Small Cap Value Report (Part 1) - Thu 25 May 2017 - FEVR, RBG, EHG, BLV, MMX, BOOT, FLO, REDX | Paul Scott

25th May '17 by Paul Scott

74 comments 28382 reads

Good morning! It's Paul here.

I'm meant to be having a day off today, concentrating on moving house. However, I've done my usual morning scan of the RNS, so thought I'd put up some brief comments. Graham is planning on doing some more in depth reporting later today.

Founders cashing in

The list is growing of companies where founders are cashing in significant portions of their stakes. Coming after huge moves up in share prices, this is another sign that the market for growth companies is clearly getting toppy.

Actually, I think we're possibly now into the final, "euphoria" stage of a bull market. Whilst that may sound alarming, this is also a time when fortunes can be made. The trick is obviously to cash out before the market eventually corrects, or crashes.

Off the top of my head, I can think of £G4M and Purplebricks (LON:PURP) (both of which I hold personally) where Directors have taken a fair chunk off the table. Yesterday Directors of Keywords Studios (LON:KWS) did the same.

Today it is Fevertree Drinks (LON:FEVR) - a founder Director Charles Rolls intended to sell 2.5m shares, but "due to significant institutional demand" (lol!) he ended up kindly selling them 4.5m shares, but took a haircut on price - selling at 1625p per share. That's £73.1m he's banked - not bad going! Mr Rolls still holds 12.9m shares though, so still has acres of skin in the game.

Should we begrudge Directors taking advantage of an extremely buoyant market, and cashing in some chips? Possibly not - I'd probably do the same in their shoes. However, when you see Directors cashing in at many companies, then it clearly points to a market that is expensive. If there are willing buyers though, then maybe these share prices could go even higher? In some cases I suspect we might already seeing the "greater fool theory" in play.

As regards Fevertree Drinks (LON:FEVR) I briefly bought some for my Stockopedia portfolio, Beam Me Up Scotty, but got cold feet after the last trading update. For me, the bull case rested on the likelihood that broker forecasts look far too pessimistic (as has proven the case historically).…

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bestace

25th May '17

I think you are far too quick to apologise Paul. If people rant and rave because they don't want to take responsibility for their own investing decisions or if they lose money because they can't be bothered to do their own research, well that reflects more on them than it does on you.

Making the occasional loss is part and parcel of the investment journey, particularly in small caps, so allowing for this needs to be built into the decision-making process through a clear understanding of risk-based position sizing and when to scale up or down. People following these principles would be able to accommodate a 40% hit on one investment without bringing a load of aggro on themselves.

I would hate to think your writing might become more 'fence-sitter' in style because you don't want to come across as too enthusiastic.

WarrantStar

Hi Doug
I think Zytronic (LON:ZYT) is up as a delayed response to interim figures released on 16th May. These showed some much needed sales growth. It's also a superstock and technology companies are generally doing quite well at the moment. Maybe it has been tipped somewhere too.

andyi

Paul,
We all make our own decisions and should be able to live with them , your inputs are a valuable resource and I for one can say that my investment decisions would be a lot poorer without the benefit of your views. Keep up the good work and don't change your style.

Cowlid

Just need to echo the above - RBG was one of my biggest holdings (c10% of portfolio), so am nursing a significant loss at the moment. BUT, i bought into this company based on my own research, and after taking your ruminations on board (along with another whose opinion I sometimes listen to - my father!).

I'm still delighted to say that my losses on RBG are significantly less than my gain on Avesco last year! Ignore the BBs (as you seem to be doing - although the temptation to feed the trolls must be great).

Good luck with the move.

Brilliant Leader

doug, re: Zytronic (LON:ZYT) - these shares are pretty illiquid and it doesn't take much buying or selling to move the price. As you say, it is generally a quiet share with nothing much happening between reporting periods and dividend payouts (worth noting perhaps that the share price held up very well on the last ex-divi day) which I take as a huge positive. Worth following their Twitter feed as well which is far more active than any bulletin board discussions.

matylda

Good luck there over the weekend Paul and thanks for the input today as always.

Trigger14

Just a question on Fevertree Drinks (LON:FEVR) being 'comfortably' ahead of expectations. I am a bit unclear on the actual meaning of words like 'comfortably', 'materially', 'significantly' and 'substantially' in this context. I've discussed the difference between materially and significantly before (which is unclear!) but not 'comfortably'. I assumed 'comfortably' was pretty bullish i.e. better than 'materially' or 'significantly' but without being clear by how much, but Paul you seem to think otherwise? Just wondered what others understood by these terms in case I'm misinterpreting them...

jonno

Paul
Even the best don't always call it right, Warren Buffet with Tesco for example. I am sure I recollect Peter Lynch saying in one of his books, 'One Up on Wall Street' perhaps that if your investment decisions are more often right than wrong, you will do very well over time, getting 7 out of 10 comes to mind. So as difficult as it sometimes is just reflect on all the good calls that you have made and helped others make, Avesco being a formidable case in point.

One of the many things I like about Stockopedia is the quality of the discussion board, both in terms of the knowledge of the contributors and the respect shown. So no worries Paul onward and upward.

On the matter of Zytronic I suspect that a reason for the recent price movement may be a pending upgrade to eps for the year to end Sept, if you look at the TTM it suggest 30.2p as opposed to the 28.6p currently shown. This was alluded to in a recent review of the company by Phil Oakley.

Jonno

There is no consensus agreement on what these terms actually mean, but someone suggested this in a SCVR comment last year:

Materially better" than expectations : +10% to +15% beat
"Comfortably ahead" of expectations : +2% to +10% beat
"In line" with expectations : 0 to +2% beat
"Broadly in line" with expectations : 0 to -5% miss
Anything worse than this and a Boardroom shuffle is pending. Hope this helps!© PJ0077 2016

That got Paul's seal of approval in the following day's SCVR.

JohnEustace

Re Minds + Machines (LON:MMX) the growth in the .vip domain is being driven by China.

steviej

Actually you can do very well even if you lose on a majority of your positions, so long as your average profits exceed your losses by a nice margin.

jonesj

I agree 100% with your comments Paul. The analysis here is outstanding & only the overall record should be considered.
As for boards, well there are too many rude people who make pointless criticisms. I suggest the way forward it to ignore other boards and kick them off this one, so we keep it constructive.

Mark Tughan

Good afternoon all,

I too was warming to the Revolution Bars (LON:RBG) "story" but I felt at 200p+ the risks were meaningful and wider market toppy, so I held back, setting an alert for a sub 200p price. I use a the stocokopedia alerts a lot and I don't usually pile in (or out) when they are hit, but Iook at the numbers and the news again at that point and sometime act, but frequently set a fresh alert having considered the numbers, valuation metrics, news flow etc.

Fortunately for me, I now have what I believe to be a bargain entry point for Revolution Bars (LON:RBG) and have started to build a position. I beieve the yield is quite safe, the problems are fixable and the management, whilst humbled I hope, will learn. I also think it may be "in play" or will be soon at under 4x ebitda - assuming that this years outturn will in fact be close/similar to last years.

I've occasionally bought stocks after profit warnings and am well aware of the excellent research this site has done on this area. Many should be avoided, but slavishly following stockmarket "adages" like "never catch a falling knife" is to me as stupid as not studying the numbers and the news and substiuting silly rhymes with exercising rigorous judgement about valuation, and management ability. The last "falling knife" I caught was IG Index (at £4.66 / 7% yield) and this seems to be working out well and slightly proving the exception to the adage followers. I think Revolution Bars (LON:RBG) is in similar territory - overdone and now offering serious value but not without risk. I'd be happy to hold it without a substantial growth story, more as a value play and good yield. It's in the right place in premium bars and the upside from a revamp and fresh focus on food could be material.

Don't we all read this daily blog precicely because we want Paul to express his views. Without these is's just regurgitating the news. If anything it's refreshing that he too is as fallable as the rest of us. I say keep it up Paul!

vodathan

No need to apologise Paul, I think most of us come here for your clear analysis and honest opinion, not instructions on how to run our portfolios.
Getting it wrong now and again is a statistical certainty in this game and so long as you are right more often than wrong then all is good (and your BMUS stats speak for themselves).
I would hate to think this episode will change the way you write as I value very much the work you put into these reports (Graham too of course) and it's one of the reasons I subscribe.
I personally was out of RBG before the big drop but probably due to chance and other stocks needing my limited funds.

WhaleHQ

I have to laugh because I've got the the same reference taken from the same SCVR. Not sure how accurate it is though because if you look through the RNS feed they have used 'comfortably' before:

15/05/2017
‘will be comfortably ahead of current market expectations.’
24/01/2017
‘Therefore the Board expects that the outcome for the full year will be materially ahead of its expectations.’
07/11/2016
‘will be materially ahead of current market expectations.’
19/05/2016
‘will be materially ahead of market expectations.’
14/03/2016
‘We have had an encouraging start to 2016 and look forward to the future with confidence.’
25/01/2016
‘Given the strong sales in the final two months of the year, the Board anticipates that the outcome for the full year will be comfortably ahead of its expectations.’
04/11/2015
‘Given the strong sales in the period to date, the Board anticipates that the results for the full year will be materially ahead of Board expectations.‘
08/07/2015
‘Given the strong sales in the first half of the year and in particular in June, the Board anticipates that the results for the full year will be materially ahead of board expectations’

I think that my over analysis of terms is ridiculous though; maybe they thought 'comfortably' sounded cool and they were sick to the back teeth of using the term materially conversely maybe their guidance is closer to market expectations than people want to believe, time will tell

Camtab

Paul, don't apologise simply because people don't understand the nature of what you are doing here. They should either learn or go elsewhere!! I am inclined to agree with your macro view. It is always difficult to understand how anyone would sell when things are looking good so perhaps now is the time.

Thanks for that - v helpful

FoolishBen

Apology completely unnecessary. If Warren Buffet was judged on his worst performing investment, none of us would have anybody to look up to. If you do get tempted to respond to the trolls I'd remind them of the fact you backed £G4M before everyone else had jumped on the bandwagon. Bit of a cliche but you win some, you lose some and this is coming from someone who has a fair bit invested in Revolution Bars (LON:RBG) .

Thanks for digging all this up. Yes agree the distinction maybe does not mean much in this case and shouldn't read too much into it ( though it seems materially may be vaguely more than comfortably in general)

Tanglands

Paul, can I please add to the voices on here asking you not to apologise when things don't work out as anticipated. I was, but no longer am a holder. I did lose money on it, but as noted above its the "I" that did it not the "you". Please do not pull back from giving an insight on why you hold your view. I have read all of them, and I mean all of them, agreed with many and for me perhaps most helpfully formed my own view as to why I have disagreed with some, BUT your analysis and comment has been a catalyst for my enquiry and my action and therefore my responsibility. Hope the move goes/gone well!

Small Cap Value Report (Part 1) - Thu 25 May 2017 - FEVR, RBG, EHG, BLV, MMX, BOOT, FLO, REDX

Founders cashing in

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Paul Scott

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