Small Cap Value Report (Fri 24 August 2018) - Ageing Bull, FUL, PEB, AIR, BOOT

Friday, Aug 24 2018 by

Good morning! A few bits to look at today and then we can go enjoy the bank holiday weekend.

Macro Musings - Ageing Bull

Firstly, there are a couple of macro themes on my mind today. If this isn't your thing, just skip ahead to the next sections! When the RNS feed is quiet, I often prefer to focus on the bigger picture.

As of Wednesday, US markets achieved their longest ever bull market, i.e. from March 2009 to the present day. This entire period has passed without a 20% correction.

The previous longest bull market was from 1990 to 2000, and ended in misery for all sorts of investors who got caught up in the dotcom rush.

The S&P Index enjoyed a P/E rating of between 25x and 30x just before that crash, way above its historical average.

Today, however, the S&P Index is at a much more modest rating of 18x. This is not extreme compared to the long-term average of 17x (since 1990).

The FTSE also does not appear stretched. According to Stocko, the median forecast P/E ratio for all UK shares with estimates is 13.4x.

On this simple view, it is difficult to argue that markets are wildly overvalued at present.

On the other hand, if you use cyclically-adjusted earnings, taking into account the traditional volatility of profits, then US indexes do appear overvalued, On a cyclically-adjusted basis, the US P/E ratio is 33x, not far off double its long term average. This means that US shares are vulnerable to an earnings wobble.

Another red flag is the market's concentration in a small number of high-flying tech stocks. The FAANGs are collectively worth $3.5 trillion at the moment. If a few of them were to fall out of favour, that could be the trigger for a more general loss of confidence. Stockopedia gives these stocks an average Value Rank of 20, i.e. they are a heavily overvalued group.

It could also be argued that earnings today are less supported by strong corporate balance sheets than they have previously been, after $4 trillion of share buybacks over the past…

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All my own views. I am not regulated by the FSA. No advice.

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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Air Partner plc is a United Kingdom-based aviation services company. The Company provides worldwide solutions to industry, commerce, governments and private individuals. The Company has two divisions: Charter division comprising air charter broking and remarketing and the Consulting & Training division comprising the aviation safety consultancies, Baines Simmons, Clockwork Research and SafeSkys, as well as Air Partner's Emergency Planning Division. In addition for reporting purpose, the Company is structured into four divisions: Commercial Jets, Private Jets, Freight (Charter) and Consulting & Training (Baines Simmons, Clockwork Research, SafeSkys and Air Partner's Emergency Planning Division). more »

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41 Comments on this Article show/hide all

timarr 24th Aug '18 22 of 41

To the (limited) extent looking at markets is useful I tend to use the Buffett Indicator - so the ratio of total market capitalisation to GDP. When this goes over 100% it suggests the market is overvalued. The argument, roughly, is that the total market value ought to be less than the total worth of the nation's good and services. Even if you accept that the markets are forward looking you wouldn't expect total market cap to significantly exceed GDP.

Today, the US's Buffett indicator currently stands at around 140% and the UK's around 120%, both of which are in the "significantly overvalued" area. This doesn't forecast a crash or correction but suggests that market returns going forward will be quite constrained. Warren Buffett certainly seems to think so, as he's just modified the buyback terms on Berkshire Hathaway - if he and Munger think the best value in the US market is a repurchase of their own stock you've got to think he doesn't see a great deal of value out there.

Obviously, the way this pans out may not be simple. Maybe capital light Internet businesses will continue make excess returns at the expense of capital intensive old economy companies, certainly that's a theme that's played out well over the last decade or so. Yet you've got to think governments will figure out how to tax internet companies proportionately at some point - as the collapse of high street stores precipitated by higher business rates shows, there's only so long you can milk fixed assets before the asset owners shut up shop.

So it may be different this time. But it probably won't be.


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mojomogoz 24th Aug '18 23 of 41

Thanks Graham

My macro inshites:

Significant strong dollar uptrend from here = market crash >50% catalysed by eurodollar market freeze (ie replay of 2008, central banks and policy makers still do not know where the critical problem is located)

Rates rises, dollar moderation = bear market

Rate freeze or reverse (or halt to QT), dollar moderation to weakness = off to the races with significant new highs

Longer term the dollar is screwed...but when that longer term occurs is the nub

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purpleski 24th Aug '18 24 of 41

In reply to post #393499

Hi N+1 Singer released a note yesterday. I am not sure what this was based on but maybe this is where The Times got there story?

The N+1 Singer can be found on Research Tree at:

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jonesj 24th Aug '18 25 of 41

In reply to post #393579

The ratio of total market capitalization to GDP can be justifiably higher in countries with strong financial centres & a favourable legal framework, as they can attract overseas listings.

Also some countries have large listed companies doing business all over the world, so it's fair that they have the market cap of a global business, not one reliant on the domestic economy.

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JMLDutch 24th Aug '18 26 of 41

In reply to post #393544

I do think the CAPE has some issues, in particular relating to FANG stocks (and other growth companies). The FANG stocks, however, are particularly relevant since they make up a large section of the S&P500.

How meaningful is a 10-year average earnings for companies like Alphabet and FB that grow their earnings double digit annual compound for years? Or for Amazon and Netflix (whose valuation I admittedly do not understand)? This is actually a double-edged sword because not only is the CAPE significantly higher than their current P/E, one of the reasons these companies trade on such lofty valuations is because of high earnings growth. On top of that, CAPE doesnt take into account debt/net cash and these companies have very strong balance sheets.

In relation to Hussman, he seems to focus on the price/sales of the S&P 500. According to Vanguard, the S&P 500 is now 25.6% "information technology" stocks, which of course trade on higher price/sales than most other sectors (and have much higher profit margins). Therefore, Id think that comparisons with past valuations are only relevant when at least taking sector breakdown into account when comparing historic price/sales.

Since the S&P 500 CAPE is downright scary, but forward P/E quite acceptable, it would appear that the S&P 500 has experienced very rapid earnings growth, which I think would be explained by FANG (and other tech) stocks.

I am not saying S&P 500 isnt overvalued. As a matter of fact, I am really confused about this which is why I am interested in this discussion.

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Gromley 25th Aug '18 27 of 41

In reply to post #393564

I too love a bit of macro discussion and hopefully when I'm 'back at my desk' next week I'll be able to chip in a bit as well.

Meanwhile though, I was somewhat stopped in my tracks by reading this bit :

agreed on the macro: feel a good 10-20% correction is probably the shock needed to remove complacency.

On reading that, my immediate reaction was : "that's exactly the sort of complacency that suggests a much bigger correction could be on the cards".

I mean no disrespect whatsoever to you dscollard as all you have done is to very eloquently express a sentiment that seems to me to be quite commonplace. 

Oftentimes there seems to be a bit of a subtext along the lines of "a little bit of a correction will damage some of the idiots, whilst I'll ride it out and because of my skills I'll find even better opportunities on the far side."

I don't subscribe to this point of view. I consider myself "smarter than the average bear" but I am very concerned about what a significant correction could do to me - I've written elsewhere on Stockopedia what I'm doing to counter this, that may or may not be the right thing, but it is a thing.

I won't rant further on the subject now, but the one point I did want to reinforce is that the coming (sometime I don't know when) correction is not just an interesting curio ; it is something that can cause you serious harm and you need to be prepared. I suspect most / many Stockopedians do not need this reminder but perhaps some that have only begun investing in the last 10 years do need a bit of a shot across the bows.

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timarr 25th Aug '18 28 of 41

In reply to post #393614

The ratio of total market capitalization to GDP can be justifiably higher in countries with strong financial centres & a favourable legal framework, as they can attract overseas listings.

Absolutely true. If you look at different markets you can see that the Buffett Indicator average level tends to vary quite significantly - you wouldn't want to use it to compare two different markets without a bit of thought. 

For instance, Japan is currently at 164% and has a historical mean of 134% - expensive, but not as expensive as you might think - while Germany is at 49% and has a historical mean of 33% - so it looks cheap compared to, say, the UK, but is expensive for Germany where there's a lot of off-market privately owned business.

The US looks very expensive - at 149% compared to 75%. It's only been at this level once before, just before the dotcom crash in 2000. It looks significantly overvalued, and it's hard to find any real justification for that other than the normal animal spirits. 

The UK isn't anywhere nearly as overvalued as the US by historical figures - its BI is at 124% compared to a historical mean of 118%. The average high level is presumably because the UK's companies derive an unusually high proportion of earnings from overseas. For comparison purposes the lowest it's been in recent times was, not surprisingly, in 2008 when it dropped to around 75%, having reached 150% just before.

So the risks for the UK look like either problems in the US - historically if the US markets fall then so do ours - or a drop in UK GDP due to post-Brexit friction. Both of those look quite likely, I'd have thought.


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doug2500 25th Aug '18 29 of 41

In reply to post #393649

The BI looks interesting thanks.

There's plenty of articles about it but I can't find a website that actually quotes it except as part of articles.

Where do you look for it?


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dscollard 25th Aug '18 30 of 41

In reply to post #393639

No offence taken: I'm neither a bull nor a bear, I'm a trader so I like a bit of vol. Any direction will do me.

For me there is no subtext: by complacency I mean as measured by CBOE VIX, Fear and Greed Index, VFTSE. ....... I rely on numbers, data, charts, correlations. Eliminating emotion by process and numbers, routines and discipline

Numerically there are good metrics for complacency right now which are often prequels to significant market moves. Often happens when too many people are on one side of the boat

Been around for a few cycles and not too worried about the sky falling down. I took a few heavy hits after the dot bomb in 2000 or so. I remember the NASDAQ hit its pre-crash high on 10 March as that is my birthday. All good experience though. The exuberance is not so irrational this time with the exception of crypto euphoria but that seems to have corrected. Could well be a market top indicator but one can only tell that looking backwards.
They were Friday afternoon musings, I wouldn't read too much into them

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timarr 26th Aug '18 31 of 41

In reply to post #393679

There's no very easy free data source that I can find, but gurufocus does provide it with a bit of work:

The BI is the third section down. For other countries click on the links to the left.


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Trigger14 26th Aug '18 32 of 41

In relation to the ‘macro’ musings I have to say I can’t really see much logical basis for pessimism. I’m pretty bullish right now.

Valuations are not yet that high relative to historical averages. I’m not sure historical averages are a very good guide anyway - the nature of the stock market and the economy has changed quite a lot over the short period for which there is history available. Average valuations are trending up over the long term (partly as the economy changes but mostly because equities have been historically undervalued in my view). Using the CAPE as a predictor for a market crash is also pretty foolish if you ask me. The main reason that the 10 year CAPE is predictive of lower returns over subsequent years is because historically the business cycle has been roughly around that long (the causality is more often that the end of the business cycle causes a stock market crash which lowers subsequent valuations, rather than just high valuations causing a stock market crash by themselves as many seem to assume). But the CAPE has never been good at predicting when a crash will happen with any accuracy. The length of the business cycle is variable and has also been increasing significantly over time - it will probably be longer this time in my view.

It doesn’t feel like we are near the top of the business cycle. Interest rates are still near their lowest level in history and the global economy generally seems to be in rude health. Incidentally, while I think Graham’s logic for US dollar strength based on interest rate differentials is correct, the timing is critical! Most of the US dollar strength may have already happened. It is expectations of future interest rate differentials that matter rather than current differentials. It is true that the expected pace of future US interest rate rises vs other countries has gone up this year - so correspondingly has the dollar. It is quite possible that other countries will now start to catch up faster than currently anticipated. The dollar also seems fundamentally overvalued and the pound is negatively affected by Brexit. I’m fairly heavily in US equities at the moment, though am wary of extending myself further.

The FANGs don’t seem that highly valued and the fact that the largest businesses account for a disproportionate share of the stock market is nothing new or to be concerned about (I don’t understand why people care about this). The idea that buybacks support share prices at artificial levels is clearly nonsense and I don’t think there is much basis for thinking businesses are over-leveraged in general.

That all said, I can’t predict that there won’t be a crash with any confidence. It just strikes me that there seems to be too much pessimism about at the moment.

For further reference here is a recent blog post I wrote about market crashes:

Blog: Quality Share Surfer
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mmarkkj777 26th Aug '18 33 of 41

In reply to post #393719

Hi Trigger 14.

Regarding your statement from above "the nature of the stock market and the economy has changed quite a lot over the short period for which there is history available."

I do not feel that the nature of the stock market has changed one jot in the last 50, or even 100 years. The technology has changed, the speed with which stocks can be bought (and sold) has perhaps changed some strategies, but the NATURE of the markets, I believe, remains the same. They are driven by human sentiment, greed and fear, confidence and trepidation. Crashes (or large corrections) often occur when confidence is too high and an over-reaction to a particular event, that otherwise would be taken in the markets stride, turns into the triggering event for a crash/correction as the overconfidence turns to fear.

The true nature of the markets is a herd mentality in humans (to get-in and get-out at certain times). Always has been. I was going to say always will be, but I can't predict the future. Maybe automated dealing by large quant allgorythms in the future will change this, but then this will be a totally artificial marketplace, driven by metrics and indicators.

But currently, I feel, that big markets changes (just like individual shares at the micro level) are driven (mainly) by collective human emotional instinct, and crashes usually occur when the masses are over-confident.

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Trigger14 26th Aug '18 34 of 41

In reply to post #393734

Hi sorry probably wasn’t clear. I agree with you that the fundamentals of human psychology have probably not changed much and that markets behave in largely the same way - the way sentiment drives crashes and so on. (However, I probably wouldn’t go so far as to suggest that investor behaviour has not changed at all - it would be quite surprising to me if we weren’t learning anything.)

I meant something broader by the ‘nature’ of the stock market. Some things have changed a lot e.g. the composition of the stock market and the availability of information. The nature of the economy and economic policy has also changed. My point was more broadly that it is naive to make a backwards looking comparison of valuations and assume you are comparing like with like.

Blog: Quality Share Surfer
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ken mitchell 26th Aug '18 35 of 41

In reply to post #393719


“The FANGs don’t seem that highly valued.”

Amazon PE 151
Netflix PE 163

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Trigger14 26th Aug '18 36 of 41

In reply to post #393744

Yes the PE ratios are high but you also need to take account of future growth. Amazon due to grow profits this year by 279% alone according to Stockopedia (and 45% next year). Question is how much you think they will grow over the long term. I’m less sure about Netflix but think Amazon still looks cheap. That’s my view but you could quite reasonably disagree as there is a lot of uncertainty about the future of course.

Blog: Quality Share Surfer
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timarr 26th Aug '18 37 of 41

In reply to post #393739

However, I probably wouldn’t go so far as to suggest that investor behaviour has not changed at all - it would be quite surprising to me if we weren’t learning anything

You might hope so but I think you'd be disappointed. If you step outside the relative sanity of Stockopedia and spend any time on other private investor sites you'll find them an intoxicating and joyous mix of ignorance, foolishness and unevidenced opinion: bias, in other words. Even on Stocko we saw a surge of panic and some excellent (and completely incorrect) ad-hoc prediction earlier this year when markets took a mild stumble. I have to say I'm very much looking forward to the reaction when we have a real correction.

One of the stronger human biases is the tendency to extrapolate the present into the future. In evolutionary terms this made a lot of sense - things didn't really change very often and if occasionally a mammoth wandered by and stepped on grandad's head that was probably safely ignored for future reference. In stockmarkets, however, it's rather dangerous to extrapolate.

Consider, for instance, Amazon's rate of growth. If we were to feel very positive about Amazon's prospects we might extrapolate its current extraordinary rate of growth into the future. Were that to happen then in a decade Amazon's earnings would exceed the entire current value of the world's economy. Now it's possible that Amazon may have taken over the world and installed Jeff Bezos as World President in Perputuity, but I think it's rather more likely Amazon's growth will ameliorate a bit ...


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Howard Marx 26th Aug '18 38 of 41

In reply to post #393739

Re Timarr's comment, I'd concur that there is scant evidence that investor behavior has changed - we tend to be emotional creatures driven by fear & greed with tendencies to buy high & sell low.

The most recent example of this of course was the 2017 Bitcoin/Blockchain bubble. Not just the rise of Bitcoin from $900 to $20,000, but also the peculiar share price rises that accompanied companies putting the word 'Blockchain' in their name. Blockchain name-grabbing has obvious echoes of the dotcom bubble. Two examples: 

In Dec 17, Long Island Drinks Corp become Long Blockchain, immediately causing its stock to surge 200%. It has subsequently fallen 97%


UK-based Online PLC saw its share price rocket from 15p to a subsequent high of 152p after it announced it was adding ‘Blockchain’ to its name. It has since fallen 74%


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Trigger14 26th Aug '18 39 of 41

In reply to post #393759

Hi Timarr

I agree with what you say but I was trying to be more nuanced than that. I certainly didn’t suggest that investors are now completely rational. I stated that the fundamentals of human psychology have probably not changed much and markets behave in largely the same way, but I wouldn’t go so far as to suggest investor behaviour hasn’t changed at all. There is a huge gulf between remaining exactly the same and transforming entirely. I’m saying we’re near the ‘remaining the same’ end, but not in exactly the same place. There are signs that investor behaviour might have changed somewhat e.g. the value factor working less well in recent years. Possibly this is temporary but I wouldn’t assume so. Intuitively, it seems absurd to me to suggest that investor behaviour will never change at all, but I presume this is not what you are trying to say.

Blog: Quality Share Surfer
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mmarkkj777 28th Aug '18 40 of 41

In reply to post #393774

Hi Trigger14

" Intuitively, it seems absurd to me to suggest that investor behaviour will never change at all, but I presume this is not what you are trying to say."

Unfortunately, this is exactly what I'm trying to say. Technology has evolved, Market information and intelligence has evolved. However, if we all agree that collective human psychology drives crashes and corrections, then this has not evolved at all (or a tiny, tiny amount, that could be disregarded to all intent and purposes). Humans don't evolve that quickly (regarding instincts) and there is only a tiny fraction of the human population trading at any point in time(with new traders/investors entering the market all the time), so it wont happen. Techniques will change. Information will abound (for those willing to do the homework). But human nature will stay pretty much the same, in my opinion of course.

In a crash, just as in the heat of battle, often many of the sensible join the herd. Its hard not to and it needs a strong discipline. The quants are set up to get out first, triggering further panic.

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rivaldo 28th Aug '18 41 of 41

Graham, if you're interested in aviation services companies, I recommend taking a look at Gama Aviation (GMAA). It's much less cyclical than AIR as it only has a very small charter division, and has much greater recurring revenues as it concentrates on aviation services.

It's on an extraordinarily low rating as it's had some mishaps and not delivered growth in recent years after its indigestible acquisition of Hangar 8 and some legal issues. However, those are now behind GMAA. Management presented well at the last Mello, it's well financed following good institutional support and is starting to deliver on promised global growth as a sector leader.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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