Small Cap Value Report (Thur 21 May 2020) - Strange Events, MOTR, CWD, BEG, TPG, PDG

21st May '20 by Graham Neary

63 comments 9788 reads

Good morning!

Graham here with the placeholder for today's SCVR.

I'm planning to make a few macro observations before commenting on the latest company news.

Contrary to popular belief, I didn't quit finance to go into gardening - I'll have to use my Twitter more carefully in future.

Cheers

Graham

Small-caps of interest today (final list):

Motorpoint (LON:MOTR)
Countrywide (LON:CWD)
Begbies Traynor (LON:BEG)
TP (LON:TPG)
Pendragon (LON:PDG)

Finished at 13.20pm.

Macro Latest - Strange Events

There have been some very unusual events in recent days, related to the pandemic, which I think are worth a mention.

1. UK Sells a Negative Bond

The Debt Management Office yesterday sold a bond with a negative interest rate for the first time.

It was about £4 billion in value and matures in 2024.

The yield was only very fractionally negative - minus 0.003%.

So does it really matter? I think so, even if it's a mostly symbolic event.

It shows that the zero bound can be broken in the UK.

We've already seen negative yields in many other countries in recent years. Now that the zero bound has been breached for the first time in the UK, the institutions buying these bonds might start to think of it as normal, and will reset their expectations for where yields might go in future.

Why did it happen?

The effect of quantitative easing is of course very important - the Bank of England owns c. 25% of UK government debt.

The emergency low 0.1% base rate is also a big factor, because it depresses interest rates generally. It's not as if High Street banks offer great alternatives for yield.

To the extent that the negative bond yield is not purely driven by existing policy, it's also a reflection of pessimism for the years ahead - it reflects extreme risk aversion, and perhaps a belief that UK interest rates are about to turn negative.

On that point...

2. BoE won't rule out negative base rate

New governor of the Bank of England, Andrew Bailey, has refused to rule out imposing a negative base rate in the UK.

…

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jonno

21st May '20

Hi Tamzin

An excellent presentation by Reg and a fascinating insight into his nuanced approach to investing in Trusts. All of the PI World webinars have been top drawer, but for me today's, together with that by Stephen English rank as being the most enjoyable.

Keep them coming.

timarr

Its the increase in free cash flow and the return in investment that matters not how much cash is distributed (and some of it turns out to be funded by borrowing).

Absolutely. Dividends are a complete red herring. What matters is free cash flow - i.e. proper earnings without any of that fake accrued stuff.

Any company that can grow its real earnings over the next few years will do very well. All that cash sloshing about has got to go somewhere, quality stocks fortunate enough to be in business lines unaffected by Covid-19 in more than the short-term will probably continue to do very well.

That said, given how cheap debt is, I'd like to see a few more of my holdings raising funds especially as most of them are lightly geared or have net cash. That's a nice position to have coming into a crisis but there are a lot of distressed assets out there, ripe for consolidation.

However, company managers tend to suffer from the same biases as private investors - they buy when markets are buoyant and retrench when they fall. They're human, like the rest of us.

dealtn

Why do you think M&S is over-leveraged?

Sharechap

Why did you not bother with Knights (KGH) in the end? I think there is an interesting read across from Begbies Traynor (BEG). Everyone jumps on insolvency practitioners as ones likely to do well in these times however legal services seem to do OK too.

Bigclaw

I agree with this but I would suggest that this is more of an issue for Ed and the Stocko management. Graham and Paul are both very knowledgable in their respective areas of expertise, and it is unrealistic to expect thim to be experts in every sector.

I personally would love to see a daily / weekly report for mining, as well as tech, and pharma stocks. There are some real gains being made in those areas and they don't really seem to get proportionate coverage.

I enjoy reading the SCVR, the macro writing from Graham and Paul is thought provoking, and it's always good to get a range of thoughts and discussion from a generally nice and interesting bunch of people. It can be funny and it's got a really nice 'community' feel. But in terms of share ideas I do find it of limited use at the moment, and that's mainly because of the lack of coverage of all sectors. It may just be me but I seem to see the same shares (M&S, Boohoo, for example) seem to get discussed time and again.

I definitely think there is room for different regular reports to complement the SVCR on the website.

Graham Neary

Hi, sorry, I will look at KGH if things are quiet tomorrow.

Best wishes

G

Sorry bullsnbears, have to try to focus on smallcaps with this report. G

JohnEustace

But I thought Gilead had a patent on it?

You had better hope it doesn't mess with his dodgy ticker then.

Cisk

Haven’t looked at Dart (LON:DTG) for some time, last time I did their fleet age was very old and I remember there were scary stories of their aged aircraft having technical problems in the press.

Personally I’d never fly them and view airline shares as a way to make a small fortune from a large one - I purely ask from an interest in aviation standpoint!

Bigclaw you are right and we can’t expect Paul or Graham to cover resource / pharma stocks as well.
I think it’s a real shame that there are so many money pits in these sectors - they shroud so many other success stories and put people off. As an example I’ve been investing in the diagnostics arena for many years, of course recent events have highlighted the need for such companies, but the need is ever present, and these companies are way different from a one -trick pony, betting everything on a single new drug, or a mining company developing one new mine... But such companies are often lumped in with good quality stocks who are making money.

So it would be great if Ed could expand the writing to include pharma / mining / oil - or even just do the occasional article.

But of course these discussions need to appeal to everyone, and I fully appreciate it’s not to everyone’s tastes (although to be perfectly honest I’ve run a mile from anything retail or finance related, and way before covid-19 - times have changed and the large legacy retailers like M&S are in my opinion, doomed!)

SundayTrader

It is an issue. Paul and Graham are sector experts in retail and finance respectively. Possibly it is not very sensible of me, but both sectors are on my "do not go there" list (on the grounds that when things go wrong in either sector they go wrong very fast. Businesses with a "product" are more durable, or so I naively believe.) So as a result a lot of their discussion is to me academic.

Stocks123456

Gilead are conducting trials of remdesivir. It seems the Bangladeshi government is happy to proceed with its use in their hospitals.

Boon

I almost fell off my chair this morning at the Dart (LON:DTG) news. 20% dilution, £172m accelerated bookbuild (so not a small amount), and for what is a share that could be very binary depending on how the second wave of COVID develops and delays to vaccines.

Zero discount to the closing price yesterday, which itself wasn't out of line of the average over the last few trading sessions.

Absolutely stunned with how much money is swishing around the financial sector at the moment, trying to find a home.

Just saw that Accesso Technology (LON:ACSO) have announced their own bookbuild, for a more modest amount but also significant to dilution to existing shareholders. Would be interesting to see what price they get. They could be considered a "Tech" share, but unlucky to have 100% concentrated in the business of theme parks.

55555

I think one of Motorpoint's biggest problems is that for the last two to three months it has been sitting on over 5000 depreciating used cars. They aren't like new cars and can't be registered and sold at new'ish prices. Being registered these cars are typically going to lose £200+ each per month if not more. So 5000 cars * £200 = £1,000,000 * 2 months = £2,000,000 extra depreciation hit. This with depressed used prices mean that much of Motorpoints 5000 stock cars will deliver little if any profit.

Graham ... any thoughts?

TheArb

I don't think that's right, I've flown on Jet2 several times and when I checked the reg on G-INFO they were quite new.

22nd May '20

It was some years ago since I last checked, I think now it’s just over 13yrs. Their fleet is much bigger than before as well... interestingly they only have one plane flying whereas EasyJet / Ryanair have more - but maybe that’s better as they’re not flying empty planes?

jwebster

Just to add to the debate above on adding miners to SCVR

My view is no, for the following reasons:

Graham and Paul specialise in retail, finance with a deeper analysis of balance sheet strength. I appreciate their good work and read SCVR for this. SCVR is not a tip sheet, is geared around RNS for the day in small caps. But it is a great source of ideas for further thought. I only need one good trade a year from here to achieve a good ROA on my subscription and time spent reading. For example, Paul's writings turned me to look into Bigdish and I ran a nice trade on that. Without the SCRV I wouldn't have found that. I ran good trades on Sosandar (LON:SOS) and Next (LON:NXT) last year as well.

Miners and oil are a beast. To understand a miner you really have to have a good view on the underlying commodity and where it is in the price supply/demand cycle. China construction rebounding iron ore up? Uranium mines shutting down? Latest OPEC twists and turns. Some war closing down a country. Then overlay the political issues as many miners operate in difficult areas where a change of government can lead to tearing up old resource rights agreements. Add in a miner's management competencies and execution risks. I do dabble on resource swings but prefer EFTs e.g. GDX as a way to gain exposure without incurring individual company risk.

The LSE is stuffed with miners, many highly speculative somewhat lottery ticket (strike oil or not) and there is opportunity for those who wish to make it their specialty. So there is a case for a separate thread in Stocko, but not the SCVR which already has its focus.

I think part of the issue is there are no exciting new listings on AIM to add to the debate so a few good names tend to recirculate. Trading ideas, I find the US markets have much more depth. So I can understand the desire to look into miners, given there's so many and the price volatility attracts, but for me they are a tough trade I don't have the time or background to really figure them out. Perhaps the Stocko mgt could hire an industry expert to opine on commodities?

I would find it interesting if Paul and Graham dug deeper into their respective specialties. Yes, financials look terrible now, negative interest rates will make large retail banks suffer. But amongst small caps there are a few specialist finance companies, beaten down, which could be value plays, e.g. 1pm (LON:OPM) Provident Financial (LON:PFG) Arrow Global (LON:ARW) Non-Standard Finance (LON:NSF) PCF (LON:PCF) for example.

intuitive6191

"The LSE is stuffed with miners, many highly speculative somewhat lottery ticket (strike oil or not) and there is opportunity for those who wish to make it their specialty. So there is a case for a separate thread in Stocko, but not the SCVR which already has its focus."

Mostly agree. Not all stocks are speculative and some quite useful in following to get a view on the health of the global economy. There are a couple of markers that I use to indicate sell situations.

If a thread is started, it would be useful to discuss Petropavlovsk (LON:POG). A decent contrarian performer with possibly more to come.

CamRaid

Punch Card capital have taken a stake in Motorpoint (LON:MOTR)

They also built a position in Naked Wines (LON:WINE) which has pretty much doubled in price since. Admittedly, this was helped by C19 proving to be a catalyst for growth in the US.

I have bought Motorpoint (LON:MOTR) and will watch with interest.

Small Cap Value Report (Thur 21 May 2020) - Strange Events, MOTR, CWD, BEG, TPG, PDG

Macro Latest - Strange Events

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Graham Neary

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