Small Cap Value Report (Fri 5 July 2019) - Monetary Madness, CHH, LVCG, FST

Friday, Jul 05 2019 by

Good morning!

Today's news flow is not particularly exciting, so why don't we have a quick roundup on markets in general?

The FTSE-100 has had a rocket under it since the beginning of June (this is a two-year chart):


As you can see, we are stll belows the highs of H1 2018. But for how much longer?

Other equity markets have been creating all-time highs. Here are the long-term charts for the Nasdaq (blue) and the Dow (grey):


One of the hedge fund managers I follow (thanks to his Tesla-related efforts) is Mark Spiegel. I should acknowledge that since inception in 2011, his fund has underperformed the major stock market indices.

But it has been a horrid era in which to run a long-short book, and Spiegel loves shorting: his fund is currently "very net short", according to his June letter!

The reason I mention him is that he has identified the Russell 2000 Index as "the most overvalued of all stock indices". This is the subset of the Russell 3000 (the top 3,000 publicy-traded US companies) that excludes the top 1,000. So we could think of it as a mid-cap index, a bit like the FTSE-250.

According to Spiegel, this index trades on a trailing P/E ratio of 35x, and 35% of its components are unprofitable! Those are quite amazing numbers (at least to me) and they suggest that the overvaluation relative to traditional metrics extends far beyond the FAANGS. So I remain extremely cautious about the valuation of US markets.

Turning closer to home, I'm becoming a lot more comfortable with the valuation of the FTSE.

The FTSE All-Share Index, for example, is on a trailing P/E ratio of 14.6x, while EPS growth of 3.2% is forecast to increase to 8.1%.

The FTSE does not have as many exciting growth companies as the US markets do, but I do think it can serve as a stable source of value.

Indeed, I've been picking up a little bit of extra income this year by making regular long bets on the FTSE. In the last few weeks, however, I've been cautious about placing any more trades - I've been comfortable doing it around 7100-7200, but am more reluctant with the market at 7600. Given the change…

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

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Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

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Live Company Group plc is a live event and entertainment company. The Company operates in two segments: Proprietary Events and Licences. Through its subsidiary, Brick Live Group Limited, the Company produces BRICKLIVE branded events. The Company’s subsidiaries include Parallel Media Group Asia PTE Ltd, The Championship (Singapore) PTE Ltd, Brick Live Group Limited, Parallel Live Group Limited, Brick Live Far East Ltd, Brick Live International Ltd, Brick Live Hong Kong Ltd, Brick Live Far East Ltd and Parallel Live (NY) Ltd. more »

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Frontier Smart Technologies Group Limited, formerly Toumaz Limited, is engaged in offering software and hardware technologies for Digital Audio devices. The Company through its division, Frontier Silicon, provides solutions for Digital Radio and Smart Audio devices. The Company is engaged in providing chips, modules and software for consumer audio devices. The Company offers fourth generation Kino 4 chip. The Company's smart audio module is Minuet, which offers hardware, software and services solution for the smart audio device. Its digital radio modules include Verona 2, Tuscany Bluetooth/digital radio and Verona HD Radio. Its digital radio platforms include Venus, Venus Colour, Neptune (Tuscany Platform), Venus H2 and Venus HD. Its digital radio software includes DAB and AUTODAB 2.0. The Company also offers Chorus 3 chips. Its Venice 6.5 FS2026-5 module is a hardware and software solution for Internet radio and network streaming. more »

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  Is LON:CHH fundamentally strong or weak? Find out More »

30 Comments on this Article show/hide all

V4Value 5th Jul 11 of 30

In reply to post #489951


Watched part 1 of the interview last night and it was fascinating. Loved the fact he met Buffett & Munger as well as the Buffettologists like Lowenstein and Janet Lowe! He's a fellow down to earth Mancunian, and like Buffett, does not want to be distracted by the City. Interesting to hear his new acquisitions such as Focusrite (£TUNE), because I also hold, in addition to £BVXP and £GAW. I've followed his advice since meeting him at a ShareSoc, Manchester event and his discussion on Buffett type moats. I've tried to follow that philosophy ever since.

Keep the interviews coming, they're really interesting and educational. Well done.

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andrewdb 5th Jul 12 of 30

On overvaluation and monetary madness:
I believe seasonality is a thing and
-never go long in Feb, July, October, November.
-never go short in April, May, Dec
(disclaimer : based on personal experience only)

Currently gathering cash and tightening stop-losses

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Mark Carter 5th Jul 13 of 30

Meanwhile, the ECB still thinks that inflation is unacceptably low

Do you not know, my son, with how little wisdom the world is governed?
-- Axel Oxenstierna

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
-- Friedrich August von Hayek

I have seen all the works that are done under the sun; and indeed, all is vanity and grasping for the wind
-- Eccl 1:14

The curse of wisdom is to know the folly of men.

I'm feeling in a poetic mood today.

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jonesj 5th Jul 14 of 30

The government bond markets are amazing.
It was only about 3 years ago that Argentina managed to get a 100 year bond issued. Unsurprisingly, these are already down.
A 100 year bond from Austria is a better bet, but even before investing in that, one has to note that the maps of central Europe in 1914 and 1939 look quite different to those of today. Who knows what the map would look like when it is time to redeem that one.
Being a little cautious about the stock market, I'm about 78% in stocks, with the remainder in gold, short term US treasuries & cash. Who knows whether this the correct allocation.

Some experts have recommended increasing your bond exposure with age.  Even something like  (100 - your age) as the percentage in stocks & the remainder in bonds.     With current low bond yields and increasing longevity, perhaps it needs a substantial adjustment.    I ignore it.

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jwebster 5th Jul 15 of 30

"If anybody can think of other non-mining operating businesses with a positive exposure to gold, please let me know!"

One option is buy GLD - a physically backed EFT which tracks the gold price fairly closely. Good option if you just want to go long gold. Doesn't pay a dividend or have earnings of course. But good insurance against a meltdown in interest rates, as mining stocks will have a degree of market madness risk if they were swept up in a broad stock market sell off.

Speaking of meltdown, we are in the last innings of the global market bull run. Actually the USA is the only major market to beat its high though.

The FED is ever poised to unleash another round of QE of course. USA economic indicators have been softening. The 3mth/10yr yield curve spread is negative by 0.25pts. Historically this implies a 30% probability of a recession in the USA, four quarters out from today.

Where it goes from here, nobody knows, we haven't had the euphoric peak yet where the last buyers pile in at the top. Possible the FED dropping rates might give us that. Then it can crash in a heap.

Gold has done well this month with the FED signalling lower rates and the bond market driving that.

Note the SPX500 doing well but Russell2000 not so much. The big leaders are going up. This is a last leg bull market signal as well.

As for the FTSE, yes, much better value on a PER and dividend yield basis than the USA. Keep in mind the FTSE100 companies generate 70% of earnings abroad, so the Pound rate will move it around. Funny thing is if Brexit has a good outcome (you decide what that is) then overseas investors are likely come back to chase yield but the Pound FX rate would rise, suppressing earnings. Go figure. Either way yields will compress. If there is a bad Brexit, good luck everybody. Short UK domestic stocks and the Pound. FTSE100 might do ok though, because of the overseas earnings point, as a safe haven.

Late stage bull markets are a pain. The mantra is to invest in large cap stocks if you want to ride the last leg up, as you can sell these quickly if prices start to drop, as liquidity is there. Can get trapped in small caps, so own ones you love to hold, or short the FTSE index if things go badly as a hedge, rather than be a forced seller in a thin market.

Gold is looking up, as the next round of QE could really impact savings. Europe is fighting deflation so expect more QE there. USA will follow. Note the USA grew it's deficit by 6%, which is more than economic growth, so their economy is debt funded now, therefore expect lower rates and more QE to support it. It's a given now MMT (modern monetary theory) is an option to fund increasing budget deficits.

Keep in mind Trump has his re-election next year. His tax cut sugar boost has faded now. So he will push the FED to drive lower rates and QE for an economic burst to support his re-election chances. Also he will magic a solution to the trade war as a bounce, when the timing is right.

If there is a recession next year, he won't get in, so expect him to do what it takes to engineer one last push through next year, if he can keep the debt merry-go-round spinning. That might time in with a last bull market rip, which we haven't seen yet.

So, in the round, you would think markets have another burst yet, dancing to the FED's tune. If the yield curve spread widens, all bets are off.

Interesting times!

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sharmvr 5th Jul 16 of 30

Like the market summary - certainly the recent rally has me feeling a little smug and to that end I am not a net buyer. Just under 10% net cash and then another 10% in what I would call cash equivalents, eg gold/govt/Supranational debt

Pure play gold, Ishares Physical Gold ETC (LON:SGLN) is gold in £. I have held since q416, and include as part of my cash. No yield but on current levels, am up slightly above 10%, which is acceptable on cash.

Who wants inflation: over indebted western governments, who calculate debt to (nominal) GDP and generate tax revenue on nominal wage rises, while a substantial portion of their expenses are fixed interest payments

Re multiples, it is my contention that as rates tend to zero, multiples tend to infinity, so in the current environment (monetary madness indeed) to drive valuation lower, we need an increase in risk premium, which is at least in part driven by sentiment. Based on my observation, taking the risk free rate aside, it seems that as the data shows an increase in risk, risk premium actually falls, especially if we assume a reduction in central bank balance sheet equates to a rise in the risk free rate.

On US equities, I am not aware of the Russell multiples, but so far as I know the S&P is around 17x, which is only slightly above the long term average (understandable given rates - see above). I would also be interested to know where the average and median sit. I believe certain pockets of overvaluation are distorting the picture. Finally, if a company is loss making, is the PE infinite or zero. Would be interested to know the PE ratio once all loss making businesses are excluded - assuming of course that the loss makers form part of the initial calculation.

As I type, I received a jobs notification saying above estimate - i.e. no rate cut. If my rate thesis is correct this should be market negative.


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Graham Fraser 5th Jul 17 of 30

In reply to post #490066

Thanks for that Luthrin , I do not think it would make any difference if the acquisition cost, rather than actual price on death, was taken into account as many AIM shares go down. In fact it might increase the total relief !

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Graham Neary 5th Jul 18 of 30

In reply to post #490101

Re: WPM (Wheaton) - that's great John, thanks for the suggestion! G

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Paul Scott 5th Jul 19 of 30

In reply to post #489966

Hi rmillaree,

I don't think there's read-across between Churchill China (LON:CHH) and Portmeirion (LON:PMP) because they're mostly targeting different markets.

CHH is mainly practical crockery for the hospitality sector, whereas

PMP is mainly decorative china, for gifts, and collectors. It does other stuff too, but the core market is decorative china.

Regards, Paul.

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Graham Neary 5th Jul 20 of 30

In reply to post #490116

Hi Laughton - I totally agree with the view that the FTSE will fall if the US does. But I take comfort from the current valuation of the FTSE, i.e. I do not expect the FTSE to crash by anything like the same % that the US markets could. Can't wait to find out!! G

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Graham Neary 5th Jul 21 of 30

In reply to post #490136

Beautiful words, Mark!

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spantick 5th Jul 22 of 30

Regarding gold

My preference is to own Gold Producers with a dividend yield. But what is so frustrating in my opinion, is the blatant manipulation of the gold market.

The above link is just one example of many!
For example take a look at today's NY NYMEX cliff edge fall -

I regularly check Kitco for the latest gold price and on a regular basis NY MYMEX at around 8am ish you can see the same old pattern time and time again. I just hope that strong buying momentum will overwhelm these antics.

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Graham Neary 5th Jul 23 of 30

In reply to post #490156

Thanks for the strong input, jwebster. Please accept a +1 vote from me. G

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mojomogoz 5th Jul 24 of 30

Since its macro's some pure big picture stuff - money, eurodollar (its what counts not the dollar) politics, power, social - if you don't want a ramble on that then don't read!...

At heart our issue is a huge amount of unproductive debt. This is near universal on a global basis...except some emerging markets that ain't so bad relative to developed but often don't look good relative to their history. Bad right?..

Well, it's MAD....mutually assured destruction mad. Where and how is the debt bomb going to drop? The truth is we can't afford it to do anywhere really, not even 'evil' China. So ways will be found to ameliorate the pressure and weight of debt...Boris and Jeremy are joining the big JC on that one with promises and magic money trees...this is the direction of travel....MMT and derivatives are inevitable.

It means equity bull is probably going to run. In the US income and taxes related to equity market performance have become super important at the margin and US policy will come to recognise this and supporting the equity market will be an issue of national security! Perhaps The Donald already knows.

Word. ;)

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ACounsell 5th Jul 25 of 30

In reply to post #490111

Not sure I agree. Have a look at the much praised (by Morningstar and just about any commentator you care to read) Black Rock Gold & General fund which holds most of the large cap gold miners. The performance has been dreadful over the last 10 years or more I have held - down about 30% from cost!!

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Trident 5th Jul 26 of 30

I seem to recall I bought some 1oz gold coins when they were about £360ish each to the ounce. Probably one of my better investments, that I proceeded to dish out to wife/nieces& nephews etc.

Of course since 2009, its hasn't done as well as the stockmarkets by a long way, but post crash has been a reasonably stable store of value overall, in that it hasn't cratered back to previous lows.

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shipoffrogs 5th Jul 27 of 30

My favourite "quote" on gold is - that a couple of thousand years ago an ounce would have bought you a toga and sandals, and today - a nice suit and shoes..

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Desanj 5th Jul 28 of 30

If anybody can think of other non-mining operating businesses with a positive exposure to gold

There are a few ETFs which hold the gold asset which in theory makes them safer.
Some of the tickers are

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PLS1nve5t 5th Jul 29 of 30

Not wanting to jinx it, but the old adage "Sell in May and go away" is looking a bit sorry so far this year.
Long may this run continue......

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Jonathan C 5th Jul 30 of 30

In reply to post #490211

Yes, I like gold producers with a dividend yield, though the yield is compensation for enhanced risks like seizure of the mines by the local government, e.g. Caledonia Mining (LON:CMCL) or Highland Gold Mining (LON:HGM). Caledonia Mining (LON:CMCL) (yield 4.7%, trailing P/E 6.16%, ROCE 23.7%) says that it is on track to produce 80,000 ounces of gold per annum by 2022, up from 53,000-56,000 for the current year, thanks to the sinking of a new shaft; surely worth a punt.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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