Small Cap Value Report (Tue 16 June 2020) - Macro, IND, DLAR, RNO, ECK

15th Jun '20 by Paul Scott

100 comments 9409 reads

Good morning, it's Paul here with the SCVR for Tuesday.

Estimated timings - I have to stop by 1pm, because the XJS is going in for its MoT.
Edit at 12:49 - today's report is now finished.

I've got a bit more material left over from my weekend preparation session. Some of this is probably already out-of-date;

Commentator snippets

I like to review many sources of information & views, and have CNBC audio running in the background on my computer, during the afternoons, as there are often good interviewees (when they can get a word in edge-ways, as Joe Kernan’s questions are more like speeches, then he interrupts them within seconds of them starting to reply! Dreadful).

Plus some of the women have voices like an angle-grinder running at maximum rpm. And don’t even get me on to Jim Cramer. Hence the mute button needs to be kept close to hand.

In between those annoyances, there’s often some terrific commentary, from high profile guests. When I hear something interesting, I jot it down on my pad. Recent snippets;

Nikola - this seems to be a zero turnover US listed company, currently valued at c.£20bn. It is hoping to make electric cars at some point in the future. The share price has been a multi-bagger lately, as punters pile in, speculating that it’s the next Tesla (I’m short Tesla - yes, again! Glutton for punishment springs to mind). The name of the company is a hat tip to Nikola Tesla, the inventor & electrical engineer from history.

This was cited as an example of market mania, or “mass psychosis” as one commentator put it, which is currently gripping the US markets. His stance was that millions of “clueless retail investors” were chasing up junk shares (including essentially insolvent companies) using a platform called Robin Hood. They are often trend following, and using stop losses, therefore this is sowing the seeds for explosive boom & busts in many share prices. A very interesting point I think. Last week’s large & rapid pullback in the US markets (which spilled over into the UK market) seems to validate this view. With valuations so high, despite dire economic news, I think we should therefore work on the basis that there’s an elevated risk of more sharp pullbacks.

Automobiles - Jim Cramer pointed out that the public may be reluctant to use…

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Trader Jack

16th Jun '20

If you like AUTO look at $CARG - a bit more volatile but more growth potential

kgb1953

I think thats the point of the zero interest rate. Financial repression - deliberately keeping the interest rate below the rate of inflation to inflate away government debt. As all countries are doing it there is no hoped to be no impact on the exchange rate.

GN100

Are there any (many) MOT stations open? I thought there was a 6 month extension to MOT's expiring after March? ie Only vehicles with their MOT already expired before March need to get one if they are to be put back into use. Maybe this is the case with your XJS Paul? I am an interested party as I have an MOT station tenant in a property.

Jim Wall

I work in the CLO industry and I worked in subprime as well during its heyday and some less controversial stuff in between. The Atlantic article on CLOs was genuinely one of the worst I've ever read on any topic in my career. the author seems like a nice chap but it made a horrible mess of the topic.

to understand CLOs it makes sense to first think about a normal fund that buys leveraged loans. investors buy a participation in the find and get the asset return net of fess. Leveraged loans are typically non-investment grade and pay something like Euribor + 350-450. There have been a few cycles at this point and net return has been ok (I believe)

CLOs flip the liabilities onto their sides. the manager buys the loans as per usual but this time there are different tranches which the most senior receiving a much lower spread but this is typically rated and is far more risk remote from a credit perspective (in terms of suffering a loss). the tranche below is typical AA and pays a little more and there's A below that etc etc until you have an equity tranche which can pay up to 20% depending on loan scenarios.

there are broadly two systemic risks from CLOs. one, losses in the deals can destabilise the fin system like in 08 and the second is that CLOs disappear and you have a credit crunch due to a loss of credit provision.

The first one is unlikely in this instance because the owners on the more-at-risk tranches equity and B/BB-rated tranches are typically specialist Hedge Funds and Asset Managers. losses in their books pose little systemic issue outside losses in repo etc. banks and insurance do participate but only in the higher rated tranches. for what its worth, the chances of the top part taking losses are extremely remote. I can delve into why but its equivalent to a default cycle that would hobble every bank in the land..

the second risk - permanent loss of credit - has been somewhat assuaged by Fed actions and the market here is coming back to life. there are aspects to the CLO and Loan market that rightly attract criticism but it is *NOT* going to be the epicentre of some 08 type financial meltdown

ben316

Great news !

Fantastic report Paul.

Fascinating story r.e Indigovision! WOW

TamzinPiworld

Idox (LON:IDOX) H1 20 results presentation to analysts, given yesterday 15.6.20, including Q&A, view the video or listen to the podcast.

The new management team, headed up by David Meaden, CEO, seem to be doing a good job. Highlights: Revenue up 13%, including 10% organic growth. Recurring revenues 53% of total revenues. Revenue visabiity strong, with 90% FY20 contracted. EBITDA increased 133%.

Separately, piworld webinars coming up. This Thursday 18th June, 1pm, we have ex bond trader, Paul Hawkins, telling us Everything you wanted to know about Corporate Bonds. Having just run through the content with him, I know it's going to be superb. Register here.

The following Thursday, 25th June, 12.30pm, Codemasters Group (LON:CDM) CEO, Frank Sagnier & CFO Rashid Varachia will present the groups results for FY20. There will be the opportunity to ask questions. Register here.

The Phoenix

Agree with some of the other posters Paul write that book not another how to buy stocks effort but your real life adventures reckon you would have a lot of sales on Stocko subscribers alone.

Hope this time round your hanging onto the millions

Mark Penney

Superb story Paul - that keeps you feet on the ground as they say

IncredibleMosesLeroy

Cheers for the follow-up Jimbo. I had come to a similar conclusion i.e. 'it'll be probably be fine', but good to hear a voice from the inside.

FREng

David, Do you know whether there's a management incentive scheme and, if there is, what the KPIs are?

mojomogoz

Someone needs to take it to the supreme court. That's probably unlikely as no thanks will come for doing it (at least not until after corporate bond buying were to blow up)

FDR went thro many constitutional battles particularly around his revaluation of gold relative to USD (ie depreciation of dollar) and the severing of the gold clause common in all bonds issues (public and private) after the Civil War promising to repay in either dollars or gold coin at the price fixed at issue. FDR administration won the case by 5 to 4. Historically they are considered to have lost the argument but won the day as realpolitik prevailed. Note this was just the beginning of series of battles with the court many that FDR lost but he won this one as to overthrow FDR's action would have bankrupted US overnight.

There was great moral outrage from financial and legal industry and many politicians (at the time that included a lot of Southern Democrats as well as Republicans). It was the end of US, moral bankruptcy, the whole system would collapse, etc....but markets loved the change and it helped begin the very slow process of stopping the huge deflationary pressures (I view FDR as villain in many regards too so I'm not a pure fan boy...but to his credit he took some leaps in the dark that very few experts supported).

Hussman and others in finance who complain about Fed actions remind me of the above. He seems like a good guy and I think his analysis is well worth reading....but on stuff like this along with other Wall St talking heads he's talking his book and layering on a immorality/illegality angle to fluff it....he doesn't like that the game has been changed on him and that he missed it in his analysis. Be careful the models and the data.

Like i said yesterday:

Option 1 = debt deflation driven depression
Option 2 = something else
https://www.stockopedia.com/content/were-all-fomosapiens-now-621583/

We are going option 2...good luck working it out....be careful of being sucked into intellectual robust and beguiling option 1

David

Thanks for your points. I put up my low knowledge negatives as I was interested in understanding a little more as clearly a situation that could interesting due opacity and an owner with track record. Some responses to you:

Equity raise point is matter of fact. The've got overheads over their revenue. They need to invest more including scaling customer handling ahead of growth given the focus on premium/big customers. In addition, they wrote down all their acquired assets to zero....that should be read as a problem. C19 isn't a good excuse for it as the reasonable assumption is that the world has not ended.

I think it probable that cashflows benefit from C19 interruption at the moment as it allows for hard cost cut.

Daley has his money and this is his net fun project. He's not that sensitive to when or how it works.

It remains quite a dangerous if interesting situation and the prior Bulgin record is not a safety blanket I would hold on to...I'm very willing to rate people and don't know Daley and so may be missing the point. I do own outwardly flaky businesses as I think mgt are good plus dynamics not understood enough.

My hunch is that I will get a chance on Checkit (LON:CKT) at a lower price. The share price rise today on what was not a good report suggests over optimism short term

Momoko Miyamoto

Activist fund Crystal Amber Fund (LON:CRS) should take a lot of credit for the turnaround at De La Rue (LON:DLAR) they managed to replace the awful previous management after taking a 19.2% stake

Michael C

I'm sure you are a good chap Jimbonambo41, and work hard at what you, do but your post inadvertently explains much of what is wrong with the financial world these days. I'll be happy to explain what I mean if you wish, but please ask on tomorrow's board.

Tonysaparito

17th Jun '20

Timarr..Auto..Do you know if the directors inc chairman are invested to a significant level in the business as it appears difficult to find this info and you with a holding probably know this as I agree with you as Auto is a great way to get new and used exposure to the car market which surely is going to have a new scrap page scheme in the July budget..Thanks

intuitive6191

Interesting article in the Wall Street Journal. Cites some risk for insurers if downgrades force requiement for extra capital. No firm conclusion either way.

18th Jun '20

happy to hear your thoughts.. I dont know if you see this reply or not... I am a much bigger fan of small cap equity than exotic debt instruments so I may surprise you :)

timarr

Hi Tonysaparito

Autotrader director shareholding here: https://www.sharesmagazine.co....

As you can see the Chairman and a CEO have large financial stakes, although compared to the market cap they're not really significant. With companies this large I never worry overmuch about director holdings - they'll be handsomely rewarded anyway. Smaller cap director shareholdings are much more important, IMV.

I think you're right, there has to be some support for the industry to try and boost new car sales. Not sure that will benefit Auto Trader (LON:AUTO) directly but it's such a well run company that I don't think it matters. I really liked the proactive way they immediately raised money as soon as the crisis hit and then dropped fees for all of their customers in April and May. There was no magical thinking going on, they assessed the situation and responded accordingly.

19th Jun '20

Thank you timarr, much appreciated..Tony...PS.You are like another Paul

Small Cap Value Report (Tue 16 June 2020) - macro, IND, DLAR, RNO, ECK

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Paul Scott

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