Small Cap Value Report (Thur 22 Nov 2018) - Howard Marks, FA., CMCX, MTC, Mello/ShareSoc. WYN, KLR

Thursday, Nov 22 2018 by
60

Morning all,

There is a strong supply of updates, so I hope you'll help me with a few suggestions in terms of what to cover today!

Yesterday featured great results from Creightons (LON:CRL), which is now 6% of my portfolio. I am tempted to add more of it, but 6% feels heavy enough for this micro-cap.

I am increasingly bullish on the UK market, seeing as it remains so weak. It's down another 1% today, and Stockopedia's median forecast P/E ratio for UK stocks (one of my favourite macro indicators) is just 12x. That number tells me there must be plenty of value opportunities, and I've been trying to find fresh candidates for the portfolio.

In addition to Rightmove (LON:RMV) (added earlier this month), I've also added B.P. Marsh & Partners (LON:BPM), the insurance investment vehicle, to my portfolio. I'd like to be more active in the insurance space - there are plenty of interesting and overlooked candidates in the sector. For example, the FTSE 250 component Lancashire Holdings (LON:LRE) is completely ignored by most investors.

Anyway, given my view on equities, I'm nudging up my portfolio allocation and becoming more and more "risk-on". My portfolio is now 82% equities, 14% bonds and 4% cash.

For the Howard Marks fans in the audience, I'd recommend this YouTube video published last week by his company.

It's a 25-minute interview outlining his overall views on macro topics. He is quite cautious about the 10-year US "recovery", thinking that we must be closer to the end of the good times than the beginning. But he also acknowledges that US equities have been growing into their expensive valuations over the past year (the stock market hasn't budged while earnings have been growing very fast).

Other points from the interview:

  • Private assets have more attractive pricing than public assets. All publicly-traded assets are expensive.
  • The crypto boom is mostly based on people hoping to find greater fools to sell their coins to (but I would note that hardcore crypto advocates don't fall into this trap).
  • ETFs may provide the illusion of liquidity where the underlying holdings are illiquid, e.g. junk bond ETFs. He asks the question: if junk bonds are illiquid,…

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Disclaimer:  

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

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36 Comments on this Article show/hide all

Graham Neary 22nd Nov 17 of 36
4

In reply to post #421039

Hi andrea, the Plus500 (LON:PLUS) update didn't have much content so not much to say about that. I haven't changed my mind about it - I'd see it as a v. dangerous investment in comparison to IG Group (LON:IGG) and CMC Markets (LON:CMCX).

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shailenpatel 22nd Nov 18 of 36
3

Hi Graham - a large reaction to the FW Thorpe (LON:TFW) trading update. I do not hold but follow given its a well run biz that has a good following amongst private investors. worth a look?

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ANDY1861 22nd Nov 19 of 36
3

Rec Mothercare (LON:MTC)
We are expecting our second child and my wife looked at Mothercare but found the same products much more expensive than other retailers.

Amazon and most other stores you can get the same product but 10-20% cheaper, so am not surprised they are seeing such a sales decline.

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Graham Neary 22nd Nov 20 of 36
1

In reply to post #421029

Hi Michael, I'll check that out after lunch (along with £KLR). cheers!

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paraic84 22nd Nov 21 of 36
1

Thanks for another good report Graham. I always enjoy your understated humour - "It's worrying that a fire alarm company can be so accident-prone!"

On another note, at 9am this morning Patisserie Holdings (LON:CAKE) "

Subsequent edit: I also just stumbled across this interesting article about On The Beach (LON:OTB) ambitions for growing its staff which is a good sign of the current confidence of the business: https://www.ttgmedia.com/news/...

I hold and am off the view it looks attractively priced at the moment after a bit of a sell-off in a lot of travel stocks due to some reporting falls in revenue due to the warmer weather and football during the summer. 

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bobo 22nd Nov 22 of 36
4

Wynnstay is in a business with no moat, and in which no one makes any money. I used to compete with them and the whole industry is pitiful

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JohnEustace 22nd Nov 23 of 36

In reply to post #421049

I think the impact on Mothercare is as much about staff morale as customers reading about them in the papers. My daughter had jaw-droppingly bad service in her local store trying to buy a child car seat. They didn't want to fit it because it was drizzling outside.

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fwyburd 22nd Nov 24 of 36
3

Re: Mello
I am very much looking forward to attending this year and meeting other fellow PI's there. And I'll be presenting the Investor Sentiment research findings at 14.20 on the Tuesday - do come along if you can and say hello. If not, I'll write-up the report and post it shortly afterwards here.
cheers
Francis

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Robert corden 22nd Nov 25 of 36
2

I read recently that consensus US EPS for 2019 had been reduced by 9%. If that were correct, then maybe one should not have too much confidence in UK consensus for next year as small cap in particular do not appear to have many revisions between announcements.

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wildshot 22nd Nov 26 of 36
2

As a relatively new parent I can't speak highly enough about £:MTC . We have always found the staff to be brilliant and they took a great interest in us and our story (we've adopted a girl). When it comes to things such as buying prams, doing it in person really does make a difference. You can "test drive" the pram if you like in store and get clear demonstrations on how to set things up and pack things. Believe me physical demonstrations are much easier than trying to under videos online. Also seeing things in person is much better for making a choice on what is right for your child.

Staff have also been brilliant and come to help us with the child seat on a non-purchase visit too.

Compare Mothercare to the Mamas and Papas (which are next door to each other near us) and it is clear that Mothercare is better on price and range.

Admittedly knowing that Mothercare was in financial trouble made me want to shop there more. In spite of what Graham says I don't think there is anything close to it on the high street and I would feel really bad for all parents if it disappeared.

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ACounsell 22nd Nov 27 of 36

In reply to post #421089

Hi Graham,

Did you get the opportunity to look @ Keller (LON:KLR) trading update - appreciate you have plenty of requests so cannot always get round to everything!

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JohnWigg 22nd Nov 28 of 36
1

I'd have big reservations about including a global general insurer such as Lancashire Holdings (LON:LRE) in a list of undervalued UK stocks. The insurance cycle is pretty independent of the UK economy. Look at US hurricanes and wildfires for a better measure.

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Graham Neary 22nd Nov 29 of 36
1

In reply to post #421174

Isn't that a good thing, John? Weak correlation with pretty much everything else in the index.

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Graham Neary 22nd Nov 30 of 36

In reply to post #421164

Hi AC. Yes, I have managed to put together a few poorly-informed comments on Keller (LON:KLR). Happy to be educated on its merits! G

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JohnWigg 22nd Nov 31 of 36

In reply to post #421179

Graham - yes, in the context of 'uncorrelated assets', it is. But thinking more of the UK economy and looking for catch-up opportunities?
I'm periodically tempted by housebuilders such as Taylor Wimpey (LON:TW.) with its yield, but then remember falling house prices, rising interest rates, etc. and hold off for another day!

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Beginner 22nd Nov 32 of 36

In reply to post #421104

Yes bobo, anyone with a barn and an HGV licence can set up in this game. We should also remember that Wynnstay (LON:WYN) (and NWF (LON:NWF) ) are essentially retailers, that is members of an unloved and arguably receding sector. Both also depend for their business on farmers and the horsey set. The former may well yet be negatively impacted by the UK leaving the EU. This might be an area to stay away from for now.

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ACounsell 22nd Nov 33 of 36

In reply to post #421184

Thanks Graham - not sure there are any at the moment! Performance of Keller (LON:KLR) would seem to be one more nail in the coffin for my version of NAPS this year! I didn't go for Plus500 (LON:PLUS) (really does look too good to be true!) and Volvere (LON:VLE) (a favourite of yours I believe) and the performance of these two stocks (along with Drax (LON:DRX) to lesser extent) have reduced Ed's NAPs/SNAPs portfolio selection % losses by a significant margin.

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skinner66 22nd Nov 34 of 36
1

don't like to say it but i think mothercare gunna go same way as woolworths did,,times are changing. i remember when we had man come round renting vhs film tapes once aweek,,also the lemonade drinks man.. wow i feel old lol,, but i guess need to move with the times. even if sad

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jonno 23rd Nov 35 of 36

Graham
With reference to you comments about insurance orientated equities you might want to look at Randall & Quilter Investment Holdings (LON:RQIH). It has recently completed a strategic revamp and looks an interesting and potentially rewarding investment. Like many small cap stocks the share price has fallen back close to 20% recently and is worth a look. I hold.

There are some useful reviews from Equity Development and the Capital Access Group available on Research Tree.

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simoan 24th Nov 36 of 36
3

Graham,

There's actually a more recent and IMHO better interview with Howard Marks at UCLA here:

https://www.youtube.com/watch?v=6ATUoZ6qjpIre

Just like his memos are required reading, this is essential viewing for all investors, particularly those who get over-excited when the market goes up and suicidal when it goes down :-)

All the best, Si

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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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