Small Cap Value Report (Thur 5 Sep 2019) - BOO, Tough markets, MPAC, ALT, BKS

Thursday, Sep 05 2019 by

Good morning!

Thank you for the suggestions.

Today I have covered:

I did not get to cover these three, but Avation (LON:AVAP) received some intelligent commentary in the thread below, if you're interested.

Boohoo (LON:BOO)

  • Share price: 272.4p (+12%)
  • No. of shares: 1.2 billion
  • Market cap: £3,160 million

Trading update

A brief but very positive H1 update from Boohoo. Performance is ahead of expectations.

Consequently, the board now anticipates that results for the current financial year will be ahead of previous guidance, with Group sales growth now expected to be between 33% and 38% (against previous guidance of 25% to 30%).

Assuming 35% sales growth, total revenues would climb to £1,155 million in the current financial year.

The company's broker thinks that only a tiny fraction of the revenue growth will come from Bohoo's recent acquisitions (MissPap, Karen Miller and Coast). So it's nearly all organic growth from Boohoo, Prettylittlething and Nasty Gal.

As far as profitability is concerned, EBITDA margin is set to stay around 10%, so the EBITDA result this year should be in the region of £115 - £120 million. The adjusted pre-tax profit forecast is now £96.7 million (previously £90.4 million)..

My view: I'm impressed, of course. Boohoo has a great track record of profitable growth and of beating expectations.

As mentioned before, one of the things which holds me back from investing is the fact that Boohoo only owns 66% of PLT. Last year, out of £47.5 million in group net income, £10 million was attributable to the minority shareholders (i.e. to the family behind Boohoo (LON:BOO) ).

Maybe this doesn't matter, if the total pie will ultimately prove big enough to justify today's market cap of around £3 billion?

Elsewhere, I note that the valuation of Marks and Spencer (LON:MKS) has dropped to sub-£4 billion. Seems to…

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

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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MPAC Group PLC, formerly Molins PLC, is a United Kingdom-based technology and services company. The Company is engaged in providing instrumentation, machinery and analytical services to the fast-moving consumer goods (FMCG), healthcare and pharmaceutical sectors, together with aftermarket support. The Company’s Packaging Machinery segment supplies automated product handling, cartoning and robotic end-of-line packaging machinery and systems, and operates from three locations, in Mississauga, Canada; Wijchen, the Netherlands, and Singapore. The Packaging Machinery segment provides technical consultancy and machinery to solve packaging and processing challenges from its base. more »

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Altitude Group plc is a technology and information business providing services to the promotional merchandising and print industries across North America and the United Kingdom. The Company operates through Technology & Information segment that enables the buyers and sellers of products to interact and trade, through the provision of technology, catalogues and exhibition services, in the promotional merchandising and printing sectors. The Company provides technology services, specializing in cloud and server based software. Its Technologo offers a range of interactive image solutions, which are used for increasing engagement from online business-to-business (B2B) and business-to-consumer (B2C) buyers, and reduced cart abandonment rates. It also provides a Website solution for companies in the promotional product industry. It publishes catalogues annually for the promotional products industry, which include Spectrum and Envoy. It also hosts the Promotional Product Roadshows. more »

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48 Comments on this Article show/hide all

iwright7 5th Sep 29 of 48

Graham re Tough Markets - Yes an excellent observation about Quality vs. Value. I used to be a largely bargain Value investor, until I realised that the shares within my portfolio that multi-bagged were all expensive Quality shares. Even with all the political uncertainty over the last months my now Quality based portfolio has done remarkably well.

For curiosity and to try to input some objectivity I have used company Q and V scores as a measure of Quality and Value. Taking a look at my portfolio of 28 companies 85% have a Q Score >80 (ranging from Bioventix (LON:BVXP) at 99Q down to the lowest SimplyBiz (LON:SBIZ) at 65 Q. Not one of the 28 companies is less than the market average of 50 Q. 

Conversely looking at the V scores, almost 80% of the portfolio have a V score <50, which are thus more expensive than the market average. The lowest V score (and one of the best performing) is  Ab Dynamics (LON:ABDP) at 2V and the least expensive a Value punt Billington Holdings (LON:BILN) with 93V.

My theory is that during troubled times there is a flight to Quality companies that have a higher probability of continuing to grow their earnings. At the other end electronic media disseminate company information so rapidly that truely undervalued Value stocks are very difficult to find and are more prone to unexpected profit warnings. If recession does hit it may be all change and Value make a comeback, but for the moment I am very happy with a high Q, low V approach.  I should maybe mention that I like a high QM combination too.

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Gromley 5th Sep 30 of 48

Fascinating views on the macro as ever Graham.

As I think I may have said to you a few days ago I am seeing some echoes of the 90s, with "sexy" stocks soaring whilst boring ones wither. Back then the buzz word was dot-com, nowadays there are several; blockchain (perhaps) ,"Artificial "Intelligence""  and '#aaS' ("as a Service"). I will know we have reached peak madness when Lookers or Pendragon start calling their HP deals AaaS - although the idea that the white good box shifter AO World is apparently a software/IT business is quite mad enough for me.

Twenty years on and it's once again an established fact that this new fangled internet thingy will kill off traditional business as we know it. (Don't get me wrong I'm not a flat-earther but I think perception often races far ahead of reality.)

It's certainly a tough time for a value investor (although I have morphed somewhat that's still predominantly how I would describe myself). Back in the late 90s I was hoovering up value bargains, which unfortunately got smashed every bit as much as their sexier cousins in the crash. However, with a little bit of patience they mostly paid back admirably in the end.

This time around, with I like to think a wiser head, there's much less buying going on and far more stocks being added to my watchlist.

As I've said before I have no feel for 'timing' the overall market so I have adopted a policy of using a broad portfolio of very small 'shorts' to offset my 'longs' and be roughly market neutral. Even with this safety blanket, I'm not finding it easy to buy these days.

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kevfle 5th Sep 31 of 48


Very interesting article on tough markets. I noticed that you didn't comment on the recent share price fall in B.P. Marsh & Partners in which I think you hold (or previously held) a long position. Is seems oversold to me. Do you have any views on this please?

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Glaws2 5th Sep 32 of 48

Graham - excellent piece on tough markets - thanks

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Sully8786 5th Sep 33 of 48

There is an interesting discussion over on The Investors Podcast with Tobias Carlisle regarding value.

I would encourage a listen for those interested - there is also a discussion on the most recent one regarding shorting Netflix.



Company: Dave Sullivan - Talking Stocks
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Howard Adams 5th Sep 34 of 48

Hi (I hope this is not too OTT, but it might interest some)

REf investing styles this year conversation.

I was a QM investor. Mid-year I realised QM was not working for me this year. Luckily for me Jack Corsellis started posting his Stocko Technical Analysis thread explaining in detail Wyckoff technical analysis (and much more). See here

I watched first video 05/07/19, then every one since. I applied principles as quickly as I got to grips with them. The graphs below suggest that abandoning QM for Wyckoff is beginning to work (for me).

First (1 - light orange line) I began exiting any holdings which clearly did not align with a sensible Wyckoff chart/volume structure. At that point I was 60% invested 40% cash. I am now 25% invested, 75% cash so very low risk (see marker 3).

Second (2 - light grey line) after period of getting a working knowledge of Wyckoff my invested portfolio finally began to outperform the FTSE 100 (blue line), and now exceeds it (see marker 4).

Third (3 - Light orange line) my invested portfolio is now performing at over double my previous performance with less than 50% of the what was my invested capital, so risk/return ratio is significantly stronger.

Fourth (4 - light grey line) after further absorption of Wyckoff and introduction of strict buying/scaling in & stop loss rules and investing using Wyckoff structures, my portfolio is now exceeding FTSE 100.

Fifth (5a - dark orange & 5b light orange) small increases of invested capital seem to be returning quite noticeable positive outcomes for the £value of gained capital.

Obviously there is no silver bullet, but this suggests changing investing styles (quite dramatically) can be sensible, as several comments above are suggesting they are doing. Also, as CHarlie Munger points out use as many mental models as you can possibly absorb because this can add to ones investing tool kit.

I fully accept, that these stats are over a very short period (2 months). But for me, I am feeling more positive than I have been all year, about how to be in this market in these dynamic conditions.




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Graham Neary 5th Sep 35 of 48

In reply to post #510516

Hi Kevfle, I still hold B.P. Marsh & Partners (LON:BPM) and don't plan to sell at current levels. I might write something up on it soon, if I get a chance. The profit warning was a disappointment but I think LEBC might be more diversified than the sp fall suggets. We shall see. G

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Nick Ray 5th Sep 36 of 48

Although the AIM index has not been a very impressive performer, AIM100 has been excellent right up until about August 2018 since when it has really struggled.

More generally, all factors (Q V M) have stopped providing a returns excess over the index since about the middle of last year. But as many have observed, V (as measured by Stocko anyway) has not really performed for quite some time. Value is a perhaps a special case though. The "sweet spot" for Value as defined by Stocko seems to be somewhere near the middle (50) rather than as high as possible but it does not seem to be very selective for "performance over the next year".

I think the instant availability of data on a stock's price history and fundamentals have caused a continual chase after the small number of really top performers. I can try as many clever screens as I like, but I usually find that the stocks I identify are already listed in one of Stocko's "top ten" on the Home page and the battle seems to be to notice when the circus has moved on and your chosen stocks have fallen out of favour.

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Mark Carter 5th Sep 37 of 48

"I need long-term holds, which means I need to be extra strict on quality, and less strict on value."

it's always tricky. Some styles can persist for a long time, only to be overtaken by something else.

Although it's fashionable to bash Woodford these days, he was prescient about predicting the ascendancy of quality shares in an FT article in 2010, IIRC. I remember the date because it was about the time Terry Smith launched his Fundsmith fund. His fund went on to give excellent returns. Undoubtedly Smith is a good stockpicker, but you have to ask yourself if he was helped by favourable style headwinds.

To what extent can we expect this to continue? 

I think it was about a year or so ago Woodford said that there was near a record level of disparity between quality and value shares, the implication being that it would be value shares that would outperform.

Woodford's credibility has since gone down the plughole, of course, due to a combination of holding illiquid stocks and some really ropey value shares.

That doesn't necessarily mean that he is wrong in principle, though. Or maybe he is. I don't know. It might be, for example, that the shadow of 2008 lingers on. Value shares with poor capital structures may get slaughtered if interest rates rise just a little. We could have a major economic downturn, which will also slaughter these so-called "cheap" shares.

I don't know what the answer is. Probably when you hear the "death of" something, that's the time to invest. Are we at the "death of" value? I could flippantly say "answers on a postcard please", but I would actually be genuinely interested in hearing considered responses to the question.

"I don't think we are at peak despondency yet"

I'd agree. The markets have been a grinding one, rather than an atmosphere of despair. A recession would really remind us of what a tough market would be like. The markets seem fairly priced at the moment, so my best prediction for the markets is "more grinding".

We've got no reason for economic enthusiasm, and the market certainly seems cognizant of potential dangers. So who knows, maybe ol' Boris will pull a rabbit out of the hat and the markets could actually rise.

I try not to be too clever these days. A combination of low debt (PBT>3X net debt) and a nice divvie yield (say 4%+) is a pretty simple strategy to follow, and very low maintenance. Safe company, good value. Maybe throw in a momentum score for good measure.

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HornBlower 5th Sep 38 of 48

Graham, as I have mentioned to you before running a number of short positions is very helpful for reducing market risk.  I run a long/short book and this year 80% of my returns are from short positions, despite markets being up broadly.  There have been some easy short situations such as Metro, WPCT, Debs, AO, M&S, Thomas Cook to name but a few.  There is asymmetric risk being short but there are plenty of struggling businesses around at the moment where the risk of a surprise take out are very low.


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Howard Marx 5th Sep 39 of 48

Graham re Tough Markets

We all know that cyclical shares do well in an economic upswing, & relatively poorly in a downswing.

Similarly, factors also vary in efficacy through the economic cycle. 

Durng an economic slowdown (where the UK economy currently is), the Value factor tends not to be rewarded. Instead, investors tend to pay up for growth.

JP Morgan have attempted to identify which factors work best & when:


Curiously in the 'Recovery' phase (when emerging from a recession), those stocks with the worst Quality & worst Momentum perform best. This should be bourne in mind by investors who prefer to consistently invest in high QMV 'Super' stocks.

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Trident 5th Sep 40 of 48

Re Altitude (LON:ALT)

One of my red flags is changes of accounting date. The motives usually quoted for doing this normally seem superficially plausible, but in many instances to me do not pass the smell test.

Its strange how they most precede, or follow difficult trading circumstance. They also usually refer to circumstances that they want to benchmark as the new normal, forgetting that if they were accommodated within their current trading year, they still reoccur. A bit like swapping a weighted H2 to being a weighted H1.

They muck up prior year comparisons, and basically seem to allow management usually a further breathing space when they hope something better can be headline reported at year-end, albeit on an extended basis.

I guess there can be circumstances when it makes sense to change you accounting year-end, but I fear the history is usually a CEO/CFO ruse to buy time.

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Gromley 5th Sep 41 of 48

In reply to post #510446

Graham :

The company explains that its order book at the start of 2019 was much higher than at the start of 2018, and that's what helped it to generate such a big result in H1.
The order book at the end of H1 2019, however, is only "broadly comparable" to the order book at end of H1 2018.
So it sounds like many more orders will be needed to sustain the growth into H2

That was my initial reading too, but I don't think it is actually the case.

The acquisition delivered £5.5m in H1 but that was only two months, so if we assume £16.5m for H2 that requires the existing business to deliver £33.1m in H2 to deliver the forecast FY revenue, that's still 10% up on H2 last year but not as big a stretch as it seemed at face value.

I do though note the tone of caution and uncertainty and I think I would want to understand more about how prospect and orders flow through to revenue. From some of the comments it sounds as though they would too!

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Old ManFit 5th Sep 42 of 48

In reply to post #510541

Did you buy his course? 

Any good?

Been following Jack for a while on YouTube, he does come up with some interesting ideas which I have found both rewarding and thought provoking.

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WDWombat 5th Sep 43 of 48

FUTURE FUTR has so far delivered brilliant returns on investments and for investors. The results due on Nov 15th are clearly going to be spectacular and I guess will be examined on two counts especially - are the accounting profits being realised as cash returns (look at cash/debt position, RoA, RoCE and free cash flow) and are the prospects for next year (Sept 20) still looking good - there will clearly be a huge slowdown in the nominal growth rate as this year has been hugely impacted by the acquisition (especially) of Purch. Some of you will know that there was an attempted bear raid a few months ago which produced possibly (I hope!) the most spurious contra arguments I have yet heard. Well, they were just lies really.

I don't pretend to understand the business more than superficially but it strikes me that it does have a very large moat inasmuch as it needs to be really well managed and the model really well executed in order to grow and monetize the online magazine product. The US is now easily the biggest actual and target market. It does not, I think, have the gearing of (say) a software company that just has to add subscribers to a largely fully- developed product and the gross margins go up. Future has to keep its readers and advertisers stimulated and satisfied. When I have doubts I always return to the video results presentations and satisfy myself that the CEO, in particular,  seems to be in superb control of her business even with the rapid growth of product offering and staff. I have made big mistakes with high flyers in the past but I don't want to let this one go.

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Martin Verlaine 5th Sep 44 of 48

In reply to post #510561


A good comment and echoes my sentiments. I tend to adhere to more traditional valuation yardsticks and as you say these have not proved reliable recently but I take the view they will at some time. The penalty dished out to smaller companies when they fail to meet expectations is a good example of the type of market we now have and will continue to do when we have the likes of Trumps tarriffs and Brexit affecting the UK economy as it will do for sometime to come, leaving  aside the portent of  a  Corbin lead government which seems more credible given the antics of BJ 

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FREng 5th Sep 45 of 48

In reply to post #510446

Thanks - that's a balanced analysis and very helpful

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xcity 5th Sep 46 of 48

All factor stats are dominated by the definitions and data sets used. Momentum is the easiest to measure, but definitions still vary.

I use my very personal somewhat vague definitions. Quality is steady (low standard deviation), usually with a moat. Growth is growing at x% faster than average; usual definitions assume that growth should invariably be present and generally - that's not my experience in practice. Value is much cheaper than it ought to be; usual definition seems to revolve around low PEs or other low valuation metrics.

As a PI, I am predominantly a value investor. REITs are an exception. Nevertheless I do have growth shares. It was gratifying to see the valuation rise in my Boohoo (LON:BOO) holding today exceeded the amount of my original investment. When I bought it, it was a value purchase even though the PE was high.

Although they are "cheap", shares in declining businesses are never value buys unless the management is fully focused on the fact that the business is declining. Statistical definitions nearly always get this wrong. Declining businesses can be turnaround opportunities or asset plays (or &etc) but they are never value unless you can add up all the receipts during the decline and see that they exceed the present price. Even if they could, management will usually gamble to make things get better and that almost invariably fails. The best way to see businesses like this is as speculative and a bet on the exceptional capability of the current management. Can work but usually doesn't.

Buying decent businesses cheap always works in the end.
Buying duds never does unless you are lucky and/or good at getting out in time.
Value requires knowing the difference.

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Howard Adams 5th Sep 47 of 48

In reply to post #510611

Hi Old ManFit

Yes I did buy Jack's course.

I have session 9 & 10 left to go. I parked sessions 9 and 10 because the earlier sessions had furnished me with so much to begin to implement I wanted to try a few things out before working towards the concluding sessions.

IMO the course is very well worth it. His pace of explanation, clarity of thought and articulation are just spot on to help you absorb the richness of the Wyckoff methodology.

To put it bluntly, the course and Jack's YouTube vids have already paid for themselves several fold.

But the interest is far from just financial.

To my mind and previous experiences what Jack explains makes great sense to me. I feel I have elevated my comprehension of Mr Market far beyond my previous levels.

Encouraged by the course and Jack's vids I have elevated my levels of investing disciplines and these have given me a heightened sense of security in handling my portfolio (see for example my posting #1 on this thread

And then on same thread, posting #9

I hope that helps. Very happy to respond to further questions should you have any.


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Gromley 5th Sep 48 of 48

In reply to post #510586

Thanks Howard (M) for reposting that JPM cycle chart - I was scratching my head trying to think which thread it had been posted on last.

It shows the economic cycle and its generally regarded that the stock market cycle precedes it, so the market drop since last summer would indeed be consistent with the view that we are now in the slowdown phase.

It is difficult though in my mind to use these thing predictively - you can have short cycles and long cycles (and one sitting inside the other!) . The FTSE 250 (said to be most representative of the UK domestic economy)  fell by around 18% from last summers peak to late December and is now 13% above the low (via c. +15% in April). So the bullish could argue that we are past the worst and the economy should turn sometime soon - I'm not convinced by that, but in all honesty I do not really have a clue.

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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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