Small Cap Value Report (Fri 24 April 2020) - TRI, TW., LUCE, DTG, PSN

24th Apr '20 by Paul Scott

92 comments 9638 reads

Good morning, it's Paul here, with Friday's SCVR.

I'll start early, with some catch up sections from yesterday.

Estimated timings today - the lockdown seems to have turned me nocturnal, so I did 4 hours writing overnight, and needed to sleep more recently. I'm writing more now (from 11:57) and am likely to keep going until about 3pm.

Your Covid-19 comments - I read with considerable interest all the different views yesterday (and previously) about the virus, and how it might affect our investments. Can I just make one suggestion though? It seems that most people who are giving their views, and making predictions, phrase it as if their views are incontrovertible fact, and that anyone who disagrees is a fool! E.g. most comments seem to be phrased along the lines of "This or that will happen...", when actually all the comment really is, is educated guesswork. Nobody has any idea how this will pan out. All we can actually say is, "My view is that this or that might, or could possibly happen". Or, "I think the most likely outcome could be ....", etc.

This is a point made in a terrific book I'm reading at the moment, which I've mentioned here before, highly recommended: Super forecasting. This book points out that the media loves commentators (on economics, shares, world affairs, politics, etc) that are strident, emphatically give one point of view, don't change their minds even when they're wrong, and are very frequently wrong yet never called to account for their poor forecasting. It calls commentators like this "hedgehogs". This type of commentator is often strident & refuses to even contemplate alternative views. I think it's fair to say that I often fall into this trap myself. Hence I'm making a greater effort to mention different views on stocks when I remember. I'm also making an effort to change my "this will happen...." into "I think the most likely outcome is .... but there's a fair chance this other outcome could happen". Or this is the upside, and this is the downside case.

My personal view is that I think many of yesterday's reader comments seem way too pessimistic. I'm working on the basis that bars and restaurants could be open again by July. My suggestion would be to initially limit customers to healthy under-50s with no pre-existing health conditions (where the statistics show the risk…

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samanddee

25th Apr '20

Hi - to what is this note responding too ie who has mentioned locking up the elderly to hopefully die as you have written? That sickens me if someone has written that but this post should be amended if nobody has said that.

peterg

In terms of age restrictions, bars could be required to ask everyone for ID, regardless of age. If people are over (say) 50, or 60

But that one it's own wouldn't help that much. They would need to be under 50s who don't live with/visit their parents, mix with older people at work or other places, or with other under 50s who do. Otherwise you would still see increased infection rates across the population, including the more vulnerable.

Thornabian

Agree on houses completely but I used Fevertree as an example because their recent update was pretty much "business is flat but we have lots of cash and will bounce back strong" and since it is up over 20% since that but up from 900p to over 1700p in about 2 weeks! I'm a long term holder of Fevertree and bought at around 1400p average after buying and selling at various points. (I sold out last year and bought back in March) I think Fevertree will be a brand similar but not as powerful as coca cola or pepsi at some stage and their business model is practically all outsourced on the production side so I think they are a great long term buy.

However, my point was, Fev and ITV and BT are stable businesses in this crisis but their prices were 60% down (ITV and BT still are roughly). I don't buy the argument they warrant that much of a beating and a 'business as usual or thereabouts' update could have a big impact on market perception, as with Fev this week.

muckshifter

One of the most striking interviews I've watched in the last couple of days was the interview of a WHO scientist involved in receiving, validating and correlating all sorts of covid related news from health authorities all over the world. The statistic she gave which surprised me most, and makes me think it is unlikely that early lock - down releases are going to stick without absolutely dramatic increases in test, trace, and isolate capability, was that in controlled random population testing to find the proportion of the population of many countries that had developed antibodies (ie. those who had had the disease whether or not they suffered symptoms), the highest percentage encountered was 14% with most in single figures.

That percentage appears to have been validated by New York surveys which indicated 14% statewide and 20% in NY city, iirc. New York state appears to have the bit between its teeth in terms of building a test, trace, etc, process before release of lock down but I have my doubts about many other countries, including the UK, having that determination.

Neil P

"Challenge 50 - if you are under the age of 50 but are unfortunate enough to look like a pensioner you might be asked to show identification proving your age" ;-)

I wonder if the casual dining sector might be better placed to deal with this on the basis that it's already geared up to spacing people out (at tables); keeping them "more in one place" for the duration of their visit (at table service); and controlling numbers (via reservations in advance).

It might be that bars change to a more table service based approach to achieve the same thing. There is a (big) flaw with this though, when you're in your 20s you go out with people that you know with a view to meeting people that you don't know, which would be rather difficult...

simoan

All very true Peter but a number of these companies are up 5 or 10 times from lows. The highest recent riser that I know was up 18 fold in less than one month and NCYT (a testing stock) has been up 90 fold in a six month period at its highs. It is tough not to get involved .....just don't put too much in and don't be slow to cash in on a major rise is my advice to those tempted to play this "pass the parcel" . The twitter crew are going crazy on some of these stocks....and it is true that some of them do just go up and up. I have a long list of such stocks and I freely admit that I had never heard of most of them before.

As always with these kinds of investments, it has nothing to do with intrinsic value or picking winners in a Keynesian style beauty contest. This is simply the Greater Fool Theory at work.

All the best, Si

Hi Paul,

Looking back to the late 1980s, I remember when house prices crashed about 30-40%. What caused it? Very simple - the economy took a downturn, but above all, interest rates went through the roof. I took lodgings in a luxury house, because the owners couldn't pay c.12-15% interest rates, on their relatively small mortgages.

We're nowhere near that now.

If you can stump up the deposit, then you'll get the cheapest mortgages % interest rate, ever imagined now. Way below what was imagined actually. Hence the logical thing to do, is to over-pay and reduce the capital, taking advantage of artificially low interest rates.

I remember it well! I think when it comes to housing we can learn a lot from history. When I took out my first mortgage at the start of the 90's people were almost giving property away because of the 15% interest rates. Of course, unemployment also reached 10% a few years later, but IMHO affordability is the key and with low interest rates and Help To Buy not going away anytime soon, UK housebuilders with strong balance sheets looks a very good call to me currently.

gregatr0n

Paul, Staffline (LON:STAF) departing CEO was Andy Hogarth, profile here: https://www.linkedin.com/in/andy-hogarth-405b989/. His bio has the hotel as the Hogarth Hotel just south of Birmingham (https://goo.gl/maps/1YhLVxZXjr...). My overall sentiment towards what happened at Staffline is on a par at best, needless to say his hotel is on my newly created Hotel bargepole list!

timarr

Of course, unemployment also reached 10% a few years later, but IMHO affordability is the key and with low interest rates and Help To Buy not going away anytime soon, UK housebuilders with strong balance sheets looks a very good call to me currently.

True, but it also depends on unemployment and peoples' confidence in the security of their jobs. Typically when unemployment rises then the number of house sales drop - buyers won't buy because they're worried about their jobs. As Zoopla's recent report states:

House prices will largely be influenced by unemployment rates. The greater the economic shock and unemployment, the greater the potential impact on house prices over the spring and summer.

Zoopla Research modelling indicates a fall in the number of sales of up to 60% over the second quarter of 2020, continuing into the third quarter. Individual spring months may see newly agreed sales down by up to 80% on last year given the shutdown of normal life and knock on impact for the market.

Obviously that's all houses, not just new ones.

Normally house sales start rising before unemployment starts falling. Once the number of benefit claimants levels out then those who still have jobs start to buy.

At the moment it's difficult to know who will and who won't have a job - furloughing people only delays the inevitable for some companies and people. The latest CRR research estimates that 20,000 retail businesses will close this year and 250,000 people will lose their jobs. Not only that, but a lot of them will see significant amounts of business permanently move online which changes the labour / capital equation in favour of the latter. Retail Economics estimate online non-food spending will jump from 30% to 50% of the total. Basically, buy warehouses, sell retail.

In addition there are some specific issues - I know of two people who've been "asked" to take a pay cut. Not a temporary one, just a pay cut. No one's hiring, so people will grit their teeth and take the hit, but it all reduces overall confidence levels and affordability. Interest rates are only part of the story.

Still, I'm not disagreeing that housebuilders look decent value, but they've soared on the back of Help to Buy which, frankly, some of them have abused - the bonuses to Persimmon's ex-CEO Jeff Fairburn for merely turning up and taking the government's penny were outrageous (and, at last look, he still hadn't set up the charity he promised). I would expect any further government largesse - and I do expect further largesse - to be more carefully targeted.

Personally I favour Berkeley Group (LON:BKG) who have a billion in the bank and are still paying dividends, but higher risk companies will probably yield higher returns - although their assets, aka land banks, may melt away in a deep recession. As ever, you pays your money and you takes your choice.

GrahamF

“ .Just because I worked for 46 years (in NHS) ”.......

“ on the off chance I might catch a virus less deadly than influenza”

Sorry Penny, what was your role during this 46 years? I’m struggling to understand how you can say Covid-19 is less deadly than influenza if you have 46 years exposure to working in a medical environment.

TheArb

"Land cost is 15% of a house price". I don't think that's right, land price is variable (I've seen between 10% and 50%)., primarily based on location. In principle it is the cost of the build that is fixed (certain caveats). It costs me the same to build the house wherever it is (approximately).

it's important to remember that the lock down is to protect the NHS not to protect people. People will do what they want to do, road traffic is already up dramatically last week. There was interesting survey in the FT last week about what people would feel most comfortable about returning to. Gyms, pubs and restaurants came out bottom. Leisure and hospitality have been hit hardest and will be last to come out of this. There will be no sudden lifting of lock down, we will be in a twilight zone of social distancing for months, people will change behaviour to avoid contact with others. They might go to quiet pubs, they won't go to busy ones, this will last for months to come. The economy won't recover to where we where for months - if ever. Some won't survive the structural change.

2ShedSam

Not sure anyone can conclusively say either way just yet! However, the sentiment behind the post is perfectly valid. Its also possible that not everyone who works in the NHS is a medically trained expert required to know the relative harm of different viruses.

Sam

I would have thought that anyone working in a medical environment for a very large number of years even if not a medically trained would have come to the conclusion that when the assessment of WHO, Sage etc. and an enormous number of other medical experts is that this is far more serious than flu that’s more than likely to be right.

So, my view is, sorry but it is not valid to say that COVID-19 is less serious than flu and to deny the evidence for that is ridiculous.

I am gobsmaked that there are people who still think this might be likely in any way. There’s more than 20,000 dead in New York in a matter of just a few weeks!

Beginner

Reading through some of the comments here, does anyone else think that there are far too many people around with far too much time on their hands??? ; )

JOHN GASCOYNE

26th Apr '20

The over 60's have been more locked in/out/down/up than the unders (not opinion), and therefore less likely to have the virus or be carriers (hardly opinion). So we should be allowed to go to the pub, play golf, attend the the cinema, while the unders go to work and get the economy back on its feet. Just a disinterested opinion.

Hi timarr,

This is a very short term outlook. I'm not a trader and you've got to look beyond the next 6 months to make a case for investing in anything tbh. Yes, unemployment will likely provide a headwind but I can't remember a time with such low interest rates and IMHO this will keep the housing market alive. For those people in secure jobs who are effectively forced savers during lockdown, there will be a wall of money that will be spent in the economy at some point, and I can't see it going on holidays anytime soon! I can only talk my own book, but our monthly bills this month and next (and who knows for how long?) will be a fraction of what they normally are.

Of course this is quite circumstantial. You are always going to get employers who try and take advantage of a bad situation. In the long run this will come back to bite them, because I bet those two people and their colleagues are not going to forget how their employer shafted them when more normal times return.

I agree Berkeley Group (LON:BKG) is a solid company with very good management which I've held before but tbh I'd rather not stock pick at this stage. Why not hold more than one company to gain exposure? Ideally I'd like to invest in a UK Construction ETF (or similar) that held several housebuilders, brick makers, Marshalls (LON:MSLH) etc.

Hi Si

Me neither, and yes I'm absolutely looking beyond 6 months. But I'd rather not buy into stuff where there's even a trace of existential risk, let alone a reasonable probability of a fall.

Remember - in 2008 interest rates dropped from 5% to near zero. House prices responded by falling 20%. Over the same period the number of houses sold dropped from around 160,000 to about 40,000. To be fair that high number was artificial due to the stupid self-certifying mortage offers, but the long-term run rate is around 120,000. It took until 2015 for valuations and volumes to recover - probably not unrelated to the introduction of Help to Buy.

Low interest rates over long periods do lead to house prices rises, but in the short-term it's the rate of change of unemployment that matters as that's a proxy for buyer confidence. If unemployment is rising people stop buying, once it stabilises they start again.

Of course, it may be different this time - employment may hold up and the government will do everything it can to keep the housing market going. And many housebuilders look - or at least did look - very cheap. Everything has its price.

Anyway, I don't have a dog in this fight, so I'll leave it here.

penchrise

27th Apr '20

The isle of man govt introduced a two week quarantine for

all visitors despite a high dependency on tourism. It will be interesting to see the course of play in an area so close to home

Glorenfeld

Assuming that we're in a position that the NHS can cope without the additional cases causing shortages or delays treating other issues, then isn't the answer to both of your questions that we should balance the number of cases and the social restrictions such that the expected QALYs gained by those restrictions don't cost any more than the NICE guidelines would allow spending on any intervention? The expected cost would clearly be an estimate and would need to take into account, inter alia, damage to economy, stimulus required, additional issues caused by lockdown, etc.

My initial understanding is that the current cost of each QALY gained from lock-down is running massively higher than the normal NICE guidelines would allow, but that's because we thought that otherwise the NHS would fall over. It seems that the demands on the NHS haven't been as bad as worst predictions, and this should probably be remodelled to see where we are now.

Small Cap Value Report (Fri 24 April 2020) - TRI, TW., LUCE, DTG, PSN

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Paul Scott

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