Small Cap Value Report (Thur 11 June 2020) - CMCX, OTMP, CHH, MIND

11th Jun '20 by Graham Neary

61 comments 11268 reads

Good morning!

Graham here. Paul is taking a long weekend for his birthday.

Markets continue to act in all sorts of surprising ways - the NASDAQ has returned to all-time highs and the FTSE climbed back to 6500 as of Monday before retreating 300 points (6200 in the futures as I type).

Reflecting the uncertainty, the Volatility Index (VIX) has found strength again and is now around 30 - a historically very high level, although we've been much higher than that in 2020.

I hope you are all managing to navigate these conditions - it's not easy! I have taken the 'easy' option of trading virtually not at all, and simply watching the value of my accounts gyrate.

Today I'm looking at:

CMC Markets (LON:CMCX)
Onthemarket (LON:OTMP)
Churchill China (LON:CHH)
Mind Gym (LON:MIND)

Finished c. 2pm.

CMC Markets (LON:CMCX)

Share price: 217.5p (+9%)
No. of shares: 289.1 million
Market cap: £628 million

Final Results

Spread betting companies are a very lazy way to invest - compared to having an active spread bet account.

Why bother with all that trading, when you can sit back and make money from everybody else's trading?

Why bother trying to make money in blackjack and poker, when you can simply own the casino?

I should have held on to the CMC shares I bought last year. The share price has more than doubled since.

Instead, I focused on my shareholding in IG Group (LON:IGG) - one of my top 5 holdings. IG is in my view likely to be the lowest-risk share in the spreadbet industry, with CMC coming in at second place.

This entire industry has enjoyed a bizarre windfall from the Covid-19 pandemic. Government lockdown policies crashed the Western economies which in turn sparked stock market chaos and drove traders (both old and young) to churn their accounts like never before.

Let's see how CMC did for FY March 2021:

net operating income +93% to £252 million
PBT explodes to £98.7 million
EPS explodes to 30p

It almost sounds too good to be true, and I am nervous that it is.

Last year, as flagged in my analysis of CMC's interim results, the company changed its risk management strategy.

Risk…

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Graham Neary

11th Jun '20

Thanks cmpeckham. I totally agree that it's not necessary to hedge every single trade. There are so many ways to manage risk.

I just hope they aren't trying to be too "smart", and don't get too used to the idea that clients can't trade well! Cheers. G

Deegee Eff

There is no practical difference between owning 1000 shares of Vodafone and a CFD for 1000 Vodafone shares.

CFDs were invented to avoid tax and that is what they continue to be used for.

UK_Investor_8888

Boo!

All investing is done on already pre-taxed funds, and then the profits are taxed too.

There's too much taxation and government meddling in peoples' lives already.

Paul Scott

re Onthemarket (LON:OTMP) - the upside case here is all about risk:reward. The business is growing, and can dial its marketing spend up or down, in fact most of its costs are variable. Therefore, it can continue growing without being forced to raise funds. I think it probably will raise more funds at some point, to accelerate growth, once it has a new CEO. That's why I have held back on buying more shares in OTMP, it's only a small, entry level position for me.

I wish we knew why the old CEO left, he seemed a safe pair of hands to me, but something obviously went wrong behind the scenes.

Going back to risk:reward, if OTMP does manage to topple Rightmove, then this share could be a 100-bagger. So even if you think that there's a more than 1% chance of this happening, it justifies having a punt on the shares.

Remember that Rightmove is hated by its customers, since it price gouges them, making absurdly high profits. Therefore it stands to reason that estate agents would jump at the chance to usurp Rightmove with their own portal, and OTMP is majority earned by estate agents. I think it's surprising this hasn't happened yet. IF it does, then OTMP likely becomes a a big multibagger. That's the attraction of the £40m mkt cap, which could potentially become billions.

Hence I recognise it's speculative, but the upside potential is so large, I think it's worth a punt.

Regards, Paul.

Vsihv

Whether there is a practical difference or not, there is a legal difference and that matters for tax purposes. You still pay income and capital gains tax. If the objective is to avoid tax, I suggest using a spread bet, unless you are trying to make losses to protect gains elsewhere.

Leveraged products in general and CFDs are very useful and cost effective risk management tools. They serve that purpose for those who choose to use them as such. Hold IGG

I was under the impression that because it is classified as legal tender, it is not taxable. Then again a market maker doesn't pay stamp duty but pays tax on profits/deducts losses (although I don't think that extends to currencies).

Guess they can always change the rules based on which assets Dominic Cummings decides to trade. :D

doublelutz

There are a lot of things to take into account but just one point, if it is your main activity and you are making money you can expect HMRC to say it is taxable. If it is just a few trades before you go to work then it is not likely to be taxable. So a market maker with an organisation trading in currencies would certainly be taxable. If you lose money, of course, HMRC will say you are not carrying on a business of trading in currencies!

I don't get the human psyche - remove a $10 fee, I am willing to risk thousands of $ . Guess if Sir Isaac Newton struggled with the madness of men, what chance us mere mortals!

I sincerely hope I am not one of the people I denounce!

If you wanted Vodafone shares to hold I think you would buy the shares and pay the stamp duty. If you wanted to hold them for a very short period for a small potential profit then you may decide to use a cfd or the completely tax free spread bet. There must be a vast number of transactions that would not take place with a stamp duty charge.

sharw

Regarding the debate between Onthemarket (LON:OTMP) and Rightmove (LON:RMV) Stephen English is negative on the latter in his webinar with Tamzin - the Who will be the losers? section starting 39:29 in.

https://www.piworld.co.uk/2020/04/10/stephen-english-webinar-a-plague-on-all-our-houses-how-to-repair-some-of-the-damage/
He cites the website:
https://www.saynotorightmove.co.uk/

FuzzyHaha

When we used to go into a pub many months ago, and order a coke for the driver. It's expected that the cola drink you are given is Coca Cola. Other Cola based drinks are available but I think you'd be put out with "Nobby's Cola" on your glass. Same thing with RMV.

I am a regular property investor and RMV is my 1st port of call. There are a few skinflint agents who insist on using Zoopla, but I don't have the time to use a 3rd and a 4th provider. I know that anything that I'm likely to be interested in will be on that.

I'm not defending RMV.....far from it. They just don't seem to like their customers, but I can't see OTB seriuosly challenging.

LongValue

OldFitMan, your argument that 90% of clients lose 90% of their account in 90 days could be correct (At least for private clients) but I suspect that a good proportion of Cmc Markets (LON:CMCX) clients are simply hedging rather than trading. In which case, why should they be any more likely to make a profit than someone taking out an insurance policy?

kgb1953

I guess it encourages small trades in penny stocks. A lot of CFDs are small trades too.

bryaz

The fund produced a total return of +11.3% during the month of April against the benchmarks +3.9%.

When so-called medical “experts”, led by Neil Ferguson, once again came forecasting death on an apocalyptic scale, just as they did with

BSE, Aids, Ebola, SARs, Swine Flu, Asian Flu and MERS, all of which turned out to be greatly exaggerated and whereas in the past their

predictions have been treated with scepticism, largely because on every occasion they have been proven wrong, this time gullible

politicians fell hook line and sinker for their prophecies of doom. Essentially, they faced two simple choices:

1) let the virus run its course, as has been customary up until now, and provide the necessary resources to the health service to deal with

it. That would have had little, if any, impact on financial markets, the economy, jobs, civil liberties, the public finances/government debt

and our children's education and future prospects.The economy would have remained strong and growing, well able to fund any extra care

required for the very small subset of the population that was at risk from covid-19, or;

2) Shut down the economy. Wipe trillions of dollars off people’s savings. Spread undue panic throughout the population, creating its own

problems for the NHS and lasting damage to our economy. Throw millions of people out of work. Destroy very large numbers of

businesses, large and small alike, in every sector of our economy that have taken years to build. Introduce martial law, stripping citizens of

their most basic civil liberties and effectively imprisoning them in their homes. Deny our children their education. Deny seriously ill

patients, such as those suffering from cancer and heart disease, the medical care they need and deter others who need care from

attending A&E. Borrow gigantic sums of money to try and mitigate the wholly unnecessary and self-inflicted economic damage done by

those policies, at a time when public sector debt is already at irresponsibly high levels and the tax burden is at a 50 year high. Additional

debt that will require very large cuts to public services and yet more tax rises to service it, which will further reduce our already anaemic

rate of economic growth, burden our children with a mountain of debt to pay off and severely damage their future prospects.

Our politicians chose option 2. Undoubtedly, the dumbest most damaging decision ever taken by a Conservative government.

Not a single person need have lost their job, not a single company need have been forced into bankruptcy, not a single child need have

been deprived of its education or its future prospects, not a single penny need have been added to the national debt, no tax rises or cuts

to public services would have been required and no one need have been stripped of their civil liberties had our country been run by

intelligent, able people. Sadly, it is not and the full extent of the damage done by gullible and utterly incompetent politicians is going to

become all too apparent in the coming months. They have destroyed millions of people's livelihoods and future prospects, although most

don't yet know it, for a ludicrously exaggerated and largely unreal threat. We are now, as a result of their stupidity, barrelling towards an

economic catastrophe and the wholesale collapse of entire sectors of our economy, including car manufacturing, airlines, restaurants, oil

exploration and development, retail shopping, cafes, bars, hotels, theme parks, entertainment, housing, shopping malls, airline

manufacturing and quite possibly our banks as bad debts skyrocket. If ever there was a time to rethink how we select the people to run

our economy it is now. We need a system based on merit that ensures only our best, properly qualified and most able people get to do so

and that excludes virtually all current politicians.

ISAallowance

Just as a minor point, I don't believe that you pay income tax on CFDs. As I understand it, dividend adjustments to CFDs are regarded as a capital adjustment rather than income, and hence the CFD is only potentially liable for capital gains tax when sold, never income tax.

Of course I am a layman not a tax expert and may be wrong, but this is my understanding of the situation after looking into it for my own interest.

smatthews1

Thats a fair assessment but if you rewind 10 + years or so, who would have thought there would be room for 2 extra supermarkets competing with Tesco, Sainsbury's, Morrisions & Asda?

Even though their margins are wafer thin, the shrewd Germans have come along and taken even more market share.

Brands and trusted names are a powerful thing, but so is heard mentality. No one likes being the first to try some thing, but once there is a following, they can catch on pretty quickly.

I see the upside here, maybe one to tuck away long term, but for that to happen management really needs to crack why estate agents should change to them, I am not sure manipulating them with shares will win long term. But one ill start watching this one more closely.

Steve Artingstall

Hi Paul - "it stands to reason that estate agents would jump at the chance to usurp Rightmove with their own portal, and OTMP is majority earned by estate agents. I think it's surprising this hasn't happened yet."

I expect the reason estate agents are proving v.slow to shift from Rightmove to OTMP despite hating the former is that their customers like/love it and have never heard of OTMP. If estate agents tell all their potential customers that their house is going to be marketed on a site they never heard of, rather than the one they are undoubtedly using themselves to search for their new house (i.e. Rightmove) - they might end up with no houses to sell rather rapidly... I own neither so no pony in this race.

Cheers

Steve

Snoo

The On the Market website is a bit of a cheap knock-off the Rightmove site. It is puzzling why it should be so unappealing, there are many quick fixes it could make, and it should seek to differentiate itself a bit. Any agent that made the brave jump to ditching Rightmove would save money in the short-run but in the long run lose money as people get dissatisfied with their visibility stats. If there was an industry-wide pact, this could work but I feel it is way to much dog-eat-dog for that type of co-operation.

I do believe there could be room for disruption, basically Rightmove has changed little in the last 10+ years. The network effect means that getting agents on board gets easier if you get the buyers on board. But how would that happen? Maybe people could be incentivised. None of the portals have built any form of community, which could be really powerful. A site combining Rightmove, Houzz (interior design), CheckaTrade, conveyancing services would have some synergies between them.

Yet I feel Rightmove has become a cash cow, simply returning profits instead of seeking to build their moat further. That's not necessarily a bad thing and is ideal for certain types of shareholders.

But could an innovation be replicable without them copying it? It seems unlikely.

12th Jun '20

that makes sense - your trade is based on change in capital value, and this is an adjustment for the capital value - as per stamp duty, you didn't purchase the shares so didn't receive the dividend.

Boon

28th Mar '21

That's not a good analogy. You're comparing supermarkets who operate physical locations, to property portals online.

This is why Google, Apple, Facebook, LinkedIn, Amazon, eBay.... all online marketplaces... have dominant positions. Unlike supermarkets where its almost impossible to get 60%, 70% of a market.

Why? Because people are only willing to travel X miles for supermarket shopping. But there's no such concept of "distance" in online - everyone can access a website, easily. So it is a very much winner takes all in online.

Small Cap Value Report (Thur 11 June 2020) - CMCX, OTMP, CHH, MIND

CMC Markets (LON:CMCX)

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Graham Neary

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