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

24th Aug '18 by Graham Neary

41 comments 11219 reads

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

Macro Musings
Fulham Shore (LON:FUL)
Pebble Beach Systems (LON:PEB)
Air Partner (LON:AIR)
Henry Boot (LON:BOOT)

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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tanneg

24th Aug '18

Byotrol (LON:BYOT) from yesterday if possible - 2 late morning RNS

runthejoules

Morning Graham! Quite busy for a Bank Holiday Friday on my watchlist. Codemasters Codemasters Group (LON:CDM) - new F1 game out. Haven't played a driving game since Road Rash or a Codemasters game since Dizzy, can't get excited myself but worth a look?

Versarien (LON:VRS) - collaboration with massive US builder AECOM - again, not an actual order (yet)? But derisks/uphypes the business.

shailenpatel

Hi Graham, also a trading update from Air Partner (LON:AIR) today

jonno

Good morning Graham

Interims from Henry Boot (LON:BOOT) if you have time, please.

Jonathan777

Hi Graham, would be great if you could cover Computacenter (CCC) Half-year Report please.

InvestedGeordie

Hi Graham,

I'd be interested to see you cover Henry Boot (LON:BOOT) should you have time.

Thanks,

IG

ChrisLong

Another vote for Henry Boot (LON:BOOT) please.

Whitbourne

I am a happy long-term holder of Air Partner (LON:AIR) which I like in part because it's uncorrelated with the rest of my portfolio. The headline from today's update is that profits are in line with the Board's expectations and with the same period last year. The statement also points out that the business has a strong net cash position - Air Partner (LON:AIR) has a £60m market cap but only £45m or so enterprise value. It's also worth noting that free cashflow has been greater than net profits in four of the last five years. This is a good share to hold through a downturn, in my view.

I like that it's clear what they do, there is a demand for it, they're not beholden to a few large customers and their strategy is clearly stated and is designed to mitigate risk:

We manage the business for the long term, with a very clear strategy of alignment to the needs of our global customer base. We have a strong portfolio of global aviation services, which provides us with exposure to various sectors and geographies, and our portfolio approach, without any single product or market dominance, often enables us to mitigate volatility, in either direction, in any one market or product line over the course of a year.

Readers will remember an embarrassing blip earlier in the year when an inappropriate accounting treatment was discovered going back some years, which took significant time and money to sort out. Personally I felt that management dealt with it well. They don't refer to this directly but it's clear that they are taking appropriate action:

A competitive tender process is underway to appoint new external auditors, which will be completed over the second half with an appointment expected in sufficient time for the new auditors to undertake any preparatory systems and controls assessments deemed necessary prior to commencement of the year end audit.

It seems clear that the briefing for the new auditors will be: "our previous auditors missed this issue for years, we want you to make sure that nothing like it ever happens again."

Benson

Air Partner: I am opleased to see that they have changed auditor after the accounting blip that knocked the share price earlier on. Forward visibility will always be a problem with small airlines
If you want to follow this company take a look at the charts. It has been profitable to buy this share on price dips otherwise the chart rises nicely

Reacher

This isn't strictly a post about RNS but more a lack of RNS: there is an article in The Times today regarding potential disruption to PLT due to a warehouse move. PLT is part of Boohoo (LON:BOO). I couldn't see any RNS that BOO had released regarding this. But the article refers to a call updating the market.

https://www.thetimes.co.uk/edition/business/boohoo-sale-signs-go-up-after-warehouse-move-z5vtwgkb3

cholertonandrew

Thanks Graham, definitely appreciate the macro commentary.

Regards
Andrew

Howard Marx

"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 10 years and heavy junk bond issuance."

Interestingly Graham, a note from Artemis earlier this year suggested that in the US "buybacks have accounted for .. an astounding +72% of the earnings growth since 2012.” Financial engineering at its finest.

https://latest.13d.com/end-of-...

ken mitchell

Maybe a minority view here but I really like the macro musings, so appreciated the excellent one today. I also like it when you and Paul stray away from small companies and cover the odd big share like Next. It must also be far more enjoyable writing about the topics and shares you know a lot about. Better than feeling obliged to look at a small company where you are starting from scratch just because of several requests (and those possibly from non subscribers?) here.

I don’t want to start a debate on buybacks as opinions tend to be fixed on both sides, but agreed with your comment on the massive US buybacks. Even if they are beneficial for shareholders it does seem extraordinary that US Companies are spending SO much on them,.$1 trillion this year and Apple alone $100 BILLION! So a huge chunk of the money being repatriated to the US thanks to Trump’s risky policy is not being invested anywhere. They may or may not benefit shareholders, and Company executives, but is a great opportunity to invest in the US itself being wasted?

Also note this! This year more is being spent on buybacks than ever before, and 46% more than last year. AND not with the share prices at a low point but often at all time highs! And the previous highest year for buybacks was 2007. AGAIN at what turned out to be a market high. And we all know what happened next.

Hope history is not about to repeat itself.

Well yes, history suggests that buy-backs will peak at the top of the market.

As Reuters observe: “Share buybacks proliferate when the market is rising but evaporate when the market collapses”

https://latest.13d.com/end-of-...

Aislabie

I think shareholders in Air Partner (LON:AIR) are entitled to feel cheated when a trading update appears without any numbers or even percentages of any kind.
It should surely be clear that good corporate governance requires numbers as mandatory. The cynic in me expects that the brokers have not been left with just this verbal waffle

LANE

Excellent macro views Graham artificially overstretched us equities in an ageing bull markets not to mention trade wars Brexit Turkey and perhaps Italy makes for a sizeable correction likely in the near future.

What steps to protect portfolio is the 6 mark question ?. More cash, defensives ,a spread bet short on Ftse/ Dow .

It could be an interesting ride .

I would be interested on the collective thinking on protecting ones wealth.

Be fearful

FREng

Hussman (https://www.hussmanfunds.com/content/comment/) are extremely negative on the US market. Their graphs show strong correlations between CAPE valuations and subsequent returns and currently predict significant medium term losses.

gus 1065

Hi Graham.

I for one like the occasional macro market musings, especially if it’s based on your own analysis backed up by a position taken in a particular market.

Not sure if it’s been discussed in more detail elsewhere, but I’m interested in your hypothesis behind going long US junk bonds. While I can see the FX play merit in going long USD against STG in an environment of a sharply rising gap in relative interest rates (USD firmly up, STG most likely flat-ish until the Brexit deal has been thrashed out), I would have thought going long junk bonds is quite high risk as these tend to be high fixed coupon/long term/long duration so will see sharp capital depreciation with rising rates coupled with a further risk of widening spreads/higher default rates if rising US rates put pressure on these highly leveraged issuers. I would be concerned that what I’m winning on the FX play and short term high yield swings I might be more than losing on the devaluation of the capital value roundabouts. Is there any particular reason why you picked this part of the fixed income market to take a position?

Gus.

dscollard

agreed on the macro: feel a good 10-20% correction is probably the shock needed to remove complacency. I have been watching the sector rotations and changing leadership combined with fairly sideways range bound markets. S&P has made a lacklustre double-top which it is retracing away from: let's see what happens when volume returns after the hols

Apart from tech , the US small caps are the stand out performers up 11% ytd, this is mirrored in the UK with AIM up almost 7% (compared to losses for FTSE100, 250 and 350)

attached a chart of the markets I follow: the RHS is price against moving averages over 8,21, 50, 100 and 200 which gives a visual ready-reckoner. US is bullish, UK mid-term bearish with all our major indices just hanging above the 200MA

Being long oil and especially the O&G services companies has been a good trade.

Almost with you on cable where it not for the buffoons in government : at the rate of their behaviour parity also seems a good bet

Dr Copper has had bad year. down 20% although 15% of that has been in the past month.....trade wars or more fundamental? China may well be source of this

Always good to trade and invest with a view to the weather, even if most forecasts get it wrong

(below is linked to a bigger, more legible image)

5b801036015552018-08-24_14_53_39-World_M

dan2015

And they have been wrong for twenty years. Look at his performance, it has been atrocious. He would need a 70% decline in the stock market in order to catch up.

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

Macro Musings - Ageing Bull

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Graham Neary

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