Small Cap Value Report (Fri 13 August 2021) - BOTB, MCLS, VLG

13th Aug '21 by Paul Scott

171 comments 15580 reads

Morning all, it's just Paul here, with the SCVR for Friday.

Today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda -

Paul's Section:

Best Of The Best (LON:BOTB) (I hold) - Brutal profit warning, with profit guidance for FY 04/2022 lowered by 62% to c.53p. Expect a big fall in the share price today.

Mccoll's Retail (LON:MCLS) (I will hold - applied for placing) - equity fundraising at 20p announced last night, with interim results. This is a special situation - financially distressed and high risk. However, I like the turnaround plan, to re-brand stores as Morrisons Daily, which has worked well in early trials.

Venture Life (LON:VLG) - profit warning, and broker forecasts reduced. Chinese distribution deal sounds like it could be dead in the water. Too much uncertainty & too many moving parts for my liking.

Paul’s Section

Best Of The Best (LON:BOTB)

(I hold)

1525p (pre market open) - market cap £146m

I’ll rush to get this out before 8am, as this share is widely held by readers (and by me!)

Background - briefly is that this supercars competition company went entirely online (it started in UK airports), and started delivering stellar growth. The shares were a big multibagger. However, more recently the gloss came off BOTB shares when management sold about £60m of shares in a secondary placing at £24 per share, after a lengthy period when the company was up for sale. About 2…

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mwjackson

15th Aug '21

Timarr,

Roughly 100 positions, 40% of those make up about 80% of the portfolio.

Can you give us an idea about what your time management look like? I struggle to give 15-20 the time they deserve, keeping up with the news flow, updating my valuations, thinking about risk management etc... I can't imagine managing a portfolio of 100 positions.

RandomWalkTrader

good question

Ross Johnson

16th Aug '21

Why did you change everything? Having great problems trying to navigate.

timarr

From your other comments I interpret that you don't actually implement this philosophy. I just feel sorry for the people that do.

I don't think anyone would implement a 100 bagger approach - Meyer's book is about as clear an example of the Texas Sharpshooter Effect as you could ever wish to find. It makes for an entertaining read but it's unlikely that any serious investor would take it, well ... seriously. So, no, I don't implement this philosophy.

Nonetheless the idea of actively seeking multibaggers is a valid approach. It was at the core of Peter Lynch's success, as he described in One Up on Wall Street. Providing you don't buy during one of the market's periodic manic phases there are always decent quality small cap stocks around with reliable management who will grow their businesses steadily. As I noted earlier, my average holding time is around 8 years (and rising) and for stocks like James Latham (LON:LTHM), James Halstead (LON:JHD), Xp Power (LON:XPP), Jarvis Securities (LON:JIM) and many more that's been a nicely profitable and rather stress free exercise. Often these types of companies end up getting taken over, so the prospect of 100 bagging rarely arises.

As for Nick Train - well, I'd agree the article is rather seeking to explain the Lindsell Train buy and hold forever strategy and, as such, is a bit contrived. But a 100 bagger is only such at a given point in time. No great company has ever remained great forever - Coats Viyella was once the largest company in the world, that's never happening again regardless of how much regression to the mean they achieve.

Underlying this, however, is an important point - buy and hold is a great strategy but it isn't zero effort. Companies with apparently unbreachable moats can be upended by innovation - newspapers, retailers, music publishers, etc have all been undermined by the internet in recent years. It's reasonable to assume fossil fuel companies will also go the way of fossils, although probably not as quickly as people expect.

Of course, if this stuff was as easy as the writers of investment books made out then they'd be doing it themselves rather than writing investment books.

timarr

Etonkush

yes you’re right, Directors crewed over shareholders whilst pocketing £60 million & setting themselves & their families up for life.
I don’t care about being sued- I have told them- Rupert Garton & their PR guy Toto Berger from Buchanan what I believe they have done. They only said on 13th May that they were trading in line with market expectations.

Moaning won’t change a thing. Like Paul, I will get out if these rebound. Management have proven themselves to be untrustworthy with zero credibility.

Best Of The Best (LON:BOTB) Directors screwed over shareholders whilst pocketing £60 million & setting themselves & their families up for life.
I don’t care about being sued- I have told them- Rupert Garton & their PR guy Toto Berger from Buchanan what I believe they have done. They only said on 13th May that they were trading in line with market expectations.

Snoo

Hi Abtan

Good posts on Best Of The Best (LON:BOTB).

TBH I think calling Omaze illegal is going too far. Similar restrictions apply in the US (lotteries are not permitted without licencing). It is obvious it is a paid prize draw, but perhaps the more compliant way to describe it is a free draw with optional paid entry (you can enter by post).

But it does illustrate the grey area in which these firms exist. The terms could simply be reworded in future, banning these competitions. The charity aspect, IMO is an 'investment' - it is a selling point and also potential protection from any other action. But the structure to my mind is not good value for either customer or charity.

But let's not think BOTB are immune from this either. If I ran a competition where you had to guess where I think the FTSE will end to 2 decimal places today is that skill or luck? Note that when you 'spot the ball' at BOTB you are not spotting where the ball actually was, but where the ball was according to their panel. There are other aspects that I think are tenuous as well. I don't think most players are actually aware that if they spend £5 on one ticket their chances can be diluted out by others playing at £0.45 going for a different prize.

Its interesting that you capture the average prize giveaway, it does show that recently at least the average value of prizes are declining. Looking at the maximum prize available they are some way off what has been given away earlier in the year- this is much more pronounced in the midweek.

One metric you may like to consider is customer value, which is not affected by variance. Today's competition shows a £4.80 competition for a Porsche Turbo S (cash alternative £128,000). Going on a cached page, in January, a chance to win for the same car (cash alternative £125,000) was £2.30. All the other prizes follow the same pattern (cash alternative/ticket price is lower). Even allowing for the fact that overall entries could be down 20% or so, someone playing today is getting much worse value.

The new competition I think is a bit of a gimmick but has its uses for the company. The prize variance is very large at the moment from smallest to largest (over a factor of 10 for the weekend). But the prizes here have very low variance - £40k seems a good guess as the liability no matter what combination is picked. So if £80k a week could be shaved off the average giveaway by virtue of lower prizes, they could run this special competition permanently and still be better off.

So at this point we are seeing overall average price values reducing as well as the effective cost to entry increasing - customers paying more for less. We can see businesses with high monoply effects (Rightmove) or big barriers to entry/switching costs (electricity) do this, but BOTB doesn't have any of these features.

Going down a path of trying to restore profits by increasing ticket prices while reducing their prizes paid out is not likely to work long-term. They go on about engagement, but I actually think this is pretty poor - basically one-way videos showing winners. Their Youtube channel has 63k subscribers and has very little in engaging content. By contrast the new competitor Yiannimize is pushing 2m subscribers, is much more watched (305m total views vs 15m), and has genuine content. In terms of fostering community among customers this is way more likely to succeed.

One thing I noticed about the figures is that the massive increase in revenues to 2020 was done without employing any more staff; it's basically turning the advertising dials up and down. Yet the next years forecasts (profit £6m) indicates that they have already been paying higher costs. One could argue that if 50% of the business was done by old customers, why bother advertising at all? Iam inferring that even the old cohort of customers still requires much advertising to.

It is right that there are unknowns. On the current valuation, this could be a bargain if sales come back and advertising rates go back to normal. Even if not fully recouped it could still imply £10m a year - a very low multiple if you believe that growth can resume.

However, these factors will be visible to the insiders way before any investor can deduce it. And lack of money is not an excuse, seeing as they cashed out very recently. So big directors purchases/share buybacks I think is going to be the biggest clue here.

abtan

£botb (I hold)

Hi snoo

If you follow the links in my original post omaze definitely looks to be operating illegally.

You cannot run a paid prize draw competition in the UK, even with a free entry option, unless you are a lottery, which must be a registered charity.

Omaze is not a registered charity.

Zero skill is involved when buying a ticket. It's just a raffle.

I'm happy to be corrected if I've missed anything, I'm just not sure what it is.

I will respond to some of your other points later on.

Cheers

£BOTB

Sorry, I can't edit my post, but it's worth adding that US legislation/regulation, whatever they are, are not applicable to omaze UK.

cmpeckham

I remember reading One Up On Wall Street and deciding I didn't have the time to follow that approach (he held even more stocks than you do!). I agree that actively seeking multi-baggers is a valid approach, but I think it should be for a select few. I'm happy to believe that you are among that number. Most investors don't belong in that group.

The problem is the rough patches. No one can know if they are temporary. The better approach for most investors is something along the lines of the Stocko investment club. They have sell rules based on the purchase price which is illogical, the purchase price should be irrelevant in the sell decision, but at least they cut their losers.

As you say the world changes and it is doing so even more rapidly than in Peter Lynch's time. I just looked up his biggest winners, which were: "Fannie Mae, Ford, Philip Morris, MCI, Volvo, General Electric, General Public Utilities, Student Loan Marketing, Kemper, and Lowe's." Hmm. Is that really a buy and hold forever portfolio? Should he still have his portfolio concentrated on those stocks today? If not, how do you know the right time to sell?

Future investors will look back at today's winning portfolios containing the likes of Apple, Facebook and Amazon and think: "How quaint! Did they really think they would hold those tired old things for ever? They should have sold in 20xx when xyz happened." As we know, recognising that point in real time is rather tricky.

Well, Peter Lynch didn't run a buy and hold portfolio. He made his money then moved on.

The challenge, as you rightly point out, is when to sell. And, of course, you're also right that the pace of disruption is higher now than it ever has been. But every decision, be it buy or sell, comes trailing clouds of uncertainty and is indicative of the habitual overconfidence of human beings.

Personally, by and large, I'm happy to run holdings as long as the fundamental business model doesn't appear to be broken as evidenced by the numbers - primarily cashflow, in my case, although there are other factors that may be relevant. As far as I'm concrnered share price, by and large, is irrelevant to the holding decision, or even the selling one. But it is relevant to buying - as Rob Arnott showed, investors are great at identfying the stocks that will grow fastest, but then overpay for them.

FWIW, I think I'm agreeing with you, albeit I always prefer to err on the side of management while I have confidence in them, even if the company is struggling. Selling is the hardest discipline and avoiding emotional attachment to stocks is very important. That's, perhaps, the most important principle for private investors.

timarr

Re: BOTB and the US: sure, I realise that laws are not applicable - the point is that the company must have some experience at navigating a grey area to make their competitions legal.

For instance, in the UK, Omaze are registered with the Fundraising Regulator which repeats the laws for running draws. Maybe it's worth a complaint to them? It would be a massive coup if you are right, seeing as Omaze have been operating here for over a year here. (I think Omaze is a bit of a rip-off for reasons given before). My suspicion is there is some technical explanation which defeats the wording. They are not alone: Raffle Houseis also a prize draw but they also have a page explaining their compliance. It would be a huge regulatory oversight if these things were in breach.

I should have added IMO, Yiannimize increases the regulation risk. Their competitions run exactly the same as BOTB; multiple competitions open with one draw, whoever gets closest gets the prize. On some weeks someone might win a supercar, landing them with a loss. But on a lot of other weeks someone might end up winning a low value prize: Louis Vuitton bags, a golf or kitchen bundle might be £1.5k tops, 20% of the prizes are maybe £5k or less. Entry to the lower prizes are much cheaper, thus they can be overweighted in the draw, and each entry has an equal chance.

Personally I think this is rather sharp practice, many customers will be ignorant. The scale of this is much worse than BOTB (where at least customers win a car). But the regulatory action if it comes down would affect the companies massively.

Vsihv

I wrote my thoughts up on it on my blog - writing is helpful.

Anyway - I wanted to say that this discussion board was a big help in dealing with any "whatever" - appreciate it!

All the best,

Vivek

GUYUKTRADER

Nice post Forsby!

Investors/traders please take into account at least some technical data (what the market is telling you). This is particularly relevant to well promoted names on forums where recommendations/constant positive chatter may lower your research guard. I personally let the chart tell/indicate the direction of a price and buy and sell accordingly.

Good luck

Hi Snoo

Thanks for sharing the Raffle House compliance page, that's really interesting.

I didn't click their links (so I assume that they are indeed pointing to the correct regulation) but this comment did catch my eye:

"Raffle House has NOT joined the growing list of prize competitions that have been shut down by the Gambling Commission,"

Which competitions have been shut down by the GC? And more importantly, why?

----

On a separate note, being on the Fundraising Regulator (FR) Directory doesn't really say much about Omaze, except that they are:

a limited company (not a charity)
they raise money for charity.

It's probably worth adding that the FR is funded by companies and charities that want to be in its Directory, such as Omaze.

---

In any case, I think we're moving away from the issue of investing so I think I'll leave my Omaze analysis there.

Thanks again for sending those links through.

Best Of The Best (LON:BOTB) (I hold)

Hello again Snoo

"If I ran a competition where you had to guess where I think the FTSE will end to 2 decimal places today is that skill or luck?"

I think the more pertinent question is:

"If I ran a competition where you had to guess where the same x10 Stockopedia subscribers think the FTSE will end to 2 decimal places every day is that skill or luck?"

Not sure I want to get into the skill or luck debate though.

"Its interesting that you capture the average prize giveaway"

I've forecasted Revenue for a while now by doing this.

As you can see below, GP has been around the 60% range for a while now so if I could estimate COS, I could estimate revenues reasonably accurately.

Having said that, this H1 looks different, and I am expecting a gross profit closer to 51%, or at least that's what I'm tracking.

For clarity I don't generally look at research notes so I don't even know what the broker is forecasting.

Thanks for sharing that cached page - very interesting.

I knew that BOTB dropped prices in 2020 (I could see) but it's certainly interesting seeing it in the digital flesh.

I'm not sure the ticket price increase is universal though.

For reference I see that BMV M5 (cash alternative £82k) tickets are currently £2.75, much lower than back in 2019 = c£4.80 (5.65EUR.).

I did consider setting up a crawler to track ticket prices, but to be honest I wasn't really sure what it would tell me unless I could track user numbers as well (which the company doesn't divulge.)

To reinforce what I've said previously I still think the future of the Best Of The Best (LON:BOTB) - and the other raffle/gaming websites - is dependent on the changes made by Apple + IDFA.

I read of another company this morning - Poshmark (US-based) - claiming in their recent earnings release that they were forced to spend more on marketing to get the same number of users to their app due to a poorer ability to target users due to the Apple changes.

As a result their expected profitability % was lower than expected.

I don't know why this situation would change in the future - perhaps more money being targeted to Android users - but I am coming around to the belief that future growth is simply going to be more expensive...and hopefully BOTB will take advantage of their cash resources to pay up and get things going again.

Antwainer

18th Aug '21

hi Forsby nice post on BoB... I am also trying to apply a techno fundementalist approach (a la Minervini) to small caps, which is what you refer to here. But I am interested to hear what you think of and how you apply stops...? Given liquidity constraints around small and micro caps. Its much easier to hit and run in large caps obviously.

Will S

Seems one of the NEDs bought £500K worth of stock @ £24 during the issue from the other directors. Could be an interesting board meeting when he is sitting on a paper loss of 70%....

Snowbum

19th Aug '21

Hi Antwainer,

Thanks for the compliment re post above. Though not sure who Forsby is lol.

My name is Forbsy!

For the record, I don’t use set stops on small/microcaps. I analyse the chart patterns alongside the candles in respect to volume and make decisions based on my interpretations. For small/micro caps I accept the greater volatility that comes with it before entering a position. I don’t use Minervini tactics as the stops are too tight for small/micro caps as you have alluded to. I also like the following indicators to add context to price movements EMA’s, MACD, RS, RSI, ATR. I don’t use them all at the same time but some help with entries and some with exits. If price falls through a significant pivot point I look to exit and take my loss. I tend to reduce position sizing when a stock rises to >10% of portfolio, I often sell into strength after a strong breakout and add again on pullbacks to pivot points for small cap holdings that I still like.

I trade and invest across spread betting account, ISA & SIPP so utilise different styles in each, with higher conviction holdings I will add more on pullbacks as per the styles outlined in the ‘Art of the Execution’. Don’t be a rabbit!

Hope it helps,

Forbsy.

13th Sep '21

System1 (LON:SYS1) (no position)

Hi Boon

I've finally found some time to catch up on this company, prompted by yourself and the Maynard Paton/jonkingston interview.

I can see why you are all so bullish on it now.

Indeed, the Test Your Ad product looks very interesting; a fast growing top line, presumably much of which is recurring, and a high gross margin.

You mentioned a high fixed cost base. I don't recall seeing that but I will keep an eye out for it now. If in fact most development costs have already been incurred and opex costs are relatively quite low here, then this could be the foundation for a future star.

No position yet, but it's on the watch list now. Thank you for taking the time to post your comment.

Small Cap Value Report (Fri 13 August 2021) - BOTB, MCLS, VLG

Paul’s Section

Best Of The Best (LON:BOTB)

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