Small Cap Value Report (Fri 22 Nov 2019) - Woodford, IDP, CMCX, SIS, REC, CFYN

22nd Nov '19 by Graham Neary

31 comments 7973 reads

Good morning!

Let’s see what the RNS has in store for us today.

Today's report covers:

Woodford
Innovaderma (LON:IDP)
CMC Markets (LON:CMCX)
Science in Sport (LON:SIS)
Record (LON:REC)
Caffyns (LON:CFYN)

Finished at 3pm.

What Went Wrong at Woodford

This is a popular topic. I was calling out a few of Woodford's terrible companies years ago (Allied Minds (LON:ALM), discussed here yesterday, and RM2) but I never took the time to examine the structure of his entire portfolios.

Ed Croft has done that for the Woodford Equity Income Fund, and the results are fascinating. It turns out there were huge style shifts in this fund, and inconsistencies between the strategy that Woodford said he was going to employ, versus what he actually did.

The online webinar is here and Tamzin at PI World has also published the presentation of the results at Mello last week: here's the link. If you look carefully, you'll see myself and Mark Simpson (@DangerCapital) in the crowd!

Innovaderma (LON:IDP)

A quick note on Innovaderma, which I've been covering recently - most notably on 6 Nov, when I remarked that the company's capitalisation of its marketing expenses was "highly suspect". By capitalising these costs, and not amortising them, reported profits are higher than they would otherwise be.

The CEO, Kieran Callan has been in touch to offer me some insight on this point.

He told me that historically, the company capitalised about £3.50 per customer in terms of marketing spend, which was just a fraction of the total customer acquisition cost. They did this on the basis of the company's predominantly direct-to-consumer strategy involving lots of repeat purchases (i.e. they expected to get a healthy payback from the expense).

He acknowledged that there hasn't been any amortisation of this database yet, but said that this would change going forwards. He also said that the capitalisation of marketing costs would be lower this year, and in future, as the company has found diminishing returns from marketing spend as it grows.

As far as the auditors are concerned, he assured…

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GrahamF

22nd Nov '19

Does Winnifrith disclose what position he holds in the companies that he comments on? If he doesn’t one can’t but help think on many occasions his commentary is self serving and he is nothing like the “champion” of the small private investor simply publishing a subscription newsletter.

Graham and Paul disclose their positions in their Stockopedia reports so if they are enthusiastic about a stock they hold we can all factor that in.

As for Winnifrith being “the first” to spot problems with Woodford I very much doubt that.

dealtn

I'm clearly missing something so please somebody explain.

Looking at CMC Markets (LON:CMCX) and the graphic in the report the company appears to have hedging losses which offset against client losses (ie. company gains), which is broadly what hedging is about and should be expected. It is almost one-for-one in the latest period, but much less so in the past but that's by-the-by.

BUT what is the "hedging costs" line? It appears there is an additional cost here, which is way too disproportionate to the underlying "problem" of customers potentially making money. Clearly I am missing something but why not abandon hedging altogether, accept that customers might make money, but reduce to (close to) zero the hedging costs?

Graham Neary

Hi Gerard, I'm sorry I won't get around to Manolete Partners (LON:MANO). G

rmillaree

CMC Markets (LON:CMCX)

Clearly I am missing something but why not abandon hedging altogether, accept that customers might make money, but reduce to (close to) zero the hedging costs?

The mass of bods speculating mean you will always have situations where a market is lopsided. It might for example be bitcoin if 90% of their customers bet on the price to go up they would lose a fortune if they didn't hedge that exposure and the price went up 50% overnight. That hedge will ensure exposure is limited to a lesser or greater degree at a cost to their margin . Just look at the 3 month amount that Plus manager to lose to their customers where they advised they were mitigating risk. Hedging to some degree is fundamental to the business survival for any particular market that is lopsided by way customer is placing their cash to the extent that potential losses would be beyond acceptable limits.

I did 25 years in the city, the majority as a market maker. I get what hedging is, and why it is (sometimes) necessary. What I am questioning is the cost of it here and how the accounting treatment works.

peterthegreat

Re: WOODFORD. The analysis done on Woodford's portfolio's is indeed useful. However it was blatantly obvious to anyone with experience in investing in biotech stocks that he was buying lottery tickets as early as 2016. I made a number of posts on ii in 2016 trying to warn private investors about this, describing Woodford's Patient Capital Trust as "an accident waiting to happen" (I don't think I subscribed to Stockopedia at that time). How could he possibly have succeeded when he does not have the experience to understand the biotech or other tech sectors? I would emphasise that this judgement involved little or no skill on my part, just enough experience of biotech investing to understand that Woodford did not understand what he was doing. I think the fundamental lesson to learn is never invest in funds/ITs unless you have enough knowledge to be able to assess the quality of the fund manager.

LongValue

It may have begun as a purely business to consumer spread betting operation but Cmc Markets (LON:CMCX) seems to be increasingly focusing on institutional markets. The result is that some 28% of its total net operating income is now coming from institutional clients of which it has some 300. Purely speculation on my part but I suspect that at some point it may sell off the retail division and concentrate on its business to business offering. It also appears to resemble a technology company offering proprietary software solutions rather than a financial services group. In which case, a revaluation could be in the offing.

Some very good points have been made about the company's hedging policies. Unfortunately, I suspect that there is scope for what might be described as “Aggressive accounting". However, as Cruddas pointed out in the webinar “We love regulatory changes”. These changes seem to have given the company a smaller but more lucrative retail client base. And, I would suggest, a client base with more predictable trading patterns. That might be facilitating the “Natural offsetting of clients' positions”. And helping it to reduce its hedging costs.

I continue to hold.

mammyoko

Yes, it is a pity that Tom Winnifrith feels that he has to be so shrill to get noticed. And a pity that he puts a lot of people off because of his rudeness and lack of sensitivity. I am not a psychiatrist but I suspect he would make an interesting case study.

Be that as it may, I think one ignores Shareprophets views at your peril. That is not to say that they are anywhere near invariably right, but their cynicism is often well thought through. And turns up information that lazy City analysts don't have the time to consider. What surprises me is that, with the exception of Chris Bailey, their long-side views are (at least when I last looked) so poorly-performing. Being a cynic doesn't seem to help you to spot winners, just losers.

I always check on Shareprophets before I hit the buy button. It doesn't always stop me from buying but it does act as a useful check on whether there i an angle that I am missing.

Re Record (LON:REC) I was a holder in the past until I discovered that Neil Record funds the Global Warming Policy Foundation, a man-made climate change denying lobby group that was stripped of its charitable status after breaching rules on impartiality. I think I may have raised this here before. For me, this goes in the folder of unethical investment, because of the views of its founder and major shareholder. I felt that holding shares in Record (LON:REC) would indirectly lead to financial support for an organisation that I am opposed to.

Speaking to the CIO of a highly successful hedge fund recently (who knows Record) it is clear that he is one of those autistic people who believe their view is infallible. Some of those traits can be useful in his business. For a while. As Woodford and others have found out. He (the CIO) summarised the position on the GWPF's approach to man-made climate change (it's all too expensive to deal with) very well. If Record and his ilk are right what's the worst that can happen? We will have wasted some money. If he's wrong, we're doomed. Why take the risk? Obviously, this is a personal view and others may be more comfortable with holding this share despite the views of the company's founder.

Chris Archer

I think Cmc Markets (LON:CMCX) is an excellent business. They have done an excellent job in adapting to the new ESMA regulations. I understand why some are nervous about their exposure to risk and question whether CMC have just had a lucky half year. I don't take this view. The board have identified their previous poor performance in hedging clients positions as being a major drag on profits. As a result they have taken steps to revise their strategy in this area. As far as I can tell, their strategy has been to neutralise as much as possible their client exposure. They have achieved this through a data led approach which has enabled them to make more efficient and better informed hedging decisions. The change in the ESMA regulations has also helped since clients are no longer able to operate using such high leveraged positions. They are also holding positions open for longer periods. These factors have meant their risk book is much easier to manage. For these reasons, I tend to believe the current performance is not just down to luck. I guess we will find out when the full year results are out next year.

It is also worth pointing out that CMCX is becoming far more than just a CFD provider. Their stockbroking partnership with ANZ bank is growing very nicely. To add to this they are concentrating their efforts on becoming ever more B2B focused. Their strategy is to move away from risk and focus on providing cutting edge technology for the B2B market.

All in all, I'm a big fan. I believe CMCX offer good value at current levels.

TamzinPiworld

piworld have just published the Creightons (LON:CRL) interim results webinar. A fascinating little company. Know their market back to frront, very nimble operators, making the most of every opportunity.

https://www.piworld.co.uk/2019/11/22/creightons-crl-interim-results-presentation-for-period-ending-30-9-19/

back2value

Even climate change deniers must admit that fossil fuels are a finite resource. I am also tired of people picking and choosing acceptance of those bits of science which suit them. Grrr....

B2V

Trident

I think those of us who use to read Private Eye, are probably aware of the old Glenda Slag column feature.

This was a satire of many of the then well known female tabloid Gossip columnists, who had an almost schizophrenic view of people that featured. One minute praised to the hilt, the next entirely rubbished. The two views were run side- to -side in the Glenda Slag column in an amusing contrast.

Thus it is with the T Winnifrith approach, that one week people are praised or referred to as friends,and then later referred to in less than complementary terms.

It is obviously more than a stylistic pose, so signals quite an odd take on the world.But he's done some good work, and some occasional writing which shows he has ability.

Lord Gnome

Tom Winnifrith, crazy name, crazy guy. Doncha just luv him. One of lil ole Glanda's hunky shorters. Not so short eh Winnie?

With apologies to Glenda, but that was the best I could come up with on the spur of the moment.

Deegee Eff

Hedging, surely, is just covering open net positions, therefore if 68% of your punters lose money (or whatever the percentage is) then hedging will always lose money. Only when their clients make money will they make a profit hedging !

Phil Mc

Graham

Thanks yet again for your excellent market commentary. Explanation of your thought processes really helps my investing knowledge. On another topic unless I missed it ....how did you find the movie you watched (The Irishman) and did you order a large coke? Coming back to investing, as a secondary school Physics teacher I have recently started a lunchtime investment club for the 6th form. If you ever fancy making a webcast to inspire them on their investment journey that would be fantastic.

Richard Goodwin

Love it. Thanks Genda!

robmahan

I sold mine - IMHO lack of movement in book value shows they are not making as much as you might think.

Cisk

A fascinating post. Not so much about TW - gave up on shareprohets some time ago when I got fed up of the constant politicizing by TW.

But your comments about Woodford are illuminating - and chime with my belief that the vast majority of fund managers are at best nimwits and worst slightly crooked. There are of course some excellent ones out there as well.

But people forget that fund management is a business as well, designed to attract funds to get every increasing fees.

And I’m sure that if the average fund manager treated funds under management as if it was their own money at stake they would do a far better job.

I gave up years ago paying someone else to invest my money when I can do a better job - and so can most, thanks to cheap fees and abundance of information. I’d rather buy a tracker or ETF than 99% of the the funds out there.

It really is a crazy world that people like Woodford can get away with losing small investors millions of pounds, and yet still claim their large fees!

Anyway, rant over. Thanks for the insight.

xcity

If there's any value in Caffyns (LON:CFYN) it is the in the property value. I've never been sufficiently interested in recent years to check it out, and they do buy and sell sites. Accumulated a tidy holding many years ago - more than paid its way with yield and share price rises - but no longer hold. Extremely cyclical. Very tightly held family company - but many shareholder links with management must be becoming more distant. One day they'll sell up, but who knows when or what for.

Small Cap Value Report (Fri 22 Nov 2019) - Woodford, IDP, CMCX, SIS, REC, CFYN

What Went Wrong at Woodford

Innovaderma (LON:IDP)

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Graham Neary

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