Small Cap Value Report (Tue 27 Aug 2019) - FTSE Contrarianism, CPR, CLG, SONG, COG

Tuesday, Aug 27 2019 by

Good morning!

I'm back to look after the SCVR for a few days.

After some musings on the FTSE, I will look at:

FTSE Index - Contrarian Trading

It may not be the most exciting financial instrument in the world, but the FTSE remains an object of fascination for me.

This instrument was trading above 6700 in mid-2007. It previously broke that level in 1999 and 2000.

Twenty years later, anyone who was waiting for some decent capital appreciation has been disappointed. Despite reaching 7900 last year and 7700 this year, it is now threatening to return back to the 7000 level. Over a very long period of time, it has made very little progress.

Now it is true that the dividends have been strong, and if you reinvested them, then your portfolio has done ok. But the capital value of the index hasn't gone anywhere.

There are several possible explanations for this, and I think "the truth" lies somewhere in the middle:

1) FTSE-100 is a poor-quality index whose companies are structurally unable to generate compound returns.

2) The FTSE-100 is currently exposed to severe macro-economic risks (e.g. Brexit, recession), which require the index to carry a large discount.

3) (related to 2) The pound sterling is temporarily undervalued. When it strengthens, the value of foreign earnings will decline in GBP terms. The FTSE needs to be discounted to prepare for this.

4) The FTSE-100 is undervalued.

Personally, I am leaning toward 4) as the primary explanation for the FTSE's current level, with a little bit of 1) and 2) and 3) as well.

Indeed, I have added to my leveraged long position in the FTSE this morning, via put options.

While I have mostly avoided leverage in the past, and remain very cautious about using it, I can't resist taking a big position in the UK index at this time. 

Even allowing for the fact that it's a low-growth index, the P/E ratios which it offers make little sense to me:


I don't currently expect interest rates to rise. And especially if they don't rise, then the…

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

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Carpetright plc is engaged in providing floor coverings and beds. The Company operates through two segments: UK and Rest of Europe (comprising Belgium, the Netherlands and Republic of Ireland). The Company trades from approximately 440 stores and concessions in the United Kingdom, as well as over 140 stores across Holland, Belgium and the Republic of Ireland. The Company offers free home estimating services. The Company's product range includes carpets, mattresses, headboards, laminate flooring, engineered wood flooring, rugs, vinyl flooring, luxury vinyl tiles and flooring accessories. Its luxury vinyl tiles are available in a range of designs, including tile, oak, pine and stone. It offers a range of beds and bed products, including divan beds, roll up mattresses, bed frames and others. It offers a range of options from memory foam mattresses to open coil and pocket spring mattresses. Its brands include Kosset, Essential Value, Storeys, Carpetright Clearance and Carpetright. more »

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Clipper Logistics plc is engaged in providing value-added logistics solutions and e-fulfilment and returns management services to the retail sector. The Company operates through two segments: Value-added logistics services and Commercial vehicles. The Value-added logistics services segment provide three business activities, which include e-fulfilment and returns management services, non e-fulfilment logistics and central logistics overheads. The Company's commercial vehicles segment includes sales, servicing and repairs. Its e-fulfilment and returns management services include the receipt, warehousing, stock management, picking, packing and dispatch of products on behalf of customers to support their online trading activities, as well as a range of ancillary support services including returns management, branded as Boomerang. It also undertakes retail support services, including processing, storage and distribution of products. It also provides consumer electronic repair services. more »

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Hipgnosis Songs Fund Limited is a Guernsey-based investment company. The Company is engaged in investing in Songs and associated musical intellectual property rights. The Company will seek to acquire 100 per cent of a songwriter's copyright interest in each Song, which would comprise their writer's share, their publisher’s share and their performance rights. It will acquire interests in Songs which are sole authored or co-authored. It may also acquire interests in Songs jointly with another purchaser. The Company's investment adviser is Hipgnosis Songs Limited. more »

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

38 Comments on this Article show/hide all

Martin C 27th Aug 19 of 38

Hi Graham, when you buy PUT options they make money when the underlying market drops, not rises... or are you going long via spread bets, and using PUT options to limit your downside risk?... or are you selling PUT options - which IMO would be dangerous given all the macro factors at the moment.

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andrewdb 27th Aug 20 of 38

I know this is all a bit 'rough' but...
The UK equity-risk premium is about 5.5%

The yield over the next year is ~(3.6+4.4)/2 = 4%
Base rates are 0.75%
Productivity grew ~0.8% to Q1 19

4 + 0.75 + 0.8 = ~5.5%

... so you could argue that the ftse is about fairly valued.

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Graham Neary 27th Aug 21 of 38

In reply to post #507946

I haven't researched that product Gerard, but I find that the fees associated with those sorts of products can be high, and they are more complicated if you want to really understand how they work. But there are probably some good structured products which I haven't discovered. G

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Graham Neary 27th Aug 22 of 38

In reply to post #507966

Martin, I am doing the dangerous thing which nobody wants to do. G

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Gerard88 27th Aug 23 of 38

In reply to post #507981

Morningstar quotes an annual charge of 0.7%, but I'm not sure how all the derivative costs are factored in.  The trouble with options on the other hand is that they expire, but these ETPs don't.

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andrea34l 27th Aug 24 of 38

An interesting read, Graham.

I would suggest other reasons that the FTSE has barely moved are:

  • The traditional saying of "the US sneezes and the UK catches a cold"  - the problem is that when the US market rises strongly, the UK reaction is muted, but when the US markets fall then the UK markets frequently drop more excessively and for longer.
  • The FTSE is largely made up of non-growth companies, where one is lucky to see much more than low-single-digit increases in revenue. Notable exceptions IMHO re Ashtead (LON:AHT) which is exhibiting very strong growth, Legal & General (LON:LGEN) which seems to be on a ludicrous valuation despite good growth (though there seem to be excessive fears about how Brexit could affect them), and NMC Health (LON:NMC) which is growing at over 20% a year and yet has seen a huge decline in share price.

I also give a thumbs up for the new photo - much more suave and sophisticated ;-)

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cmpeckham 27th Aug 25 of 38

In reply to post #507946

Gerard, it's too long to explain in a comment but you need to investigate "daily rebalancing". These ETFs are designed to be held for less than a day. A long term holding will destroy your returns. The more volatile the underlying (FTSE 100 over the next few months?) and the greater the leverage (5x) the worse the performance.

Whatever else may be said about Graham's trade, it does not suffer from this weakness.

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Martin C 27th Aug 26 of 38

In reply to post #507986

Ahhh. Can't quite bring myself to say good luck as i'm on the other side of the trade! :)

But FWIW i do think the FTSE will be the most resilient of the major indices in a correction... My FTSE puts are small in comparison to those on the Dow, S&P, Nasdaq, Dax & Stoxx 50.

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ExpectingValue 27th Aug 27 of 38

In reply to post #507971

What's the conceptual logic behind this? Adding up these three variables and noting they are roughly equivalent to the UK equity risk premium?

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rmillaree 27th Aug 28 of 38


This instrument was trading above 6700 in mid-2007. It previously broke that level in 1999 and 2000.

In hindsight it seems pretty obvious that the logical conclusion is that the ftse was way overvalued around these peak quoted times - the dropback in price from prior highs suggests this was the case. If  we say 5000 level average in the 00's and 6500 average in the 10's - we are now at 7000 - does that not make the performance look way less bad? . don't know but i am guessing anyone who has steadily been adding since 1999 will probably have  averaged a purchase price of below 5700? - so not such awful returns really if we look as how crapola bank interest returns have been in the last few years.

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Mark Carter 27th Aug 29 of 38

One thing to notice is that although the FT100 has gone nowhere since 2000, the FT250 has done well. There seems to be little in the way of value discrepancy, suggesting that as a class, mid-caps are better bets than large-caps.

I also think that the vast majority of FT100 shares are too highly leveraged, and earn poor returns on capital, making them poor bets in general. I once solicited ideas for LTBH shares, and one suggestion that cropped up was Vodafone (LON:VOD). I rejected it for the reasons just mentioned.

Another thing to watch out for is that the FT100 index can go through spells where a cyclic sector is at its high point, such as we had with miners some time ago. Investing in these could spell disaster.

I'm not saying never invest in large-caps, of course. I do, for example, own some shares in Royal Dutch Shell (LON:RDSA).

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Helen Boreham 27th Aug 30 of 38

Thanks for your more general musings on the FTSE Graham. I always enjoying reading these - alongside the standard small-cap coverage. So please keep it coming. Should be an interesting autumn all round! 

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Thornabian 27th Aug 31 of 38

Interesting point but all it tells me is that holdings indexes is not a good way to invest at all because you need to account for the companies which have been bought out or went bust.

If you own the ones which were bought, you gained. If the latter, you lost. However this is key to showing the full picture.

Since the final trading day of 1999, former household names such as Abbey National, ICI and Norwich Union have disappeared entirely after mergers or takeovers. Other famous brands such as Cadbury’s Schweppes, British Airways and NatWest live on but as part of bigger companies.

In 1999, the telecoms and first internet boom was in full swing and phone companies and technology companies made up more than 20% of the index, according to figures from stockbroker Hargreaves Lansdown. Now they account for about 7% of the list.

BT and Vodafone made up almost 14% of the FTSE between them and were the second and third biggest companies in the country. Both are still in the index but companies that fell out after the dotcom collapse of 2000 included Marconi, which went bust, Colt Telecom and Cable & Wireless.

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Thornabian 27th Aug 32 of 38

In reply to post #508106

+around half have delisted, went bust or got bought by overseas companies since 1999. (ICI/Reuters etc.)

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elviron 27th Aug 33 of 38

In reply to post #507926

"Indeed, I have added to my leveraged long position in the FTSE this morning, via put options."  I'm not sure I follow this.  Put options are used when betting that the market will fall and yet you stated that your position is long on the FTSE.  You've used put options as insurance for your longs?

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Geoffclark 27th Aug 34 of 38

In reply to post #508131

And who bought your options?
Graham, or someone who thinks the same way. They underwrite your put, they take your premium.

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JohnEustace 27th Aug 35 of 38

In reply to post #507841

RNS after the close - 48m shares taken up out of up to 68m offered

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ISAallowance 27th Aug 36 of 38

In reply to post #508106

If my memory is correct, Norwich Union simply renamed as Aviva, which is still in the index. Cadbury's and Schweppes are no longer in the UK index, but part of larger US companies (Mondalez and Dr Pepper Snapple?)

That's a big decline for the Telecoms since 1999! I wonder how the big consumer defensives such as Unilever, Diageo, Reckitt etc will have fared when we look back in another 20 years. Will Shell & BP still be drilling oil, will they have transitioned to green energy companies, or will they be much smaller?

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andyfwwrench 27th Aug 37 of 38

An index does not show the performance on an investment in it unless it is a total return index like DAX30. To be tautological the only measure of return is the total return.  An accumulation fund / etf, or if you can find it a long term TRIUKX chart or data series gives a better idea.

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elviron 28th Aug 38 of 38

In reply to post #508136

Implying that Graham is selling put options therefore...which would make his position entirely long (long on the puts and long on his spreadbet).  How therefore is his "breakeven" 6400 to 6500?

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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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