Small Cap Value Report (Tue 10 Nov 2020) - SNWS, MCS, WEY, CPI

9th Nov '20 by Paul Scott

110 comments 12699 reads

Good morning, it’s Paul here, with the SCVR for Tuesday. Jack's busy with other work today, and I reckon I can handle the relatively modest newsflow on my own today.

Today’s Agenda

Smiths News (LON:SNWS) - left over from yesterday, refinancing (Paul, done)

Wey Education (LON:WEY) - Final results (Paul, done)

Capita (LON:CPI) - Trading update (Paul, done)

Mccarthy & Stone (LON:MCS) - Irrevocable undertakings, re takeover bid (Paul, done)

Zoo Digital (LON:ZOO) - Interim results - see tomorrow's report

Timing - update at 12:55 - I'm taking a break for lunch now, and will finish off the last 2 sections later this afternoon. Should be done by 4-5pm. Today's report is now finished.

Market gyrations (written by Paul)

What can I say about yesterday? FTSE-100 up c.276 points, to 6,186. What a remarkable day - large, seemingly knee-jerk market moves up (and down) happened on a colossal scale, once the seemingly positive news from Pfizer came out about its vaccine, subject to all the usual caveats about peer review, further testing, and regulatory approvals.

I hope readers did OK overall. When such large market moves up or down happen in such a short space of time, I’ve noticed that things seem to fan out afterwards - some instant gainers continue rising, whilst others gradually give back the gains as people bank profits. Hence it should be an interesting process of price discovery in future, as the short term traders bank their profits or losses, and we get to see how much conviction investors have in their positions.

For me, it was a generally up day, I’m positioned for an overdue covid recovery rebound, but there were some losses too. Such is life. In the overall scheme of things, one day is nothing more than a blip on the chart. That said, it does feel like a turning point has possibly been reached, where we should be looking forwards, towards a gradual reduction in covid over the next 6 months, as mentioned here last week, with lucky timing.

That said, personally I’m not interested in chasing up stocks that have perhaps already priced-in a recovery. I want plenty of upside (100%+ ideally), because there’s an opportunity cost at times of great opportunity. If you back the wrong stocks in a recovery,…

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Gromley

10th Nov '20

personally I doubt a 1.9% short position would cause any type of short squeeze. It would need to be highly market illiquid for that to occur and Reach doesn’t strike me as that illiquid from watching it over the last few years.

david - I suspect we are pretty closely aligned on both the short squeeze and the pension (your later comment)

But the short is at least significant against the average daily volumes and with 70% of the shares with large holders a 1.91% short is 6% of the "free float" (probably using that term wrongly)

OsullivanB

£RCH was the lead recommendation in the recent issue of Small Company Sharewatch. It wouldn't be the first time that a recommendation in that tipsheet has had an impact on price at least in the short term.

Good point - thanks was I think a large driver of the rise last Monday. I would normally consider selling a SCSW tip a couple of weeks later, but in this case the uptrend was already well established and I think SCSW were almost just "noise" on this occasion.

The Phoenix

There is a third option its just cancelled off at maturity as per link below, normally you would expect to get inflation but we didn't see it in 08/09 and the Japanese print on a level that makes us look Sunday league and they can't get inflation even though they want it.

We did see some inflation in 08/09 onwards but it was in property and stock markets as a result of rock bottom interest rates I expect the same scenario to play out over the next ten years given this time round roughly 5-6 times more qe has been lobbed over the wall against 08/09.

https://www.thisismoney.co.uk/...

QARPY

But the pension valuation due soon could go either way, right? There is no guarantee it will reduce the deficit, it might actually push it higher.

How do they get rid of it? Can they just sell it?

Paul Scott

Hi kgb,

Yes, my instincts & experience are similar to yours, in that I am intrinsically distrustful of MMT, seeing it as folly, which has historically led to disastrous devaluation, then hyper-inflation, ruining millions of lives.

There again, I think it is important to keep an open mind. Hence why I've begun reading the provocatively titled "The Deficit Myth". What intrigues me, is that in a zero interest rate world, QE is proving (so far) a highly effective way to avoid an economic slump, and to fund huge crisis deficits effectively free. It has not caused inflation (other than asset prices).

Hence why, after 12 years of this apparent madness, we surely need to wake up to the reality that, whilst if goes against everything we know to be true, it's somehow working! That's why I want to explore the topic more.

My main worries with MMT, are that all this QE could ultimately lead to out of control asset bubbles, on leverage, and then a banking crisis - although surely that then could just be fixed with even more QE?

Or, maybe a situation where one of the major currencies suddenly collapses? Who knows?! It will be fascinating to see how it pans out.

Where to invest? I think reasonably priced equities in decent, profitable companies, and property (not retailing space!) look sensible places to focus on.

The most important thing to remember is that, nobody knows. People love to say emphatically, that this WILL happen, and that WILL happen, whereas in reality, they're just making it up! Maybe let's all try to be a bit more humble, and admit we don't know, and we're purely speculating.

If I'd told you in 2007, that the financial system was about to shake itself to pieces, and interest rates would be near-zero for (at least) the next 12 year, you'd have told me I was stark-raving mad!

Such a missed opportunity for me. Back in 2008, I had a lovely £1m house, a former rectory in Highfield, Southampton, and my mortgage was, amazingly, floating rate at 0.2% BELOW Bank of England base rate. It had no floor either.

As my finances collapsed in 2008, I felt obliged to sell the house. The buyer screwed me by gazundering me at the last moment before exchange to basically rob me of £40k, as he smelt that I was a forced seller, so suddenly reduced the price he was prepared to pay. All fair in love & war I suppose, and he probably thought he'd been terribly clever, in a Donald Trump type of way. I wished him well, and hoped that he would enjoy the lovely house, over dinner in a local brasserie. There's no point in letting bad feelings linger.

Shortly afterwards, I moved out of my dream home, and ended up in a basement flat in Brighton. I was burgled by some junkies 2 weeks later, whilst taking a nap, and had to chase them out, and fought one of them to get my laptop back.

Then the piece de resistance happened - a letter came through from my old mortgage company of the big house in Southampton. Due to interest rates being reduced to near-zero, my monthly mortgage payment was reducing from £3,500 per month, to £200 per month. Yes, you read that right!

I just collapsed in fits of laughter. It was such a ridiculous turn of events, that you have to laugh, to prevent you crying.

As Oasis always say, don't look back in anger.

As Cilla said, life is full of surprises!

So I ended up paying £1k per month, to live in crappy rented flats in Brighton, when I could have paid £200 per month to continue living in my lovely £1m rectory.

But does it matter? Not really. I miss the garden more than the house actually. Rattling around in a big house is pretty pointless, so it's better that a family are enjoying it now.

We've got to see things glass half full.

Best wishes, Paul.

True, it can go either way. And no they cannot just sell it. You can only sell of a DB pension scheme if you overfund it to a ridiculous amount - It's for sure a buyers market in this respect.

Unless companies are desperate for cash (as I believe 600 (LON:SIXH) were) the best option is just to ride the pension - in this context Reach (LON:RCH) are quite strong and they benefit from a constructive relationship with the Trustees who seem to recognise that the best way to support their pensioners is to let Reach succeed.

A definite risk factor to consider however.

shipoffrogs

R-G, not sell it, but they can pay for it to be taken off their hands.

The price paid will far exceed the value of the liabilities being shown in the accounts, as it will be valued on a "buyout" basis, designed to remove much of the risk that the buyer incurs on taking on liabilities which cannot be accurately valued.

Snowbum

Hi GrahamF,

My missus is a Geneticist. I showed PDiddy's post to her and she said she agreed with every word wrt to the vaccine technology. I asked her when we were next going on holiday to Russia :)

https://www.thelancet.com/jour...

https://www.nejm.org/doi/10.10...

https://www.standard.co.uk/new...

john652

What an excellent reply Paul , thumbs up, if we had emojis :)

Logical David

My advice regards buying shares and to minimise any potential loses is to only buy:

High Quality shares which have a good Balance Sheet, which are making a Profit and which have Momentum behind them. I ride out any stock market storms because the market always bounces back with time.

timarr

11th Nov '20

Arf ... but the problem isn't the Russian or the Chinese science, it's the authoritarian states behind them. We had a taste of this in the the US where it was clear that if he could have Trump would have forced the FDA to announce early in order to give him his election win. Because that's what authoritarian leaders do, they subvert the scientific processes to their political needs.

The likelihood is that there will be adverse cases with all vaccines, that's the nature of them. At least with Western states we're likely to see the evidence of issues - but will we, have we with Russian or Chinese vaccines? Ironically, the fact that we're seeing trials stopped because of incidents gives me more confidence in the processes, not less.

GrahamF

Hi Forbsy

I still fail to see why the Pfizer vaccine is being evaluated by PDiddy as a Russia versus the West issue. I still fail to see why the Russian vaccine versus the AtraZeneca vaccine is relevant to whether or not the Pfizer vaccine is going to be useful or not.

And if we are going to throw around articles from the Lancet publishing the results from the Russian study, should we also not be putting that in the context of the queries raised about the validity of those studies.

https://www.nature.com/articles/d41586-020-02619-4

https://cattiviscienziati.com/2020/09/07/note-of-concern/

It is perfectly right and proper to query the outcome of the Pfizer trials provided that we do not seek to make it seem like the Pfizer trials are poor by setting up a straw man Russia versus the West type of angle to it and failing to also mention that queries have been raised about the Russian studies too.

I suggest a visit to St Petersburg by the way once travel can safely resume.

But leaving that aside what does your wife think of the queries raised about the Russian trials and the decision that has been made to start using that vaccine so early?

Interesting stuff Mojo. I don’t pretend to understand the economy, or inflation etc. It seems to me that economists don’t understand it very well either, they just pretend that they do, or allow us to think that they do. MMT seems very much something that holds together in a narrow theoretical model, which is all well and good until something that the theoretical model didn’t factor in comes into play. I don’t like going by human instinct as so often it is wrong but still cannot help feeling that MMT sounds like a “free lunch”.

What role would you say that wage inflation growing faster than productivity plays in feeding through into price inflation? And to what extent are we beholden to the sentiment of our trading partners (in the sense that if we print vast quantities of money, what happens if they are no longer willing to trade in pounds or they decide that our pounds are worth less than they once were)?

mojomogoz

Graham

No one truly understands economics...its too complex and economies have significant endogenous factors prone to cause periods of high volatility or regime shift that our heuristics can't keep pace with (2008). We all tend to rely on heuristics...the great heuristic of our post-Keynesian times (we are still Keynesian but not nearly as much as we were) is that the budget of country is like a household. This couldn't be more wrong....and in that regard I think the MMTers are more right than other key economics groups.

MMT is no more a free lunch than credit creation within licensed bank balance sheets and financial markets more broadly is. Its merely the govt and its institutions (central bank) taking a more direct role in this credit-money creation and spending. This is not necessarily good or bad. High debt issuance and QE are similar functions except there's a shell game whereby the financial system creates the money and then passes it back to the government to spend. Note at present that in the US with massive fiscal gap that the biggest buyers of treasuries are banks whom the Fed changed regulation to make it possible for US banks to effectively create bank money to buy govt paper without needing to place any risk weighting against this process....pure fiat credit creation within bank balance sheets. AKA supplementary leverage ratio https://www.federalreserve.gov...

In many ways MMT describes what's going on better and cuts out the complex opaque interim processes.

I think simplicity and honesty with self and others are good. In that way I think MMT is a positive step in knowledge and process. But you are right we could mess it up.....that said, the increase in debt, wealth gaps, poor infrastucture, significant decrease in opportunity for some groups (ie 'working class') etc suggest we ain't making a good job of our tools and immense wealth at the moment...

I think we will embrace MMT as we must....to stick to the old hard currency derived thoughts will mean ultimately a second great depression and/or a massive debt jubilee. The latter is preferable but hard to deliver directly in an excessively financialised economy...MMT is the soft and inflationary route to it.

Wage inflation is complex and not straight forward. In the UK we have had disinflation from growth in China and other EMs that has seen massive wage inflation in these countries. How we get inflation is beyond just local wages. All things equal higher wages are good if they derive from higher productivity and bad inflationary if not....however, some inflation is now a system good IMO.

MMTers propose using tax as a way to clamp down on inflationary pressures. This is good logic IMO...but super hard to implement...when do politicians really want to spoil a party?

On trading partners....I think the world is waiting for the next economic/policy step. Its my view that a careful but explicit use of MMT will be welcomed as its seen as system stabilising and provides catalysts for activity and growth. In a fiat system no one really worries about the sanctity of money (as if it were a hoard of gold), they worry about who's doing what next. The UK would receive strong capital flows too with clarity on a policy like this....wing nuts like AOC or John McDonald are sometimes right about some things :) ....

Tuffty

Re: “The Deficit Myth”, by Stephanie Kelton.

If you want to get the gist here's a link to an FT article about her earlier this year...

https://www.ft.com/content/ea25934a-7b28-11ea-af44-daa3def9ae03

LeoInvestorUK

Inspired by Paul's comments on Wey Education (LON:WEY), I have written a downside case valuation here: https://www.stockopedia.com/co...

(Incidentally, this SCVR is not tagged with WEY)

gari en desti

12th Nov '20

I can see some issues with Wey Education (LON:WEY) re the online school/ classes. I don’t hold and don’t intend to.

I have some insight into this, as I don’t live in the UK at the moment and my children are doing a UK based home school program from a specialist home school provider based in Oxford.

This school was set up in 1894 and it is used by ex-pats around the world.

As Covid hit and UK schools closed, floods of parents signed up to the Oxford home school and the school decided to close to any further students to protect the service they provide to the existing ones.

There are some excellent points made in other people’s comments about Wey but there are 2 that stand out for me. Social interaction and being able to provide excellent teaching that is scalable.

We don’t live in an English speaking country and are in a rural location. We recognised that being in an actual school added more than learning, so we tried the local school, but this for various reasons this didn’t work for us, so along with some other families, we have set up a small home school classroom, where my children go each day to do their schoolwork, using the online platform from the school in Oxford and the same course books that they would use in a school in the UK. The other children do the home school program they chose to do. Our home school has 6 children in it and is run by a teacher, all of the children have become very self motivated but more importantly they need this social interaction. They also have after school activates which aren’t connected to our home school and I would say that they need both of these. Just having after school activates isn’t enough social interaction.

So, just having an online live school, where children sit at home in their bedrooms for x hours a day is really depressing. This is not a way to learn. I thought battery farming had ended in the UK.

As for scalability, I can’t see excellent teachers signing up for this. Maybe ones that are unemployed or newly qualified, or those who are disgruntled with their present job or disillusioned in some way, but the best teachers will stay in the their jobs.

That’s where the Oxford school we use shines. As it’s not a full time job for its teachers, it has a whole raft of outstanding teachers, who monitor our children’s progress, mark and comment on all their course work and respond to questions via the platform quickly.

These teachers have day jobs in Universities and UK schools and have excellent CV’s.

I cannot see that Wey will not be able to attract teachers of this standard, so for me, this isn’t good enough for my children and they would hate doing it too.

Finally as soon as schools get back to normal, all the parents will send their children back to their good school leaving Wey with lots of empty online classes.

Zipmanpeter

14th Nov '20

Reach (LON:RCH) is a bit of story stock - not in the sense of blue sky technology but in terms of 'known for'. They shifted part of the negative history by the move to Reach vs Trinity Mirror. However, older fund managers will still remember

Re-rating can therefore only occur when/if they can drop the bad baggage (pension, phone hacking) as well as roll out the good (monetising consumer contacts). Whilst a pension exit looks plausible in 2-3 years all being well, phone hacking will also likely linger (see Econmist article this week on why phone hacking scandal wont go away) https://www.economist.com/brit...

On the positive side of the ledger, technology/digital connection is hot. But whilst the strategy may be good, collecting, organizing and monetising those email addresses even if can be done will take several years.

Net, this is a multi-year investor story and any multi-bagger potential needs to be seen in the context of that.

smatthews1

Thats an excellent example, thanks Gromley

Small Cap Value Report (Tue 10 Nov 2020) - SNWS, MCS, WEY, CPI

Today’s Agenda

Market gyrations (written by Paul)

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Paul Scott

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