Small Cap Value Report (Thu 21 Dec 2017) - Bitcoin, Ground rents, SOS, STY, TFW, BOTB

Wednesday, Dec 20 2017 by

Good morning, it's Paul here.

It's another quiet day today, with the market winding down for Christmas. There are still some interesting things going on though.

Bitcoin mania

My view on this remains unchanged - that blockchain technology sounds fascinating, and could have multiple, game-changing uses. However, that doesn't mean that Bitcoin, and other crypto-currencies, are actually worth anything. Just because there is a limited quantity of something worthless, doesn't mean that it becomes worth anything. In the long run, once this bubble has burst, I see Bitcoin being worth zero, and is likely to be banned by Governments wanting to stamp out something that is mainly of use to criminals. People say that it can't be banned. Of course it can - Governments just pass laws making it illegal to hold, or transact in crypto-currencies. That seems the likely end game to me, eventually.

Here's an amazing statistic (source: CNBC) - the total market cap of the 1,300 (and rising) crypto-currencies has risen 30-fold in 2017 to $600bn. So this is now one of the largest financial manias that the world has ever seen. Bear in mind that these things have zero intrinsic value. What could possibly go wrong?!

I see that there are manias in individual stocks which claim to be doing something to do with crypto-currencies. Again, another classic sign of a bubble. The same thing happened in the late 1990s - numerous share issues occurred in junk companies jumping on the internet & tech bandwagon. They typically resulted in 90%+ losses for the punters who believed the hype.

Here is a list of UK listed companies which seem to be jumping on the blockchain bandwagon - not exactly high quality companies! I see several opportunistic spivs in that list, which confirms my existing thoughts on cryto-currency mania.

In terms of how blockchain mania is going in the USA - as you would expect - our excitable cousins across the pond are going crazy over it. This short article mentions Crypto Co, which listed, and rose 2700% in its first month, valuing it at $11bn. The SEC recently suspended its shares. Another similar company, Longfin, rose a similar percentage, leading to its CEO/Chairman publicly stating that the rise was not justified.

So, it's all an absolutely classic financial bubble, which is inevitably going to end in disaster -…

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83 Comments on this Article show/hide all

shine66 21st Dec '17 64 of 83

In reply to post #257618

a big factor to concider with bitcoin is apparently less than a thousand people own 40% of all the currency in circulation

Is that unusually concentrated? For comparison, 10% of households in GB hold 45% of all wealth*.



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runthejoules 21st Dec '17 65 of 83

I'd like to see Stockopedia thumbs up become a cryptocurrency. (NB everyone who gives this message the thumbs up gets 50% of the profit when I sell them all at 20,000% in two weeks' time).
A massive thank you to you Paul and Graham, Ed, Matylda, MrContrarian and the rest for all the ideas (not tips!) and expertise you've given us. Sure, we should all dyor but I think there's no doubt your ideas have beaten the market - and mine - this year! My investments have done so much better this year than last, and next year I will pay a bit more attention, work harder to understand the market, psychology and the maths and do better with this excellent resource. Merry Christmas, one and all!

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smatthews1 21st Dec '17 66 of 83

I have also found the exponential rise in crypto currencies fascinating to witness. I have sometimes watched the price of bitcoin rise with amazement and questioning how it could be possible.

I then started looking into the previous bubble which was the tech bubble, then it dawned on that the stocks back in the late 90 's were promoted from the newspaper, news channels and your mates down the pub. Where as now the whole world is using the internet the information travels much faster, with greater coverage. with greater access to trading with the use of smart phones, and other devices I believe we now have on our hands a supercharged bubble.

The results could create an interesting time to look back upon.

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Redrichmond 21st Dec '17 67 of 83

Paul/Graham, any chance of reverting to the tried and tested system of putting the following information on each company? You have stopped doing this now, and Graham follows a different pattern.

The below format helps a lot on each share under its title, maybe with the spread bps as well?


"Share price: 97.0p (up 1.0% today, at 08:15)
No. shares: 295.8m
Market cap: £286.9m"

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Chris123 21st Dec '17 68 of 83

In reply to post #257868

Wow. Re. $LTEA I feel this is guaranteed to be an anecdote in some future book which looks back on this period of crypto-mania. Maybe it will rise 1000% in the next few weeks and months!? Does anyone know what Michael Lewis is currently working on.....?

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Gromley 21st Dec '17 69 of 83

In reply to post #257758

Hi Paul,

Interesting that you should cite Tom Winnifrith's input as one of the reasons you sought to look again at your (former) holding in IQE (LON:IQE) .

I personally find TW's rather ranty style of writing rather challenging at to be honest I find it sometimes makes his views hard to take too seriously. Nevertheless one should absolutely try to take in as much opinion that differs from one's own, so I've tried to look back on that.

I'm not a paid subscriber so I cannot access the "bearcast" from back in September, but looking at some of the responses I think I can piece together some of the main arguments and also his  arguments from more recent posts.

1. There is competition

I'm not sure which competitors TW quoted back in September but clearly there are competitors and if you have a profitable niche business clearly there will be more challengers trying to enter the space. This is the area in which I feel least comfortable with my ability to directly verify the "market lead" that IQE is presumed to have, but the 80% market share which IQE are reputed to have already says something about  the relative strength of the competition and IQE continue to report process improvements etc. This is absolutely something to keep an eagle eye on (and something I intend to try to research further) but at this stage I don't see anything to suggest that IQE's "moat" is in danger of a serious breach anytime soon.

From TW's postings in the last couple of days :

2. IQE has been a rotten generator of cash.

Firstly I should say that I do not have a detailed understanding of the past of IQE (I might research it further, but I'm not sure how relevant it really is).

This might just be my aversion to TW's writing style, but this an a few other comments make me feel that TW has a grudge against IQE since the dot-bomb.

Still cash is important and indeed our Graham reflected recently that IQE is a very capital intensive business so we should not ignore this area.

TW's beef in terms of the recent TU is that revenues are ahead, profit is ahead but cash is only "in the range of current market expectations." I have no idea what those current market expectations are and in fact it seems to me that on all metrics the "market expectations" are pretty uninformed. But a company that is investing heavily in a  strong growth  phase that it has just entered is not throwing off sack loads of cash, hardly seems very surprising to me.  Certainly cash generation IS important, but it is pretty clear to me that in growth situations, substantial cash generation really only starts to kick in once the growth starts to moderate.

3. Top Line growth is not very good.

"Full year revenues in line with market expectations" is not actually very good. It basically means they deliver 12% top line growth. Woop woop...

It's a valid point, but as I noted yesterday growth in the high margin photonics segment (starting from a smaller base) is 100%, and in fact (as below) it seems that IQE opted to sacrifice some lower margin turnover in order to enable photonics growth.

TW expands this argument to the "modest" growth in profits and also comments  "This is exactly the same story as every year up to now".

Again this reads to me like a "grudge" comment against a serial "jam tomorrow" company . Not having the "history" with IQE, I instead see a company with a substantial transformative market opportunity , but it is still worth considering whether IQE has form for over promising and offering up false dawns.

4. Wireless is flat to down. That is by far its largest division.

"Basically, the core end market saw negative LFL growth in 2017 over 2016. Wireless represented about 70% of 2016 revenues, and it declined. Oops."

Firstly one should correct the point that Wireless was by far its largest division in H1 it was 77% of turnover (vs 23% for Photonics) but in H2 it moved to 55:36 and it is not inconceivable that by now photonics might even be the bigger market.

Looking at H1 operating margins were 15% in wireless and 41% in photonics - not hard to think where one would like to see the growth.

Those figures also point to the fact that wireless is the more mature market and perhaps coming back to competition as above the more commoditised.

Also I would refer back to my interpretation of the TU that IQE actively deferred wireless business in order to focus on photonics (fascinating if they were really able to do so). This deferred business together with the roll out of 5G networks should see material growth in this segment going forwards.

5. Reduced US taxes a negative.

IMHO this is where TW completes his departure from planet reality.

"There is a big write down on deferred tax asset owing to new US tax law. This is actually an interesting problem. It is conceivable that someone would place quite a high value on that NOL (ie maybe 30% of full value). So, this is a real diminution of the attractiveness of IQE as an investment."

So, any future profits IQE generates in the US will be taxed at a lower rate, but that means that the value of past losses which can be offset against future profits reduces.

"So, this is a real diminution of the attractiveness of IQE as an investment."

I'm sorry I quite obviously have insufficient brainpower to begin to understand that rationale.

6. Kicker.

"Earnings, no cash, weird write downs [ Which weird write downs are those TW?]  to marry the difference. Live, die, repeat. I think IQE has goosed it up too much this time though - people won’t forget."

Another comment that reads like a grudge to me.

I presume "goosed it up" is meant to be slang for over hyping (I'm obviously not "down with the kids").

Certainly IQE use terms such as "the VCSEL ramp" and "inflection point" but I don't really see much evidence that they over hype anything. If anything they seem quite careful with their announcements - less that two months ago they expressed confidence of meeting market expectations now they will beat revenues by c. 2-3% which suggests a more than 10% "beat" in November and Decemeber.

But has the share price got "ahead of itself"?

In terms of the short term movements in the Share price that is a relevant thing to think about.

SP reaction to the positive TU and even to the "delay" (in some people's minds) of the TU suggest very much that the SP got ahead of itself.

But in terms of the potential 2 to 3 year trajectory of earnings and SP, my view is that in fact after this correction IQE looks "cheap" - it may well look cheaper still in the near term I have no idea, but I certainly remain a happy holder (unbothered by the "paper" diminution of value over the last few weeks. - Other than the fact I would love to have sold at 180p to buy back now!)


As I'm still a value investor at heart, even investing in growth/story stocks this is still important to me. So the key questions for me are :

1. Can I envisage (in say 2-3 years) a level of earnings that would support the current share price even if earnings growth moderates?

  • Current share price of £1.39 so for a PE of 20 = 7.0p EPS or PE 15  = 9.3p EPS - I can absolutely see those numbers.

2. Can I envisage (in say 2-3 years) a level of earnings that would support a multiple of the current share price with continued growth?

  • Also (for me) a yes - but I'd rather wait until the analysts update their views (between now and the end of March)  based on more information than I will have access to.  (There is though at least one number in the source material I've used here that would support a share price +200% from here)

On balance (I know this is a very bullish post) I hope I have not missed any of the points of contention, nor dismissed any to glibly and I would certainly value any contrary views.

For me, validating the apparent competitive advantage that IQE has is the biggest priority here.

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jesseowens 21st Dec '17 70 of 83

Thanks Paul and Graham for all your hard work . I really look forward to reading SCVR every day . Have a great Christmas

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bestace 21st Dec '17 71 of 83

In reply to post #257973

On the point about cash, I found the actual wording in the RNS somewhat ambiguous:

Net funds are expected to be in the range of current market expectations.

IQE (LON:IQE) are in a net debt position so if they are referring to cash here it seems odd to use the phrase 'net funds', a term which typically implies positive net cash. Using the phrase 'net debt' or simply 'net cash' would have been more appropriate if they are indeed talking about cash.

I wonder if they are in fact making a reference to shareholders' funds rather than cash, i.e. they could be saying that even though pre-tax profits are going to be ahead of market expectations, because of the prior tax liability and the write-down of the deferred tax asset, on a post-tax basis profits are only going to be 'in line' with market expectations.

The deferred tax issue is a complete red herring to me. It's one of those areas where the accountants/regulators have disappeared up their own backsides in coming up with an accounting standard that maybe make sense from an academic or technical point of view, but is far removed from the real world.

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rhomboid1 21st Dec '17 72 of 83

In reply to post #258003

Hi best ace

I think you’ve missed

‘IQE plc (AIM: IQE, "IQE" or the "Company"), a leading global supplier of advanced wafer products and wafer services to the semiconductor industry, today announces that further to the announcement made on 9 November 2017 regarding the proposed placing of ordinary shares, it has successfully placed 67,941,581 new ordinary shares of 1 pence each in the Company (the "Placing Shares"), at a price of 140 pence per share, raising gross proceeds of approximately £95 million (the "Placing").’

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bestace 21st Dec '17 73 of 83

In reply to post #258013

Ah yes of course, I'd forgotten the placing.

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Paul Scott 21st Dec '17 74 of 83

In reply to post #257958

Hi redrichmond,

You said;

Paul/Graham, any chance of reverting to the tried and tested system of putting the following information on each company? You have stopped doing this now, and Graham follows a different pattern. 

"Share price: 97.0p (up 1.0% today, at 08:15)
No. shares: 295.8m
Market cap: £286.9m"

I didn't do that today, because there weren't any proper results to analyse, and I'm winding down for Xmas!

Rest assured though, I have no plans to stop putting in the above info into all future reports. It's a pain in the neck to do (as it slows me down), but I agree it's essential info. So worry ye not!

Regards, Paul.

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Graham Ford 21st Dec '17 75 of 83

In reply to post #257973

I don’t have access to TWs musings either but have similarly tried to follow what appear to be the points he is making as reported by others

I understand it when he gets passionate about market abuse or corporate management shenanigans to the disadvantage of shareholders generally. However, does that emotional style really make for a balanced view of a company like £IQE?

The company has clearly communicated that it has multiple, multi-year contracts for its wafers that are used in VCSELs. It is very unlikely that they would have been able to secure those if the competitors had a viable offering. Seems like TW has a bit too much belief in his own technical understanding of where IQE stand versus their competitors and is ignoring the multiple, multi-year contracts.

TW also seems to still be anchored in a lot of historical baggage with this company. It is abundantly clear that the world/market has changed and they have entered a new high growth market that requires capital investment to produce volume. Yet it sounds like he is expecting the type of free cash flows that would be expected from a mature company. So I cannot see lack of cash flows at this point in the cycle as a significant or unexpected situation.

I think that IQE are difficult for commentators to call because they operate in such a technical field and are prevented by NDAs from talking about specifics of what they are doing for individual customers. Graham Neary said in one of his reports that clearly the photonics business is going very well but how many of us can say we know significant amounts about that (or words to that effect)? Does TW, or any other non-specialised commentator, have the time to devote to acquiring enough knowledge about epitaxy and its markets to really evaluate the competition in this market? I suspect not and this is why there is a lot of not very good analysis out there. There are even some commentators that refer to IQE as a chip manufacturing company.

It feels like TW has used sensationalism to try to generate interest and possibly new subscribers and let emotion cloud his judgement. Added to that his complaints do not seem to be justified. So I think he is wrong on this one this time.

I think that one of the strengths of Paul and Graham’s reporting here is that they don’t need to play to the gallery to attract readers.

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Redrichmond 22nd Dec '17 76 of 83

Great stuff, have a great break

Roll on the turkey and the only fools and horse repeats..

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gus 1065 22nd Dec '17 77 of 83

Noteworthy that Bitcoin (on IG Index) has just touched down to US$12,500 this morning at 7.15am (off about 20% in the last day or so and well off the c.$19,500 peak last weekend). Brings a whole new meaning to the term “volatile”.

I’ve taken and closed a few small shorts in the past few days although the bid/offer spread (currently $120) and minimum trade size (25p/point) makes it quite a chunky trade for a casual punt.

Probably back above $16,000 by lunchtime.


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lemonjar 22nd Dec '17 78 of 83

Perhaps this is it, the bitcoin route, the stampeed to the exit. Hey, maybe some of that cash will come wondering back, cowed, into one or two shares I hold, that would be nice :)

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Paul Scott 22nd Dec '17 79 of 83

In reply to post #258228

Hi lemonjar,

My gut feel is that there's probably not a lot of overlap between stock market investors, and bitcoin punters. Out of my fairly wide network of sensible investors, I only know 1 person who holds Bitcoin, and in that case it was just a tiny fun money punt.

Looking on Twitter, people posting on Bitcoin seem to be mainly young (millennials) and appear to be financially naive. Or, they're people who have been transfixed by the clever BlockChain technology, and mistakenly think that this makes cryptocurrencies valuable, where of course they are ultimately worthless.

Fascinating times! I think banks could take a bit of a hit from people taking out loans to buy cryptocurrencies, but that's not likely to be a systemically important problem, globally, in my view.

Regards, Paul.

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lemonjar 22nd Dec '17 80 of 83

Thanks Paul! Wishing you, Graham, Ed and all the team a great 'stocking'-filled christmas :)

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ed_miller 22nd Dec '17 81 of 83

In reply to post #257953

Re: crypto bubble - From your post it sounds as though you are probably too young to have experienced the tech-stock and bubble first-hand. The media/online 'buzz' around crypto-currencies reminds me very strongly of the tech bubble, as does the insane, explosive runaway of speculative price rises. Of course this time it's different. It certainly was different that time too. It always is before the hugely-inflated bubble bursts. But you are sensible enough to sense the danger. And I am happy to agree that robust, sustainable and reliable crypto-currencies will be very important in the future, just as it was clear by 1998 that the internet and internet companies were going to be massive and global before too long in the then future.

I have no position in crypto-currencies. Unfortunately I did have a modest amount of a tech-stock fund acquired in the dead-cat bounce of 2000. (It didn't remain a tech-stock fund for long - was renamed and re-focused when tech-stock funds were uncool again following the crash of August 2000.)

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timarr 23rd Dec '17 82 of 83

The parallels with 2000 are uncanny, even down to the bounce in share prices triggered by companies adding "blockchain" to their names. Back in 2001 there was a famous paper written about this in the dotcom era - A by any other name, in which the researchers recorded the following:

We document a striking positive stock price reaction to the announcement of  corporate name changes to Internet-related dotcom names. This “dotcom” effect produces cumulative abnormal returns on the order of 74 percent for the 10 days surrounding the announcement day.

This happened even though most of the companies didn't change their business models.

A few years after the event they went back and took a retrospective look and found:

Following the Internet "crash" of mid-2000, investors react positively to name changes for firms that remove from their name. This deletion effect produces cumulative abnormal returns on the order of 64 percent for the sixty days surrounding the announcement day.

Again with no change to the underlying businesses. 

Of course the internet did revolutionise things, people were right about that, but most invested in the wrong things, at the wrong time and the wrong price.  Do not - ever - underestimate the herd like qualities of human beings. 

Merry Christmas all, and a belated thanks to Paul and Graham.


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smatthews1 23rd Dec '17 83 of 83

In reply to post #258508

Your right I wasn't old enough to experience it from an investment perspective, but certainly made the most of its use. But I also agree that the technology behind it will prevail at some point once a use has been realised. but whilst these keep popping up and have a fluctuating price attached to it, I'm putting them into to the 'bubble basket'

Also Thankyou to timarr for sharing that, very insightful, as you can see how easily this can rub off onto the main markets as we are starting to see already.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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