Small Cap Value Report (Mon 16 Dec 2019) - FUL, K3C, VANL, STU

16th Dec '19 by Paul Scott

43 comments 10440 reads

Hi, it's Paul here.

Estimated timings - I awoke today feeling uncharacteristically perky (not being a morning person). Therefore I'm hoping to have this report finished before 1pm.
Update at 12:59 - sorry, I got so bogged down in FUL that am running a couple of hours behind schedule. Revised finish time of 3pm - it has to be done by then, as I have to walk into town to get an Xmas present for my nephew, and have a beard trim.
Update at 14:33 - today's report is now finished.

Remit of the SCVRs here

I thought it might be helpful for new subscribers here, if I explain our remit.

Graham and I review typically the 4 or 5 most interesting trading updates & interim/final results statements, announced on the day, from small caps [which we define here as c.£10-400m mkt caps]. Sometimes we stray outside of that size range if we see something interesting (e.g. being an ex-CFO for a ladieswear retailer, I like to look at my 2 favourite retail sector picks, Boohoo (LON:BOO) and Next (LON:NXT) results statements).

We cover about 500 companies in total, excluding these sectors: natural resources, pharmaceutical/biotechs, insurance, anything wildly speculative/blue sky, and anything else we don't like the look of. Also, I don't tend to cover financials but Graham does. I might start covering financials in 2020, to eliminate that anomaly.

Since we cover so many shares, please understand that we're just reviewing the figures & commentary. The idea is that readers might then like to do your own more detailed research on anything that catches your eye. The idea is very much that readers DYOR (Do Your Own Research).

We are NOT share tipping! Hence you will never find buying advice, or buy/sell instructions here. Graham and I are both professional investors, sharing our research & views with you. We disclose if we have a position in a share.

We're independent! We never accept money from companies to give a more positive view on them.

Like all other investors, we make plenty of investing mistakes - missing opportunities, and sometimes buying shares that do really badly (that's been my personal speciality in the last 18 months!).

I think our main achievement here over the last 6 years, has been to steer our readers away…

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FREng

16th Dec '19

Paul, either your profile picture is out of date or you would be wasting money paying for a beard trim.

bryans1311

Personally i had about 30% cash and have already used it mostly to top up existing holdings (what i know best). It's not just our cash that's finding its way back into the market though. i suspect a lot of international cash will too (you can already see that with strength of GBP). I expect this to continue for a while as value hunters become growth/momentum hunters. It's incredible how much catching up we have to do still.

EmptyPockets

Hi Paul & Graham,

Don't usually comment here but enjoy the SCVR a lot.

Before you get inundated with 'Best Wishes for Christmas & the New Year'. I would like to add mine and thank you both for all your hard work over the past year and look forward to a successful 2020 to you both,

Happy Christmas and a Peaceful New Year.

hayashi22

As it's a bit slow news wise I will drop this in on the immigration debate.
Brixton market in London..Mexican restaurant. Bit of Dad talk to the pretty waitress.
'So which part of Mexico are you from' (said Dad having been there on business/pleasure a few times)
'Oh I'm not from Mexico I'm from Colombia/Venezuela/Ecuador.'...can't remember which
' that's interesting how did you manage to get over a job over here.?'
'It's easy enough to get to the UK..everyone has relatives in Spain ...if you know what to do when you go to Spain you can get a Spanish passport in around two years. Once you have that then you can live anywhere in the EU'

good luck to her ..but it's the true life version of immigration which you never really see reported in the media.

Marcus Pugh

Does that mean there will not be multiple tweets from you when you've had a few too many drinks?

abtan

Genuine questions:

1) Why is there an assumption that money will flood back into the UK after the recent election? Isn't there still much uncertainty over the next 12-18 months?

2) Why does the UK market appear to be cheap to some? I personally don't find it easy to find a "cheap" + quality stock, or at least UK companies weren't coming up more frequently on my various Stockopedia screens (hence my recent upgrade to European Stocks).

Could it just be that US stocks are expensive, therefore making everything else look cheap? Or perhaps my criteria are just too stringent?

Thanks in advance

I go touring to Eastern Europe frequently and small villages in Bulgaria have depopulated and are left with just old people and fewer doctors to care for them as they've gone West. People here are always on about we rely on EU people for our hospitals and caring etc. but don't seem to realise to the detriment of others.

That's a good point and something rarely pointed out by those on the left of the political spectrum.. Poor country trains up medical staff/doctors/nurse who then leave for a richer part of the world. Is this a good thing or a bad thing.?
Looks like the NHS is now a sacred cow and therefore not subject to reform..it is in fact hugely inefficient/bureaucratic. In my experience it greatly favours huge US multi-nationals ..initially because they bribed doctors/consultants/purchasing staff by offering freebies (overseas conference in Thailand anyone....all on expenses). Since that got chopped the big fear for hospital buyers is change. Buy some cheaper British made forceps from a small UK producer and something goes wrong in the op.then the lawyers will be all over it. Why bother...just stick with the big established US supplier.
What irony...again never really understood by the Islington lefty types.

Gromley

Indeed (re the movement of young people from the East to the West), this one of the big issues I always had with freedom of movement of labour across such an economically diverse continent.

I remember seeing one of the Sunday morning politics shows a good few years ago where Jack Straw (I think it was) and a conservative (predecessor or ante-cessor can't recall which) agreeing that the increase in immigration was a good-thing because it had helped to redresss the imbalance between working age people contributing to the state pension pool vs older people drawing down from it.

But as you observe, it has exactly the opposite effect on the 'donor' countries. It is a source of puzzlement to me that it seems to be the 'poorer' countries that are most in favour of freedom of movement of labour (within 'the club') when it is actually against the interests of their economies.

On a related note, and pointing back to the discussion on the potential shortage of cheap low skill labour, it seems clear to me that the influx of low cost labour over recent years is a major factor behind the much vaunted "productivity gap" here in the UK. Also I would argue it is part of the reason for over-capacity in sectors such as casual dining and also is the reason that home delivery has become so cheap as to decimate the high street.

I honestly do not know how profound Brexit will actually be on immigration and movement of labour, but I do think it could cause significant short term damage to some sectors, but over the medium term encourage innovation and rationalisation in the domestic economy.

Hopefully I managed to just about squeeze this into the investment remit of these discussions.

;-)

Trident

The Govt set out a policy of encouraging small companies to get involved in Govt contracts, and may be there has been some improvement, but when it comes to it, big understands big, and small companies find the weight of compliance and other guff somewhat overwhelming, as Govt and indeed most large institutions apply tick box regulation, because Politicians and regulators create a punitive environment to show they have done something.

Most big entities can cope with it, because they can afford their own compliance and technical resources.

GTrader

Paul, I own a company being "sold" by K3 Capital, 2-3m window. They have been excellent from the off with a steady stream of investors and a number going to DD and offers. They also offer to manage the legal side of the deal via Gateley. Happy to discuss more.

mojomogoz

Laney, do you own £K3C too?

I've met mgt a couple of times and I think they are good...and hungry to so more/better.

MichaelFBS

Thanks for the shout out Paul!

Beginner

Historically poorer countries are generally happy to encourage emigration on three grounds. First, emigrant remittances provide a very valuable source of revenue (in the 1890s they provided over 20% of funds spent in Ireland). Secondly, the the decline in population frees up domestic resources for those remaining, be it land or government services. Thirdly, migration offers a safety valve for politically unstable regimes, drawing of the discontented and disappointed.

As a side effect emigration also drains away the industrious, the dynamic and the motivated.

Paul Scott

17th Dec '19

It was just a bit of fun! ;-)

jwebster

1) Why is there an assumption that money will flood back into the UK after the recent election? Isn't there still much uncertainty over the next 12-18 months?

The assumption is international funds will buy UK stocks based on yields and lower PER ratios, given they are cheaper than USA markets, effectively repricing out the discount for political uncertainty. But, your second point is correct, the details of the final deal with the EU will unfold between now and July and markets will move on news flow. So the repricing upwards we have seen is a receding of political risk, not a full removal. Also, any impact will vary by industry and whether earnings are generated domestically in the UK or overseas, so a few moving parts. For example, Rio Tinto's revenues are derived outside of UK-EU in USD but it's stock price quoted in Pounds will vary based on the £ fx rate. In contrast the revenues of Lloyds Bank are tied to the UK economy not the £ fx rate.

Why does the UK market appear to be cheap to some?

High yield, both on a dividend and earnings basis.

Could it just be that US stocks are expensive, therefore making everything else look cheap?

Yes. But tricky part of the equation is growth. Much of the UK FTSE100 is high dividend, ex-growth, mining, financials, consumer stocks, cyclicals. Whereas in the USA you have companies with growth. So you would pay a higher multiple for a stock you expect to grow.

Of course, the likes of Warren Buffett advise to buy good growth stocks, but at a reasonable price, so you have a margin of error. The challenge is to find them.... :)

Personally, I have taken profits on small UK stocks I held on a value basis as they don't look so cheap now, but kept the small-cap growth stocks and also large caps, on the basis funds flows will goto large caps first and also any growth should pay.

I have bought US stocks, as I think Trump needs to win the election in Nov and the Fed has quietly restarted QE injected funds into the REPO market. More liquidity needs a home.

No, but only because I keep my holdings 8-12 and they remain on my monitor list. I run a double filter, one Buffet like (must pass) and one O'Shaughnessy like qvm (90% rulz pass). K3 albeit a good forecast return, not sure if EPS growth or ROE are sustainable, would need a lot more small/meds deals but they are the go to, so 5 years of conserve gov will see a lot more deals IMO. My flags are F-score only 4, also last couple of years OPsCFps lower than EPS (not big gap). Seeing them in action is very useful (qual) insight but they still need to pass my (quant) rules to deploy funds.

I know!

I was chuffed that you have even noticed me. I used to be on twitter/watch the news/read the ft/read the Guardian/listen to Today and it screwed with my head (don’t think I am alone). Was off all of those for about 8 weeks and have only dipped my toe back in the Ocean (or should that be mire) that is Twitter but have muted B and J words amongst others and still enjoy the Fintwit community there.

I have you to thank for Globo (out with small profit just in time) and Boohoo (LON:BOO) still in four years on with my first purchase up 7 fold and the profits on Boohoo (LON:BOO) representing 24% of all portfolio gains.

Snoo

NMC Health (LON:NMC) still falling.

Can't see why they have not even put out a holding RNS like Burford did. If there isn't one tomorrow you'd probably think the falls might continue.

Can you buy shares in Muddy Waters? Seems a licence to print money if you were them.

20th Dec '19

Hoorah! Well done :-)

Small Cap Value Report (Mon 16 Dec 2019) - FUL, K3C, VANL, STU

Remit of the SCVRs here

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Paul Scott

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