Small Cap Value Report (Mon 11 Jan 2021) - JD., CALL, IDP

Interesting times for Tesla shares. The stock has had a massive runup from about $650 in late December to $882 yesterday. It fell 7.8% today. Legendary investor (is it OK to call him "legendary"?) Michael Burry announced he was short in early Dec 2020.

So whatever happens, it will be interesting!

Held Venture Life (LON:VLG) in 2020 on trading update & sold on half year results.

Clearly some capable investors like it a lot but they do capitalise an awful lot of development spend for a company that buys heritage brands that are ready to go to market. Not to mention receivables - pretty easy to increase sales if customers don't have to pay you.

Mid market fund raiser after a rampy CoVid announcement (study sponsored by Venture Life (LON:VLG) ) & from my untrained eye Dentyl wasn't doing much that other mouthwashes don't do just creates more doubts.

Maybe I am being overly cynical or just an embittered ex holder - reading financial statements seems to be hazardous to your wealth in this market.

But if shareholders are happy to finance ever higher adjusted EBITDA, who am I to judge.

Thanks Paul,

I'd quite forgotten that exchange re Innovaderma (LON:IDP)

Was it really 2019? Whatever happened to 2020? 

Oh yes - THAT!

A useful reminder of some of the things to look for - as I commented at the time I wasn't too concerned about the points you raised and don't really think that any of them have played out negatively.

Except - I was comfortable with the intangibles (capitalising the cost of customer acquisition) :

1. Because even if excluded they were still modestly profitable during a growth phase and 

2. Because the cost of customer acquisition (mostly via social media) was real and quite high but once a acquired repeat business could be generated at zero marketing cost (email). In fairness I think I only understood that second point fully a couple of months later when Kieran Callan spoke at MelloBASH.

This second point is interesting in that I believe they are about to write down these capitalised customer acquisition costs. Essentially, as I mentioned earlier it looks as though conclude that they will have to spend to "reacquire" these customers all over again once fake tans come back in vogue.

I'm not so sure on this point, so long as they have retained the right to contact these people (Data Protection and all that) then I think a "Hi remember us?" email might be quite impactful.

It will be interesting therefore to see the scale of the write downs and the market reaction to them. I think the market reaction will be adverse (particularly if the write downs are especially large, but I think that may be an over-reaction.

I watch with interest and thoughts about a possible second bite at the apple.

As I've learned the hard way, position sizing is everything with shorts - i.e. I keep them relatively small, so a big drawdown doesn't hurt too much.

Doublelutz - The Mello evenings are recorded - you'll need to register  ( and pay up) then in a day or two they will send you link to access the event.

doublelutz and all.....yes every show is recorded and the ticket holders get the recording about 24 hours later once any pauses/gaps in filming have been removed but they do tend to run smoothly tbh.
The big bonus is for annual pass holders as anyone buying one of those gets all the eight recorded shows so far and also the 20 plus shows that will take place during 2021. There is an offer currently running for £10 off those if you use the code APXMAS10

I see Tesla are up another 8% today. I read recently that Tesla shares and BTC / other cryptos are now the main destinations for the stimulus checks (sic) being issued by the US government! 

But I suppose all this newly printed money has to end up somewhere.

Hi If you subscribe to Mello they release a video of the event a couple of days afterwards to watch at your leisure.

Paul - are the Mello talks recorded for viewing later please? Parts would be of interest to me but there is no way I can watch for 3 hours. I am too busy this week.

Yes - u get sent a link to rewatch it as many times u like - I think the next day 

"I would never have listened to Taylor Swift until he suggested it last week!"

Blimey Michael - what planet are you living on??

That has put me right off.

Here is Mark's biography from when he was appointed as an Innovaderma (LON:IDP) non-exec https://www.stockopedia.com/sh... I am fairly sure he is also the Revolution Bars (LON:RBG) shareholder. He built up and then sold a business, so he will have amassed significant capital. I don't hold Innovaderma (LON:IDP) currently and it seems something of a gamble until the board has settled its refinancing plans (the director loan and any equity raise). I wouldn't invest until those were known.

Hi shanklin, 

I also read that 2 American companies are potentially interested in buying TopShop. Maybe BOO should bide its time, and just wait for it to go bust again under new owners in a couple of years' time?  I think overseas investors often over-estimate their ability to turn around problem UK businesses. Look at those clowns who bought Homebase a few years ago. Or another set of clowns that bought Quindell.

Thanks for the article about Next, really interesting. I've been very keen on Next shares for several years now, but foolishly sold out too soon. Can't bring myself to buy back in now it's risen so much.

Regards, Paul.

I know, Quiz (I hold) is very high risk compared with the others you mention. It's a special situation really. But having ditched the loss-making stores, and got the rest onto turnover rents, then it should be in a good position once restrictions are lifted (Easter seems to be the best guess at the moment). Plus its specialism in special occasionwear should see lots of pent-up demand. Plus remember that QUIZ has a highly developed online offering.

Quiz is still in the game, and the founders own c.50%, and are loaded (they got nearly £100m from part-selling in the IPO). Hence I doubt it's likely to be allowed to go bust, as a matter of pride. Cash burn has been quite modest since the pre-pack administration, and it has no debt.

Could be an interesting one, but definitely not for widows & orphans.

Best wishes, Paul.

Yes, but as someone has mentioned on this link, the FCA only publish shorts of 0.5% or above so even the 0.2%'s  are not shown let alone the 0.1%'s unless they change their policy.  Actual shorts are often far more than those published.   There are also the shorts placed by punters on cfd's probably not taken into account

Thanks andrew,

Yes I've got a lot riding on Boohoo (LON:BOO) (I hold) as by far my largest long position.

What I'm expecting/hoping for is - continued strong trading. Some additional costs from ESG supply chain stuff, also additional costs from freight & dispatches - a generic problem at the moment. Probably not much supply chain disruption due to clogged ports & sea freight, because a high-ish proportion still made in the UK.

International growth is also important, especially in the USA market.

Will be interesting to see what they say about more brand acquisitions - e.g. TopShop. I feel TopShop could be a good brand acquisition, although it's lost a lot of its sheen from the glory days of the 1990s.

I think the ESG impact has probably run its course now, as surely by now anyone wanting to sell because of that issue, would have done so? It's quite liquid after all. Once the issues are more publicly resolved, then of course we could have a wall of ESG buyers wanting to get back in again, bidding up the price hopefully! Also, by now, I imagine BOO shares would have attracted a fair bit of attention amongst US investors, who would likely regard the stock as very cheap, compared with  the bonkers valuations put on growth companies across the pond.

Fingers crossed!

Regards, Paul.

I struggle to make shoes or trainers last much more than a year.  I used to get Doc Martins, but these don't  last.   Makes you wonder if the recognised brands are just using the same far east clothing/footwear sweatshops as unbranded.

So I can easily see why there's ongoing demand for cheap n cheerful clothing and shoes from Primark/Boohoo etc.   Not exactly fitting the eco agenda, but maybe what the average purchaser likes.

I reckon trainers last about 6 months, but I am about 93kgs and they are designed for someone of 70kgs, I also have long term knee damage hence recommendation to always have good cushioning for pavement pounding (thank you to Michele for that lesson and the leave the work shoes under the desk every night that way you can have really nice leather sole ones and not worry about it raining outside!) and about 4 months in do a check and walk with the old trainers and new trainers straight afterwards to see if I can notice a difference, when I do, the old ones go in the Charity Bin at the local Co-op.

So good luck if you can make the last ages, I am just a high mileage non-standard model even if I class as vintage!

Hi JohnDoe2378,

Thanks for flagging up the update from Science (LON:SAG) - I somehow missed that on my first trawl of the RNS. So yes, I'll take a look at this one next, it looks good.

Best wishes, paul.

Hi Camtab,

Yes I agree with that, I normally avoid IPOs too, as so many of them seem to go wrong, often in the first couple of years.

I think brokers like to under-fund small cap IPOs, so that they have future fee income lined up from placings. Trouble is, that acts against the interests of the initial investors.

If investing in a new listing, I would want reassurance that it is fully funded, for the next 5 years, on a pessimistic but plausible downside scenario.

Regards, Paul.

Morning tomhurst1,

Gamma Communications (LON:GAMA) is £1.5bn market cap now, and in a sector that I don't really understand or have any insights in, so i'll pass on that one. Sorry about that.

Regards, Paul.

jonno,

You have an hour from posting a comment, to be able to edit the original, which is better than putting up an apology/correction additional comment.

Regards, Paul.

Hi Jonno, I take it you meant Sig (LON:SHI) as opposed to Signature Aviation (LON:SIG) , fortunately the confusion is about to end as Signature Aviation (LON:SIG) will be taken over before long!

Peel Hunt have SIg trading on circa 16x PE for 2023 with a margin assumption of 2% vs the 20yr average of 4.6%.

They haven't upgraded numbers on the back of today preferring to be cautious though clearly the company expecting to grow sales. Post the raise the balance sheet is clearly much better.

On a 5% margin I'd expect it to trade at circa 0.5x sales historically. On sales of £2bn you'd be talking a share price closer to 90p.

The pe outfit who have bought in at 25p have also just acquired the Wolseley UK business in the divestment from Ferguson. 

I suspect the downside is limited because of the corporate angle with potentially decent optionally around better trading. 

I do hold

I’m very new to this type of investing but have recently bought some SIG shares.  I worked for the company in the U.K. Sheffield Insulation’s division 14 years ago and they were very dominant in the market. They had a lot of clout with their suppliers and always bought better than the competition.

I couldn’t believe how low the share price had fallen. It seems since I left they’ve lost their way a bit.  However they are still the dominant player in the insulation market despite this. If they turn things round I feel there is plenty of upside.

Given the huge upturn that I feel is not that far away in the construction market and the green agenda I think there’s every chance they’ll do very well over the next 5 to 6 years.

I’ve invested 100% in buy to let property up until now (I don’t want any more tenants) and my reading of the property cycle indicates strongly that shares in the construction market sector should do very well just like they did in the last housing boom from 2002 to 2007. I’m hoping 2022 to2027 will see a similar excellent performance if this current cycle plays out like the last one. So far all indications are that it is.

It would be nice if they could at least check what they post for errors and use of English in the normal way.

Take this in the update from Directa Plus (LON:DCTA)

“ We have been requested to raise to 2000 metres per month the production capacity in 2021.”

Confusing metres and metric tonnes is abysmal. I’m not a particular stickler for grammar etc. (What’s considered acceptable grammar is changing all the time anyway). But you really do get the impression that this was written very poorly and no one bothered to check it before releasing it.

at the prices it was trading at earlier this morning, I'd say this was overly-discounted.

Using AJBell (for my sins), I was unable to purchase any at all (limit or quote) and missed a predictable 15-20% bounce, whilst IG was happily offering me quotes at the desired quantity.

Another issue is the change in regulations whereby HMRC now requires retailers based abroad to collect and remit U.K. VAT on all direct shipments to U.K. customers.

For example a number of bicycle parts suppliers have stopped direct internet sales from Europe to the U.K. Parts are still available from U.K. distributors.
I noticed that AliExpress are now charging taxes on U.K. orders.

Hi Stevenlondon3,

Yes, I've seen similar announcements from lots of retailers & eCommerce businesses (in trade press articles, like drapers record), saying that they won't be shipping goods to N.Ireland or Europe for the time being, until restrictions are sorted out.

Also, press articles recently saying the French ports are not happy with poor paperwork from UK exporters, and are about to clamp down.

So I imagine we're likely to hear continued news items about teething problems with the new arrangements. Hardly surprising, as it was all agreed at the last minute. My feeling was that Brexit would probably cause 3-6 months of chaos, then everything likely to settle down. Pleasantly surprised so far, but let's not jump the gun.

Also as JohnEustace says below, some EU companies are now stopping shipments to the UK for low value items, as not worth the hassle. I suppose if they want to trade in the UK, then they might open UK subsidiaries. That's how UK companies are getting round restrictions - many had already set up subsidiaries within the EU.

Regards, Paul.

Not sure why thumbs down. I agree but maybe they are obliged to?  

I don't think Edinburgh Investor is complaining about £BOO  so doesn't really merit the two down ticks shown at present.  He is reiterating what Paul said the other week where RNS's have to be issued showing small changes in holdings when often those holdings go up and down like a yo-yo.  Year's ago I decided to monitor changes in institutional holdings and what a waste of time that was with increases and reductions from the same holders on a weekly basis.  I think I gave up when an RNS referred to a transaction on, say, 3rd February and a few days later there was an RNS referring to an earlier  transaction on 1st February in the other direction.

I agree, those RNSs from Morgan Stanley re Boohoo (LON:BOO) (I hold) every day are such a nuisance. There must be some technical reason why they have to be issued. I have to check them every day, just to make sure it's not something more important. Grrrrrr!

P.

I had thought Octagonal (LON:OCT) would be my worst investment of 2020 but the positive update today gives some hope. BBs are full of vitriol for the boss and majority shareholder. I was lucky to escape from Wirecard before the meltdown but can't win them all I guess.