Small Cap Value Report (Thu 4 May 2017) - TUNE, TNI, BLTG

Thursday, May 04 2017 by

Good morning!

Webinar at 1pm today (4 May)

Last call for Ed's webinar today at 1pm. It should be very interesting, as Ed will be unveiling some new features on Stockopedia. As mentioned yesterday, I've had a preview, and very much like the new classifications system. It will be fun to see how the site rates my shareholdings. I think this feature will be much talked-about, and is set to ruffle some feathers too!

So do sign up - here is the link.

Focusrite (LON:TUNE)

I covered this share in yesterday's report. I see it has risen by a further 7% today, on top of yesterday's rise. This reminded me of a term in the excellent Mark Minervini book, which he called something like "post announcement drift".

This is where a company puts out a highly significant piece of news (e.g. strong out-performance, or a big profit warning). What often happens is that the initial first day move is just the beginning of a much bigger move.

This is particularly the case with small caps - because lack of liquidity means that buyers & sellers cannot be immediately satisfied. Therefore buyers/sellers tend to continue buying or selling, often over a long period of time, as they have no other choice. Whereas large caps are so liquid, that most buyers & sellers can get filled quite quickly.

Also, I think a lot of traders use momentum-based strategies (which have worked very well since 2009 - buying the dips, riding the up-trend, then selling once the up-trend breaks). This reinforces the tendency of shares to continue drifting up or down after major positive or negative news.

The obvious conclusion from this tendency of prices to continue drifting after major news, is to buy or sell aggressively on the day of the big news. That's what I've been tending to do lately, and it's working a Treatt (LON:TET) ! (which is a great example of post announcement drift)!

I flagged up the great news from Treatt here on 23 Feb 2017, when the share was up about 21% on the day. Here we are just over 2 months later, and it's risen a further 29%.

A similar thing may be happening at Focusrite (LON:TUNE) although it's early days.

Therefore I am flagging to…

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Focusrite Plc is a music and audio products company supplying hardware and software products used by professional and amateur musicians. The Company is engaged in the development, manufacture and marketing of professional audio and electronic music products. It operates through three segments: Focusrite, Novation and Distribution. The Focusrite segment includes the sales of Focusrite branded products. The Novation segment includes the sales of Novation branded products. The Distribution segment includes distribution of third-party brands, including KRK speakers, Ableton, Stanton, Cakewalk and sE Electronics. The Company sells its products in approximately 160 territories and countries around the world. The Company offers Scarlett, which is an audio interface; Blocs Wave application, which is used by musicians to create their own sounds and songs on any iPhone Operating System (iOS) smartphone or tablet, and e-commerce Websites. more »

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Richoux Group plc is a restaurant company. The Company operates over 20 restaurants in the areas of central London under the brand names, including Richoux, Dean's Diner and Villagio. The Company's business segments include Richoux, Dean's Diner and Villagio. The Company has approximately eight Dean's Diner restaurants in Chatham, Port Solent, Braintree, Fareham, Bicester, Trowbridge and Hempstead Valley. The Company has over seven Villagio restaurants in Andover, Basildon, Hammersmith, Chislehurst, Chatham, the rebranded restaurant in Port Solent and a restaurant in High Wycombe. The Company also has an Italian restaurant trading as Zippers Bar, Restaurant and Grill in Chatham. It has over five Richoux restaurants in Knightsbridge, Mayfair, Piccadilly and St John's Wood and a restaurant in Gloucester Arcade off Gloucester Road in London. Dean's Diner is a classic American diner, which offers burgers, shakes and fries. more »

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Reach plc, formerly Trinity Mirror plc, is a national and regional news publisher. The Company is engaged in producing and distributing content through newspapers and associated digital platforms. It operates through four segments: Publishing, which includes all of its newspapers and associated digital publishing; Printing, which provides printing services to the publishing segment and to third parties; Specialist Digital, which includes its digital recruitment classified business and its digital marketing services businesses, and Central, which includes revenue and costs not allocated to the operational divisions. The Publishing segment publishes paid-for national newspapers and paid-for and free regional newspapers, and operates a portfolio of related digital products. The Printing segment operates five print sites with approximately 20 full color presses. Trinity Mirror Digital Recruitment operates three specialist job boards: GAAPweb, TotallyLegal and SecsintheCity. more »

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  Is LON:TUNE fundamentally strong or weak? Find out More »

36 Comments on this Article show/hide all

PhilipHanson 4th May '17 1 of 36

Paul, re Trinity Mirror (LON:TNI) the other sectoral decline that comes to mind is tobacco, although the key difference there is that volume decline has been offset with price increases to mitigate revenue impact. Also litigation issues similar to Trinity Mirror (LON:TNI) ! However it has proved to be a very profitable sector for investors.

The key dynamic to me is that cash generation should run ahead of earnings as business volume declines. It's the opposite effect of overtrading for a growing company as working capital unwinds and new capex runs substantially below historic depreciation. Trinity Mirror (LON:TNI) should be debt free soon (my main beef with today's update is that there was no comment on net debt, maybe they have recently settled the previously provisioned claims?) so it's not going bust. There is massive cash generation even after pension contributions, something like a 33% FCF yield. So even if you think it's a cigar butt investment, I think there is still plenty left to smoke.

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paraic84 4th May '17 2 of 36

Interesting update from Purplebricks (LON:PURP) today. The reported YOY 83% growth rate for H2 16/17 in instruction growth - which I am regarding as mostly synonymous with revenue given sellers have to pay a fixed fee regardless of whether the property is sold - is superb. Particularly when you consider it was already the third largest estate agent last year and is now probably the second or maybe first by revenue.

Broker targets were for revenue of 43.4m. I thought they were missed but having just done another back of an envelope calculation I think it should be in the region of 40m so not far off and my calculation does not reflect any increases in revenue per customer. The Australia business sounds like it is also going well and they vastly beat their own targets for number of local estate agents.

I also noticed that they now seem to be exploring the lettings market. To date the business has almost solely focused on sales not lettings. This could be another growth area although I would have thought they'd be less well placed while their agents cover a wider geographic footprint than traditional agents.

(I hold in case you're under any illusion otherwise)

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Hot Socks 4th May '17 3 of 36

Paul - any views on the Next trading update and reaction? Not a small cap I know but it is one you've commented on frequently before.

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JohnEustace 4th May '17 4 of 36

Re Focusrite (LON:TUNE), I wonder if there is a Post Paul Scott Positive Comment Drift effect at work, given the low liquidity?

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fahimc 4th May '17 5 of 36

Paul, Have you launched a fund?

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ricky65 4th May '17 6 of 36

Interesting point regarding "post announcement drift". I've revisited my extensive Minervini notes and he mentions that earnings surprises linger and create positive/negative momentum for future earnings. I think that's an important consideration. It also brings to mind the Stockopedia study where it was shown that buying immediately on a profit warning is a bad idea most of the time.

Focusrite (LON:TUNE) was also a technical breakout to an all time high - usually very bullish. I recall Minervini stating that after a breakout the price often continues upwards in the hours/days afterwards with little or no pause. He mentions that some inexperienced investors make the mistake of looking to buy a pullback that rarely materializes during the initial breakout.

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FoolishBen 4th May '17 7 of 36

In reply to post #182355

I've often wondered that my self but have come to the conclusion that Paul doesn't move markets that much (Yet). To highlight the point I would draw your attention to the positive review of Focusrite (LON:TUNE) he wrote on 20th March, after which the share price did nothing much until yesterday. Nice thought though, would make for a rather simple trading plan if it were true.

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Trident 4th May '17 8 of 36

I seem to recall Paul was involved in a private fund, and eventually tired of the pressure and worry associated with it. Think he said Boo Hoo just about made it breakeven.

But as we all should know that just as there is a small timing gap with Comedy and Tragedy, it is really similar to the issues of market timing. He probably would have hit a bull run if he had kept on with it, to date?

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herbie47 4th May '17 9 of 36

In reply to post #182360

Have a look at his fantasy fund, it's up over 100% in the last year.

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seadoc 4th May '17 10 of 36

In reply to post #182356


Paul has a fantasy:


PS: Herbie, you type faster than I can!

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Reubencash207 4th May '17 11 of 36

Hey paul, i found this bit of news on RBG off a site called hospitality and catering news. Weird it didnt come up in the RNS or new alliance. Personally i think this is great news as many feedback sites always say the food at revolution is pretty average so could get a shake up. Whats your opinion? The news is below

Revolution Bars Group plc, the 67-strong leading bar and restaurant group, has appointed Scott Macdonald as Director of Food under contract.

Scott will be responsible for reinforcing development of the food offering across the entire estate for both Revolution and Revolución de Cuba. He will also oversee concept innovation to support the next level of growth for the business.

Mark McQuater, CEO of Revolution Bars Group plc, comments, “Scott will be instrumental in further enhancing food innovation within the group. His wealth of experience and fresh approach will support Revolution’s continued growth as we move forward and further develop our food offering.”

Scott Macdonald said, “I’m delighted to be working with Revolution Bars Group. The company has a reputation for forward-thinking and I welcome the opportunity to work with them to help evolve the business further and be part of its continued success.”

Scott has an abundance of experience working within the hospitality sector, joining Revolution Bars Group from Bill’s, where he held the position as Managing Director. Whilst there, Scott managed the 74-strong estate and was the driving force behind the roll out of 68 restaurants over four years.

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runthejoules 4th May '17 12 of 36

In reply to post #182356

He should make Beam Me Up a real one! I would so buy into it!

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seadoc 4th May '17 13 of 36

Paul, thanks for heads up about webinar, was very interesting. Today you wrote:

"This reinforces my conviction that the smallest, most illiquid shares are really best avoided - unless they are truly exceptional (which very few are)."

You kindly gave mention to "The Retreat of Globalisation" and I was so impressed that I have just read "The Future is Small". In "Future is small" Gervais suggests that the smaller the cap the bigger the gains, well in DMS UK micro-cap from 1955 to 2014 and even more so in the US over the same period. Also the less liquid the share (this time US only) 1972 - 2013 the greater the gains. Now I guess the smaller the share and the less liquid the more likely to go "pointy bits up". I have not been back to the original references but from the text it looks like this was taken onto account in the original works. It could well be that the last 10 or 15 years are different but that is also one of Gervais's thesis, that the last 30 years have been an aberration and now is the time to put (some) money into illiquid microcap shares.


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ricky65 4th May '17 14 of 36

In reply to post #182370

Hi Seadoc.

Thanks for mentioning "Future is small". It's something I'd like to read. I've often read that smaller caps outperform mid caps which in turn outperform large caps but haven't ready deeply about the subject.

I have to say that I disagree with Paul's statement that most small illiquid shares should be best avoided. My experience over the last year or so with microcaps has been positive for the most part. Perhaps I've just been lucky. I had winners with Creightons (LON:CRL), Arcontech (LON:ARC), Northern Bear (LON:NTBR), Elecosoft (LON:ELCO), Scientific Digital Imaging (LON:SDI). I've noted that these are all profitable and generally have increasing revenue/profit/EPS. I had two big duds which I learned a lot from: Forbidden Technologies (LON:FBT) - jam tomorrow cloud-based video technology company which hasn't made a profit. Zamano (LON:ZMNO) - mobile telecom company that had its questionable business model regulated away.

Consequently it appears to me that microcaps can be great but you need to be shrewd to sort the gems from the duds.


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gekkoluvchild 4th May '17 15 of 36

Paul and Graham,

Is there a list of you fave shares at the moment? Haven't been tuned in for abit and value your opinions.


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seadoc 4th May '17 16 of 36

In reply to post #182375


Both books fairly slim, not many words and big pictures so may not seem a bargain at £16.99. But, in my view, well worth the money, somewhat cheaper (even with postage added) from the website of the publisher and if you pop into your local bookshop you will see the codes in the back of the book to get £5 off by ordering direct: rog551 if not previously ordered on line or rog25 if you have and want to buy both or indeed any order over £25.

"...microcaps can be great but you need to be shrewd to sort the gems from the duds."

Very much the view of Gervais. He stresses the importance of a sound, even a strong, balance sheet. So get the full financial data from Stockopedia and look carefully at the balance sheet. Worry not if you are not FCA. For most (perhaps not the very tiniest?) there is a recent summary from Paul/Graham with a detailed analysis of balance sheet, and that is the one thing that Gervais thinks needs the most analysis to avoid losing money on an individual share but the overall data is that the smaller and more illiquid the share the greater the return over 40 yrs. And for those like me on a pension, we have just had 30 years with lower returns on microcaps so (maybe) the good times are just ahead.

Good luck,


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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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