Small Cap Value Report (Mon 7 Sept 2020) - SRC, UPGS, SLP, BLV, SPSY
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A lot of the time, the findings that go into financial studies and the rest are actually based on quite short data sets in the grand scheme of things. Perhaps 200 years max of good data.
That means some of the investing truths we take for granted can rightly be called into question from time to time as conditions change.
One bit of news that caught my eye over the weekend was that Warren Buffett has apparently invested more than half a billion dollars into Barrick, one of the world’s largest gold miners, while selling down holdings in banks such as Wells Fargo, JP Morgan, and Goldman Sachs.
Here’s what Buffett (allegedly) said about gold in a speech at Harvard in 1998:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
It seems like that stance has changed slightly. Another quote that is tricky to attribute: ‘When the facts change, I change my mind - what do you do, sir?’
It reminds me of efficient versus adaptive markets. Efficient markets was an academic idea that implies it is impossible to ‘beat the market’ consistently on a risk-adjusted basis since market prices should only react to new information. Most subscribers will not recognise this description of the markets. EMH has had its day in the sun.
Adaptive markets is a more intuitive idea which acknowledges that unknown human variable, suggesting that conditions evolve as competition, adaptation and natural selection do their thing. Things change and some ‘fundamental’ financial truths actually have an expiry date. Think of how hard it can be to describe software and IT values using traditional price to book metrics, for example. The world has moved on from Benjamin Graham’s world of deep value.
It’s worth bearing in mind that one of Buffett’s first big investments, and Berkshire’s namesake, was an on-its-knees textile mill in 1962. The Omaha got in just as the world was changing and those old US textile mill economics no longer stacked up.
Thankfully he saw the writing on the wall and got into insurance instead and the rest is history. Decades later he would call Berkshire Hathaway the ‘dumbest’ stock he ever bought.
I won’t interpret Buffett’s move into gold - I’ll leave that to the man himself to explain in due course. There are probably already hundreds of articles online putting words into his mouth about it.
I just thought it was an interesting bit of news given last Friday’s preamble about potential changes in market dynamics. Once they are identified, they can run for months and years because the forces driving them are just so big.
Couple that with the long-held idea that the market can be slow to price in improving prospects, and you have some potentially lucrative themes to start investigating.
Sigmaroc (LON:SRC)
Share price: 48p (pre-market open)
No. shares: 253.7m
Market cap: £121.8m
(I hold)
There’s a tsunami of RNS statements this morning. First up is Sigmaroc (LON:SRC) - I made an initial buy after doing some work on the company here. It’s a buy and build strategy in the construction sector, rolling up uniquely placed assets such as quarries and assembling them into local clusters (or ‘platforms’).
The theory goes that assembling assets previously neglected by larger global companies and pairing them up with complementary businesses should unlock further value. The management team seems experienced and has worked together before so I’m curious to see what can be achieved.
Since the group is rapidly assembling new businesses that makes for a lot of adjustments and underlying figures in the accounts. It’s the nature of the beast right now unfortunately. Bear in mind, as well, that some particularly large and transformational acquisitions were made last year in the Benelux region, funded mostly through debt and equity.
Highlights:
- Underlying revenue +83% to £54.5m
- Underlying profit before tax +51.4% to £5.3m (non-underlying +126% to £3.5m)
- Underlying earnings per share +0.5% to 1.98p (non-underlying +54% to 1.17p)
- Cash and equivalents +380.5% to £17.3m
- Reduction in net leverage across the first six months of the year
- Option to acquire the remaining 60% of GD Harries exercised in August 2020, funded by SRC’s own cash reserves for £7.3m
These results are all stated before acquisition and reorganisation-related expenses. The difference between profit and EPS growth is a bit of a concern - if you fund acquisitions by issuing more shares, you need to make sure those acquisitions will be suitably EPS-enhancing. You can see the share count has been going up.
The last bullet point is significant though - GD Harries is one of Wales’s largest independent suppliers of aggregates operating out of six quarries. So that’s quite a significant asset now wholly owned by SRC.
Previously SRC had a 40% interest in GDH which was equity accounted. This means it provided minimal contribution to group results due to accounting standards but should now provide a meaningful contribution to the Group's results going forward.
Operating performance
Ronez (Jersey and Guernsey platform) - a strong start to the year before mixed fortunes post-lockdown, with Guernsey operations halted for a month but better fortunes in Jersey. ‘Near-normal’ trading was resumed by the end of June. The outlook for H2 is ‘promising’.
SigmaPPG was up 26% year-on-year in Q1. Sales fell in April but recovered in May and June.
Benelux - a similar pattern, with demand down in April but recovering in subsequent months. Sales for the 6 months to June 2020 were 10% higher than the six-month period to June 2019 - a good result. CdH is one of SRC’s biggest assets and there is promising growth potential here. Work can be done to get more favourable terms for aggregates production which presents and there is the potential to bring Bluestone to the UK market.
GDH faced some stronger challenges but remained largely operational.
Outlook
Trading for July and August saw ‘normal seasonal reductions in activity’ in SRC’s European operations. Aggregate demand for CDH is encouraging coming out of the summer holiday period as is the residential market order book for Bluestone. Visibility over Belgian commercial and public sector Bluestone demand is more limited and so demand patterns for the fourth quarter are more challenging to predict at this stage.
Ronez continues to see an encouraging rebound in Jersey, supported by a solid order book into Q4, but with a slower return of activity in Guernsey.
SigmaPPG performance remains strong with supply into a number of high-quality infrastructure projects.
The recovery in South Wales has continued with the order book now benefiting from some significant project work and the Group will look to begin implementing further efficiency initiatives in the business having acquired the outstanding 60% interest in GD Harries in August.
Here’s a key bit:
On the basis of no further significant impacts on the Group's markets as a result of the pandemic, the Board expects the recovery trends experienced through the third quarter to be maintained over the remainder of the year. As a result and with the benefit of the GD Harries acquisition, the Board expects 2020 financial performance to reflect further significant year on year progress which could be further accelerated by a continued recovery in end-market conditions in 2021.
Conclusion
The group sounds pretty optimistic about H2. Talk is cheap, but taking the team at its word, let’s assume that we have H1 underlying EPS of 1.83p and H2 underlying EPS of 2p. That would make for a FY20 PE ratio of 12.5x. I’m hoping 2p is conservative given the growth potential in SRC’s Benelux and South Wales assets - especially the latter now that SRC has 100% of GdH on its books.
I think that’s quite a modest valuation. The clear risks here are execution risk of a rapid acquisition and integration programme, as well as the correspondingly messy accounts. There’s not much you can expect management to do about the latter, but it can’t be ignored that there are a lot of adjustments and restructuring costs going on at SRC that are subjective in nature and have to be taken in good faith.
Given that the above results were achieved over lockdown I’m happy with this progress and feel like the share price is cheap. It's not clear to me right now just what level of EPS the group can turn in over the next six months but the longer term thesis is that management is assembling a profitable construction company of significant scale. There are a few moving parts though, so DYOR.
UP Global Sourcing (LON:UPGS)
Share price: 110p (+5%)
No. shares: 82.2m
Market cap: £86m
Up Global Sourcing Holdings (LON:UPGS) has been on the list for a while. Equity Development provides excellent coverage of this stock - I haven’t had the chance to read today’s report but you can find it here if you’re interested.
It’s an owner, manager, designer and developer of household appliance brands selling to over 300 retailers across 38 countries.
Some suggest there are few barriers to entry here, but you can’t fault the group’s recent operating track record and share price performance. I would imagine it’s a huge market for a sub-£100m company to expand into as well.
At the lockdown stock market nadir in March, UPGS shares hovered just above 30p. Today they are at 110p. That’s quite a turnaround.
What’s interesting is that even after trebling the group’s valuation metrics (and particularly the PEG ratio) are modest.
The group is proving impressively resilient thanks to its flexible, adaptive business model and canny management. I’m happy to see it passing the Tiny Titans screen, which identifies small cap momentum and has proven very successful in the past.
When Covid was restricted mainly to China, the UPGS share price was one of the first to be hit. The group’s operational resilience is to be commended and the market seems to be waking up to its continued strong execution.
There could be further to run here - the important thing to find out is the scale of the opportunity and to identify any possible barriers to entry in its business model.
Given its focus on providing mass-market goods to supermarkets, discounters, online channels, and international retailers, you’d have to think the addressable market is quite big. I imagine there’s plenty of scope for UPGS to grow from its current market cap of £86m if past performance is anything to go by.
A profitable, fast-growing enterprise with a rolling forecast PE ratio of just 11.8 - worth a closer look given the potential for both earnings growth and price multiple expansion.
Today’s trading update sounds like a slightly mixed bag but hopefully future years won’t involve global pandemics and entire economies locking down.
Trading update for the year to 31 July 2020
Highlights:
- Revenues down 6.1% to £115.7m
- UK and international online revenue up 47.2% to 14.5% of total sales (FY19: 9.2%)
- UPGS’ top two customers accounted for 26% of group revenue (FY19: 34.8%)
- Underlying PBT -2.7% to £8.2m
- Net bank debt down 73.7% to £3.8m due to dividend suspension and cash generation; dividend now reinstated
- FY21 order book ahead of this time last year
I would suggest these results are good given UPGS’s modest valuation and macro events this year. Perhaps though, after such a strong rerating rise that valuation of 11.8x is now fair?
Conclusion
Andy Gossage et al might well be quite a sharp retail outfit. What they are accomplishing at UPGS is no mean feat.
That said, it’s worth remembering that the group licenses rather than owns some of its biggest brands. This does introduce some risk but then again I wonder if this fact can get overstated as a negative sometimes.
Thinking about it some more, an 11.8x forecast rolling PE ratio with an attached PEG of just 0.6x does still represent good value to me. I wonder if perhaps UPGS is a higher quality and more resilient business than the market has previously given it credit for.
The group is very cash generative and boasts excellent returns on capital over the years - at what point do you admit there is a promising business here?
Online growth looks strong and there could be big potential here. In unlocking online, other businesses have reaped tremendous profits in recent years. One to take a closer look at, IMO.
Sylvania Platinum (LON:SLP)
Share price: 62p (-5.5%)
No. shares: 271.6mm
Market cap: £178.2m
(I hold)
A popular platinum, palladium, and rhodium miner with operations in the South African Bushveld complex here.
Sylvania Platinum (LON:SLP) is known for being cheap across conventional metrics. Today’s results look strong - but perhaps not as strong as brokers were anticipating, hence a c10% share price drop.
Part of the problem is probably the announced 1.6p dividend payment - considerably less than some were expecting. To this point, SLP makes an intriguing announcement about a possible ‘metal price windfall dividend’ to be expected in Q3 of FY21:
The Board is therefore considering the payment of a 'metal price windfall dividend'. This windfall dividend payment will be based on excess cashflow generated from palladium and rhodium prices achieved above long-term broker consensus prices for these metals for the 2020 calendar year. Actual production achieved, actual prices achieved and the actual ZAR exchange rate will all be taken into account as well as its share of royalties, corporate tax and dividend withholding tax.
I see a Liberum note calculating this payment could be as much as $10m.
This seems a strange way of managing investor expectations. It’s the first I’ve heard of it. Perhaps this possible windfall dividend could have been better flagged previously - presumably it’s something the board has been considering for a while.
That aside, It’s worth mentioning the share price has been very strong recently as well, so perhaps some profit taking is to be expected.
SLP has a very low cost base, extracting platinum group metals (PGMs) from chrome dumps rather than mining itself. It’s cost is $636/oz versus a basket price of $2,676/oz (based on spot prices).
It also has some exploration assets and, as noted, it’s very cheap:
There are some negatives as well though - namely ongoing operational disruption as a result of water and energy issues. Also, SLP’s fortunes are obviously tied to the spot price of the commodities it produces.
There is also an investor presentation on the company’s site here.
Highlights:
- 69,026 PGM ounces produced for the year, 4% below the FY19 record of 72,090 ounces, with c10,000 ounces lost due to the impact of COVID-19. This means SLP was on course for another record year.
- Net revenue up 62% to $114.1m
- Net profit +125% to $41m
- Basic earnings per share +130% to 14.62 US cents - I make that about 11p and an FY20 PE ratio of 5.3x
- Net cash balance of $55.9m - about £42.2m of cash you can knock off the market cap
- A total of 14,937,795 shares repurchased in the year (c5.2% of FY19 weighted average shares in issue - a meaningful buyback programme)
- Cash dividend of 1.6p per share
Water constraints and power supply issues continue but progress is being made on these fronts.
Current depressed chrome market has led to production cuts at the host mine, hitting current arisings volumes at some operations ‘and this will continue into the foreseeable future’.
Exploration projects
There’s a $9.5m impairment charge on the Aurora exploration project.
This is because it’s no longer being linked to the Volspruit project, meaning economies of scale and infrastructure benefits are missed. Regarding Volspruit - a review of the previous feasibility study is ongoing, so we should expect an updated investment case here in due course.
The Grasvally project received a conditional cash offer in FY19 of ZAR115m (c£5.2m). This was thwarted by the chrome market downturn and other reasons, resulting in an option agreement with Forward Africa Mining to have 12 months to purchase the asset, so watch this space.
Conclusion
Comments on the depressed chrome market and subsequent production cuts should be investigated further. The Aurora exploration project is not ideal and I suspect the group’s strategy re. dividend payments could have been better communicated.
Beyond that, my impression is the PGM market is recovering along with other commodities and appears to be supported by favourable long term dynamics (such as demand for electric vehicles, which use PGMs). I'm long personally, but let's see. There are also a number of ongoing initiatives to bear in mind, all of them funded by SLP’s impressive free cash flow generation.
It is cheap and has navigated a tricky year with only a modest decrease in production and revenue despite being hit harder than most with shutdowns at its South Africa sites. Meanwhile, profit has shot up and it has a growing cash pile on the balance sheet.
SLP is generating pots of cash, buying back shares, investing in new projects, paying dividends, and has some asset optionality. The group has a profitable operational life of at least ten years, with scope to extend this. On the whole I think risk is to the upside but DYOR as always.
Belvoir (LON:BLV)
Share price: 157 (-0.3%)
No. shares: 35.1m
Market cap: £55.3m
So how’s the property and rental market? This is a big question as there’s a couple of interesting plays here.
On the one hand you have franchised real estate operations such as Belvoir (LON:BLV) ,TPFG , and WINK . All three are QARP plays, with sticky revenue, stable cash generation, and high returns on capital. They’re all quite small though, with BLV the largest at £55m.
And then you have the obvious high-yielding housebuilders - Persimmon et al. But also there are the much higher risk estate agents like Foxtons and Countrywide, which could be deep value recovery plays. High risk though.
It might pay to have a view on this market (even if that view ends up being to leave well alone).
We’ve got Belvoir’s first half results today.
Highlights:
- Revenue +8% to £9.77m (2% organic, 6% from the acquisition of Lovelle network)
- Management Service Fees (MSF) -1% to £4.16m
- Financial Services revenue +7% to £4.25m
- Profit before tax +17% to £3.16m and basic EPS +16% to 7.3p
- COVID-19 impact on revenue ‘substantially mitigated’ by a reduction in operating expenses and government support
- Dividend reinstated with an interim divi of 3.4p (same as last year)
- An additional payment to shareholders to make up for suspended FY19 final dividend, with a further catch up payment expected later in the year
BLV has also entered into a ‘strategic alliance’ with The Nottingham Building Society, which will see The Nottingham hand over its estate agency and lettings activity to Belvoir.
These strike me as pretty resilient results and are testament to the strength of Belvoir’s franchise-led business model. Back in the middle of lockdown, with the property market totally frozen, who was expecting this type of turn out for a property franchise group? People forget quickly but it was a lot gloomier a couple of months ago.
Of course, there’s a valid argument that we’re not out of the woods yet but still BLV is to be congratulated on these results. Indeed, group CEO Dorian Gonsalves says:
Since our sector was 'unlocked' in May, both property sales and financial services activities have been at record-breaking levels for the Group in terms of instructions, sales agreed and written mortgages. These are expected to convert to sales fees and banked mortgage income during the remainder of the year.
… Given results are on track in H1, a promising start to H2, and a strong pipeline of agreed property sales and written mortgage business, the Board is confident of meeting management's pre-Covid expectations for the full year.
Conclusion
I’m more impressed by the business model as an investment proposition than I am enthused by UK house market prospects going forward. Every now and then I encounter a bad news piece about nasty landlords, etc. so possibly ethics might be a concern here? It’s all been quite anecdotal in my experience.
For now, I’m assuming that’s not an issue but perhaps others will disagree in the comments. What I can say with more certainty is that BLV’s performance during lockdown suggests you need to really throw the kitchen sink at these property franchise groups before you see an impact on profit.
The group is supported by sticky, recurring revenue and has a valuable layer between itself and the housing market in the form of its franchise network. Meanwhile the Financial Services division seems like a canny way to further monetize that network.
The first half of 2020 saw network lettings revenue basically the same as 2019. I think that signals business model strength and encouraging prospects assuming markets normalise. The group has observed ‘only a minimal increase in rent arrears’ and is expecting a ‘strong last quarter for sales fees and financial services income’.
It’s an impressive performance. Given the business model resilience and BLV’s quality characteristics, I think there could be longer term value here.
Spectra Systems (LON:SPSY)
Share price: 151 (+14.4%)
No. shares: 45.3m
Market cap: £62.3m
Spectra Systems (LON:SPSY) is a ‘leading provider of advanced technology solutions for banknote and product authentication’.
Interestingly, the group says that ‘discussions with central banks during H1 have reinforced our belief that worldwide demand for banknotes will be significantly higher this year than last year and that this will positively impact our earnings in H2 of this year.’
It’s a High Flyer with strong returns on capital. A closer look shows SPSY to be potentially attractive, with some niche tech that could have interesting applications and apparently strong demand from respected clients.
Interim results for the six months to 30 June
Highlights:
- Revenue +1.8% to $6.5m
- Adjusted earnings per share down from 4.8c to 4.6c
- Cash from operations +14.6% to $2.3m
- Special dividend +28.5% to 9c
- Net cash down slightly to $10.9m
These results at first seem sensible if unspectacular. Modest top line growth, EPS down but handily covered by cash, with a solid special dividend.
But hopefully there is a little more growth in store than what’s on show today. The company certainly sounds optimistic of its prospects and ‘expects to significantly exceed market expectations, in spite of the COVID-19 pandemic’.
So to me that sounds pretty exciting.
SPSY is busily executing a new central bank contract to enhance existing authentication sensors and has got continued research funding for future sensor technology development for a central bank.
In fact, reading through, there’s a lot of varied operational activity at this company - it’s quite impressive. I’ll just bullet point the rest:
- Strong sales of optical materials for K-cups - K-cups being those little containers of coffee that coffee machines puncture and then flow water through
- Launch of a new phosphor which outperforms and undercuts incumbents
- Covid-19 studies on Aeris banknote decontamination efficacy
- Four lottery contract renewals for the secure transactions group
All this activity suggests to me that SPSY has some valuable technical nous and can add value to multiple markets. The group seems to have a high quality roster of central bank clients, and that K-cup business could offer interesting growth potential.
Conclusion
The key takeaway is that the Company is on track to achieve record earnings for the full year and expects both revenue and earnings to significantly exceed market expectation.
This is definitely one to look at more closely - its security solutions clearly add value in a number of different areas, with many of these being potentially large markets. So the opportunity facing SPSY could be quite large. Perhaps there are further earnings surprises in store.
If the group expects to significantly exceed market expectations of 9.2p, let’s say 10p of earnings for FY20 (hopefully conservative). That would give a PE ratio of 15x. That’s very good for a high margin security company with top-tier customers and multiple promising growth prospects. We could see some quite handsome returns over the long term.
There’s a story at Spectra and I look forward to uncovering it in more detail at a later date. In the meantime there is a reassuring level of cash generation, net cash on the balance sheet, and a solid looking dividend yield.
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48 comments
This is the small cap value report for 7 September. I was reading the write up on UP Global Systems and the PEG number (quoted above) has changed quite radically instead of being 0.6 it is now 1.88 because the EPS forecast has been revised down a lot.
Do you still like this share?
Many thanks Jack for covering Sylvania Platinum and Belvoir (I hold both).
As you know Paul is a very busy person and so he doesn't have the time to cover mining companies. Hence, I was wondering if it is possible for Paul to continue covering his usual companies and for you to cover mining companies as and when they report their results??
It is always nice to receive a second viewpoint on investments.
Spectra Systems (SPSY): catching up....sounds like could be a read across to De La Rue (DLAR) re positive bank note activity.
Hi Jack
Some excellent coverage today, thank you. I’m glad Spectra Systems (LON:SPSY) has piqued your interest, it is one of my core holdings. FYI, WH Ireland upgraded forecasts earlier today; FY20 and FY21 an increase of 17% and 16% respectively for pre-tax profits. It’s an interesting company to own - a bit of a black box but consistently ahead of forecasts over the past 2-3 years, a rising dividend and plenty of upside potential.
Cheers
Simon
Sylvania Platinum (LON:SLP) is probably great value and growth. I held a partial position before Covid. I sold out as Covid intensified primarily as I worried that SA could be one of the worst hit places with significant political and economic stability knock-ons. I did the same with Pan African Resources (LON:PAF) . I'm price wrong on both so far (I did make a decent bit on both but my approach is not short term nickel and dime).
Clearly, cash position and valuation is brilliant and compensates for a good bit of risk...but this is deep cyclical company operating in an emerging market so LfL valuation comparisons with bug pinch of salt
I only had a partial position as the following bugged me:
My spidey sense says that SLP will let down quite badly at some point....it'll probably be from a much higher price though so I have space ahead of me for regret, remorse and thinking I'm an idiot
Nice to see small cap resource shares covered. Thanks Jack.
seconded, much appreciated Jack, cheers.
Hi
Conscious that I have limited time to catch up on things, has anyone seen anything on other news flows and bulletin boards regarding Solid State (LON:SOLI) as I can see no announcements though it did go ex-dividend last Thursday?
Just wondering whether there has been any information or speculation out there that has caused the sell off Friday and Today, as going ex-dividend shouldn't have caused this bigger price movement, I would have thought? Or have some stop-loss positions been tripped due to spread and going back under the £6 barrier?
Thoughts appreciated.
Thanks
Tommy
ps. I hold
Just illiquid. No volume - off 10p today on 4000 shares traded. It does move in 30-50p clips quite quickly on small sales/purchases.
Solid State (LON:SOLI), it has gone below the 50DMA which can be a trigger for selling for some holders.
I would avoid bulletin boards.
Thank you, I am a long term holder so was not planning to sell but sometimes as someone who is not a full-time investor there can be stuff come out on other sources that you miss and hence it sometimes feels that making a decision on a change in fundamental information a lot later than other folks!
I used to hold Solid State (LON:SOLI) about 5 years ago, I sold out just after a lot of director selling, soon afterwards there was a profit warning and the shares crashed, so I would keep an eye on what the directors are doing.
UP Global Sourcing Holdings (LON:UPGS) webinar at 2pm for a little more colour. https://zoom.us/webinar/register/WN_kiga3aqAT7KiAuwtM4vCOg
I think it's very very unlikely that Buffett is involved at all in the purchase of Barrick. $500m is exactly the size of a position taken by whichever of Todd/Ted run 15-20 positions, so it is much more likely to be one of them. $500m is way too small for Buffett to be directly involved.
And thanks for the report Jack!
Jack: "EMH has had its day in the sun."
Are you sure? To dismiss the EMH you should have some evidence, but the evidence still runs entirely the other way. Every study of long term returns shows that the vast majority of active managers underperform. The number that have consistently outperformed is well within the limits of statistical chance (and many "stars" that have outperformed, have then gone on to underperform). It's hard to explain that without there being a core of truth to the EMH. Some try to explain it by pointing to active managers' costs, which misses the point, but even if true, that would suggest that there is less than 2% of outperformance available, so why bother?
For my money, EMH is mostly true, most of the time and it is dangerous to dismiss it. There always has to be a small element of inefficiency in the market .... otherwise all the active managers would leave and it would become inefficient again. But where that inefficiency resides keeps changing. Each time it appears it is hunted down before popping up somewhere else. So sticking to one investment style your whole life is unlikely to work.
Inadequate heuristics such as p/b ratios will change, sure. But the real fundamental financial truths will not. In a hundred years time, people will still be arguing about the EMH and most people who try to beat the market will still be underperforming.
The efficient market hypothesis is to the understanding of markets what "humours" where to medicine.
An unpredictable malady is described but the theoretical reasoning is tosh.
Not sure.
Anyone who places faith in the StockRanks is praying that the EMH may be correct but not yet (apologies to St Augustine)
There are some effects that seem to be durable.
- seasonality
- momentum
- dividend yields (I use this one)
The EMH says that one way you can beat the market is by taking on more risk. Trading momentum is one way to do that. You create higher returns but with more volatility, and we're talking the kind of volatility that will stop people following the strategy. For example, in 2009 the classic long/short portfolio returned -73% in 3 months. The really risky part of this is that it happens around economic declines when people are likely to be losing their jobs. If you need to stop investing and/or withdraw your savings just after they've declined by 73% then that will ultimately be a losing strategy.
I also question how realistic the historical data on momentum is. I haven't seen any that includes trading costs. Given that momentum portfolios are very high turnover, the majority of historical returns have come from smaller companies, and spreads on small companies can be massive - that adds up to a serious headwind.
Overall though, over time, the strategy probably works in terms of absolute returns. But not all the time and some individuals will be burned by it.
The evidence for the other effects you mention is very mixed. On its own, high dividend yield is another high risk strategy. Also, as part of a wider value strategy, it has underperformed for a long time (I believe every year for the last decade). That kind of extended underperformance creates its own problems. As with momentum, there is a risk that people are drawn in and shaken out at just the wrong time.
That factor investing is unstable and reality doesn’t conform to modelled history does not prove that EMH is right .
Also, aside from low volatility, it is likely that any portfolio constructed of a narrow factor will be higher volatility than the index. This is a function of the circularity of the noddy maths EMH and other volatility/beta based analyses.
long-short funds didn’t make -73%. in 3 moths of 2008. Perhaps a long-short “index” did but they were complete nonsense and constructed from a handful of very mediocre investable funds
1) As I said it was 2009, not 2008, from March to May. The data is from the widely quoted CRSP database. These crashes are caused by massive increases in prices of the stocks in the short porrtfolio. In this period, the shares in the short portfolio rose in price by 163%.
2) Forget the maths. Most of it is a largely irrelevant way of explaining the effects in terms of standard (faulty) economics. It's not the maths that matters, it's the outcomes.
3) If any portfolio, including factor portfolios, is higher volatility than the index then it is likely more risky. This is real, not noddy maths and it is not surprising. Any concentration of a portfolio without compensation will usually make it more risky. But it doesn't have to be the case, it depends on the selection.
"............................"
blah blah blah highbrow bs bingo
1) I ran a fund of hedge funds at the time. Made a positive return in 2007 and 2008 (virtually no one made money in 2008). In 2009 I lost money (approx 10%). I had canned the short sellers I had (c.15%-20% of portfolio) before the September 2008 fireworks got underway in August (as effectively had to give them 4.5 months notice, so out end of 2008) as I knew the denouement was imminent. Note, I wasn't that clever as I was surprised by the depth and ferocity of it. I expected some systemic worries but not the end of the world.
Despite my inshite I still got whipsawed in 2009 as too many of my more balance to long biased guys all pulled in their horns in early 2009 so missed bounced but the guys that like to short were looking back at the end of the world and felt like they were the dogs etc. So they got their faces ripped off. (PS I still made money through the whole crisis period 2007-9 which is probably top 1%)
However, -72% in 3 months is not a real number that is representative of the industry at that time. It will be a narrow sample and probably of highly leveraged market neutral fund that tend to share a value+quality+momentum factor combo and then ones that didn't have good risk management (probably as they were part of some investable hedge fund index that demanded that they run a "full" strategy always)
CRSP might be respectable but they ain't feeding you good data to base your spurious intellectualisation re EMH on
2) Forget the math...ha ha ha....so your saying a theory that seeks to and is part of the quantification of markets we should forget the maths on. The maths that justify the random walk, efficient frontier, capital allocation pricing model, many (most?) risk packages in the market....as its the vibe and feels that counts.
Ok. I agree that it very hard to predict where individual securities and markets will go next on any timeframes (that said if you believe our societal-economic paradigm will continue, with some volatility of course, then the long term time frame is actually the most predictable...there's good practitioner research on that too)
Joker
3) I refer you to 2....plus implicit in what you start saying is that you can predict the market as you believe that you can identify out and under performance of the market through measured volatility and/or factor deviance...but then you go on to contradict yourself with some vague handwaving re whether the selection is compensated for or not....as I said its hard to know what's going to happen
So....are you saying something I miss or are we just taking up eyeball space on an irrelevance?
You're welcome
*Brought to you by mojoinshite productions
You obviously don't properly read what I say, and you respond with so many errors of all types and van loads of bullshit, that its not worth trying to explain this to you.
Okay. Thanks for your input anyway.
I wholeheartedly agree its not worth persisting with gibberish.
I think you build my prejudice that maths and mathematical concepts should only be used under license...people are so dangerous with their partial understanding of it*
*Eg see a lot of analysis and reporting of Covid (inc super champion dimwit Prof Neil Ferguson....who also couldn't code)
'When the facts change, I change my mind - what do you do, sir?’
According to Quoteinvestigator, one of Keynes's pupils who knew him well testified that he said this: In 1986 an article in “The Economic Journal” about the notable economist Joan Robinson claimed that she had a favorite anecdote about Keynes that included a version of the saying. Robinson was at Cambridge with Keynes and knew him well [MKJR]:
" Her favourite story about Keynes is that when someone remonstrated with him for being inconsistent, he responded: ‘When someone persuades me that I am wrong, I change my mind. What do you do?’"
could you give a review of the trading update for Future FUTR. I hold these and a very upbeat trading update this morning
would be interested in your thoughts on Sylvania Platinum (LON:SLP) Jack
revenue up 62%, EPS up 130%, no debt and $55.9 in cash and yet a 20% drop (looks to be recovering) at the bell - sell on news after a good rise perhaps.
The issue, it seems, is the board's failure to return more to shareholders given the ample profit and cash pile.
Also looking through the presentation - trying to work out how meaningful the buyback programme is versus the dividend for Sylvania. If anyone knows it would be appreciated!
Yes, it would be great to hear your thoughts Jack after a great write up a couple of months back.
I feel like I'm missing something with Sylvania Platinum (LON:SLP) as the numbers seem fantastic. Future forecasts also look very strong. I hold (and purchased more this morning). From going through my analysis, it felt like such an obvious buy - which is why I'm worried! Hopefully it turns out to be the right decision :)
A research note put out today by Liberum suggests a special $10m dividend could be paid in Q3 FY21. The possible reason for a reduction in the dividend this time around is cash conversion and the uncertainty with Coronavirus.
The following investor presentation is quite interesting and insightful - https://www.sylvaniaplatinum.com/component/jdownloads/send/77-2020/484-corporate-investor-presentation-august-2020
I agree with the "missing something" comment. This company (I hold) seems insanely cheap. I appreciate it has risks around metal prices, political/geographic situation, resource inputs but a p/e of 5????
Nice write up Jack,
Difficult share price action this morning, It difficult to value £SLP. Valuations are really dependent on the PGM4 avg basket pricing. See the conservative and optimistic valuations below.
Conservative Valuation (Avg basket price reduces from $2676 to $1277)
Optimistic Valuation (Avg basket price stays at $2676)
Maybe the truth lays in-between the above scenarios.
I am happy to continue to hold.
DOYR.
BSV
Hi Jack
Thank you for your comments on Buffett.
Though I believe gold is a sound investment in the current times (I am long £PHAU and Anglo Asian Mining (LON:AAZ) is 20% of my portfolio) but not long term (five years +) I think it should be remembered that Buffett’s (or one of his lieutenants) investment in Barrack is equivalent to Berkshire’s holding in Apple changing in price by 1.66% (which seems to happen on an almost daily basis at the moment).
The Apple investment is the extraordinary investment that people don’t really seem to be talking about. Equivalent to 20%+ of Berkshire’s mkt cap .
Regards
Michael.
Good morning Jack
Still working my way through the interims from £BLV. On the face of it, it appears an excellent performance and testimony to the franchise model operated by the company and diverse income streams. The reinstatement of the dividend and unexpected catchment payment of 2p in lieu of the previously cancelled final dividend is very welcome, although I hope that the company is not being overly extravagant given the economics uncertainties that lie ahead. Your views would be very much appreciated.
I hold.
All the best
Obviously Belvoir (LON:BLV) not very interested in having a positive corporate image. One of very few companies that have kept Government money (£250k) and are paying a dividend. Given the results are otherwise excellent, especially given the pandemic, its obvious they don't need the £250k. So just give it back and don't give the impression that management are complete shysters.
Hi Shanklin
Yes, I wholeheartedly agree that Belvoir should repay the Government support money, which it appears they can afford. It may well be their intention?
As a share holder and without wishing to sound 'holier than thou' I would prefer the company to do so, even it were at the expense of dividend payments. In my view it is the right thing to do and will I believe reflect better on the company going forward.
I honestly don't understand what the issue is here with Belvoir (LON:BLV) keeping the furlough money that they received. They received the furlough money from the government legitimately in return for keeping employees on their books who were unable to work at the time, and there was and still is no compulsion, or even IMO expectation, that these monies would or should be repaid.
Essentially what posters are asking for is that companies that we own make a completely voluntary donation to HMRC. I'm sure that HMRC would be delighted to receive individual voluntary donations from posters if they feel that strongly about it (actually I'm not sure that there is any mechanism for voluntary taxation, and the paperwork would probably be horrendous!).
To my mind voluntary repayment of furlough by companies falls into the same catagory as charitable giving by companies. I don't mind it to a certain extent, especially when related to their footprint (e.g. mining companies funding projects where they mine), and it's all very noble, which I admire somewhat, but ultimately they shouldn't forget that they are there to serve their shareholders, and we are quite capable of giving our profits to charity should we so wish. I certainly don't think that public companies should be lambasted for not repaying money that they have every right to keep.
Incidentally, another company keeping furlough cash and paying a dividend is Creightons (LON:CRL). The CEO was asked in the webinar whether they were considering repaying the cash, and seemed almost astonished by the question. As he put it, we took the money so that we could pay our workers full pay to stay at home when sick to benefit society, why would we repay it? (from memory, apologies to Creightons (LON:CRL) for any paraphrasing errors!).
I did not realise Creightons (LON:CRL) had taken the same view as Belvoir (LON:BLV) on furlough money. A black mark for them as well then as another company that in retrospect really does not need this money.
I'm sure I share your sentiment here on companies needing the money.
The government set the rules, If companies followed the rules legally then I see no reason why they would want to give the money back. If there is a question mark over how the company followed the rules then they might decide to give the money back to avoid any legal action.
BSV
Paul in one of his previous SCVR reports referred to concerns around the balance sheet of £BLV. He questioned the wisdom of paying excessive dividends when heavily indebted (c. £9.5m) and was concerned about the high level of intangible assets (a consequence of their acquisition strategy) resulting in a negative NTAV of £6.7m. In 1H interims gross debt is little changed at £9.1m though the strong cash flow in the period has reduced the net debt significantly. Some of this boost to cash flow can be attributed to government action (furlough scheme, VAT deferral, etc.), dividend suspension, and cost reduction actions by the business. NTAV remains negative at £4.0m which is an improvement but still a concern following Paul's line of reasoning. Also linked to Pauls's previous concerns is the reinstatement of a significant dividend at the interims which amounts to c £2.0m with more to come later in the year subject to performance. It would be interesting to hear if Paul is still of of the opinion that Belvoir (LON:BLV) shouldn't be paying such hefty dividends and views the reinstatement of the dividend as 'overly extravagant' as you suggest.
They also have a £10m loan to repay by March 2023. I hold Belvoir (LON:BLV) but I think the dividend reinstatement was a poor decision both because of the Government monies it has received and because of the need to repay debt. We don't know what the near-term holds so I think it should be taking advantage of the general move against dividends right now to repair the balance sheet.
At the risk of sounding a bit Victor Meldrew, I'm going to make a point of writing to them.
I just listened to the webinar on Investor Meet Company and I thought company, CEO and CFO came across well. In my judgement they have a good cash generative business with a simple to understand and repeatable business model so growth should be possible from here. The moat comes from the expertise in operating the franchise model (which isn't easy to replicate outside the business) and the network effect. Another positive point is how resilient the business has proved to be through the last 6 months. I will continue to hold with expectations of growth over the coming years. I can't say I am too worried by the (improving) NTAV position since this is a cash generative and asset-light business.
Warren Buffett turned 90 last weekend, it’s just a feeling I have , perhaps prompted by the unusual investment decisions made recently but I’m pretty sure he’s doing less and less of the investment these days and Ted and Todd are doing more and more. Being him though he won’t come out and say that outright and of course it suits BH that he’s still regarded as the man making the decision as that in itself “makes” the investment right so to speak. For instance the Japanese bet he took, 2or3 of the names were up 10-15% after it was announced.
Hi there is an EquityDevelopment (paid) research note out on UP Global Sourcing Holdings (LON:UPGS) today too:
https://research.equitydevelopment.co.uk/research/tag/up-global-sourcing-holdings-plc
My morning smallcap tweet:
Spectra Systems (LON:SPSY) Telit Communications (LON:TCM) Cyanconnode Holdings (LON:CYAN) Destiny Pharma (LON:DEST) NAHL (LON:NAH) Omega Diagnostics (LON:ODX) Amigo Holdings (LON:AMGO) Quadrise Fuels International (LON:QFI) UP Global Sourcing Holdings (LON:UPGS) Fox Marble Holdings (LON:FOX) Byotrol (LON:BYOT) SRT Marine Systems (LON:SRT), Totally (LON:TLY)
Spectra Systems (SPSY) FY. Guides this FY revenue and earnings to significantly exceed market expectations. [SP=129 Cap=59m] I hold
Telit Communications (TCM) CFO scarpers. He is thanked. [SP=140 Cap=186m] I'm short.
CyanConnode (CYAN) order for 350,000 modules in India worth INR 1.8bn or £18m. [SP=4.44 Cap=8m]
Destiny Pharma (DEST) collaboration and Innovate UK grant award to co-develop novel, preventative treatment for covid via a nasal spray of a bacterium. SPOR-COV has already been shown by collaborator SporeGen to provide complete protection in preclinical models (???) of influenza virus. [SP=48 Cap=21m]
NAHL (NAH) CEO scarpers, immediate effect. He is thanked. [SP=39 Cap=18m]
Omega Diagnostics (ODX) completes self-test usability study for the UK Rapid Test Consortium's COVID-19 lateral flow antibody test. "Omega remains on track to have production capacity in place this month to produce an initial 100,000 AbC-19 Rapid test per week, scaling up to 200,000 tests per week capacity in October." [SP=53.99 Cap=96m]
Amigo (AMGO) fight update: notes Tweet from James Benamor re irrevocable instruction which his vehicle Richmond Group Limited has purportedly entered into with its broker to acquire up to 29% of co, conditional on Benamor being appointed CEO. [SP=12.7 Cap=60m]
Quadrise Fuels International (QFI) update on progess. Nothing big. [SP=2.81 Cap=30m]
UP Global Sourcing (UPGS) guides FY rev down 6%, U/L pretax excluding the furlough credit down 2.7% to £8.2m. FY21 order book up YoY. No longer utilising the Government Time to Pay and VAT deferral schemes. [SP=102 Cap=84m]
Fox Marble (FOX) recommencing operations in its Cervenille quarry in Kosovo due to orders for Grigio Argento marble. [SP=2 Cap=7m]
Byotrol (BYOT) £350k grant from Innovate UK to further investigate the anti-viral properties of certain common forms of seaweed. [SP=8.5 Cap=38m]
SRT Marine Systems (SRT) FY loss £3m (excluding one-off impairment charge on Middle Eastern project of £3.9m) - 'very disappointing', as expected but jam tomorrow. [SP=41.98 Cap=69m] I hold.
In line: Totally (LON:TLY)
Is it not the 7th Sep 2020 today?
Good Morning Jack
Having written an article on them previously, I am hoping you will cover the Sigmaroc (LON:SRC) interims today. With this in mind, I would be very interested in your thoughts on Stockopedia assigning a quality score of 0 to them. Being very charitable, this seem bizarre to me.
Thank you & Kind Regards, Martin
UPGS is a really interesting business. It is actually builds most of its brands in a unique way...from buying the brand from administrators and then relaunching. The founder's story is quite impressive and worth following. It does have Salter and 1 other brand that are licensed, but the rest are owned. It has many years of growth in my view. It could be a target for something like Spectrum Brands in the US at some point as well I suspect.