Small Cap Value Report (Fri 26 April 2019) - Diary, AJB, EUSP, ALM, BOOM

101

26th Apr '19 by Graham Neary

49 comments 8969 reads

Good morning!

I'm a bit tired this morning, after a hectic week.

There have been plenty of RNS announcements here to keep me busy.

Apart from that, monitoring the fast-moving events at Tesla over the past few days has been as wearing as a part-time job, given the pace of news flow at that stock.

On Monday, the company released a nearly 4-hour video for Investor Autonomy Day.

Then on Wednesday night, it released detailed Q1 2019 financial results, along with the standard quarterly conference call. I listened to the call live.

Yesterday morning, after considering what I had just observed, I increased my position size first thing, when pre-market trading opened.

Something else that happened yesterday morning was that one of my tweets ended up getting retweeted by the #TSLAQ community and then later by Zero Hedge. This tweet is on its way to achieving 150,000 impressions.

Here it is:

When a tweet blows up, the constant stream of notifications is incredibly addictive. Given Elon Musk's addiction to Twitter, I'm sure he feels the same way!

My main point is that staying on top of the analysis, and managing the trade, while also keeping an eye on all of my long positions and the rest of my portfolio, and providing media content too, is a lot of work.

Elsewhere in the last few days, I also had to deal with a malicious GDPR request by an individual who was upset that the writers on my website weren't bullish about a company he is invested in. I resolved the issue as quickly as possible.

This is merely to give you a sense of what's going on behind the scenes. I'm creating financial models, reading company reports, browsing the internet for any additional information that might give me an edge, talking with customers, and handling the occasional malicious attack. There's a lot going on that doesn't get talked about, but it's all part of the large mosaic of information and experience that gets pulled together to form this report.

What's different about this report compared to pretty much everything you would read from the City, is that this report is written by real investors who are putting their money where their mouth is.

That makes the production of this report a lot messier than the content written by sell-side…

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Camtab

26th Apr '19

Good question mammyoko. But here is the thing, professional managers make their money by taking 1% or more from other peoples' money. They don't take anything other than a business risk. If they underperform their benchmark they get fired at worst. They don't give the money they have earned back. In my opinion they are the ones who favour diversification for this very reason. Sure if you have a steady job and want your savings to give you an asset class return then this is ideal. Because that is what most of them do and let's face it you are still guessing. It is just you are guessing who you should trust with your money rather than which management team and business to go with. I once saw an interview with Jim Rogers in it he said "if you are going to get rich then you need to take on risk". I have never heard a truer thing, the question is how do you temper that risk. But investing 1% of your portfolio across 100 stocks for me is a waste of time. Buy passive and let them crunch the numbers and pay a lower fee. I still see very few examples of active management doing a good job. BUT they do exist, my great favourite was Anthony Bolton at Fidelity who returned something like 17% a year over 20 years. My approach is do your research, as Paul says pay attention to the balance sheet, then if it goes wrong you might get a second chance. Look for companies meeting needs etc etc but when you decide you are right back yourself.

Techno Trousers

There is a very good reason why I do not hand over my money to financial fund managers, this being that since I invested seriously using a disciplined approach, with Stockopedia being my chosen platform, my performance has been (for me) stellar compared to anything these guys can do.
To validate this to myself, I just checked my performance on the X-Ray on AJ Bell where I hold an account, and it gives me the numbers on my 'Time Period Return'

Best periods as follows:
3 months: 44.36% (Nov 16 - Feb 17)
6 months: 60.48% (Dec 17 - Jun 18)
12 months: 108.10% (Sep 17 - Sep 18)

3 Years Annualised : 50.69% (Mar 16 - Mar 19)
5 Years Annualised : 31.33% (Jul 13 - Jul 18)

Now I did join Stockopedia in Aug 2010, but did not use it properly, nor with discipline, this being the key, until around 3 years ago, so my 5 Year Annualised figure above of 31.33% also includes some of my usual 'under performance' years too, and as was so common before Stockopedia. My investing at this time was like a yo-yo - huge gains followed by huge losing streaks, which is largely hopeless.

So, what not to like, and hopefully explains why I will NEVER use funds again.

Best Regards, TT

hayashi22

Well done Techno. Why not share a couple of the star performers which have helped you along the way?!

Reacher

I think you raise some interesting points and I have quickly pulled together the below table to show the returns the Investment Trusts generated in 2018, although bear in mind these are not all calendar year but whatever year end date each investment trust has in place. I have taken the data from each IT website. For example Allianz's data ran for the year to 31 March 2018 which would be more favorable than taking data for the year to 31 December due to the sell-off in Q4 2018.

However, each trust has outperformed its benchmark from 9.3% to 26.7%. This is quite a significant out-performance. Taking into account and suggests there is definite advantages of employing the skills of a manager. Whilst the table below shows shareprice performance, it may not match the NAV performance and there may have been addition alpha as a result of this.

I have assumed that passive funds replicating the benchmark exist and charge 0.1% which is significantly lower than IT fees. It is apparent from the table that you would have generated a better return in 2018 by investing in a trust rather than a ETF/passive fund.

	Allianz Tech Trust	Scottish Mortgage I.T	Blackrock Smaller Co IT	Fidelity Special Values IT
2018 Shareprice	29.80%	21.60%	31.10%	14.00%
Benchmark	14.40%	2.90%	4.36%	4.70%
Alpha	15.40%	18.70%	26.74%	9.30%
Ongoing charges (incl AMC)	0.93%	0.37%	0.70%	1.04%
Performance fee	12.50%	0.00%	0.00%	0.00%

Net return	26.81%	21.19%	30.29%	12.89%

Passive (assume 0.1% charge)	14.29%	2.80%	4.26%	4.60%

I did note on a few websites it was mentioned that a new charging structure was being introduced which was basically reducing the charges, perhaps as a result of the fee pressures from the passive.

I guess whether you choose to invest in an trust or self-select depends on your own skills set, time, risk tolerance etc.

Snoo

One that didn't get much coverage was AdEPT Technology (LON:ADT).

I do quite like this and they seem to be growing nicely. This surely must be close to the end of the acquisitions though.... with the payouts they are making it seems there might not be too much room left.

Their balance sheet makes me a bit uneasy though. they are very capital light, which leaves their liabilities being balanced mainly by intangibles. NTAV is negative.

This perhaps is not so much of a problem as they are clearly generating cash, the dividends look sustainable, and if there were no more acquisitions there would be room in the operating cashflows to pay down this debt. I do suspect though that this time next year they might prefer to acquire still.

Had a question on depreciation, it seems that many of their acquisitions being being depreciated at very slow rates, up to 30 years for Centrix, 10-16 years for the rest. Given that no customers are signing up for a 30-year deal I do wonder if this is too slow or a potential source of impairment in the future?

Their record for integrating the new businesses look good and many revenues look recurring. Is this the type of product where Amazon might become a threat one day?

Hello Hayashi22

I am happy to share all the current portfolio, as the historical picks will not help much now. So my currently portfolio is only numbering eleven, and I am probably around 45% cash still.

In no particular order, they are:
Fevertree Drinks (LON:FEVR)
Dart (LON:DTG)
Altareit SCA - Euronext PARIS (the £ before the ticker doesn't appear to work)
Bushveld Minerals (LON:BMN)
Lonmin (LON:LMI)
Somero Enterprises Inc (LON:SOM)
FairFX (LON:FFX)
RockRose Energy (LON:RRE)
JKX Oil and Gas (LON:JKX)
Sylvania Platinum (LON:SLP)
Water Intelligence (LON:WATR)
So, maybe a little too focussed at the moment on metals and oil/gas, but I am currently not concerned on this and will look to diversify more as I drip feed more cash into the market.

TT

Siriusj

Thanks to everyone discussing trusts, funds, trackers and ETFs.

We are all at different stages of our investing. The stage I am at is where the portfolio is getting too big. This is not due to my exceptional skill but my ability to add £40,000 (wife's included) to the ISA each year. The amount of comfort with which I have been investing smaller sums is quite different to the level of comfort in investing in much larger amounts. The size of the daily rise and fall takes some getting used to.

I have recently been thinking of maintaining my smaller amounts and putting larger chunks into the type of instruments you have been discussing above.

Whatever happens I won't be putting Paul and Graham out of a job.

SJ

john652

Hi Sirius,

You may want to trying looking at your portfolio as % swings and not monetary amounts. I spent 2 years working for one of the largest ‘locals’ trading futures on the LIFFE exchange, he only traded with percentages, if he viewed the daily p&l as cash it was too distracting. This is common across a lot of money managers in books like Marjet Wizzards, I only use percentages after reading those books.

I imagine %’s are a common approach here.

Edward John Canham

Ferrexpo (LON:FXPO)

Mary Reilly and Bert Nacken resign as directors. Both independent both on the audit committee.

No explanation, no "they are thanked" as Mr C would say.

Gromley

One that didn't get much coverage was AdEPT Technology (LON:ADT).

I do quite like this and they seem to be growing nicely. This surely must be close to the end of the acquisitions though....

I caught part of their presentation at Mello in November, which helpfully is recorded for posterity over at piworld (who incidentally have several other AdEPT presentations from the past couple of years. )

I probably wasn't paying the greatest attention to be honest as it wasn't at the time a core interest for me, but I am pretty sure they said that they still have a long pipeline of potential acquisition opportunities.

The one thing that did strike me though (and again it could just have been more my lack of attention) but they seemed to me to be presenting themselves as more of an 'investment fund' than an operational company. (No comment intended on whether that is a good or bad thing, just that it wasn't what I expected)

abtan

I've had EU Supply (LON:EUSP) on my watch list since someone on this forum recommended it as a potential star in waiting (thank you whoever that was)

I too liked the results this morning.

Cash flow looks decent, growing revenues (although I don't like their use of "revenue of a recurring or repeatable nature" - how repeatable? every couple of years? or annual contracts?), no single customer making up a material part of revenue, positive outlook for the future.

A couple of notes I've made in the past:

They are top 3 provider in every market they operate in (although I note today they mentioned struggling to break into Germany, but this is improving)
They said in the past that they expected growth of 20% pa, whereas today it looks like growth is only 10% - something to look out for going forward perhaps?

Graham mentioned a 10% convertible loan note, but from what I understand this only runs until 2020 at which point they need to be converted at effectively market price...so not a long term cost to worry about?

One thing that did confuse me though was how staff costs were only up only 4% (£2.9m to £3.1m), yet number of employees increased by 20% from 46 to 55 - something just doesn't fit there. Or I'm misreading today's statement.

I don't hold, but I have a feeling I will do in the near future.

EU Supply (LON:EUSP)

I have not looked in depth at this company, but that query interested me and so I had a little dig.

Without looking the two "obvious" options would be :

1. That they hired staff towards the end of the year.

Whilst that may be true, it is not the explanation as the headcount numbers they quote are averaged over the year rather than being year end positions.

2. That the increased headcount was for lower paid staff.

That doesn't seem right either, given that they say "Additional more experienced staff have also been contracted, hired and trained in H2 2018, and post-period end."

More experienced generally equates to more expensive. (Although they did reduce the number of directors by 20%)

There are I think instead two other possible answers :

> The headcount numbers they quote are for "The average monthly number of permanent employees".

- Do they use a lot of temps or contractors?

> Some of their payments to staff are not regarded as costs but rather as investments. "Expenditure being capitalised includes internal staff time and cost spent directly on developing the CTM^TM platform. "

To be fair, they do amortise these costs over only three years, which is not unduly long, but it is worth noting that they capitalised net £339k of development spend in the year (zero the prior year). If the majority of that is staffing, then it would bring the increase in outlay on staff more into line with the increase in headcount.

Therefore, so long as you are satisfied with that capitalisation of development costs - I don't think that there is a significant issue.

rhomboid1

27th Apr '19

Hi Techno Trousers

One thing to be aware of is the portfolio X ray tool valuation doesn’t track your portfolio at all...

Instead it looks at your current portfolio holdings/weighting and tells you how they fared going back in time

If your portfolio hasn’t changed over the years it is better...but not ideal still as it uses your current weighting to Imply past performance...which again can be misleading

Many thanks for sharing your current portfolio. Hope it continues to go well for you. I've been in and out of Dart (LON:DTG) over the years.

jared007

With regards to the funds, investment trusts and individual shares discussion - I do all three. Funds are the lowest returns overall so far (but still positive), and I will probably cut the under-performing ones over the next month or so. Trusts seem to do better, but it's only the individual stocks that really outperform on their own (which is only natural when you pick the right one).

My handpicked stock portfolio contains around 25 shares now, and I'd say as a "fund" it comes somewhere in the top 20% of all my other funds/trusts performance. But it's certainly not the best "fund" I have.

As such, I thinks it's wise and gives me a level of comfort/diversiciation to have a portion of my money in some of the better trusts such as Allianz technology and Scottish Mortgage already mentioned. Plus there are other benefits such as exposure to other regions like China (Fidelity China Special Situations has done well for me) that might otherwise be difficult to do.

One last point - some of these trusts have a portion of their money in unlisted early stage companies as venture capital. So you get exposure, and some very good growth from opportunities that do a bulk of their boom growth before IPO.

jonthetourist

ALM "Perhaps someone else will be motivated to study it in further detail."

Allied Minds is complicated. Crystal Amber think their board costs are ludicrous, and have offered to manage the sale of holdings for far less cost. Woodford and Invesco are the biggest shareholders, and also hold a lot of CA.

"Shares in Allied Minds (ALML), the early-stage tech investor backed by Neil Woodford and Mark Barnett, have jumped 12% after Crystal Amber (CRS), an activist investor the fund managers also own, proposed taking over and winding down the company.

Stepping up hostilities against the US-based but London-listed intellectual property company, CRS chief executive Richard Bernstein said he had written to Allied Minds and offered to take over its management with the help of an American law firm with experience in this area.

In a statement to the stock exchange, Bernstein claimed he could slash Allied Minds’ shareholder costs by 70% by running the £135 million company for 1% a year while its portfolio of eleven companies was sold and capital returned to investors."

More here: https://citywire.co.uk/funds-insider/news/crystal-amber-offers-to-wind-down-allied-minds-for-big-backers-woodford-and-barnett/a1219243

28th Apr '19

Hi jared007..which trusts do you favour with some interesting early stage investments?

gus 1065

29th Apr '19

Statement from Ferrexpo (LON:FXPO) this morning on the resignation of Deloitte as auditors followed by two of the non exec directors on Friday afternoon.

https://www.investegate.co.uk/ferrexpo-plc--fxpo-/rns/statement-from-the-board/201904290700193654X/

Statement includes the full letter from Deloitte as to the reasons for their resignation which appears limited to the timeliness of initiating an independent review into the misappropriation of charitable donations that may, or may not, implicate the CEO in fraud. Also addresses reasons why the IDs resigned - appears they didn’t like being expected to do any work for their stipend. Market reaction on Friday was to shoot first (c.30% fall in share price) rather than ask questions. For the strong stomached seems a lot of company for not a lot of market cap IF you believe the numbers and think the Deloitte resignation is a hiccup rather than bubonic plague.

Gus.

Hi hayashi22,

To be honest it's not something I went looking for, I just recently found out that two of my trust holdings were doing this - Scottish Mortgage and Fidelity China Special Situations. There was an article in money observer magazine about it recently. These are two of my better performing trust picks so far.

Many thanks

Small Cap Value Report (Fri 26 April 2019) - Diary, AJB, EUSP, ALM, BOOM

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Graham Neary

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