Small Cap Value Report (Thu 9 April 2020) - ECK, OTB

9th Apr '20 by Paul Scott

120 comments 11478 reads

Good morning, it's Paul here with the placeholder article for Thursday morning's readers comments.

Estimated timings today - should be mostly done by 1pm, but I expect to carry on until c.3pm. Edit at 13:52 - I'm going to leave it there for today. Today's report is now finished.

Lockdown - this is starting to become tiresome, but I understand the need for it. I'm going to have to dodge the over-zealous megaphone wielding rozzers, and get some exercise this weekend. A month of lockdown has meant an expanding waistline, driven by too frequent deliveries from Dominos pizza, and too much ice cream. We'll certainly be a nation of bloaters once this is all over.

Italian tech - one news item which amused me, was that an Italian Govt website for people to claim support money, crashed due to a huge surge in online applications. This prompted the website Pornhub to offer its technical expertise to the Italian Govt, since Pornhub's servers were also experiencing an unprecedented rise in traffic but had managed to continue operating as normal. It seems that Italians are using the lockdown to do more than just eat pizza!

US markets - I can't believe how much the US market has rallied. I think in terms of the Dow Jones Industrial Average, just because it's what I'm used to over the last 20 years. This peaked around 29,500 earlier this year. It then plummeted to about 18,500 in the coronavirus sell-off. It's now about 23,500. That's an 11,000 point drop, followed by a 5,000 point recovery - almost half! That makes no sense to me whatsoever, when reports from the US are that the country is in economic meltdown - something which could take a long time to recover from.

It may be the case that CV-19 is getting close to a peak, and that some economic activity may be able to resume (end May, perhaps?). What worries me is the unprecedented economic damage that the shutdown is going to leave behind. Can bureaucratic, poorly designed, rushed, Government schemes get money out there quickly enough? When have civil services ever managed to get massive projects done fast & efficiently? Never. When you think through the enormity of the UK schemes, where the Govt is basically paying the payrolls for vast numbers of companies, it's impossible to imagine how such a scheme could be administered effectively. I…

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Paul Scott

10th Apr '20

Your wish is my command!

Caper4

That is highly unlikely in my view. End of this month would be my bet as I do believe we will be at the top of the curve and just on the way down. Of course the very vulnerable will still be self isolating as should many other over 60’s.

I would not go on a cruise until I was absolutely sure the virus had been all but eradicated and at the very least,there was a vaccine available and distributed to the whole world. That could be at least two years away. So as you state Paul,there would need to be heavy discounting to attract customers ,who I assume ,in any event ,would have a lot less spare cash when this is all over!!!

timarr

I think everyone is stunned by the speed of Dow recovery as one New York commentator said 'the only thing wrong with it, no analysis.

Perhaps worth noting that - in general - the stocks that have recovered most are those that went down the most. Possibly some short covering going on probably accompanied by some irrational exuberance? Certainly there's a lot of bad news to come.

Scottish Mortgage Investment Trust (LON:SMT) is interesting - it's largest holding is Tesla (hmm ...) followed by Amazon and Alibaba. Plus it has stakes in a bunch of other internet led stuff - Delivery Hero, Facebook, Alphabet, Netflix, Spotify, Shopify and, of course, Zoom - most of which will do OK or better through this. Obviously there are other things that won't be doing as well but overall it's a decent way of getting access to a broadbrush portfolio of online focused companies based outside of the UK.

Trading a bit over NAV now - but that's a moving target in these exciting times.

Simon Rowan

Any thoughts on BOKU and BANGO. No they're not 2 pups out of 101 Dalmatians but mobile payment apps. Both turned a maiden profit recently and Bango ( debt free) have a 6 million cash injection from their new S.Korean partner. For some bizarre reason neither of my brokers will trade BOKU, which has cost me about 30% so far. I have been trying to concentrate on companies that are thriving in this environment rather than those trying to survive it

Any thoughts on BOKU and BANGO.

Quite a lot actually ... (this seems to be happening a lot recently, probably not unrelated to the fact I spend my real life looking at online solutions).

Anyway - online payment companies ought to be at least temporary winners. Lockdowns plus concerns over the spread of the virus via cash have seen a dramatic fall in the use of cash - cash withdrawals from ATMs in the UK are down by a half. Paying by phone is - in this context - safer even in a shop as you don't need to touch a PINpad - and is also likely to see an online increase either through people ordering real stuff - takeaways, etc - or through digital purchases (gaming, music, videos, etc). Both Boku Inc (LON:BOKU) and Bango (LON:BGO) indicate they're seeing evidence of such trends.

That shouldn't be interpreted as an across the board buy signal for payment companies. Many card processors are facing massive losses if travel and hotel companies go bust. In those scenarios customers pay upfront - sometimes in full, sometimes a deposit - and will be demanding refunds. If the airlines, hotels, etc can't pay then payment card scheme rules mean that the processors must stand in for them. I suspect most of the travel companies will get bailouts because the systemic risk of a failure of payments companies is too high. However, this will result in a regulatory rethink around the resilience of a payment ecosystem dependent on this structure - which will be good news for alternative payment providers.

The safest plays in the sector are Visa, Mastercard and Paypal. They don't really take any risk and are rent takers, taking a click on every transaction. A couple of weeks ago they were on sale and I'm kicking myself for not spotting the opportunity (but there were so many). Now, I'm not so sure, we'll probably see a drop in overall payment volumes going forward as we go into recession, offset by the move away from cash. But they are risk free in terms of going bust.

Given the lossmaking nature of Boku Inc (LON:BOKU) and Bango (LON:BGO) it's really hard to form any direct opinion. They're in a sweet spot, they ought to be making windfall gains, some of those should stick after the lockdown. But there's a lot of competition - not least from the Chinese giants Alipay and WeChatPay and the US tech giants Apple Pay and Google Pay. Personally I'd only ever invest here with punt money but if you were going to do it now would be as good a time as any.

Sailorboy

Thanks Paul. Much appreciated. Certainly a difficult one to call at present but virtually down to punt money now.

Thanks Timarr. Coincidently they both turned positive on profits for the first time recently. They have been around for sometime now. Bango have just been partnered by NHN corp a large Data science, game and now cloud company. They have bought 3.5 million new shares (4% of cap) in Bango by way of injecting cash into their business but also claim there will be beneficial synergy for both in their massive asian market. As you mention competition is out there which could pressure pricing, but they are financially fit now to explore new markets

23jez

Hi Paul

I long ago made the choice between being liked

Sorry for my first botched attempt to respond to your report .

I long ago made the choice between being liked or repected. I personally repect you for your honesty. You tell it as it is warts and all. If we are even slightly wise we learn from our own mistakes and those of others.

I like problem solving and like to think I am good at it certainly people turn to me in times of uncertainty and have done all my adult life. In these troubled times if we have integrity as I think you have it is important to stick with it.

I have had a stoclopedia subscripton for about 2 years 18 months of which I spent in and out of hospital and most of the time feeling very ill. It is only in the last few weeks that I feel I not goiong to join the high number of those do not survive.

I am a self direted investor and use an on line platform. Stockopedia has exposed me to shares I have never heard about. I am 20% up and about 30%in cash.

Please ignore your critics by and large these are likely people who want you to do all their work for them. "prophets......."and "we learn more from....." come to mind.

Best wishes to you and your family. Get plenty of rest over the week end

23Jez

At the beginning of the year I was listening to You and Yours with Julian Richer from Richer sounds, famed for not just the success of his company but also the way he has looks after and rewards his staff. He has also been an advisor to M& S for a couple of years. He is very positive about the fortunes of M & S with OCDO. In theory the deal with OCDO though expensive is good, just as RTN's deal for Wagamama was effectively its possible saviour. Trouble is not only did they both pay a lot of money to save their bacon, but are still snared in a trap by former bosses thinking life goes on indefinitely . The bigger danger for this pair are seriously long leases on redundant properties, as yet unquantifiable and not as yet showing up in the books partly because it is not yet a legal requirement and partly because they don't actually know. The current virus is not going to improve this dilemma and is a drag on top of other difficulties they could really do without. I can only think the backers are presuming especially in the case of RTN (with yet another massive dilution) the debt is too big to let them fail.

jgunnsm2

12th Apr '20

The piece mentions Dunelm will emerge with a more favourable competitive advantage. Wayfair W (NYSE) is a $7.25 Bn company in the US and sells online in the UK the same type of goods as Dunelm. I would expect they will continue to be a key competitor and their advantage vs Dunelm is they do not have stores. At their lows in March you could have picked up shares at less than $25 now over $75 a share well done to anyone who invested. Not me.

13th Apr '20

My credentails for this reply are that I am a retired (20 years ago) medical doctor, my last job in the NHS was as Medical Director of a large Teaching Hospital.

GaliadSciences drug Remdesivir, originally used to treat ebola "where it was safe but ineffective" , has been used to treat Covid 19 patients It was effective particularly in the early stage cases. Further evaluation is ongoing. Obviously testing for efficacyy so far has been less rigorous than it would be in the normal couse of drug evaluaton.

I am hopeful for a vaccine to be produced relatively quickly . This is a world wide collaborative endeavour. J&J think they have something. The amount of computer and human intellectual power behand this search will be amazing. But I am am by nature an optimist and believe that the human will to survive is indomitable. My frustration is that I am now too old and frail to be part of the fight.

We live in an age where opinion is purveyed as fact. The fact the president of USA is a great fan clearly is very influential. I remember when I retired being inundated by "financial advisors" who wanted me to let them loose my money for me.

Has interllectual rigor died a death . I remember a bi-lingual Spanish lawyer calling me an overeducated intellectual. Perhaps it was just because I am female.

Whatever one is researching and for what ever purpose one should initially identify source material and not reley soley on the opinion of others . Nowhere is the advice DYOR more important than in investing. Even those of who do this are not totally immune from making costly mistakes. How many times did we get 100% in our exams?

unwise2

Would a short time-frame subscription be worth it?

Everybody is different so I can't give a blanket statement. Personally I don't think I would have benefitted very much if I had subscribed for only a couple of months.

Mark does a webinar every week that averages an hour, and you can ask Mark a question via the software. Every session is recorded so it can be played back. Every week a watchlist is posted and updated daily, suggested buys are posted realtime. The platform runs on a web browser and updates can be sent to your email address. There is an android and apple app (which I haven't used).

Mark's method has several layers to it and they all need to be understood for it to work correctly. Before subscribing I would recommend reading both books several times, they contain a lot of information that won't get fully understood in one go.

bryans1311

Many thanks for your reply. Indeed, I should have expected such an ongoing systematic approach. I will re-read his books (3rd time actually), but can’t really justify the subscription long-term.

dfs12

14th Apr '20

Hi, just wanted to say thanks for mentioning Novacyt SA (LON:NCYT) last week. I decided to take a mini sized punt (usual on highly successful picks!). I wouldn't have taken any position if you hadn't mentioned it. (I would have sent a private message but couldn't seem to find one on your profile page). All the best.