Small Cap Value Report (Tue 18 Feb 2020) - Apple, CNKS, ANG, TGP, TON, BLTG,

18th Feb '20 by Paul Scott

38 comments 8919 reads

Good morning, it’s Paul here with Tuesday’s SCVR. Please see the header above for the running order.

We reached a pleasant milestone today - the first day of the year when I drew back the curtains at 06:47, and it was daylight! Only just, but I'm a glass half full person. So that's put a bit of a spring in my step today.

Estimated time of completion today - 1 pm.
EDIT at12:41 - I'm taking a break for lunch now, but will add some more sections after lunch. So revised finish time is 4pm.
NB this is extra work, not a delay! So thumbs-downers, keep your greasy mitts away from that button!
EDIT at 16:28 - today's report is now finished.

I've been doing some planning for my telephone interview this Thursday, with Andrew Gossage of Up Global Sourcing Holdings (LON:UPGS) . I've asked UPGS to talk to us about China, because the company is a specialist importer of branded consumer goods from China. The company was receptive to my request for an interview, and suggested we talk towards the end of this week, so that they will have a better handle on how the situation is developing in China, a few days after the usual Chinese New Year shutdown has ended.

I see that overnight, Apple indicated it would see a greater than anticipated hit to revenues, due to coronavirus. Apparently it usually sells about 10% of its product in China, and makes most iPhones in China, so a double hit in the short term anyway, to both sales and production.

Talking of which, I've just seen that Iqe (LON:IQE) (a supplier of chip wafers for semiconductors) is down about 5% today, presumably in response to Apple's predictable warning. IQE's share price is down to only 58p. I remember doing very well, trading this share, a couple of years ago, on positive newsflow. As it's turned out, the optimism & expectations of big profits, looks to have been hot air. IQE's broker forecasts look dismal now;

IQE's share price chart looks similar to something out of the TMT (technology, media & telecoms) boom/bust of 1998-2002;

What's interesting about this picture, is that the StockRank (see above, it's embedded within the share price graph on…

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davidjhill

18th Feb '20

What's interesting is that Apple is down 2.5% on the back of this warning. So either it has already been partly priced in and Apple shares would have been much higher without Coronavirus, or the strength of Apple and its balance sheet means the temporary nature of a virus is discounted to be short term. I suspect it is the former. In the WSJ today there is an interesting chart that shows the S&P performance up 4% since turn of the year whereas US firms with high China exposure are down 6% on average! Therefore whilst Apple has actually risen it clearly has been tempered by the current situation.

On the virus itself another interesting stat came up today. Whilst Hubei cases are static the numbers being contracted globally (exc Hubei) have fallen from 450 to 115. Ie infection rates have quartered, which suggests that the containment measures "may" be working. Many of those new cases have been on that cruise ship as well. Whilst obviously pretty horrid for those trapped inside Hubei, in the context of the world the loss of GDP from a 12m population is unlikely to have a long lasting impact for a juggernaut of a managed economy like China. As long as the containment lasts then factories in the rest of China will come on line again and peoples habits will return more to normal.

From an observational/qualitative perspective : being in London I noted that just a week ago when I went to one of my favourite street stalls in Spitalfields for lunch (Chinese street food run by Chinese nationals) everyone was wearing masks......by today they had disappeared.

Clearly we shouldn't be complacent but I think we need to be careful with knee jerk investment reactions.....a sell all approach is expensive. Perhaps an Option strangle strategy on certain indices may be a cheaper way. If this peters out the stock markets may well rally sharply and you'd make money and if it gets horrid the markets would tank and you'd make money. In the middle you'd lose but that would be status quo for stocks?

Paul Scott

Hi NickRay,

Fantastic analysis, thank you very much for posting that!

I've never seen those charts of what makes up the StockRanks, where are these found on Stocko please?

Best wishes, Paul.

Nick Ray

Paul - they are not available on Stocko. I keep records of a range of metrics myself. (The graphs are produced using a tool called R.)

The main reason I started keeping these records was because I had absolutely no idea what was a good value for (say) ROCE or P/FCF so I couldn't work out how to build meaningful screens! Anyway, now I have a decent body of data which helps immensely.

And I do hope that Stocko will eventually make their own data available (which will be a lot more comprehensive than what I have) and in ways that can be used to inform choices when building screens or trying to do a bit of digital archaeology as in this case.

tic_tac_toe

given the issues outlined today by Tekmar (LON:TGP) I wonder if people here consider it prudent to contact IR depts about implications of supply and sales disruptions in China, or indeed if the proper thing to do it await any RNS disclosure that addresses the issue?

What are people here doing

Susan123

Hi Paul

First class analysis and style - as is mostly the case - but as I've said before, pls can we have a mid cap report b/c I can't squander my life savings on small caps - these are punts at the end of the day!!!!

Honestly think we need much more mid and large cap analysis here, in place of the small caps b/c that is what most of the audience will be serious about putting serious money in.

Tortoise investor

I've actually sold out on the strength in Cenkos Securities (LON:CNKS) this morning. As above, profit is likely to be small for 2019 - and market will probably not like it when it sees the full numbers so I think there may be a buying opportunity post results, especially as I am not quite convinced 2020 will be an awful lot better at this stage. You can see how many transactions it is involved in through info on its website (https://www.cenkos.com/transactions). Nothing posted for 2020 so far although perhaps they are slow to update the website? Plus with EU trade negotiations coming up I think there'll be market nervousness later this year.

I appreciate one year earnings aren't the way to value this share - I just think there might be another better entry point over the next 2 months than c.65p.

Wimbledonsprinter

Paul

Thank you for your write up of Titon plc. You ask in your write-up if readers remember what is "odd" about the company. I don't think there is anything "odd" about the company, although you may be referring the Korean structure.

What investors have to get their head around is the Korean structure, where there are two Korean JVs, one Titon Korea (which is 51% owned and therefore fully consolidated, with a minority interest) and the other BTS (which is 49% owned and therefore treated as an associate in the accounts). Titon Korea manufactures the ventilation vents and sells them to BTS which is the distributor/ reseller. The different accounting treatment of the two businesses (where the economic reality of ownership is almost identical) does cause a bit of complication, which you can argue is not worth the headache for a small illiquid microcap.

There is a large family ownership (split between different members of the family) and after decades of being on the main LSE board, just over a year ago it moved to AIM. I don't think the company has issued new shares for years - and most of the family members have not been selling shares - so you could argue that the management is not overly concerned about the share price. This can be viewed as a positive ("management does not try to sugar coat bad news") or a negative ("shares could stay cheap for years").

The shares are trading well below book value. The biggest reasons, apart from the illiquidity and convoluted JV structure is I believe, the low pricing power Titon Holdings (LON:TON) has in its 100% owned UK, Europe and US businesses on it products. It has historically enjoyed a much higher margin and market share in Korea - but maybe there too pricing power is being eroded as the Korean housing market stays in a severe slump (indicated by today's update). Historically, one of the Korean JVs decided to invest in speculative Seoul property deals at the wrong time in the cycle and now capital is tied up in property.

Susan,

I've been a professional small caps investor for 18 years, so this is what I write about.

If you're not interested in small caps, then don't read my small caps reports.

Paul.

I thought I would just add a brief further note about IQE (LON:IQE) and the P/FCF ratio. Here is the same data but zoomed into just the 2016-2017 period and showing P/FCF and P/E in their raw form and as "ranked" ratios (the ones with a # prefix) showing the values as a percentile (= "how many percent of stocks is this value bigger than?")

Looking at the raw data you might think that P/FCF jumps up a bit in March-2017 and then creeps up further until about Sept-2017 when it disappears. But looking at the ranked data (#P/FCF) you see a different story. In fact it had been creeping up from 40% to 70% and that jump in March takes it to nearly 100%. The remaining time it just creeps even closer to 100% but the ranked move is very small. This is because even a P/FCF of 100 is huge.

By contrast the #P/E creeps up to 62%-ish and then makes a more gentle rise towards 100%.

Because the Stocko Value Rank ranks these metrics high → low you need to calculate 100-"rank" to find out the Value Rank equivalents. (e.g. a #P/FCF of 70% in this plot represents a pseudo-Value-Rank of 30%). Value Rank is just the average of the ranks of (P/E P/B P/S P/FCF Yield% and Earnings Yield%).

The big benefit of using ranking with a metric (which you can do in the screener) is that you can directly talk in terms of where a stock is positioned relative to the market (or the sector) rather than needing to know exactly what kind of values a given metric typically takes.

SundayTrader

Interesting question. About half my portfolio must be in mid caps (plus a couple of large caps). But I am not sure I should have any money at all in stocks with a cap larger than about a billion - I certainly have more success overall with the smaller cap stocks. As Paul will say, there are other places to go for discussion of larger companies.

Gromley

A fascinating insight into the StockRank evolution for IQE (LON:IQE) Nick.

I would have to check the detailed timeline better to be sure, but the fact that Share-Price momentum was the first factor to fall suggests to me that Carson Block's controversial short report was a trigger for the slide.

This was shortly after the share-price went somewhat stratospheric on the back of an apparently imminent market break through.

Block's main contention was that extremely high margin royalty payments from a JV were 'dodgy' did not really prove to be true.

However those payments were clearly one offs and allowed investors to charecterise IQE as an already healthily profitable business with the potental to break through into the sunny uplands.

In fact it was a moderately profitable business about to enter a phase of huge but (still) unproven potential that would require substantial further investment at risk.

When a pre-profitability story stock reaches such a phase, the share-price will often disappoint on the basis that the most likely outcome is that the opportunity ; may not fully arise / will cost more to address / will be further away than the companies available cash reserves support. In the case of IQE, before the Block report the market had taken a different view with IQE, perhaps blinded by the established existing profitability.

Whilst I am still of the view that Block is a charlatan (and possibly much worse) he is clearly not an idiot and I think his 'reports' should be taken by investors as a signal to at least review the investment thesis through a different prism.

Burford Capital (LON:BUR) is a more recent example, whilst the more powerful of Block's claims look to be little more than smoke and mirrors - they did precede an announcement where Burford Capital (LON:BUR) had to report reduced profits. The profits warning I think was really just a reflection of the fact that Burford's business can be lumpy in terms of when the gains occur. Even if the bull case for Burford is absolutely correct, such fluctuations are going to occur. However there timing relative to Block's publication allows the market to give significant weight to the idea that he was perhaps on to something.

For me perhaps the investment message is certainly not to accept what such short reports say, but neither to focus on the demonstrable errors and misleading statements in their claims ; but rather to look at the underlying uncertainties that allow these claims to be made and review whether there are in fact legitimate risks that should be reconsidered.

In my view IQE (LON:IQE) has been serially unlucky in the way things have panned out (and may well still come out good) but such things happen all the time and I think that investors (at one stage myself included) made the mistake of considering their success inevitable.

Burford Capital (LON:BUR) on the other-hand have suffered one episode of predictable lumpiness in timing of recognitions, which appears to strongly support the bear case - but actually does not really convince me at this stage,

For the record I have a small long position in Burford Capital (LON:BUR) - a what I thought was a bargain price of £7.40/share (but 20% underwater at this stage) and no current position in IQE (LON:IQE) (probably would not buy before 2 consecutive positive 6 month results statements)

bryans1311

Susan- the clue is in the title.

PhilHofGrowYourDough

re: IQE

"As it's turned out, the optimism & expectations of big profits, looks to have been hot air."

I did try to caution people to my direct experience of the over confident statement from the Chair in Jun 2017 on this thread https://www.stockopedia.com/content/iqe-doing-what-minervini-predicts-195215?order=createdAt&sort=asc&mode=threaded

Nick those are great charts an dI really hope Ed and the team can get to a point (soon) where they can deliver charts like this

Hi Paul

First class analysis and style - as is mostly the case - but as I've said before, pls can we have a mid cap report b/c I can't squander my life savings on small caps - these are punts at the end of the day!!!!

Honestly think we need much more mid and large cap analysis here, in place of the small caps b/c that is what most of the audience will be serious about putting serious money in.

Hi Susan,

Firstly I think it's a bit harsh for you to have received so many thumbs down for a polite statement - even if I can see why people consider it to off piste - I've given you a thumbs up just to counter the balance.

There is a vast amount of Large cap coverage elsewhere and these are such a major focus of the "professionals" that it is unlikely that Paul or Graham could add much new in the majority of cases.

The same is largely true of mid-caps.I should though note that one of the Stocko team did say that they are considering a Mid-Cap report and also that Graham does also produce a Mid-Cap report on another site.

I do though, feel a need to challenge your statement :

I can't squander my life savings on small caps - these are punts at the end of the day!!!!

Certainly small caps are individually more risky than mid/large caps, but even without significant selection skill, with sufficient diversification history tells us that they are likely to be a better investment prospect than their large peers.

To suggest that there are "punts" is something of an exaggeration in my view and Stocko helps to increase your risk factors too.

Firstly the StockRanks and StockRank Styles help to filter out the real punts. The very biggest winners on the market are likely to have a single digit StockRank and a "sucker stock" style , but as a group these are the stocks that will collectively lose your fortune - these are the real punts. Looking further up the SR & SRS chain will give you a substantially less risky group of shares to look out.
Paul & Graham's analysis is also very valuable in sifting out the likely losers. I find myself very much more interested in what they don't like (and the reasons) than what they do like. I've been reading Paul for many years and when he gets excited about a stock I get nervous - he picks some great winners as well as some less so good, but if Paul offers up a negative view I regard the information as gold dust.

Smallcaps in my view absolutely do not have to be exceptionally risky in my view and with sensible selection and sufficient diversification I think it is actually highly sensible to squander [I prefer the term sensibly-deploy] your life savings on small caps.

Of course everyone's investment objectives and approach will be different but the small-cap pool does not have to be a casino.

A final reason why the SCVR can be so valuable is that the "big funds" simply cannot invest a meaningful amount is these companies hence why the often do not look at them, whereas most of us private investors can. Hence there is a greater chance that switched on analysts (such as Paul & Graaham) can get - and provide us with - something of edge.

Weather you choose to embrace small-caps or not, good luck with your investments and don't feel discouraged by the red tumbers to contribute to the boards.

Regards,

Tony

(AKAGromley)

jwebster

19th Feb '20

"I can't squander my life savings on small caps - these are punts at the end of the day!!!!"

The issue here is volatility. Yes, a small cap can surprise with a profit warning and bamm... share price down 40%+ on the day. Large caps generally don't do this.

But, small caps have an interesting ability to rise 40%+ over a few short months on good news. Large caps generally don't do this either.

In addition, main funds can't invest in small caps due to insufficient liquidity, so they are not well researched. So that makes the happy hunting ground for private investors. Small caps have been a successful domain for a few notable ISA millionaires such as Lord Lee, Robbie Burns, Leon Boros.

Agree totally share trading can be punting, but I have found from my own results - when I read carefully about a company in an industry I know about, which I believe has growth potential, a strong balance sheet, low debt, pay a dividend, generate cash, decent management, positive Chairman's statement, mgt has a % of ownership and the price is not too high - these have worked for me nicely.

My purchases on more spec stocks, turnarounds, chasing momentum, beaten up bargains, have been punts for sure and their performance more spotty, at best!

But these days, I think large caps are no longer as safe as they would appear. The FTSE100 is full of energy stocks (trapped hydrocarbons) Banks (zero growth subject to fintech displacement) miners (cyclical). The USA has great large cap tech growth stocks, but their PERs are 30+.

So there is always risk, but for me small caps is an area where the information value is not fully expressed in the price, leaving more room for us to pick through. Otherwise, I hold the Nasdaq to track the tech momentum and don't fret over selection.

iwright7

"I can't squander my life savings on small caps

I wouldn't want to be 100% invested in small caps either. If I look at my own portfolio it's about 1/3 small, 1/2 mid and the balance as large caps. But looking back it is the small caps that have produced my greatest alpha, so I wouldn't be without them. As Jim Slater noted, "Elephants don't gallop".

- these are punts at the end of the day!!!!"

Amongst the small cap dross there are some very high quality small cap companies whose return ratios smash their bigger brothers. So in my my view its best to screen for these type of quality companies. Simple screening criteria are high scoring Q Ranks, or ROIC% above 15%.

WDWombat

IQE - went to 750 shortly after listing. I dropped this one with an unpleasant loss when there was some pretty obvious dodgy accounting between the parent and the Singaporean sub after which the share proceeded to rally strongly. Murphy's law. Chip companies are poorly understood in the UK but as a general rule margins are tight and return on capital poor. But in upcycles they can do well if the products have a price or technical advantage as the earnings upticks can be huge. But really tough to get a grip on end markets and technology. You need jolly clean water and jolly clever science to succeed.

Tommy H

There are other websites out there there that provide very good mid-cap analysis so rather than another -ve feedback cross suggest you look some of them up and sign up. This does what it says on the tin just like a well known brand of wood sealant.

The Phoenix

Hi Susan Roland Head's blog on here well worth reading for more cap bias

Small Cap Value Report (Tue 18 Feb 2020) - Apple, CNKS, ANG, TGP, TON, BLTG,

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