Small Cap Value Report (Thur 15 Aug 2019) - HAT, Market Jitters

15th Aug '19 by Graham Neary

35 comments 9048 reads

Good morning!

The Dow fell 800 points yesterday, or 3%. The FTSE dropped another 100 points to c. 7150. Let’s see what today brings.

H & T (LON:HAT) footnote

(I have a long position in HAT.)

I had a very brief chat yesterday with Richard Withers, the interim FD of H&T, to clarify one or two things I had been wondering about (see Tuesday's report for background info).

1. Fall in retail margin

H&T's retail division saw a 10% reduction in gross profits and a noticeable decline in margin, and I asked Richard why the company had chosen to get rid of aged items at such a large discount.

Richard explained that these items had been sitting in stores for "quite a while", including things like less desirable watches and gold bangles which were more difficult to sell.

From a financial efficiency point of view, £2 million of cash had been released by this move, and stock turn had improved from 52 weeks to 38 weeks.

Richard confirmed that there had been a gradual buildup of inventory and that this sort of inventory clearance was just something that might be needed from time to time - there is no overall change in the company's retail strategy.

My view - this makes perfect sense and I appreciated the focus on stock turn. H&T's quality metrics tend to be "good, not great" but managing inventory efficiently is the sort of thing that can help to keep them at acceptable levels:

2. Low revenue growth in Pawnbroking

Pawnbroking revenue (less impairments) only increased by 4%, even though the gross pledge book grew by 12.5%. The risk-adjusted margin, which measures the profitability of the pledge book, fell from 67.9 to 62.9%.

Richard gave me some extra detail on this, explaining that there were more 14 carat and 22 carat items being pawned (with origins in Eastern Europe and Asia).

This business mix with more high-value items being pawned results in larger loans being made by H&T. And larger loans tend to have lower interest rates. This is why revenue didn't grow as fast as the pledge book, and the profit margin of the pledge book fell.

My view - I'm satisfied that this makes sense. Redemption rates were flat, so rising customer defaults are not…

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sharesurfer

15th Aug '19

Yes I read MM is 90% in cash. One of the best thing about his approach is that you don't have to sit through some very turbulent markets.

Also, he doesn't mind missing the bottom of markets. He says he doesn't mind waiting e.g. 5 months to re-enter a bull market. So you could buy and hold or you could do what he does. Which approach is right? Well,I don't know but his returns would indicate he is doing something right!

jonesj

The part of the H & T (LON:HAT) business I would like to understand further is the unsecured lending to sub-prime customers & in particular, I would want to see that they retain discipline.
In past cycles there have been obvious issues with other providers lending recklessly, as we all know.

Incidentally, I've recently seen close up specific examples of reckless lending from OTHER providers, as an overseas student tenant managed to run up debts with various companies before predictably going home to the far east. Companies chasing debts include Paypal (a 5 figure sum), Ratesetter & 3 mobile phone companies. So far. The banks seem to have the good sense to not extend credit to overseas students & the former landlord certainly didn't either, but some other companies seem to leave all common sense behind when making lending decisions. This was quite an eye opener !

[I have held Paypal shares ever since they were hived off from ebay, so am not impressed]

I imagine H&T are more responsible than this. However, since at present I can't figure out how far they intend to grow the unsecured sub-prime lending business or prevent reckless lending, I am no longer a shareholder.
If the business is still looking interesting next year, I might buy a token shareholding in order to visit the AGM.

herbie47

I think he is less than 10% invested now. The problem with his approach is you have to watch the your shares nearly all the time. Also his method is not so easy to follow and it probably works better in the US markets. At least buy and hold you don't need to spend so much time. There is more than one way to invest I don't think one is right or wrong, it depends what suits you best.

timarr

Which approach is right? Well,I don't know but his returns would indicate he is doing something right!

Where are his returns published? I've looked but I can't find any contemporaneous, verified data - only some legacy stuff.

Thornabian

We haven't seen the fiscal loosening of the purse strings in Europe yet.

Wait for it....

dscollard

Plot below shows the sector shift over the past week and month: big shifts away from the cyclicals so O&G and Mining getting caned along with Banks. O&G Services suffer the most by extension of their their dependence on oilers.

By contrast, Health Care, Pharm, Tobacco outperforming (relatively)

Big shift to defensives and recession-like allocations

5d55947f7f8aa15-08-38-03-FTSE_350_thurs_

mojomogoz

Market jitters...

Market crash is unlikely to happen for same reason as last time so don't play old movies.

Macro from this point is all guesswork. Economic and interest rate cycles as we historically know them are dead...classic patterns will no doubt come back but after the denouement of our current super financialised phase of economics and policy. Don't know when that is.

The genesis of today's jitters is tightening of eurodollar markets. This started happening many months ago. This is how all market correction phases have occurred since 2008. Its not the Fed and CBs and liquidity but the private banks and their confidence to swap eurodollar liabilities and so create credit and trading.

Since 2008 the global economy has been anaemic. Its never really partied at any point so no build up of kool aid in real economy...only the financial economy partied. This means that economic pullbacks might be regular but they are shallow and not very damaging so far....jumping off a small rather than huge cliff.

My guess is that we need to have a real economic overheat to furnish a sustained and nasty correction. Despite the length of this expansion that could be years away. I fancy that a different type of macro event triggers volatility first and that is around global currencies and the USD-RMB relationship.

Both countries have sustainability of balance sheet issues. China through malinvestment and that likely leads to a capital destruction phase. The US has an excess of spending and consumption beyond its tax and general income. One could make case for either going pop first. Counter to prevailing heuristically based wisdom that the USD strengthens during crisis as its the strongest economy I think that the US is the weak hand and China is like US in 1930s...big exporter with over investment internally but the strongest of a weakest hand....

In the 1930s we all know that markets crashed. This time is different as unlike the 30s central banks and prepared to be very active and so will governments...the west is no longer willing to wear the hair short of depression and will do all it can to avoid....QE to the hilt and it emerging fiscal soulmate of Modern Monetary Theory and CBs monetising govt spending (Boris is close to this with his promises...just needs to jump the fiscal discipline hurdle and he can go all the way in on infrastructure projects etc).

If this is anywhere ballpark then the the invest play through eurdollar eruptions and global currency stress if focused on whether USD is worthy of hegemonic premium is to own real assets. Not dissimilar to what happened in Weimar Republic or Venezuela more closer to our time. Inflation is likely to surprise to the upside.

Obvs I'm not sure ;)

elviron

When the majority are talking recession, isn't that exactly the sign that it's not upon us yet?!

Since when are the majority right when it comes to calling the market...

With the likely outcome of more currency printing in certain indebted western countries holding some gold is a consideration.
I currently use mainly etfs for gold, topped up with a modest quantity of sovereigns, which are CGT free.
However, if things got really messy, then etf gold might be subject to expropriation. The US banned holding gold in the 1930s.

An alternative would be services that allow you to buy & hold gold bullion in a secure location, e.g. London, Switzerland or Singapore. Splitting it 50:50 between Switzerland & Singapore is quite attractive considering diversity, security and solvency.
However, the downsides are UK capital gains, holding costs and the requirement to trust a third party company to hold the gold.
Alternatively, there is a safety deposit box company in Hatton Garden which has no doubt had some good security upgrades in recent years.

As always, I'm interested to hear how others view this problem.

xcity

16th Aug '19

One problem with the gold proxies is that all the evidence for gold as a store of value is for physical gold. I'm sure all the proxies with work in normal times, but the main point of holding gold is as a security blanket in abnormal times, and I don't know how well the proxies will do that.

jwebster

Very good question.

I have bought silver in a physically backed EFT within my SIPP.

However, I agree about the government expropriation risk. My view on this, is the UK govt at some point in the next 10-20 years will raid private pensions. I view SIPPs in the UK as 'at risk' in the long game, as one the last places for the govt to raise significant taxes against immobile assets.

On that basis, I'm fine with EFTs in SIPP as the SIPP itself is not safe.

With free cash I have sent some to New Zealand as a stable long term economy less prone to populism, researching Singapore for gold storage but more expensive than UK options and I don't know it well. I am wary of UK banks, that in a bank failure a government might require higher value depositors to take a haircut.

Not straightforward, costs involved in moving money around always surprises me.

Yes, although gold EFTs come as physically backed as well as synthetic. Of course the real thing is holding it in a safe, but then you need to pay for insurance etc. and you end up back with a large commercial storage company.

Neil Williams

https://www.bullionvault.com/ allows you to buy and sell gold, silver and platinum in different markets, although I would recommend that you check the storage costs as they get cheaper the more you have to invest i.e. there is a minimum monthly charge that is expensive for small investments.

unwise2

The last independently audited figures published for Mark Minervini were in the 2001 book stock market wizards. In the 5 1/2 years prior to the interview he averaged 220% CAGR which resulted in a gain of over 34000%. During that period he had only one lossing quarter (1%). Mark has also shown on his MPA service a brokerage statement from the early 90's (can't remember if it was 90/91) which showed the SP500 up approx 46% and his account up approx 410% for the year.

Mark openly admits he isn't as aggressive with his trading now.

The last independently audited figures published for Mark Minervini were in the 2001 book stock market wizards.

18 years ago is the latest data? That's ancient history - anyone can have a golden patch where their trading style matches the market - look at Woodford.

I confess to being really surprised, I thought I must be missing something, especially as people keep mentioning Minervini in the same breath as Buffett.

But if that's the latest data perhaps people ought to stop referencing his returns as evidence for his methods?

Hi Timarr,

Before I begin, I'm not a MM 'fanboy' or anything. Just giving you my thoughts.

Timarr - you're right that that is a long time ago and there definitely is truth to your statement that his trading methods might have coincided with the right conditions. Certainly, he is a momentum investor and does well in roaring bull markets.

I will say, the lack of recent figures is not a conclusion either way. He is not a mutual fund so he doesn't have to publish anything.

In the latest round of the US Investing championships, even though we hare just half way through the year, his clients and people who have been on his course and employ his methods apparently occupy 7 of of the top 10 places (according to his tweets). And another one of his clients/proteges (not sure which) called Zhen Zhou occupies first place.

Draw from the above that what you will!

abtan

When I started looking into MM a lot was written of him winning the US Investing Championship (USIC) about 30 years ago.

The only real reference I have found for this was MM himself on his website.
There were a few media-related posts online, but again, they simply copied what he had written about himself on his website.

I have no idea what the USIC is or how prominent it is, but I was expecting a website high up in google search results.
Instead a quick google reveals a few pages from businesswire/bloomberg, THEN MM's website referencing himself winning the USIC and ONLY THEN a website purporting to be the USIC website (but under a different name).

I followed him for a while on Twitter but found him to be inconsistent when announcing his gains/losses (or perhaps I simply needed to cough up and sign up to his website to gather more insight)? Nonetheless that was enough to put me off looking into him further.

I get what you are saying but there was further evidence of Mark's methods being superior to most in a follow up interview in 2003. You would expect someone who buys high momentum/ highly rated shares to get slaughtered in a bear market. By the time the follow up interview was conducted the SP500 had lost 45% and the Nasdaq was down 75%. Mark was up 3% over the same time period.

I am a recent subscriber to his MPA service, the worst draw down Mark has experienced in the past 18 months is 3%, compare that to the biggest losses on the SP500, Nasdaq and Russell 2000.

His aim is to sidestep major losses in bear markets/corrections and heavily outperform in bull markets.

In comparision how much has Woodford lost in the past couple of years?

I'm not suggesting that Minervini hasn't outperformed - all I'm asking is for someone to point me at the independent data that shows this. Anecdotes and self-reported data are fine up to a point, but they're not evidence, they're just data points in an incomplete set.

In comparision how much has Woodford lost in the past couple of years?

I only mentioned Woodford to point out that time limited data doesn't help this with type of analysis - especially when the time in question is in the distant past during a known period of outperformance. Anyone can get lucky over a limited period of time, it's outperformance over decades that differentiates the truly skilled practitioner from the person in the right place at the right time.

Asking for independent verified data to show that Mr Minervini has outperformed is reasonable and particularly so if that individual has written a few books that he would like to promote.

Also, if he's achieved astonishing rates of return AND has a large sum of capital, surely it would be more logical to concentrate on compounding that capital further, rather than writing books to share his methodology with the wider market ?

Small Cap Value Report (Thur 15 Aug 2019) - HAT, Market jitters

H & T (LON:HAT) footnote

1. Fall in retail margin

2. Low revenue growth in Pawnbroking

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Graham Neary

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