Small Cap Value Report (Thur 21 March 2019) - IGG, NXT, GMD, KETL, TED, LSR/THAL

Thursday, Mar 21 2019 by

Morning all!

There are a few minor political headlines but I'm sure what you really want to hear about is the company news.

Today we have:

IG Group (LON:IGG)

  • Share price: 507.5 (-7%)
  • No. of shares: 369 million
  • Market cap: £1,873 million

Third Quarter Revemue Update

(Please note that I have a long position in IGG.)

I've increased my position in this share today, up from 4% to 6% of my portfolio.

My original purchases were in early 2017, between 505p - 530p.

I topped up last October around 610p.

Today I am back at it, again around that 505p mark.

The EU's ESMA organisation is responsible for all the trouble in this industry - prior to the announcement of its regulations, IG shares had reached a high of c. 950p.

Subsequent to that announcement, from late 2016 to mid-2018, confidence gradually recovered and the shares climbed back to the high at 950p.


Unfortunately, the disruption caused by ESMA rules has been worse than we might have hoped, and this has been compounded in recent months by a lack of trading activity by clients. The same thing was reported by CMC Markets (LON:CMCX) (in which I have a long position).

According to today's update, IG's Q3 revenues (to the end of February) are down 12% compared to the prior quarter. The number of spread bet clients increased marginally, but they traded at significantly lower levels. As the ESMA rules were in force during the prior quarter as well, IG says that this is due to lower volatility.

We can estimate volatility using the VIX and VFTSE indices (though these are supposed to be forward-looking rather than historical measurements).

VFTSE, the implied volatility of the FTSE Index, was high in December, but dropped back in February:


Similarly, the VIX had a big December but has spent much of January and February at lower levels:

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

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IG Group Holdings plc is a United Kingdom-based company, which is engaged in online trading. The Company provides contracts for difference (CFDs) in over 17 countries globally. The Company's segments include UK, Australia, Europe and Rest of World. The UK segment consists of its operations in the United Kingdom and Ireland, and derives its revenue from financial spread bets, CFDs, binary options and execution only stockbroking. The Australian segment derives its revenue from CFDs and binary options. The Europe segment consists of its operations in France, Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden and Switzerland, and derives its revenue from CFDs, binary options and execution only stockbroking. The Rest of World segment consists of its operations in Japan, South Africa, Singapore, the United States, the United Arab Emirates and Dubai, and derives revenue from the operation of a regulated futures and options exchange, as well as CFDs and binary options. more »

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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GAME Digital plc is a retailer of video games. The Company operates approximately 580 stores across the United Kingdom and Spain. The Company's segments include UK, Spain, and Events, Esports & Digital. Its UK and Spain segments are engaged in the sale of hardware, software, accessories and digital. Its Events, Esports & Digital businesses include SocialNAT and Ads Reality Limited (Ads Reality). The Company's activities include multichannel retailing and merchandising; supply chain management and distribution; software and technology development; marketing and customer relationship management (CRM); sourcing and procurement from suppliers, as well as range of individual customers; event management and production, and training, development and employee engagement. The Company's subsidiary undertakings include Game Retail Limited, Game Stores Iberia SLU, Multiplay (UK) Limited, Game Esports and Events Limited, and Game Digital Solutions Limited. more »

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

102 Comments on this Article show/hide all

Graham Neary 22nd Mar 83 of 102

In reply to post #460863

Jonesj, I totally agree. The rules were written by people who don't understand trading and investing.

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Graham Neary 22nd Mar 84 of 102

In reply to post #460843

Gus, I believe they do ask for trading records. Interesting that they didn't seek evidence of portfolio size/experience. G

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Graham Neary 22nd Mar 85 of 102

In reply to post #460813

Thanks dscollard. I wasn't accusing you of not being able to read plots - it's more that I couldn't make sense of the thing myself!

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hawkipa 22nd Mar 86 of 102

In reply to post #460728

Fair point Howard Marx. Embarrasingly (for me), my feed was showing the curve just below 20.  Now refreshed.  Back in my box!

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dscollard 22nd Mar 87 of 102

In reply to post #460953

Looks to me like you might have included October 2018 and November 2018? I

not a problem Graham , I was responding to this comment which kinda does suggest I am not reading the data right.  The data clearly shows that the IG Group (LON:IGG) narrative is not supported by evidence on a YOY.

My original point was about objectively reading data as opposed to allowing company narrative to confirm a bias arising from being long.  

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cig 22nd Mar 88 of 102

In reply to post #460938

The ESMA rules are a bit clunky for sure, but how many false positives (retail investors really missing something due to be banned from using very high leverage) do you think there are?

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GUYUKTRADER 23rd Mar 89 of 102

Thanks for the continuing excellent analysis on a daily basis - I find it informative and educational a real calling card for Stockopedia.

This is probably the wrong place to ask
Can I ask from and ignorant short-term momentum/break-out investors point of view (and I admit I am only an amateur learning all the time) what is the investment case of buying a stock (IGG) in 2017 for 505 which then rises to almost double in August 2018 only to fall back to the same level in Mar 2019? Apart from dividends over that time I have seen my money double and fall back to break even. Of course I am assuming that the holder did not sell but kept the shares throughout the whole period and did not have a SL. Downsides for me is two years no movement and giving up a profit of 100% even if I only sold part of the position I would have some profit.

Not trying to criticize just curious as an amateur the investment case.

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peterg 23rd Mar 90 of 102

In reply to post #461153

Clearly, with hindsight anyone buying in 2017 and knowing it would fall back to that level in 2019 would sell in Aug 2018. But, of course the issue is that as with any investment you don't know that when it's at the peak. So you have to find ways of dealing with that. Some people like stop losses, and clearly in this case one would have crystalised some gains. But stop losses also stop you out of good investments, sometimes at a loss, when there is a short term price fall. Others take a view that buying on good fundamentals and holding, perhaps till there's a clear change in those. There is no simple answer, and multiple approaches can work for different people (or not work). The ultimate issue is that whatever your approach you will end up holding shares that make a loss, or reverse on gains. That's a fundamental of investing that has to be got used to and dealt with in a way that suits you.

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ken mitchell 23rd Mar 91 of 102

In reply to post #460908

I peters

It is not a certainty that the share price would have dropped further than it has. Investors often buy and sell without even considering the buybacks.So the share price could be the same as now, or even higher or lower. Eps would be lower if share price the same as now and PE ratio would be higher. Also the dividend yield would be a bit lower too because of the increased number of shares in issue.

Also Companies that buyback can see their share price drop a lot.

E.g Standard Life Aberdeen share price has fallen heavily despite current big buybacks. And the falls were relentless for months despite daily buybacks. 

There are a lot of misconceptions about buybacks. Plus and minus points, including for Next are well explained in that Investors Chronicle article.

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jonesj 23rd Mar 92 of 102

In reply to post #461178

Buybacks are just another way of returning money to investors. In certain circumstances, it may be more tax efficient for the investor.
I don't think it matters much if a company is paying dividends, buying back shares, paying down debt or investing in growing the business, provided the overall investment is attractive, after analyzing all factors.
Obviously the valuation needs to be adjusted downwards if the company does require the capital to fund growth or pay down debts.   

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AnonymousUser252054 23rd Mar 93 of 102

"I have a lot of comfort with the integrity of this business as a whole, its market position and its reputation.
I'm also attracted by its high returns and the manner in which it is handling the ESMA rules."

Prior to the introduction of the ESMA requirements IG Group (LON:IGG) routinely signed clients up to unlimitled loss accounts. So, when eventually a black swan type event happened, and stops were useless, some customers were ruined. Ordinary people such as teachers and doctors found themselves suddenly negotiating repayment terms for mortgage-sized indebtedness to IG.

And let's not forget also that IG has been hit with multi-milion pound fines for extremely sharp practice. Scurrying to protect their own positions while disregarding their clients mounting losses was not what I would consider admirable behaviour, even for a betting firm.

As for the brilliant idea that all they needed to do to circumvent the new ESMA and FCA regulations was to port EU client accounts to outside the jurisidiction, I recall them saying they'd dropped it but from this thread seems they've gone ahead anyway.

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wilkonz 23rd Mar 94 of 102

Ordinary people such as teachers and doctors found themselves suddenly negotiating repayment terms for mortgage-sized indebtedness to IG.

Being an ordinary person myself and also a client of IG, I have some sympathy with ordinary people like doctors and teachers who have lost money to IG. But ultimately the responsibility for losses lies with the punter not the system. Doctors and teachers should be smart enough not to gamble with money they can't afford to lose and not to get into situations they don't understand. Guaranteed stop losses are available on IG - admittedly at a small premium - but they should suffice to prevent losses becoming disastrous through slippage.

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AnonymousUser252054 23rd Mar 95 of 102

In reply to post #461223

I tend to agree with the law firm who described IG Group (LON:IGG) as "disaster waiting to happen”.  ESMA and FCA regs have attempted to bring them in line with best practice at Plus500 (LON:PLUS) in regard to banning unlimited loss accounts. Whether this will be truly effective remains unclear as they seem to be porting clients which may or may not be flouting the lawmakers' efforts.

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peterg 23rd Mar 96 of 102

In reply to post #461178

It is not a certainty that the share price would have dropped further than it has. 

You're right of course, just extremely likely!

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timarr 23rd Mar 97 of 102

In reply to post #461238

The Investor's Chronicle article in question can be boiled down to a single quote:

Share buybacks only make shareholders better off if the price paid for the shares is less than the company is actually worth.

This is exactly the point Warren Buffett always makes, although he uses the Ben Graham derived term "intrinsic value" as shorthand for the value of the company.  In this situation the remaining shareholders have their holdings' value enhanced by the buyback at the expense of the selling ones.

In fact most buybacks are executed at ridiculous prices by companies for less than clear reasons - offsetting EPS dilution from share options vesting is quite a common one. It's no accident that companies tend to buyback their shares in buoyant market conditions - which is usually exactly the wrong time to do so.

On Next (LON:NXT) the IC article is a dog's dinner. It calculates the Equivalent Rate of Return (ERR) on Next over the last five years. Roughly it averages out at 10% - basically that's the economic benefit of the buyback to shareholders - and it's almost spot on Next's target.

It then calculates the total shareholder return (TSR) actually achieved by Next shareholders over the last five years - basically share price appreciation plus dividends - and shows that it's nigh on zero, because the share price has fallen from £62 to £48 (at the time of publication). So basically the share buybacks have contributed to a TSR of zero despite that ERR.

It then argues that this "proves" that the buybacks were a waste of time and shareholders would have been better off receiving £6 worth of additional dividends. Which, of course, is the equivalent of arguing all the money spent on solving the Y2K bug was wasted because there weren't any problems.

The article even acknowledges that its conclusion is a bit dubious:

You could argue that the buyback has stopped total returns being worse as EPS enhancement may have prevented larger share price declines. That said, the £6 that could have been paid out in special dividends could have been a better use of surplus cash.

Maybe, maybe not. But an ERR of 10% suggests that Next's management are mainly buying back shares below intrinsic value and that probably the share price - and therefore the TSR - would be lower if they hadn't bought shares back (and when they can't hit that hurdle they pay out special dividends instead). In any case using TSR as a measure of the success or otherwise of a buyback program is simply stupid - it doesn't tell you anything about the intrinsic value of the company and ignores the point the article made in the first quote above.

The arguments around Next tend to miss the point, however, as usually they're constructed to argue that companies should never buy back their own shares. That's simply wrong. But for every management with the discipline of Next's there are dozens who use it to enhance EPS rather than shareholder value.

We wouldn't let an investment trust buy back shares at a premium, but that's exactly what a lot of companies do with buybacks.


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ken mitchell 23rd Mar 98 of 102

Great reply timarr. Thanks. It deserves far more than the 2 up ticks so far, and to be seen by buyback fans and those like me who think they are rarely worth doing.  My dislike of them is also for non investment reasons. . i.e the sums spent on buybacks seem obscene when at best all they can do is reward shareholders and Company Directors.

e.g Apple are spending almost as much on their buybacks this year as the entire UK National Health budget!

Also the last time so much was spent on buybacks was in 2007 ahead of the big market crash in 2008. Hope history is not about to repeat itself. Some worrying signs from US on Friday.,


We'll never know what the Next share price would be now, if Next had not bought back. We do know though that massive buybacks in 2007 weren't much help during that market crash. I know when I did some panic selling then,  I didn't even think about whether, nor how much that Company had spent buying back their shares, and doubt if many other investors did too!

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timarr 24th Mar 99 of 102

In reply to post #461303

Hi ken

Thanks. We're not that far apart on buybacks - you think they're never a good thing, I think they're almost never a good thing :-)

CNBC did some research that shows that companies performing buybacks underperform their peers:

And this research suggests that a lot of companies are performing buybacks to shore up an overvalued share price, presumably so that the management can benefit from stock options:

The mood music in the US is moving against them - they were illegal before 1982 as they were viewed as a form of price manipulation - and there's certainly an argument that that's what we're seeing here.

Anyway I wrote about this years ago (actually 10 years ago, doesn't time fly ...) and nothing much has changed so far. But maybe this time it will be different:


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ken mitchell 24th Mar 100 of 102

Hi timarr

Thanks for posting those links. The first 2 were very interesting. Will have a proper read of the 3rd one when having more time!

Morgan Stanley also provided detailed analysis several years ago showing that Companies buying back subsequently underperformed their peers whindid not buy back. That’s extraordinary really, and is something too few buyback fans seem to realise happens.

I’m sure we’re not far apart. Also Next are a rare example of buybacks being done quite effectively because they will only do them when specific criteria are met, and having now bought back more than half their shares, it means they can now afford more generous dividend payouts.

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john652 26th Mar 101 of 102

Final comment on GAME Digital (LON:GMD) , not just google but now apple, got to really really believe in their gaming venue to invest in game.

Apple introduces Apple Arcade — the world’s first game subscription service for mobile, desktop and the living room

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David Brightside 3rd Sep 102 of 102

Graham, re Strix (KETL) you rightly homed in on patent life in March...any further info?

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 Are LON:IGG's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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