Small Cap Value Report (Thur 11 Oct 2018) - Cheap Shares, BWNG, NXR, SND, OTMP, CAKE, JPR

Thursday, Oct 11 2018 by


Not sure if "good morning" is appropriate on a day like this, as most of us prefer it when stocks are moving upwards rather than getting crushed, as they currently are.

The FTSE is flirting with the 7000 level. This is proper correction territory versus the 7900 high seen in June.

What's most interesting to me is the speed of the rout. The past six sessions, including today's, have seen five dramatic falls, each of them the best part of 100 points (92, 100, 85, 92, and then 130 so far today).

The AIM All-Share Index has been even more dramatic. It's down something like 13% so far this month with some really severe falls along the way.

The NASDAQ 100 finished yesterday's session down 4.4% and looks set to open very weak again today.

I've consistently maintained that the NASDAQ has been home to the worst overvaluations of the long-term bull market we've been living in. So far, it has only returned to the levels from June this year. It has a lot further to fall, in my view.

For context, here is the chart going back to 2015:


This index has performed spectacularly since 2009, which is (not coincidentally) around that period of time when interest rates hit rock bottom. At the low point, it nearly hit 1000. It's now at 7000.

Simple rules of finance suggest that when Interest rates return to normal levels, asset valuations should too. Valuations are based on discounted cash flows, after all. I think that normalisation is healthy, but it's undoubtedly going to be painful in the short-term for many.

On a personal note, I made the difficult decision last night to close my leveraged positions: both my Tesla short (which was in profit) and my short FTSE put position (which was in a loss position). In the end, I made a small net profit from these positions.

However, I needed a bit more personal liquidity, so I wanted my collateral back. I'd actually love to open both of these positions (short Tesla and short FTSE puts) again, when my personal circumstances allow. I am now almost completely unleveraged.

These are exciting times. We could get some very attractive buying opportunities in the months ahead - that's particularly exciting for someone like myself, who rarely ever sells anything.

Some shares…

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All my own views. I am not regulated by the FSA. No advice.

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N Brown Group plc is a digital specialist fit fashion retailer. The Company offers customers a range of products in clothing, footwear and home wares. The Company is a multichannel retailer. It operates through the Home Shopping segment. Its power brands include JD Williams, Simply Be and Jacamo. JD Williams is a department store concept offering style for 50-plus customers and their families. Simply Be is a women's clothing retailer, which offers a fashion collection regardless of the size. Jacamo offers in-house ranges, such as Label J and Black Label, alongside international brands. Its brands also include Ambrose Wilson, Julipa, Premier Man, House of Bath, Marisota, Fashion World, High and Mighty, and Figleaves. It offers financial services that focus on credit customer base and cash customers. It offers womenswear from sizes ranging from 10 to 32 and menswear from sizes ranging from small to 5XL. It operates a store estate in the United Kingdom that focuses on key shopping areas. more »

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Sanderson Group plc is engaged in software and information technology (IT) services business specializing in digital retail technology and enterprise software for businesses operating in the manufacturing, wholesale distribution and logistics sectors. The Company's segments include Digital Retail and Enterprise Software. Its digital retail solutions include in-store technology; back-office systems for processing sales and fulfilling orders, and mobile and e-commerce solutions to underpin online operations. Its systems allow retailers to keep pace with new devices, technologies and channels, driving consumer engagement and retention. It offers Enterprise Resource Planning (ERP) software for manufacturing in general manufacturing, engineering, and food and drink processing businesses. The Company offers industry-specific software and warehouse management systems, delivering sales growth across wholesale distribution, cash and carry, fulfilment and logistics businesses. more »

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OnTheMarket plc is a United Kingdom-based holding company that provides online property portal services to businesses in the estate and lettings agency industry. The Company operates the United Kingdom online residential property portal, The Company's portal allows agents to display their properties to an audience of property seekers. Its online platform offers a search service and lists of homes for sale or to rent. The Company's portal offers saved search and property alert facilities to property seekers by creating a MyOnTheMarket account. Its portal provides an access to tools that enables manual property uploading, editing of property details and branch details. The Company serves home developers, online agent companies, commercials and property advertisers. The Company's subsidiary include Agents' Mutual Limited and On The Market (Europe) Limited. more »

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99 Comments on this Article show/hide all

tony akram 11th Oct '18 80 of 99

I agree with V4Value I too have taken a hit with CAKE what has shocked me is the speed of this 48 hours ago all seemed well now it looks like it is going bust with little or no shareholder value I need to go way feel sorry for myself lick my wounds and try to learn from this experience. I also hold Elegant Hotels and LJ owns 12.5% of the company not sure if I want to keep holding after this as losted all confidence in him but at the same time time not sure if it just anger talking !!

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MarkOR 11th Oct '18 81 of 99

Hmmmm. re Patisserie Holdings (LON:CAKE) Quite a few Directors excised options and sold (not Luke mind) during June and July. How about they re-inject that cash back into the company to keep it afloat? Or maybe they will need that extra cash for the D&O insurance premia they'll need to stump up for.

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Velo 11th Oct '18 82 of 99

From Paul's write-up on May14th on Patisserie Holdings (LON:CAKE) interim update:

"....This tea/coffee/cakes outlet seems to be sailing through the choppy waters of town centre retailing, with complete ease. I'm perplexed as to how this can be, when so many other town centre operators are complaining of low footfall. That doesn't seem to be affecting CAKE...."

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simoan 11th Oct '18 83 of 99

Re: Patisserie Holdings (LON:CAKE). One thing I've just noticed is that the working capital looks strange compared to other  restaurant and pub chains. Others like Greggs (LON:GRG) have negative working capital because they are effectively funded by their suppliers. Patisserie Holdings (LON:CAKE) on the other hand has very positive working capital which has actually been growing over the years. Therefore I would suspect they may have been under reporting liabilities. So it could be they've just discovered hidden liabilities. Just an idea.

Anyone else think this looks suspicious?

All the best, Si 

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smatthews1 11th Oct '18 84 of 99

In reply to post #407404

Absolutely baffles me how these situations can unravel. I have been in and out of this one a couple of times and had it in high regard in my watch list. Where is the accountability from the top level management, I do hope the law book is thrown at high speed at those responsible.

What hope does the average private investor have if the expert analysts fail to spot any irregularities. Investing is a minefield at the best of times, without these popping up now and again.

I do hope this isn't a complete write off for current shareholders when more news emerges.

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xcity 11th Oct '18 85 of 99

I'm an old fashioned analyst and never rely on gut feel. I pay careful attention to the figures (and other info) and try to understand the business that underlies the figures. For me there was a disconnect between the Patisserie Holdings (LON:CAKE) numbers and what I understood about its commercial context. Highly rated, so I didn't consider it further. The obvious explanation was that there was something fundamental that I didn't understand and surely LJ would know. But I've learned over the years that if I don't understand something well enough it will turn to bite me when I least expect.

It was a similar situation for WB with Tesco. He likes big, high quality companies with moats. At the time he bought Tesco looked like that. From across the pond. Over here, everyone could see that customers were being sweated and anyone reading the business pages knew that suppliers were being sweated too. Unsustainably, as it turned out. And some internal business practices had produced a toxic culture as we now know. The point is that the numbers are only part of the story. Understanding how a business produces its numbers helps avoid some of the banana skins.

With Patisserie Holdings (LON:CAKE), I hope for the sake of shareholders that someone simply sucked out a pile of cash. That would be a one off loss, however huge. But, if profits have been overstated for a number of years, then the underlying business will be worth much less than everyone believed.

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jonno 11th Oct '18 86 of 99

I have been musing through some of Warren Buffet's quotes on investing to lighten the mood given the thumping that most portfolios have taken this week. The following from Warren Buffett's letter to share holders in 2000 struck a chord on reading Graham's thoughts on the valuation of some Nasdaq stocks.

"... Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

On a more serious note I am sorry for the situation that holders of Patisserie Holdings (LON:CAKE) find themselves in. Hopefully all is not lost, albeit the omens do not look promising.

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Ramridge 12th Oct '18 87 of 99

Re. Patisserie Holdings (LON:CAKE) When a company crosses over the line from massaging financial accounts to plain falsifying and fabricating data, then no amount of forensic analysis will uncover the fraud in the short term.
The really clever crooks will falsify documents and create a house of cards that is just believable and does not overly arouse analysts' or auditors' suspicions. And that level of fraud can continue for a long time ...but not forever.

Any investment is exposed to this risk, AIM shares more than others. With CAKE I feel for the investors who have lost money because it could so easily have been me. I bought and sold CAKE a couple of times over the last 12 months, and it was on my list to buy at the next opportunity.

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timarr 12th Oct '18 88 of 99

In reply to post #407749

When a company crosses over the line from massaging financial accounts to plain falsifying and fabricating data, then no amount of forensic analysis will uncover the fraud.

Spot on Ramridge.

As far as I can see no one was shorting Patisserie Holdings (LON:CAKE) either, so it's not like the problems had been spotted and ignored.  Commiserations to holders.

These types of issues always seem to start to appear as markets and economies turn, presumably because as it becomes harder to generate growth then it becomes harder to hide fraud. This year we've also seen issues at Air Partner (LON:AIR) as well as the disaster at Conviviality. It's nothing conclusive, but it does all feel a bit fin de siècle.


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mrosbiston 12th Oct '18 89 of 99

i've had a good look through the accounts and pretty much nothing sticks out on Patisserie Holdings (LON:CAKE)

it appears to be a well run, successful, cash generating company. The only flag at all to me (and this is scrapping the barrel) is the financial notes to the accounts are light - six notes, all v brief and basic - would be much better if there was more detail - especially for a company of this size and profile.

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Ramridge 12th Oct '18 90 of 99

I suppose the one tell (to use a poker term) is if a company does consistently a lot better than its peers (Bernie Madoff comes to mind).

But then you have to be careful of false positives.  I am sure there are a number of companies which fall into this category because they have genuine moats, superior talent, patented technologies and so on.

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Trident 12th Oct '18 91 of 99

In reply to post #407534


I know from my own previous of legal notices that HMRC send legal notices to the Company Secretary, not the Finance Director.Though having said that HMRC can be fairly random on who they contact. Nomads definitely don't get legal notices, nor do the auditors. It would seem that the discovery of a winding up notice from HMRC was one of the factors alerting people to a problem. Then it seems they discovered that £28m of cash had disappeared, perhaps when they quickly wanted to pay off the HMRC.

The winding up order was advertised in the London Gazette, but frankly that it is only likely that professional insolvency practitioners would ever notice that.

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Merlotman 12th Oct '18 92 of 99

Like others I've scanned the accounts and nothing pops out aside from the spectacularly smooth progression of sales, profits and cash flow over the last 5 years. I don't hold (luck rather than judgement) but would be keen to find out if there are any learning points that can be salvaged. I for one will be looking harder at industry / peer metrics in future. I'd be particularly interested if any shareholders who attended AGMs ended up having any misgivings about the management team on a face to face basis.
As an aside I note that Beneish was -3.03 as at last report so no help there!

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Howard Marx 12th Oct '18 93 of 99

In reply to post #407879

From the Companies House website, it would appear that the Patisserie Holdings (LON:CAKE) CFO was also the Company Sectretary...


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peterg 12th Oct '18 94 of 99

It would seem that the discovery of a winding up notice from HMRC was one of the factors alerting people to a problem. Then it seems they discovered that £28m of cash had disappeared, perhaps when they quickly wanted to pay off the HMRC.

Except that the missing cash was announced and followed 4 hrs later by an RNS saying the board had just discovered the winding up notice?

Why the further delay if it was as  you suggest? Could be further attempts at backcovering internally, or (and I suspect the case) the HMRC notice was only spotted once they started trying to track the "missing" cash.

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Armorduck 12th Oct '18 95 of 99

In reply to post #407969

Well spotted. I wonder if the street name, Sarehole, might be some type of anagram?

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herbie47 12th Oct '18 96 of 99

In reply to post #407424

I considered H & T (LON:HAT) to be one of my defensive shares but that has also fallen back, I did sell some a while ago so I may top up. There is a concern about regulations changing which could affect their business.

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covkid 12th Oct '18 97 of 99

Haha.......................Amorduck great spot !!!!

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pka 12th Oct '18 98 of 99

I'm not sure whether this has already been mentioned on Stockopedia, but the sad irony is that Luke Johnson (the executive chairman and 37% shareholder of Patisserie Holdings), who has a regular column in the Sunday Times business section, had an article in that paper on 9th September entitled "A business beginner’s guide to tried and tested swindles". The article began: "Here is an aide-memoire for those looking to spot the next fraud — or indeed for aspirant swindlers who want to learn the basics of their trade. Surprisingly, very little changes — many of the same tricks were played 50 or even 100 years ago."

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Zipmanpeter 25th Oct '18 99 of 99

In reply to post #407274

Re my own N Brown (LON:BWNG) - have just finally listened to webinar of results. Very interestting. No change in big points above but not impressed by interim management/CEO and expectations that it will take 6 months to find new CEO and 12months for their impact to be felt.

Interim CEOs intention to revisisit brand propositions as these are still 'not clear' is a worry - especially JDWilliams where I fear the botched FiftyPLus migration has led the tail to wag the dog ie JDWillams progress is being restricted to try to 'save' migrating customers.

Some comfort that spate of (cash) exceptionals is slowing but no guarantee.

Will be a slow turnround.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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