Small Cap Value Report (Tue 28 Jan 2020) - SBIZ, SPE, LUCE, EYE, TRB, LSL, FEN

28th Jan by Paul Scott

35 comments 6629 reads

Good morning, it's Paul here.

UK & USA Futures showed some recovery overnight, after yesterday's sharp falls, so we should be in for a more calm start today.

Estimated timing - the workload is manageable today, so I'll be finished by 1pm (6 hours work).
EDIT at 13:17 - today's report is now finished.

Coronavirus

All eyes are still on China, with the coronavirus apparently spreading at what seems to me an alarming pace. For that reason I'm not planning on opening any new long positions in small caps until the situation is more clear. I'm happy with my existing positions anyway, so buying new things isn't a priority for me.

A contrarian view would be that, like all previous crises, this one will eventually pass. Therefore, for the brave, this type of situation can provide buying opportunities - not just lower share prices, but just as importantly more liquidity for buyers of small caps.

Looking back at some previous reports here, it seems almost laughable the macro things that we worried about at the time. Crises quickly pass, and are forgotten rapidly. That said, I am really worried about the coronavirus, as its economic impact seems potentially so much worse than previous similar outbreaks. Plus of course, fear of the unknown. With markets being so expensive, it seems to me that risk:reward looks unfavourable right now.

Incidentally, there have been a few cases reported in other countries. These victims are being quarantined obviously. However, what struck me is that those people will have presumably flown home, breathing out the virus - so how many of the other people on that plane will have become infected from breathing in the recirculated air during the flight? Has everyone on those flights been quarantined? I doubt it. This thing could conceivably spread around the world.

Thanks for the interesting reader comments yesterday on this topic. Some smashing posts, especially one from reader Howard Marx here, which got 99 thumbs ups from readers - well worth a read. Thanks for posting your thoughts, Howard, and everyone else. I feel that the reader comments are just as (if not more) important than the main articles, so keep them coming.

Volatile prices in small caps

There were some strange spikes down in some small caps yesterday. As readers noted in the comments yesterday, BEG shares spiked…

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fwyburd

28th Jan

Re: Broker notes

I simply don't understand the rules about private investors and their ability to access broker notes. Finncap and Research Tree are very helpful but not all companies use them, One company I invest in sends me broker notes on request and have them freely available in their boardroom. However others like Sosandar (LON:SOS) (who's PR company rang me last week about this) use Shore Capital who won't release them at all. Can anyone explain to me what the rules actually are? And if anyone has access to Sosandar (LON:SOS) broker research or knows where I can find them, I'd love to see it.

cheers

Francis

Paul Scott

Hi camtab,

Re Avacta (LON:AVCT) - I looked into this one a while ago, and was talked into putting some money into a placing a while back. I put out feelers to my network of contacts at the time, and the general feeling was that it's a good company with potential for success.

I sold them when it dawned on me some time later, that I have zero expertise in the sector, and it was little more than a gamble for me to own shares in it!

From what I can make out, there does seem to be some substance behind it, and today's announcement sounds good. Very blue skyish though, so nothing much more I can add.

Regards, Paul.

Re: Renewable energy investments

I noted a drop in this sector this morning where many firms trade well above NAV (Renewables Infrastructure (LON:TRIG) Jlen Environmental Assets (LON:JLEN) etc)

For others interested in this sector, I think the reason for the fall is this article in city wire (free to register) https://citywire.co.uk/investment-trust-insider/news/renewable-funds-could-plunge-40-on-cannibalisation-threat-say-jpm-analysts/a1317406?ref=investment-trust-insider-latest-news-list

I sold my position in Octopus Renewables Infrastructure Trust (LON:ORIT) this morning and Renewables Infrastructure (LON:TRIG) a couple of weeks ago when the premium to NAV was already looking stretched.

Not sure if these falls are justified tho' so would welcome others' thoughts

MrContrarian

Oh, the bug of course did exactly the same again. I entered [Pound sign]MAB1.

unwise2

Paul

I held Sopheon (LON:SPE) in 2018 and considered buying in 2019. After a typical update was released I telephoned the chairman. I explained I am a full time investor and said comments like "board's expectations" and "market expectations" aren't very helpful without further definition and gave a couple of examples of other companies more detailed RNS announcements. Barry said he would recommend to the board that they provide more information in future releases and he kept his word, the next RNS had more detail.

As serious investors we should take a more active approach if we want better communication. If company IR departments get multiple requests for better information we may see a change in standard practice. I recommend pointing out examples (like SPE) of what you would like included in future releases.

Camtab

Many thanks Paul. I suspected that would be your position but in a way quite reassuring that it is (you are consistent to your investment process). Keep well you are doing a great job.

Henry Walpole

Hi Paul, your chart showing Luceco (LON:LUCE) and Up Global Sourcing Holdings (LON:UPGS) overlaid is very interesting. I added Ethernity Networks (LON:ENET) to the chart (another over hyped IPO that flopped - I hold) and it follows a remarkably similar pattern!

Clissoldkid

Anexo (the ANX ticker links to an entirely innocent company called Acerinox, hence the edit) is riding on the coat tails of the massive scam that has been the personal injury industry for the past few years. It grew out of a ridiculous Government decision to abolish legal aid for personal injury claims (the net cost of which was minimal) and allow lawyers to charge `success fees' to the insurers if they won PI cases.

This was quite literally a licence to print money (I know, as I was printing it!) and it attracted thousands of corrupt professionals, including thousands of solicitors and doctors, who couldn't believe how easy it was to make sackfuls of cash.

One of the many hideous results of this dreadful misjudgement was the emergence of so called credit hire. If you were in a no fault accident a credit hire operator ("CHO") like the deeply unpleasant Accident Exchange would offer you a replacement car. These were supplied on the basis that it wouldn't cost the hirer anything, as the hire charges would be paid by the insurer.

Their charges were pretty outrageous, but somewhat incredibly they were agreed by the insurance industry. This is because despite their public wailing and gnashing of teeth about the cost of whiplash claims insurers actually love them. They often make little, if any money out of underwriting, and their profits come from investing premiums, hence the higher the premiums the more they rub their hands in glee.

But as if the CHO's weren’t already bad enough, along came a new species, of which ANX is probably the most egregious example. They specialise in supplying cars to people who are deemed to be too poor to be able to afford hire charges themselves, and the charges are truly spectacular. One claim included a claim for car hire of over £40k for a £230 repair - https://www.civillitigationbrief.com/2019/09/11/the-impact-of-failure-to-mitigate-damages-on-a-claim-for-costs-claimants-costs-confined-to-small-claims-track/

In another case, this one run by ANX, £8,600 was claimed for 9 weeks' hire of a Honda 125 motorbike - https://www.bailii.org/ew/cases/Misc/2018/B7.html The judgment is quite readable, and also gives interesting information about ANX's background.

I personally despise these companies as a cancer on society, but their end may well be nigh, to the cheers of virtually everyone apart from their shareholders. There have finally been wholesale reforms of the personal injury industry, and as from April this year any whiplash claim under £5k in value (the vast majority) will not carry any liability for legal fees. This will eliminate thousands of operators from the industry, and as CHO claims are often initiated by lawyers it's highly likely that the CHO market will be hit as well, so that the vastly overfilled gravy train finally hits the buffers, so that the ANX ticker might well be justified - in standing for ANXiety!

This is one of a very few companies that I consider to be completely uninvestable on moral grounds, and I’m afraid I’ll have zero sympathy for its investors if they lose everything.

zaracrest

Hi Paul
You seem to have picked up the wrong stock rank details re sbiz.
Should be quality 66
value19
momentum85
rank 59
Otherwise excellent analysis--thanks

Martin Verlaine

The note from JPM made some relevant points and as Market Makers also read this a mark down was unsurprising. I hold a couple of renewables but not rushing out as yet. These are bond proxies and whilst I would not see then as lock away and forget given some views of how the price of power will lower in 5 years time it could be argued that NAV will come under pressure soon. Some rotation into Europe makes sense given they are not as far advanced as the UK but you may want to read the SMT comments ( James Carthew on City Wire again) on energy which is one point of view.

CK
completely agree with you on this company. I have read elsewhere on their activities and been disgusted by how they operate. I have some investment morals and this is definitely in the basement of low brow businesses. Pass the sick bag

Jeffvshep

I own Luceco and am currently 58% up. Several times I have been tempted to make the rookie mistake and sell but remembering the words of Peter Lynch in one of his books and by reading Paul and Grahams small cap reports as well as comments from posters I am holding until the story changes.

Thanks to everyone for providing rookies with a fantastic education :-)

ACounsell

My view it that it seems a bit premature to sell out of the recently floated Octopus Renewables Infrastructure Trust (LON:ORIT) and Renewables Infrastructure (LON:TRIG) on the basis of some scaremongering from analysts (not always reliable and often trying to talk down a share to their short term benefit). I hold Renewables Infrastructure (LON:TRIG) as a long term investment in the high growth/flavour of the decade (!) renewables sector. It has an excellent yield (5%+ at purchase) and I am happy to hold even if the share price falls back towards and below my buy price (c.114p). I accept that the NAV premium at nearly 18% is well above the annual average but the shares are are virtually unchanged today and only down c. 5% YTD with most of that yesterday with the coronavirus induced market panic. For my personal portfolio Renewables Infrastructure (LON:TRIG) is more of an income play and any significant capital growth is a bonus.

sharw

Mr C -

£ followed by EPIC never works if a number is involved. With something like £D4T4 it just doesn't work but if it is a recognised EPIC followed by a number it reverts as you have found with MAB1 and MAB, The other one that is always fooling people on this board is System1 with £ then SYS1 producing SysGroup (LON:SYS)1

dahokolomoki

I'm surprised, Luceco (LON:LUCE) has certainly recovered well! Looked at it after the profit warnings two years ago, and wish I had kept track.

At the time I didn't add to my watchlist because of one crucial test: reliability of revenues. If I remember correctly, their main business is lighting for train rolling stock. So they're fully dependent on lumpy rail infrastructure projects and also a few big clients and projects for their revenue and profits.

I have now added it to my watchlist - for the next time profits are missed due to contract delays.

rhomboid1

I think you’ve confused Luceco (LON:LUCE) with £LPA

mattomattor

I find it hard to trust Luceco (LON:LUCE) when its directors in the past have sold >£4m worth of shares just before a profit warning in Dec 2017 - which then resulted in a 75%+ decimation of the shares...

Good timing for them I guess.

Hi zaracrest,

Thanks very much indeed for pointing out that I copied the wrong picture into the article for the StockRank of SimplyBiz (LON:SBIZ) - and well spotted! I try very hard to avoid errors, but inevitably the occasional one crops up.

Profuse apologies, I must have clicked on the wrong picture file in haste. I've now corrected the article. Thanks again.

Best wishes, Paul.

nicobos

29th Jan

Luceco (LON:LUCE) and a great indication of when to take profit next time !

Parsley

Thank you, I was wondering what happened. Will look to sell my holdings here

Small Cap Value Report (Tue 28 Jan 2020) - SBIZ, SPE, LUCE, EYE, TRB, LSL, FEN

Coronavirus

Volatile prices in small caps

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Paul Scott

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