever get published?

Small Cap Value Report (9 Nov 2016) - STAF, ACRL

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