Small Cap Value Report (Tue 19 Sep 2017) - PRV, EYE, FCCN, ESCH, CCT, SDY, BGO

Tuesday, Sep 19 2017 by

Good morning, it's Paul here!

There are loads of results & trading updates today, so I'll wade through as many as I can manage.

End of the momentum trade?

It's intriguing how so many share price charts look remarkably similar at the moment. When we're doing well on the markets, it's tempting to think that this is due to one's own genius! However, then you realise that many similar type of shares are all going up. In the last couple of years, the action has mainly been in growth/momentum shares. So anything that's showing decent growth, has been re-rated upwards. Then other people just started buying those shares because they had gone up a lot, for the momentum trade.

I think the momentum trade has possibly come to an end now. We're seeing lots of momentum shares falling sharply at the moment, as people bank profits. Also I think it's dawning on some people that a lot of shares have risen far too much, and are now over-priced.

Significant price corrections have happened recently on Purplebricks (LON:PURP) (in which I hold a long position), Fevertree Drinks (LON:FEVR), Hotel Chocolat (LON:HOTC) , Porvair (LON:PRV) , Frontier Developments (LON:FDEV) , Tristel (LON:TSTL) , and loads more shares that are popular with private investors. So I've been looking at these recent big fallers, hunting for bargains. However, even after a sharp sell-off, I'm really not finding any value.

Take Hotel Chocolat (LON:HOTC) for example. As you can see from the chart below, it's fallen a lot recently. However, Stockopedia shows the forward PER as being 30.7 - nowhere near value territory. The company is growing, but at a fairly pedestrian rate, so I certainly wouldn't pay anything near a PER of 30 for it. So what on earth were people thinking, when they chased the share up to 400p in May 2017? Maybe they thought that growth would be faster than existing broker forecasts?


My feeling is that, with valuations…

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Porvair plc is a specialist filtration and environmental technology company engaged in the development, design and manufacture of filtration and separation equipment. The Company's operating divisions include Metals Filtration and Microfiltration. The Metals Filtration Division designs and manufactures porous ceramic filters for the filtration of molten metals, principally aluminum. The Microfiltration Division designs and manufactures a range of filtration equipment for application in aerospace, energy, bioscience, water and industrial applications. It is developing a range of products, including the products for the manufacture of turbine blades, solar panel manufacture and energy storage. It operates Microfiltration division through its subsidiaries, Porvair Filtration Group, Seal Analytical and Porvair Sciences. It operates Metals Filtration Division through its subsidiary, Selee Corporation. It has plants located in the United States, the United Kingdom, Germany and China. more »

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Eagle Eye Solutions Group plc is a software as a solution (SaaS) technology company. The Company is engaged in the marketing, validation and redemption of digital promotions in real-time for the grocery, retail and hospitality industries. The Company's software platform, Eagle Eye AIR, integrates with all existing point of sale (POS) systems and creates digital offers, rewards and vouchers then delivers them to customers by e-mail, text or through a loyalty application for instant redemption. Eagle Eye AIR enables brands and merchants to set up targeted campaigns, choosing various media channels to reach specific demographics. Eagle Eye AIR captures real-time data on consumer activity and campaign success. Eagle Eye Promote is a rules-based platform for brands and retailers, which creates, builds and manages their promotional campaigns. Eagle Eye Gift allows tracking of gift vouchers, including redemption data. Eagle Eye Reward supports and enables the digitization of loyalty schemes. more »

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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  Is LON:PRV fundamentally strong or weak? Find out More »

49 Comments on this Article show/hide all

Catstycam 19th Sep '17 30 of 49

Good evening Paul. Very interesting your analysis of what is possibly the end of the momentum trade. You have put into words what has been on my mind for a while. It would certainly explain why my portfolio has been seemingly struggling for the past month or so. It is all to easy in good times to take our eyes off the ball, to get complacent and think that any retrace in our share holdings share price is only temporary and is bound to recover and push higher. We need to remain vigilant.

I have a copy of Jim Slaters' book "The Zulu Principle", which although a little dated these days since it was written pre internet, raises many very relevant issues. Access to information these days is far superior; we can find things about almost any company at any time and not have to rely on press releases, copies of financial journals and/or have to phone up and question our broker - how did we manage pre internet?. It really has to be much easier to make better decisions these days. In the book JS mentions a number of factors he used to look at before contemplating investing in any company. The list is too long to go into here, but I would recommend the book as a good read.

Using just 2 of the above factors, a low PEG factor (preferably under 1.0), and a reasonable PE of around 20 or less (before looking at other factors), I recently did a fairly extensive trawl of companies within the FTSE AIM All Share Index to see which would qualify for deeper research. It could equally be used for other indicies. I found very few companies meeting that criteria and had to widen it a little. In the past I would come up with a list of maybe 10 or even 20 companies to whittle down by looking further into the companies financial situation, RNS, Director dealings, latest trading update - was the outlook positive, are profits and earnings per share increasing?. Are there macro economic factors to take into account? (ie likely interest rates?), looking at the share price graph - does it look healthy?.

The conclusion I came to was that many companies are over priced, that there is limited upwards movement in the share prices. Yet, because things have been so rosey for so long there is a real danger that we can think that is the norm., that the situation will continue. Not so. Reading bulletin boards there is too much over optimism, "we all know which direction this share is going to go in!", etc. Really?!. It can be very difficult to let go of a company which has seen us do very well with, to call it a day and say "thank you Mr.!", and move on.

If we are not careful we can end up watching what is in effect a pan of milk on the stove, watching in excitement as the milk rises up and up, before boiling over leaving us with nothing more than a burnt pan, a nasty smell and a dirty stove. All too easy to watch ones profits disappear. I recently lost 20% of my profit in one company by being too greedy - a company which suddenly became far more popular on the bulletin boards with posters, having been quiet for a long time - usually a sign to contemplate ones position in my opinion.

You are absolutely right Paul, with valuations already stretched there is no room for disappointment. And strong news flow is needed to push the share price higher and can't be reliant on news already out in the open. Is there any surprise that a number of the recent high flyers are being increasingly shorted?.

Thank you to you and Graham for your hard work. Regards


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jonesj 19th Sep '17 31 of 49

Thanks for another fine report.

One point that interested me about the spread betting. I see your point about not gearing. However, if that means depositing the money with the spread betting company, I'm guessing there is no protection against the spread betting company going bust, so did you check their accounts as well before placing the money there ?

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Paul Scott 19th Sep '17 32 of 49

In reply to post #220228

Hi danyou,

I looked at today's results from Keywords Studios (LON:KWS) but in the end decided that i didn't have anything to say about it, so moved on. KWS has done so many acquisitions, and is so highly valued, that it goes in my "too difficult" tray.

Regards, Paul.

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Paul Scott 19th Sep '17 33 of 49

In reply to post #220373

Hi homosap,

Sorry, I didn't get round to looking at Anpario - there were so many companies reporting today, I was rather overwhelmed!

Regards, Paul.

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Paul Scott 19th Sep '17 34 of 49

In reply to post #220443


I did NOT appreciate this comment from you;

"I'm a big fan of your blog here, and 99.99% of the time, the quality of analysis is excellent. Sadly, with your CCT analysis today, I think you are either being emotional, or looking to snap up shares on the cheap! (And I admit I'm a bit biased as I hold CCT, but read below)."

CCT is an illiquid stock, and some people will panic sell in the morning, so I completely stand by my view that a 10-20% drop in share price in the morning is highly likely.

I also hold a long position in this share, and have no intention of selling. If it drops disproportionately, I'll buy some more.

My golden rule with profit warnings is to differentiate between;

1) Structural problems

2) Temporary, fixable problems.

If the profit warning is no.1, then I would sell immediately, and not look back.

If the profit warning is no.2, then I'll try to wait until it stops falling, then buy some more.

I think CCT falls into category 2. I say that because Toys R Us is not going to cease trading, it will carry on, restructure its debt, and after some temporary problems, everything will get back to normal.

Also, if Toys R Us is not able to stock product for Xmas, then other retailers will be more than happy to grab the business. People are not going to buy fewer toys just because one particular retailer has gone bust.

CCT has a strong balance sheet, so should be able to cope with any bad debt from Toys R Us.

So long term, it should be fine.

Short term, the price is likely to plunge in the morning. That's fine, it could be a buying opportunity, who knows?


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peterthegreat 19th Sep '17 35 of 49

In reply to post #220333

Thanks for the information a1canary. I have done a bit more research and it appears that there are larger competitors, such as US-based Boku, which have excellent access access to capital and are expanding at least as fast as Bango but it is difficult to compare them to Bango as they are either private companies or, like Zong, are part of much larger companies so they do not provide separate financial figures. I do not know enough about the sector to have an opinion on the relative strengths of Bango's service offering or whether the sector as a whole will end up being dominated by relatively few players so at this stage I think I lack the confidence to invest.

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Paul Scott 19th Sep '17 36 of 49

In reply to post #220548

Hi jonesj,

"One point that interested me about the spread betting. I see your point about not gearing. However, if that means depositing the money with the spread betting company, I'm guessing there is no protection against the spread betting company going bust, so did you check their accounts as well before placing the money there ? "

That's a very important point you raise. Yes, I always check the accounts of spread betting companies, before putting any money with them. IG and Spreadex have very sound finances.

Also I looked at how they coped in the 2008 crisis. Robustness of IT systems is also critical - if their systems go haywire, and let through loads of uneconomic bets, then the business could go bust quite quickly. Although I'm sure they all have kill switches, to stop trades being placed, if systems go wrong.

A mate of mine put all his eggs in one basket, and then the company went bust (part of Man, I think?). He then had a terrible wait, to see if he'd lost most of his money, or not. He got most of it back, but a long time later.

For that reason, I think it's always best to spread money around several banks, brokers, spread bet companies, etc, so that if anything unthinkable happens at one, then it won't cripple me.

It's best for most people to steer clear of spread bets, etc. There are so many horror stories (including my own from 2008), that I think it's only for very level-headed people. You have to resist the urge to do wild, leveraged punts. So anyone with even a vague gambling urge, should definitely avoid spread betting, as it's too dangerous unless you have total self-control, and an analytical, disciplined mind.

If in any doubt, then steer clear, is my view.

Regards, Paul.

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DAB26 20th Sep '17 37 of 49

In reply to post #220573

Another CCT holder here and I have no complaints about Paul's comments.

It was an after-hours RNS with some negative-sounding news in it, whatever the facts may eventually prove to be. In my experience those are rarely taken well by the market, which more often reacts first and thinks later. 

I hope Paul is wrong, but I more expect him to be right. Either way I can completely follow his logic.

We'll see soon enough anyway. If the price is down in the morning, I don't think it will be because of Paul's views though. 

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Paul Scott 20th Sep '17 38 of 49

In reply to post #220608

Hi DAB26,

Thanks. My family hold over £50k of £CCT 

The price is going to drop in the morning, potentially quite a bit, due to illiquidity. Such is life. I'm not vexed about it at all, because it's probably a category 2 profit warning - i.e. fixable, short term problems.

Actually, I should probably reverse my system, so that category 1 would be fixable problems.

What really pissed me off, is someone coming on here, and suggesting that I'm being either emotional or mischevious. Keep that crap on advfn please, it's not welcome here. I always give an honest appraisal of the facts, irrespective of whether I hold the share or not. Sometimes wrong, but usually right. There might be a buying opportunity with CCT tomorrow? However we don't know what the bad debt might be from Toys R Us insolvency. So incomplete info right now.


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Ramridge 20th Sep '17 39 of 49

In reply to post #220613

Hi Paul - I just would like to underline your comment. BBs such as advfn are populated with soulless, nasty, dog-eat-dog type of posters. The more we protect our open, mutually respectful ethos and encourage a diversity of views, the better we will all be.

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bwakem 20th Sep '17 40 of 49

I have bought some Character (LON:CCT) this morning. It wasn't easy, I was quoted above the spread for not a particularly large trade. There aren't many shares on offer at the reduced price. I think the market makers got ahead of them selves and marked it down too quickly and are now back-tracking.

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Logic 20th Sep '17 41 of 49

While it is quite funny to think that someone posting on a board would be able to wildly affect the share prices of listed companies (unlikely even with small ones, but I have seen people suggest it in regards to the likes of HSBC as well), it is also quite insulting to the poster to suggest they would act with such ill intent.

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ls2g08 20th Sep '17 42 of 49

In reply to post #220573

Casually accusing Paul of committing a crime (market manipulation) is not on. I'm sure that was not your intention Dan7710, but you should think before you post.

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a1canary 20th Sep '17 43 of 49

In reply to post #220583

Hmm, that's really useful info Peter. I must admit as a longer term holder and not a very proactive investor, I must admit I hadn't come across Boku - they are relatively new I see but have raised plenty of investment capital from a number of sources. I don't know quite how to interpret that. Confidence in Boku's ability to succeed vs Bango despite Bango having a big head start... or confidence in the whole payments sector and belief that there's plenty of room for both. Interesting to note that Boku began life as a UK start up.

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timarr 20th Sep '17 44 of 49

In reply to post #220863

Know nothing about the sector or Bango, but it might be worth noting that under the forthcoming PSD2 regulations, due in January and applicable to all countries in the EEA, the maximum single DCB payment is €50 and the total monthly is €300. Above that the MNO's need to get themselves regulated, which is the intent of the restrictions and which most would probably not want to do.

But I have no idea if this will impact Bango's revenues.


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matylda 20th Sep '17 45 of 49

In reply to post #220443

You arse...

"I think you are either being emotional, or looking to snap up shares on the cheap!"

Blog: Briefed Up
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gus 1065 20th Sep '17 46 of 49

Re. Swallowfield (LON:SWL) , I believe about 9% of the company is held by the listed London Finance & Investment (LON:LFI) investment vehicle. No big deal perhaps but this represents about 30% of LFI's own market cap and last time I looked, LFI was trading at something like a 35-40% discount to its NAV so this could be worth considering as a back door in to Swallowfield exposure on the cheap. I did a short piece on LFI a while ago (they also have a significant holding in Finsbury Food (LON:FIF) ) looking at the make up of their investment portfolio. Check out the discussion thread if of interest.


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robin66 20th Sep '17 47 of 49

In reply to post #220933

Hear Hear!

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Dan7710 20th Sep '17 48 of 49


That comment was tongue in cheek. I had hoped I had made that clear with the !, but clearly not in the slightest. Sorry if that wasn't clear Paul. No offense intended! A shame that my poor opening probably discredited what was (IMO) some useful facts.

Hope the quick analysis helped quantify the matter beyond what Paul noted. I had framed it conservatively, and it has turned out to be too aggressive. Felt it was fair the price corrected over the course of the day.

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a1canary 21st Sep '17 49 of 49

In reply to post #220403

Thanks for all replies on BGO. I can't be quite as dismissive as Paul if only because he ought to be right but an awful lot of investors including institutional investors clearly don't agree and have been piling in before and since the latest interims. This article is quite useful and gives a clue as to where there is added value in the company above just the payment processing. It's the data capabilities and handling they have that also has huge potential. They already use this to inform clients about customer behaviour and this is another strand of their business.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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