Good morning, it's Paul here with the SCVR for Christmas Eve.
Preamble from Paul
We're hearing increasingly positive news on covid, and I hope readers have taken advantage of the relief rally this week. It's certainly straightened out (partially) some of the problems in my portfolio. Also, as mentioned in Mon & Tues SCVRs, I've been buying this dip on the basis that reliable data from South Africa seemed to be pointing towards omicron being less deadly than delta.
Rather than being a Santa rally, the surge in some shares this week looks more like a relief rally re omicron, judging from travel & hospitality shares which seem to have rallied particularly well. I nipped in at the opening bell on Tuesday, and bought some Carnival (LON:CCL) and Jet2 (LON:JET2) both of which I think are good companies. Plus of course Saga (LON:SAGA) (I hold) has bounced strongly. Even Boohoo (LON:BOO) (I hold) has come off the recent lows, and I've doubled my position size there this week, despite sitting on running losses which would have paid for a nice 4/5 bedroom house in a pleasant area down South. Never mind, luckily I don't need another house, so have got to be philosophical about these things, there's no point in crying over spilt milk, and I think the share should recover, at least partially.
There are still plenty of bargains out there in my view. Although I continue to see the risk of more profit warnings. We've got ongoing supply chain problems, plus the large number of omicron infections means that lots of companies are struggling with many staff being off sick. More importantly though, it now looks as if the UK (and gradually other countries) should be reaching herd immunity through vaccinations of c.80% of adults, and the remaining 20% having recovered from covid naturally.
There are also now much better treatments for the sick coming on stream, including new anti-viral drugs. Vaccine makers have said they can adapt the vaccines for new variants in about 100 days. Hence could we tentatively be looking at the end of this pandemic? That would be very bullish for shares. Or possibly it changing into something that can be managed, like seasonal flu, with updated jabs each year for those that want them? I think that's how it's looking, and personally doubt whether we'll see any more lockdowns. I don't think the public would stand for another lockdown anyway. Most of us can assess risk ourselves, for us and the people we come into contact with, and reduce our social contacts voluntarily when we deem it necessary.
Overall then, I'm feeling much more bullish about UK small caps now, and think we could be at the start of a sustainable bull run. Although likely to be peppered with profit warnings in the short term. Does that matter though, because supply chain constraints should gradually ease, and current problems could turn into a tailwind for profits as recovery takes shape. It amazes me how quickly the UK market can swing from glass half empty to glass half full, and back again. Something feels wrong with the market. I think there's too much speculative money, and not enough long-term money, in the UK market. Contrast that with the US market, which seems to quickly shrug off any worries about current problems.
I've topped up my positions in the following:
Boohoo (LON:BOO) (as previously mentioned, I think the market has over-reacted to temporary problems. Although the declining sales in US and EU markets are a concern, so I can see why the share should have fallen, but not to anything like the extent it has done)
Saga (LON:SAGA) - remains one of my top picks (with a 2+ year view), so I've topped up here, with limited available funds
Joules (LON:JOUL) - again I bought a few more, as I think the market reaction to a recent profit warning seems overdone. It's actually growing profits. Although my thanks to readers who pointed out here that the TrustPilot reviews are awful. I had another look today, and all recent reviews are 1 star & scathing. The company is clearly having big problems with order fulfilment, so I am worried about the short term for this share. There could be another profit warning, but I'm in for the long run, as these problems should be fixable, but at what damage to the brand?
Studio Retail (LON:STU) - looks far too cheap, and recent profit warning was quite mild. So I've topped up a little, with modest available funds.
Motorpoint (LON:MOTR) - I see this as a bid target, so scraped up a little cash to top up. Found it difficult to buy, quite illiquid.
D4t4 Solutions (LON:D4T4) - discussed here the other day. I had been trimming back my position, to reduce gearing, but regret that now, and have started buying them back. The update this week sounded encouraging.
I'd like to continue adding to all the above existing positions, when funds are available.
Other shares that I'm pondering whether to buy back, or more of, are:
Hostmore (LON:MORE) (I hold) - woefully under-valued. It seems to me that the demerger was a flop because Numis failed to line up buyers to soak up the forced sells. At the current price of c.100-110p, this is one of my top picks for 2022. I think it has scope for a 50-100% gain, as more people discover the share, and realise what a lowly valuation it is on, for an expanding, successful, restaurant/bar group, now with several brands being rolled out.
Headlam (LON:HEAD) - this didn't survive a portfolio trim a few months ago, but it's cheaper now, and I would like to buy back in. Very strong balance sheet, with loads of freehold property, and a good dividend payer. Restructuring plan should deliver increased profits.
Volex (LON:VLX) - I still hold, but trimmed back in recent months, as it was looking fully priced in a falling market. At 340p, down from a peak of nearly 500p, I think it's looking decently valued again. Owner/manager Nat Rothschild seems to have worked wonders here. The acquisition strategy seems to be delivering good results.
Luceco (LON:LUCE) - another one I sold a while ago, on valuation concerns, as mentioned here at the time. It had signalled that H2 would be softer, so maybe there's no rush to buy back in? But at 334p I think the price looks quite attractive again.
Rbg Holdings (LON:RBGP) - another share that has fallen back in recent months, and now seems attractively valued. The PER & divi yield look attractive, and I like the CEO here, who comes over very well on webinars, as a tough, focused leader, with a strong track record.
Foxtons (LON:FOXT) - sold earlier this year, as I was worried it looked over-valued. At 40p, I think this could be a good entry point, and the fundamentals sound reasonably good.
Purplebricks (LON:PURP) - a total mess, but it has plenty of cash to deal with the legal problems. Risky, but at only 23p, I wonder if it might be worth a risky punt?
Beeks Financial Cloud (LON:BKS) - I already hold, and trimmed back a bit to reduce a margin call. It's dropped by a quarter, for no apparent reason, so this could be a better entry point to buy back?
Eleco (LON:ELCO) - I've always liked the fundamentals, but baulked at the valuation. It's fallen back a lot, but still not exactly a bargain. I am tempted to pick up a few for my SIPP, to hold long-term.
Gulf Marine Services (LON:GMS) - as mentioned before, this bit the dust from my geared account recently, as I had to sell something to meet a margin call. But I'm keen to buy back asap.
Strategy - it's dawning on me that my strategy needs to be revised. I'm taking positions with a long-term view, but too many of them end up in my geared account. It's so easy to let gearing creep up, until I end up with far too much, and then get absolutely clobbered when the market takes a dive, as it has done in the last 3 months. I've ended up with heavy losses, and then am forced to choose which positions to sell, from a point of weakness.
There's a clear mismatch there, taking a long-term view with shares, but putting them into a short term, geared trading account! It worked great from Oct 2020 to July 2021, as the gearing greatly multiplied my profits, and I was rolling in it for a while, which did go to my head a bit (we're all human). However, I've given back most of those profits in the last 3 months, as the gearing magnified the losses - a very painful experience, but we live & learn, and there's no point in doing "if only I'd done this..." type of thinking. We just have to revise strategy so that the same mistake doesn't happen again.
So a re-think is needed over the Christmas break, but I'll cover this in more detail in my usual year end review.
As always, when we present stock ideas, the onus is very much on you to do your own research, and take responsibility for your own investment decisions, because we may have missed something, or might just be plain wrong. My stock ideas tend to do well in about 60% of cases, and 40% do badly. Plus it depends what type of market we're in - during the bull market from Oct 2020 to July 2021, pretty much everything did well (apart from BOO!), but since then, almost everything has done badly, irrespective of fundamentals. That's just how markets behave, so we must not confuse good stock picking, and bullish markets that take up everything with the rising tide.
Smiths News (LON:SNWS)
37.5p - mkt cap £93m
Extension and amendment of Financing Agreement
For full disclosure, I am not currently holding this share. The reason I sold it, was due to a margin call on my Spreadex account. So I had to sell a few things that I would rather have kept, including this one. My intention is to buy it back when possible, and my fundamental view of the valuation remains positive.
- Extension of bank facilities from Nov 2023 to Aug 2025.
- Term loan of £60m initially + RCF (revolving credit facility) of £30m initially = £90m total.
- This will reduce to £41.5m by Aug 2025, so a reduction of about £10m p.a. in bank debt.
- Cap on dividends is increasing from £6m to £10m p.a., allowing bigger dividends.
- Lending margin of 4.25% over SONIA (Sterling Overnight Index Average, run by the Bank of England)
My opinion - this is further evidence of SNWS recovering from a financially distressed condition, into more normal circumstances.
This is an interesting value share, with the forward PER of only 3.8
Dividends are a key feature, currently high at 6.5%, and set to go higher still now the cap imposed by the banks has been increased.
The business distributes newspapers & magazines, so is in slow, structural decline. Costs are mostly variable, so are being cut on a three-year plan, to match the fall in revenues. Hence it should remain a reliable cash cow for years to come. Bank debt is being reduced, but there’s scope for large & growing divis alongside debt reduction.
For income seekers, I think this share remains attractive. The question mark remains over long-term viability though.
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Parsley Box (LON:MEAL)
34.5p - mkt cap £14m
I covered the most recent trading update here on 22 Dec 2021. My view on this share is very negative, because it’s performed so badly since floating, is racking up heavy losses, and has nearly run out of cash. Therefore this shares look extremely high risk, and who knows what terms the next fundraising would be on? It could be at a deep discount. Therefore I consider this share uninvestable at the moment, due to the serious risk of insolvency or heavy dilution.
When considering investment in any consumer-facing businesses, I always like to mystery shop to assess the product/service myself, and read online reviews. I’ve ordered twice from MEAL before, and found the product very disappointing - in particular there seems to be hardly any meat in the products, and they looked nothing like the product photos on the website & catalogue.
The company said it had improved the product, so I placed another order this week, and it arrived by courier very promptly the next day.
I’ve made a couple of short videos to share my experiences.
The first one shows me unpacking the box, and trying the turkey dinner, which was actually OK, and tasted alright. It was missing the stuffing ball shown on the photo, but apart from that was as described, albeit a smaller portion size than it appears on the photo.
The toffee walnut load cake was very nice, and I’ve polished off all of that since creating the video.
(if the sound doesn't work for these videos, then just click on "YouTube", which plays them in a new window on YouTube, where the sound does work)
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Next, I tried the Steak Hotpot meal, which was absolutely dreadful. It hardly contained any steak! There were just specks of steak, and only one proper sized chunk of steak. The photo shows a completely different product, and is highly misleading. So a big thumbs down for this product.
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My opinion - I’m clearly not the target customer, but even so I think MEAL has real problems with its product. Some are good, but others are dreadful. That’s not the way to build a successful business - customers need to be surprised & delighted with the product, otherwise they're not likely to re-order. Let’s hope the new MD irons out these product problems, and misleading photography, in time to save the business. The clock is very much ticking, with a fundraise from a position of weakness on the cards for early 2022.
I wish I could have said that the product is amazing, hence the shares worth buying. But that’s not true. The product is patchy at best, based on my 3 orders with the company. I’m about to try the wine, which I thought was excellent last time.
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