Small Cap Value Report (Mon 26 July 2021) - SAG, CNIC, XLM, SUP, ATQT

26th Jul '21 by Paul Scott

74 comments 11686 reads

Good morning, it's Paul & Jack here with the SCVR for Monday.

Timing - TBC

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker.

Agenda -

Paul's Section:

Science (LON:SAG) - decent H1 results out today, with profit about 4% ahead of recently raised guidance. Looks a very nice company, trading well, and still reasonably priced.

Supreme (LON:SUP) - This is an interesting recent float, with the high energy CEO with a 57% stake certainly coming across as an effective entrrepreneur, very much what I look for.

Attraqt (LON:ATQT) - Half year trading update. Seems to be slightly below expectations, which looks to be a little below breakeven. Not sure why it commands a valuation of £81m.

Sunday papers - a few interesting stories with relevance to investing caught my eye.

Jack's Section:

Centralnic (LON:CNIC) - revenue ahead of forecasts but profits to remain 'comfortably in line' due to ongoing investment. There have been a lot of acquisitions here, along with equity dilution, but the group is growing and its valuation is becoming more attractive.

Xlmedia (LON:XLM) - in line update. Casino vertical continues to suffer but registering growth in European and US sport. There's execution and integration risk in the turnaround strategy, as well as business model risk (responsible for previous setbacks in share price), so I'm happy to sit back and wait for more detailed results and management commentary.

Paul’s Section

Science (LON:SAG)

420p (Friday’s close)…

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timarr

26th Jul '21

Indeed, loss aversion ... but why? Why are we keen to limit gains but not losses?

The point is, I think, that we don't like taking a loss. We keep losers so we don't crystallise a loss and we sell winners so we're guaranteed a profit. The research in this area shows that losses cause physical pain and that losses hurt twice as much as gains give us pleasure.

It's a fundamental behavioural bias which spills over into all sorts of areas. It's also been seen with golfers putting for par or birdie, for instance. In the same situation they make more putts for par (avoiding the pain of a loss) than they do for birdie (achieving the pleasure of a gain).

The problem is that in investing it tends (on average, over time) to be the wrong thing to do. Loser stocks will tend to keep on losing and winner stocks will tend to keep on winning (albeit with lots of volatility along the way). And while you can only lose 100% your gains can go to infinity.

Broadly, selling a stock for no other reason than its made you some money doesn't make any sense. Obviously if something fundamental has changed about its business model then that's different. And, of course, most of us will sell when we see a market crash looming - but probably we shouldn't.

MichaelFBS

Excellent pre-amble on "The Sundays".

TBH I don't mind what issues you raise here (whether it's Covid, Boohoo (LON:BOO), Next (LON:NXT) or some other random subject) it is always an interesting take on the subject.

Thank you.

Regards

Michael

I will never know as he blocked me when I gently pointed out last March 2020 that him carping on how clever he had been to do x y and z in the market was not exactly helpful to those who had been less fortunate!

ken mitchell

Strongly agree with you MichaelFBS (about not minding about what issues Paul raises here). His views are always a great read and are often helpful from investment decisions angle too.

I hold Boohoo (LON:BOO) from 37p (with a short hiatus last March) and think that while £37 might be a stretch, with a world apparel valued at around $1.5 trillion in 2020 and is projected to grow in value to about $2.25 trillion, Boohoo has a lot of headroom.

Boohoo's revenue last year was £1.75 billion. Could they capture 1% of world apparel trade? Perhaps not, maybe 0.5%? Inditex 2019 (pre-covid) revenue was €28.2 billion so about 13.9 times Boohoo (LON:BOO) and their net income €3.6 billion.

I have no idea but I think Boohoo (LON:BOO) will be mulitples larger than it is today and see no reason why BOO could not grow to that scale.

My apologies for the Boohoo comment. I know they are not meant to be posted here.

Bonitabeach

Let’s hope that his advice is better than his spelling

Mark Miniverni trying to persuade us that we are 10 times more capable than we think we are strikes me as a recipe for disaster - certainly in my case.

Where does he get the figure 10 from? Number of digits on both hands? His house number? His bag of bingo balls?

Still it is gaurenteed so it must be true.

cmpeckham

Indeed, I'm familiar with all this stuff, but again ... why? Why should losses be more important than gains of equal financial value? Why should crystalised losses count but not uncrystalised losses? Kahneman and Tversky didn't say (aside from some conjecture) and without that understanding you're not much closer to being able to cut your losses and run your winners because you don't fully understand your behaviour (for "your" read "one's").

There are no definitive answers, but the best explanation I've seen tied it to the same underlying mechanism that makes it difficult for us to change our minds, as explained above; and the way to beat that is to cast aside the automatic thinking that a sale at a loss is linked to a confession of error. Think like a casino instead.

Anyway, the same mechanism is also partly responsible for the fact that you can't persuade someone of something they don't want to hear. So I'll leave it there.

... the way to beat that is to cast aside the automatic thinking that a sale at a loss is linked to a confession of error. Think like a casino instead.

The "confession of error" concept by Phelps is a general thing. He's not saying you shouldn't sell. He's saying that if you do sell you've made an error in the purchase, because the ideal holding time is forever - aka a coffee can stock, to bring us full circle to the OP.

So work out what the error was, and try not to do it again.

Wouldn't work for me, but I thought it might be interesting for the board to know where the 100 bagger thing came from.

timarr

nanotrader

The 75% payout ratio made me sell out, just a cash cow really so shouldn't attract a high rating

Wilbraham

I know it's completely irrational, but I find having to confess to one's accountant that I've crystallised a major loss (in a taxed account) is much harder than taking a loss in a SIPP/ISA.

Perhaps those with partners have a similar psychological block to fessing up to losses? (I've no idea how frequently people here discuss their performance with other halves, but several claim to manage funds on behalf of spice, parents, children, pet goldfish......)

Donna1

Tks

Brilliant Leader

It is an interesting perspective that Fonix Mobile (LON:FNX) is “just a cash cow” (i.e. ex-growth). You could be right. My take is that they have already built and developed their platform and growth will come from a) plugging new customers into that platform and b) geographic expansion (which they plan to do in conjunction with existing customers). If they can continue growing they are looking cheap but if they really are only a cash cow, then I agree, they wouldn’t deserve a premium rating. I hold and am backing the growth thesis.

Cheers
Simon

I agree with what you say.

As for Phelps; "He's saying that if you do sell you've made an error in the purchase, because the ideal holding time is forever ... So work out what the error was, and try not to do it again."

I disagree with that. The world is very random. You can make a faultless stock selection and lose the lot. Every year someone will lose 30% of one or other position, through no fault of their own. This is a far bigger factor than errors in stock selection for those of us who follow a method.

When I've sold at a loss, I've considered why I've lost. Sometimes there are lessons to be learned, but often I know that if I had rejected the stock due to reason xyz, then I'd have rejected a bunch of winners for the same reason too. Sometimes the risks materialise, sometimes they don't. That's out of my control.

That's reality for me ... and if someone else's holding period is for ever, 100 bagger style, then their exposure to sheer random chance is dramatically higher than mine.

Westway001

Perfect!

SundayTrader

re TP (LON:TPG), you are quite right, guilty as charged of reading the balance sheet figures too quickly. Given the loss-making history, I would have thought it difficult to assign any value to the intangibles.

bullhead

Had an interesting chat with a friend this lunchtime that highlighted a few of the problems with the lock down and the long term costs on the nations health one was the death of a mutual friend who had died after trying to see his doctor for a couple of months his GP like quite a few others was only doing online consultations in the end he got so bad he went to A &E unfortunately he died with a month wether he could have been saved by an earlier diagnosis we will never know he was a very good man and I will miss him may he rest in peace

The other subject that came up was the hospital my friends wife who is a nurse works in has had a huge surge in young people with a range of problems from self harm, drug abuse , alcohol abuse and mental health problems

As a farther of young children and older children the way we sacrificed the young to protect the old leaves me sad i don’t believe we have done this before in my life time anyway I would never put myself before my children and find it hard to believe many on here would put them selves before their children and grandchildren

rmillaree

27th Jul '21

I think the balance here bullhead is that we have never had a pandemic like this in the last 100 years.
Also not to dismiss the sacrifices made by any but the whole population having to spend a year or so in the house compared to the tragic amount of youths that died in either of the world wars puts things in perspective to me ref sacrifices being made. hopefully now as things stand though the young can now start to get back to a semblance of normality.

Oh I’m not comparing the sacrifice of the young today to the world wars

But this time is different in that the media has done everything it can to terrify the young I don’t watch the news at all anymore and feel a lot happier for it the young can’t escape the constant barrage of negative views which leave them feeling isolated and afraid when really they have very little to be worried about from catching covid

TangoDoc

Sad about your friend. What GPs have been doing has been triaging cases on the phone and only meeting face to face where that was clinically necessary. None I know have only been working online though I know that has been alleged in the media. A huge problem for GPs was being obliged to deep clean any examination room after each patient was seen so as not to cross contaminate other patients.

I understand what you are saying about the generations but, unless we accept a policy that we don't admit to hospital anybody extremely ill with Covid over a certain age, the major risk to all of us, at whatever age, is that we allow Covid to infect so many at one time that there are no beds available when we are in need of critical care for all the usual non-Covid reasons. My son is a Covid ICU consultant Anaesthetist and what he tells me about bed occupancy and staffing levels is very scary. We must all take all the care we can in the community to avoid wrecking the system we may then need at any age.

All I can tell you is what the guy who died told me a few weeks before he died and that was his GP would not see him face to face and he was forced to go to A&E and that’s the truth if you don’t want to believe that’s what happened then that’s up to you

I know a number of doctors and nurses too including one who works in ICU and they tell me a very different story than what you are telling me is the case at the moment maybe it’s down to different hospitals ?

Cases are falling over 90% of people have antibodies from either vaccinations or from catching covid over half of people in hospital with covid caught it in there

Spending your life cowering away hiding from the world outside is no life

Life is for living

Small Cap Value Report (Mon 26 July 2021) - SAG, CNIC, XLM, SUP, ATQT

Paul’s Section

Science (LON:SAG)

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Paul Scott

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