Small Cap Value Report (Mon 9 May 2022) - IDEA, MIDW, CER, IOF, WATR

9th May '22 by Paul Scott

41 comments 9403 reads

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

Mello is back tonight and David will be interviewing Richard Crow (you might know him as Cockney Rebel on Twitter). Richard has been investing for a long time and is a great character, so it will be interesting to hear his thoughts on current market conditions.

Agenda -

Paul's Section:

Ideagen (LON:IDEA) - congratulations to shareholders here, with a 350p recommended bid announced from HG. Very unusually, IDEA announces that it is continuing discussions with another potential bidder, so I wonder if there's a chance of an increased bid?

Midwich (LON:MIDW) - in line with expectations trading update, and a confident-sounding outlook. No signs yet of any downturn. The business is doing well, but the valuation looks full, given macro uncertainties. It's only a low margin distributor, so it doesn't interest me at the current price.

Water Intelligence (LON:WATR) - a trading update that is a bit ambiguous in places. The valuation still looks much too high, to me. WATR has a good long-term track record though, and is accelerating expansion now. So maybe the punchy rating will turn out to be justified?

Jack's Section:

Cerillion (LON:CER) - strong interim results continue the positive momentum at Cerillion. The shares touched 600p recently and I missed that window as they have since bounced back. A high quality stock with double digit growth - an attractive combination - but I’m mindful of the valuation and a fall in orders and software revenue could cause a wobble. The group has real potential for long term organic growth though, so it's on the watchlist.

Iofina (LON:IOF) - signs of progress with good net debt reduction but there are also a couple of issues. A hemp-based joint venture is unrelated to the core business and has been written off. Results depend on iodine spot prices, which I don’t have a view on. The share price is volatile and the stock is relatively illiquid. So it’s higher risk, with a chance of doing well, but probably not one I will prioritise.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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…

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GloucesterBob

9th May '22

We must be paddling in the same canoe, but I have decided to not sell anything, as I have moved during the last year to remove all my speculative stuff, and drop feed into the good stuff, mind you Scottish Mortgage Investment Trust (LON:SMT) now 22% down (albeit its 46% down from ATH) but I will continue to pick some up every month.

Sureserve (LON:SUR) announces a 68M 8 year contract extension today and now down 3% (was 6% at one stage), looks like no amount of good news is going to help in the near term.

Was planning on retiring this year, but until some mad Russian is taken care of, not sure that is still a good idea.

The Phoenix

I bought Redrow (LON:RDW): a couple of weeks back looks like my stop may be hit end of this week always difficult to know what to do but from the last crashes I have lived through you normally find the first 20-25% of the real rebound when it happens is fast miss that and it takes even longer to get back to break even.

Revs8

Redrow (LON:RDW) has a couple of important support levels just below the current price. I'm willing to sit tight for now.

Tommy H

Dear All

Sorry this is just where my head is today, right now, and maybe it will help or not with others thought patterns. Longer than intended so please skip.

Firstly, there is never a "right answer" because all of us need different things, all of us have different situations, risk levels, preferences, need to sleep and all that. So what is right for me, might kind of fit for you, or be totally wrong.

I guess my patented "buy high, sell low, buy even higher, sell even lower" strategy is perfected over many years, but also is not recommended and is powered by Fear of Missing Out :) I still have a sense of humour even on a day I am feeling very cranky. Work is horrific, but being grateful I still have a job for now!

I am responsible for 6 different portfolios, all family members. From mum's ISA (aka Pension) to my children's JISAs. Hence trying to manage very different things, in different ways, and having very different levels of worry (aka 3am wide awake moments), along with being a son to the olds, a house dad, a fulltime employee and a husband and all the rest.

The kids remain fully invested, and I continue to drip feed in every month and where I have spare (month end wash up - if I have the minimum pay in amount). Both hold Fundsmith.

My wife remains fully invested, but she has always been mostly cash savings so investment is <15% of her savings accounts. Plan is to restart the monthly drip feed.

My mum, sister and me are now all >75% cash. This morning I capitulated and moved the majority of my SIPP into cash, why did I not do this in December I ask myself? Queue global rally!

So my sister and I are both in work, this is money we have saved/inherited/part of divorce and all that. This is a long term not needed for 10+ years, basically I want to sleep at night, I can always invest tomorrow, next week, next month. But right now it is about capital preservation, we don't need income and with things going down there are only a few small (1-3% holdings) remaining where I remain confident or prices are holding up (queue crash). I am not going to time the bounce, in 2020 my low point was not March like Mr Market but July. Yes the cost of living is going up every day, but also we can potentially avoid a 20% loss in capital then for right now, that means I sleep. If I miss out on going up 10% I can sleep, but if I lose 80% then I cannot. I plan to continue buying small opening positions (~1%) where I see really good companies at a price I cannot resist, but probably not today or this week being honest I want to see some good news and not just a silly cat video!

Personally, I am still drip feeding into Fundsmith monthly (<4% of investments), and into my current company pension (about 8% of total Pensions), which is spread over 4 Blackrock funds, US, Europe, Emerging and Asia/Pacific ETFs. No intention to change that today.

For mum, I managed to time 7th March crash perfectly for the final sales, so missed the bounce, but at the same time now see the likes of Legal & General (LON:LGEN) and Phoenix Group (LON:PHNX) are now below that point, so not a wrong decision maybe? As this is a pension (all be it in an ISA) we run 12-18 months of costs in instant access cash so she does not need anything until at least 2023. The remaining holdings are now typically 1-2% holdings invested for income with some growth e.g. Twentyfour Select Monthly Income Fund (LON:SMIF) or £RECI the only 5% holdings left are Impact Healthcare Reit (LON:IHR) and City Of London Investment (LON:CLIG) but they could not be sold on the 7th March, so sometimes life shines on you or maybe not. So it is about capital preservation (for when she needs care, as she is 79 years young) and supplementary income, currently on a long weekend in London visiting various galleries and seeing friends.

So overall conclusion, I am going to get another coffee, I will pick the kids up at school tonight, I will run around taking them to activities, getting tea on the table and all that. So sorry I will always miss Mello, @CarmensFella, but they are great!

I on the whole feel nervous about the next week, month, year, so am holding a lot of cash as I want to avoid a potential big drop, and because of that I am ok to miss the start of the jump. But this is about long term, I do not need to beat the index this year, or next. Though it would be nice if I did just once in my life! If I have cash I can start again, if I am sat on 70% losses (particularly for mum) then I am not sleeping...

I think that the hardest part is that I am going to miss some bargains and jumps on good news, or takeovers, but it is deciding whether there is a genuine turn in Mrs/Mr/Ze or your pronoun of preference Market. Or whether I am chasing a bump on the way down, hence the "Buy High, Sell Low". And yes I have sold some of my starter positions today as they have gone through the manual stop once more...so they have gone back on the watch list to buy again at a later date if that feels the right thing.

Good luck everyone.

Tommy

Wimbledonsprinter

I am sorry to be bearish but I am not so sure the stock market is in panic mode (yet). The move in bond yields has been extreme this year (US 10-yr now above 3% from 1.5% at start of 2022) and as we often hear long-dated bonds have proved no diversification for equities. In other words the move in the SP500 this year can be almost fully explained by the rise in yields (that is a higher discount rate put on future cash flows).

If the above is correct, the market has made very few changes to estimates of what (undiscounted) future cash flows will actually be. With Ukraine, the energy squeeze in Europe and Chinese supply chain, we have seen global growth (and particularly UK and European growth) forecasts cut significantly for 2022 and 2023. I am still not sure the market has made sufficient adjustment for this.

I would keep my eye on long-term bond yields before getting too aggressive on stocks rebounding.

Hi Mike

Done a long piece above.

Good luck, keep calm.

If in doubt, avoid gearing, and go to cash and sleep tonight!

Caper4

Thanks for your honest piece on your investment philosophy and current position. Obviously, no one has a clue where the market is going, even if they claim they do. FWIW, I believe it will be possibly years rather than months before shares recover ( at least in the U.K. where I tend to invest ) . However, I see little point in selling at these levels, unless you need the money and/or are aware of somewhere to park it that will give a return ahead of inflation.
Best to sit tight and wait for the recovery, which obviously will come within the next few years !! Inshallah:)

gringo

I think the first question is, can you, me or anyone else genuinely beat the S&P yearly performance? If not or maybe just slightly then whats the point in the hassle and stress if you dont enjoy it.

Theres far more important things in life than stressing about share prices.

The UK and European economic outlook is poor to say the least so why not just buy the market. Im retiring in 14 years so Ive just started my first monthly purchase of an S&P ETF (should have started sooner) Would get good odds the market will be higher in 14 years than now. Small dividend, stress free, no profit warnings.

I really enjoy looking for multibaggers and trading so will continue with small caps also but everyone's different.

OldSchool05

Hi Gringo

Which S&P 500 etf are you using for the monthly purchases? £VUAG is one I’ve considered but need to factor in exchange rate movements on the sterling valuation.

I believe sterling has weakened making the etf more expensive to buy on a consistent basis. The S&P has dropped but don’t see benefits of it as sterling has weakened.

Theres £VUSA or the dollar equivalent is £VUSD. Both are dividend distributing accounts.

Accumulating equivalents are VUAG and VUAA. Slightly larger spread on these if that matters.

A nice summary of current conditions any thoughts on where you feel US 10 year treasuries will top out yield wise ? I personally am coming around to your train of thought in that there may not be any material improvement until inflation and longer dated bond yields start to come down.

Trident

Maybe its time for Ed to dredge up those stats for market recovery period. From memory they tend to be shorter than people expect, but would be good to have a refresher.

Albertos

Never understood this philosophy. I'm pretty sure an investment trust manager would not get away with saying "The NAV is down 15% for the quarter, but I've not sold anything so there's no loss".

But each to his/her own.

Phil

(Edit: I do a weekly analysis/valuation of my my portfolio - if it's gone down I consider I have definitively made a loss, just to be clear.)

Difficult day today but now is not the time to throw in the towel IMO.

Many stocks on my list are sitting on long term support levels and the RSI is at a low or sitting on support. Somero Enterprises Inc (LON:SOM) Redrow (LON:RDW) Saga (LON:SAGA) Just (LON:JUST) Legal & General (LON:LGEN) £INDV and many more. On top of that the volumes today have been very low on many small caps. So it’s not panic selling (or institutional selling). More likely a lack of buyers.

A bottom is reached when there are no more sellers. Maybe I’m being delusional but the The RSI says to me that this will happen soon on several stocks (barring really bad news such as something hideous from Putin).

I’m not sure what the news will be but I wouldn’t be surprised if things turn around (or at least stop falling) in the next few days/weeks. At least for now…..

KevinS1

I've just looked at my PF and amazingly it is now sat exactly where it was (almost to the pound) on 31st Dec 2020.

I remain 90% invested and will now adopt my ostrich approach which is what I normally do around times like this - I will avoid looking at my PF value on my brokers website and will instead try and sit on my hands and stop reacting to short-term ups & downs.

I believe I have a good spread of investments - IT's, shares and quite a few income earners from both the above. If things drop further so be it. I know long-term things will come back and in a year or two we will be sat looking back on this as a blip.

It's frustrating that the gains of the last couple of years have been eroded, but I have confidence that most of my PF is in solid companies - low debt, good earnings and good management.

I will watch the overall movements through my Folio tool on Stocko (it doesn't hold valuations - just tickers & SP's thereby avoiding me overtrading as the psychology of 10%+ drops causes you to question your thesis when this is stated in front of you as ££XX-thousands if you track the exact financial amount).

I've over-traded far too much in the last couple of years instead of having patience and letting things run in their own time. Now is not the time to be doing that as it will simply double-down on a poor practice.

Hopefully when things turn round I can deploy my 10% of cash and look to bring my PF back to where it was 18months ago. It is a long-term game and its important to remember that when planning to keep enough cash at hand to see you through these times and not create undue stress.

All the best to everyone and I hope things come good over the next 12-months.

stpalm

11th May '22

Hi Gringo, is there more than 1 ETF tracking the S&P if so which do you use and why? Tia, gla with your investments and everything else for that matter! Looks like we are all gonna need it. lol

Apologies, i neglected to read the posts below. I believe there should be currency hedged etfs on some things

Ive often used ISF did well most times if not all. I dont use it exclusively its just something i will buy when i cant assess the risk. Something i also do with CLIG. Because I always think its low risk and they seem honest with the market. God bless Barry Oliff!

I would say itdepends on the price you paid for your investments. Regardless cash is king so always have some ready. Its surprisinghow much difference 10k can make to a previously bought 100k portfolio. When i get below that liquid i worry if at that time we are not in a strongly rising market. March 2020 was like christmas. Nobody i knew was affected by covid and for the 3rd time i managed to time the market really well.That does not mean i was happy about it, i felt guilty!

MontanaDawn

10th Jan '23

Here too David. Best of luck!

Small Cap Value Report (Mon 9 May 2022) - IDEA, MIDW, CER, IOF, WATR

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Paul Scott

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