Small Cap Value Report (Thu 24 Aug 2017) - RBG, ENTU, UTW, SPE | Paul Scott

24th Aug '17 by Paul Scott

35 comments 17286 reads

Good morning, it's Paul here!

A theme which I keep coming back to, is the remarkable changes (mainly driven by technology) which are occurring across multiple sectors. This is causing a lot of problems (and creating opportunities) for investors. How do we pick the winners? Anything that looks like a future winner is probably already extremely expensive, because we're in a roaring bull market for growth companies. So that opens up a lot of downside risk, if sentiment on a particular share, or the whole market, suddenly falls.

Last night I read Howard Marks' latest memo, which (as usual) is utterly brilliant. He sounds the usual warning signals, which he is well known for. It's well worth a read, highly recommended. There seems little doubt to me that we're probably now in the euphoria stage of this bull market - i.e. near the end. However, that stage could go on for a while yet, and it's when the biggest profits are often made. Nobody knows when the bubble will burst.

Also, I see differences between now, and 1998-2000, when we had a massive bubble in tech, media & telecoms shares. Back then, all sorts of rubbish blue sky stocks soared to mad valuations. However, this time round, a lot of the very expensive stocks are actually fantastic, highly disruptive businesses (e.g. Amazon). We can argue about valuation all we like, but there's little doubt that once-in-a-lifetime changes are happening across multiple sectors. Just look at the difficulties retailers are facing from online competition, and the trail of destruction that Amazon and Google are leaving in their wakes.

Bargains?

In the past, once certain sectors became really cheap, you could buy them with the reasonable expectation that they would recover - mean reversion. However, that's no longer the case. With, say, struggling retailers, and whole sectors (e.g. car dealers) - lots of investors are wondering if those businesses will still exist in 10 years' time?

Take a look at Dixons Carphone (LON:DC.) which warned on profits today. The share is currently down 24% today, but was down 30% earlier. This is the latest in an increasing long list of big companies which are surprising on the downside.

The company said something very interesting about mobile phone handsets, and I'm wondering what other companies this may have read-across to?

...However,…

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Trident

24th Aug '17

Thanks Paul. Good overview of Revolution Bars (LON:RBG) opportunity, and interesting to hear your views of other valuations, which I do not have access to.

bwakem

On the subject of customers keeping handsets longer: I spoke to Vodafone a few weeks ago about some issue and although I am still in contract for several months they asked if I was happy with my handset and did I want to move to a SIM only deal for just £11/month instead of upgrading the handset. It seems Vodafone are working against the mobile manufacturers.

I owe you a pint for Revolution Bars (LON:RBG) as I'm in 6 figure profits on that one!

JonBirdy

Thanks Paul

I find your introduction particularly illuminating food for thought. Regarding technology revolutions I'm trying to consider how the electric car revolution will feed into lithium and copper producers and the whole supply chain.

I've been long on both GAME Digital (LON:GMD) and Revolution Bars (LON:RBG) for a while. Good week so far :)

Jon

Blissgull

Note that the "irrevocable" undertakings can be revoked in the event of an alternative offer 5% above the Stonegate bid.

jonesj

Vodafone encouraging customers to keep old phones is probably helpful in their negotiations with phone manufacturers.
ie If there is not enough margin in the phone, then they will encourage use of old phones, so phone makers need to offer a better deal.

runthejoules

Well done on your calls Paul! I was wondering what your and others' thoughts on Sopheon (LON:SPE) were? You liked it at the last results but thought it was rather in the price - sure enough, it fell and I've topped up on the way down. Recovered in the run up to today's results which are good but not amazing so today's 6% gains have been lost. Worth hanging on for more upside and potential dividend? dyor of course

PS Mightn't it be likely that someone like google would bid for rightmove Rightmove (LON:RMV), given they have billions down the back of the sofa? What makes a company an Imagination Imagination Technologies (LON:IMG) and what makes it an £ARM?

cholertonandrew

Anyone else invested in Nanoco? They've been making very positive noises, have heavyweight manufacturing partners and first orders coming in. The share price coming under quite a bit of pressure though, a little bit worrying. What do others think?

Regards
Andrew

Looking at IQE (LON:IQE) most of the rise in there (its a electronics wafer supplier for various markets) seems to be because of the expected increased camera functionality for smart phones, and the likely demand for increased wafer production to facilitate it.

There's talk of 3D camera functionality in the Apple iphone 8 apparently requiring these wafer arrays.

Apple aren't advertising this new functionality as far as I am aware, but it is 'expected' according to rumour. Therefore whilst it is true the mobile phone market is becoming more mature, there can be some decent innovations which may drive it again in the medium term. Whether people value these innovations, I am less certain.

FoolishBen

Andrew - They have £1m revenue against a £74m market cap, a StockRank of 2 and the share price is down around 80% in the last 5 years. Might be a bit speculative for the average SCVR reader. Is there something I'm missing?

Carcosa

At first glance about Nanoco (LON:NANO) I was skeptical that it was a penny share hype. However it appears to have won a major order and revenues are about to ramp up. It is however a far cry from what I see as being a major disruptor to an industry

daveinthelakes

Avoid Utilitywise (LON:UTW) buy Inspired Energy (LON:INSE)

No domestic household business.

Revenue recognition only when clients have consumed the energy

Order book all contracted

Accretive acquisitions

Tarred with the same brush as Utilitywise hence underpriced in my view

Half-year Report

EDIT Not sure why this is spamming if someone could explain? I tried to copy an extract from Inspired results but it came out as gobbledegook so I deleted it and replaced it with the above link

Hi, yes that's a good point. Their market cap isn't underpinned by revenues let alone profits. They're targeting the display market for televisions and monitors for first commercial revenues with possible later opportunities in lighting and cancerous tumour imaging to aid surgery. Their quantum dots are targeting going into the backlight of LCD televisions to improve colour and reduce electricity use. Eventually they may be used more extensively inside an LCD television set. They have Dow Chemical as a manufacturing partner and Merck also have an agreement with them but haven't commissioned a factory to build the dots at scale yet.

It's one where the company looks to have promising technology to address what could be a huge market. It's hard to value though at this stage given the tiny revenues to date but it certainly looks to me to be an interesting one. In the television market, longer term there may well be strong competition to the use of LCD screens with quantum dots from OLED displays if OLED prices come down. For anyone interested there was a really good Edison research note available on their website.

Regards
Andrew

Sorry, just to clarify my above post related to Nanoco who make cadmium free quantum dots.

Thanks
Andrew

Phil Dunphy

Disclosure: I have now sold my holding in Sopheon (LON:SPE)

Thank you Paul for your update on Sopheon (LON:SPE). I sold my holding based on the convertible loan options and general momentum of their business. I think the price will be depressed for a while yet. The results weren't bad, but they weren't great either. Personally i like a company to make growth across all fronts versus one or two blue chip clients, if they don't achieve one of those there's a huge downside risk to SP IMO, and too much of a gamble for me personally. However, it will rocket if they could achieve the bluechip clients, but the liquidity/volatility is too much for me. On top of that I can't do DMA for this share. As the dragon's say "I'm out".

GLA

Small Cap Value Report (Thu 24 Aug 2017) - RBG, ENTU, UTW, SPE

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Paul Scott

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