Small Cap Value Report (Thu 15 Jun 2017) - PURP, PRSM, DFS, SPRP, | Paul Scott

15th Jun '17 by Paul Scott

37 comments 19789 reads

Good morning, it's Paul here!

Many thanks to Graham for covering Mon-Wed SCVRs here. That allowed me some time off, to relax with family, who visited me for a couple of days.

A few overview comments, before I get stuck into some companies reporting on trading, and results.

Growth companies & BMUS

The extraordinary bull market which we have seen in growth companies seems to be having a serious wobble at the moment. The big question is whether this is (yet another) good time to buy the dip, or whether things are turning bearish? I don't know the answer to that, as it depends on the sentiment of other people. Although I'm leaning towards being more cautious now.

Personally, I decided to bank some of the stupendous profits (186% in 2 years, with no gearing) on BMUS. Why get greedy? So I sold everything that looked fully priced or more. I've only kept 3 conviction, long-term holds, and a few other smaller bits & pieces.

The nice thing about selling out & holding cash, is that you can change your mind and buy back in at any time. Plus of course your cash increases in buying power, if the market does continue falling.

There have been some really sharp corrections in tech stocks lately. I see that the US FANG stocks have had a wobble. Also, some UK growth companies that I follow have dropped sharply - e.g. Purplebricks (LON:PURP) was 450p a few days ago, and is now 370p - an 18% fall.

Another wildly pricey growth stock, Blue Prism (LON:PRSM) (in which I hold a short position currently), peaked only days ago at c.950p, and today has dropped to 724p, a 24% drop, on no news.

This is a reminder of how volatile prices can be in growth companies, especially when everyone is trying to buy or sell at the same time. Companies like PRSM and PURP look staggeringly expensive on conventional metrics, and are almost impossible to value accurately. Hence when sentiment turns in either direction, price moves can be blisteringly rapid, and overshoot in both directions.

Consumer spending turning negative?

There are some troubling facts & figures emerging, which seem to point to consumers drawing in our collective horns. Inflation of 2.9%, and average wages…

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danyou

15th Jun '17

Paul,
Good to have you back!
You said you were planning on meeting the management team of Revolution Bars. Do your comments above reflect a certain degree of optimism after your meeting?

vik2001

186% in 2 years, with no gearing - that's mad skills :)

anfitrion

The DFS Furniture (LON:DFS) profit warning should have surprised nobody. Regardless of politics and policies, the macro picture is farily clear: the UK consumer is constrained by inflation, and the increase in spending over the last year of so has been based on a decrease in the savings rate -which obviously is not sustainable source. The double wammy could come if we start seing an uptick in the unemployment rate, but so far employment seems solid, thankfully.

My favourite shorts in this enviroment are Halfords (LON:HFD), which suffers from weaker pound and personally I think they have a structural business model issue, and particularly Conviviality (LON:CVR). DFS is providing a fairly good roadmap for Conviviality, which after acquiring the top two wholesalers in the UK (Matthew Clark and Bibendum) is now loaded with debt, with a lofty valuation of 12 EV/EBITDA (after a +50% stock run ytd) and the razor thin profit margins of distributing to bars and pubs (who are now in trouble as Revolution Bars (LON:RBG) has shown us).

On the long side, I'm keen on industrial thread manufacturer Coats (LON:COA) who should benefit a lot from the weaker pound (although beware of its big pension liability as it looks like UK interest rates can't go up any time soon). But generally, I belive you can't go wrong with any industrial exporters with a UK cost-base.

dscollard

Today;'s huge headline from my PoV is BoE 5:3 on interest rate hikes: closest spilt since 2007

That is very significant on the backdrop of inflation but also wage stagnation and negative drag from Brexit. This could be one very toxic mix particularly when personal borrowing in the UK is approaching all time highs

https://tradingeconomics.com/united-kingdom/households-debt-to-gdp

I am short some house builders

Andrew L

great long-term performance and good discipline moving into cash. Moving into cash and being patient is the hard part. Boohoo was a good call and I remember you arguing with Tom Winnifrith over this who wasn't keen. I can't remember what else drove your portfolio's returns. Would be interesting to know what has been the main performance drivers.

ambrosia

"I've only kept 3 conviction, long-term holds, and a few other smaller bits & pieces."
do you mind if i ask what those stocks are, i'm guessing one is G4M, that said its 5% down today, maybe its you doing the selling

AnonymousUser41492

Also, Next is down almost 7% today despite a hefty dividend being in the next few weeks.

Paul Scott

ambrosia,

You just click on the BMUS link in the main article, to view my Stockopedia portfolio.

All trades are logged, so it's completely transparent.

Regards, Paul.

Seems that experts still see a raise as unlikely:

"Barclays also predicts that interest rates will remain on hold until 2019.

Minutes of the meeting mention higher-than-expected core inflation and investment intentions, in addition to firming global growth and extra imported inflation stemming from the depreciation in the currency.

Those MPC members who voted for a hike emphasised tighter labour market conditions and risks of a more pronounced inflation overshoot. Despite the change in vote split, we remain of the view that no interest hike will be delivered in the course of the next two years."

Having said that, I agree house builders could get into real trouble short/mid term. Long term there is still a long term UK housing deficit, though.

vik2001 - a fair bit of luck was involved too, and a roaring bull market helped lol!!

P.

tiswas

Bitcoin down 16% today and 30% in a few days. I have wanted to short it for a while but its parabolic moves upwards put me off.

Another sign of a healthy correction in frothy markets?

Paul Hill

Part of the reason why Sprue Aegis - given its product line - maybe up today, could be to do with the awful tower block fire yesterday in West London

I tend to watch the GBP reaction since this is a great aggregation of the wisdom of crowds. The ForEx markets dwarf equity markets by many orders of magnitude.

Let's face it, the calls on interest rates over the past decade have been serially wrong (as have the predictions on property prices in many cases as a counter argument). It is also pretty clear that the direction of travel can only be upwards and further that central banks need to rearm their weaponry to handle the next black swan. The timing is the thing and today's decision does at least call that into question. I'll watch the ForEx markets for a lead rather than follow the analyses of others. The term DYOR often has more resonance because many experts will be biased by their own positions and influenced by their own book.

FWIW, my shorts are doing nicely already - these are tactical positions which I can unwind rapidly and stop-loss protect profits

I see there is a bit of a rout in Purplebricks (LON:PURP) today , looking at price action, I'd fancy a 300p target in the medium term. As Paul says, these momo darlings can unwind fast when there is a rush for the exit

ricky65

"I'm out, or almost out, of all conventional retailers & hospitality stocks. The only exception being Revolution Bars (LON:RBG) as the pain has already been taken there". Personally, I think it's more likely that there's more pain to come. I think a mistake people make after a heavy fall is thinking that the fall is over and that a recovery will start shortly. Most of the time the stock has more to fall.

ricky,

Every situation is different.

With Revolution Bars (LON:RBG) I'm basing my views on my fundamental assessment of the business, and what I think it's worth. Comparing that to the market cap, I think it's very good value. Although obviously as a consumer-facing stock, it might possibly see some softening demand of demand, maybe?

The ungeared balance sheet, and outstanding returns from new site roll outs (on super-cheap rents), mean it's probably less risky than most. Anyway, time will tell. I also think RBG is a takeover target at this level, hence why I'd rather stay in the stock, than risk being out of it if a bid appears.

Anyway, I'm massively hedged now, with big short positions on other consumer stocks. That's the beauty of having a mix of longs & shorts, in uncertain times - the shorts enable you to be more bold with your longs, as the overall market exposure is netted off.

Regards, Paul.

ACounsell

Paul,

What instruments do you use to hedge with short positions - put options and what are the practicalities of hedging with short positions for an individual investor without the firepower o your returns from BMUS!? I tried shorting with CFDs via Plus 500 and that was a massive fail - albeit that was a commodity related short. No wonder Plus 500 share price and finances look good - too many people losing their money I wager (appropriate word!).

Jack Corsellis

Paul,

Could you review ECHO, SOU and FUM? I would be very interested to know your views.

Best, Jack

Small Cap Value Report (Thu 15 Jun 2017) - PURP, PRSM, DFS, SPRP,

Growth companies & BMUS

Consumer spending turning negative?

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Paul Scott

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