Small Cap Value Report (Tue 3 Mar 2020) - RBG, VTU, GETB

3rd Mar '20 by Paul Scott

103 comments 10537 reads

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

Estimated timings - mostly done by 1pm official finish time, but I've got nothing else planned for the afternoon, so will probably keep adding sections until about 7pm.
Edit at 19:"7 - sorry, it took much longer than expected, but today's report is now finished.

I'm going to start with my views on the current coronavirus situation. Sorry if this is not very well-structured, but there's so much to cover;

Coronavirus thoughts

It seems to me that (to mangle a phrase from Churchill) we're not even at the end of the beginning. Coronavirus is clearly spreading internationally, and is highly contagious. Therefore, the most logical stance to take, is to assume that it's likely to become a pandemic. Hopefully not, and there are of course other possible scenarios - e.g. that containment measures slow it down, or even gradually eradicate it, as people either recover or die (it is binary, after all). My sources in the pharmaceutical sector tell me that hopes for a vaccination, let alone cure, are premature. After all, they've never managed to develop a cure, or vaccine for the common cold, after trying for more than 50 years. But who knows, there must be lots of scientists working on this, and they could get lucky. Even then, testing would take the best part of a year before it could be widely distributed.

I monitor this website (from a good source, which I've checked out) every morning, and note that;

Reported cases in China seem to be reducing now. The number of people reported as having recovered, is rising strongly now. That's great, but bear in mind that many cases (elderly & already sick) are severe & require hospitalisation. The number of cases could be under-estimated, if people who have mild symptoms don't need medical help. We saw from some of the social media coverage just how bad the situation was in the early stages of the virus outbreak, as so many people needed hospitalisation in China. Remember the new hospital they built in 8 days? How could that be done here in the UK? It was reported on last night's TV news that we only have 2 hospital beds per 1,000 people, well below other developed countries (e.g. France & Germany), therefore the worry is clearly that if people become sick from coronavirus &…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Rusty2

3rd Mar '20

Yes some good points, I had not thought about annuities, I was thinking more about travel insurance and early deaths, had not thought about the floods. I do hold some Aviva (LON:AV.) in my SIPP more for income. I will keep an eye on Legal & General (LON:LGEN), I missed it last year. Yes best time to buy insurance companies is when they have had some big losses.

Noobvestor

And along this train of thought, if considered as a weapon being used against an ageing population and it's impacts on the world economy, Coronavirus appears at this stage to be highly effective (i.e. symptom-less, high rate of infection, mortality rates amongst the general pop vs. the elderly etc).

but that's enough tin-foil-hat for today..

Yes that is true but most of the cases are in colder climates, must be over 90%, South Korea has so many cases but Thailand has very few cases even though it had no restriction on Chinese tourists, last year Thailand had over 10m Chinese tourists and with Chinese New Year there were still plenty visiting this year.

fwyburd

Hi Paul, good point Re Sosandar (LON:SOS)

However, I'd like to think they would have told me this in their reply to my question which was worded as follows:

I’m an investor in Sosandar and wanted to know what proportion of your stock is currently manufactured in China and what if any interruption you envisage as a consequence of the CoronaVirus?

cheers

Francis

Excluded by what policies do you mean?

Yes they may have Reinsurance and Excess of Loss policies but they will still bear losses and their renewal premiums no doubt will increase.

mammyoko

Big, early cut in rates in the USA (as opposed to 'too little, too late'). Market seems un-impressed. I try not to assume that the market's reaction will be logical to such exogenous factors and find explanations of the market's reaction to such things often overly-simplistic. But could this be a sign that the state of denial that the markets were in yesterday has reversed? That monetary policy is not going to be a particularly effective tool against market fear - especially when the starting point was, by some measures, historically expensive?

Mechanical Bull

The U.S. Fed made a surprise 0.5% interest cut today. There was 600 point rally on the Dow that lasted all of 5 minutes - it is currently trading even lower.

This is a really bad sign. In the past, rate cuts have always been followed by a sustained market rally. This show that Central Banks no longer able to control events.

However, it is not really surprising as Covid-19 is not a problem that can be solved by economic stimulus. China illustrates that a highly aggressive strategy could contain Covid-19 but as others have pointed out similar actions will be very difficult in pursue in free societies. But the real issue for markets is that such containment strategies come at a huge economic cost, especially in terms of lower productivity.

Thus, even in the virus is brought under control, there is no good news for markets.

Caper4

it depends what cover is being provided. It it is All Risks travel or medical insurance then obviously virus issues will be covered , but unless the virus causes multiple deaths I don’t see that life insurers will have too much exposure. And I am fairly sure this will all be over when the warm weather eventually arrives. Let’s hope we have a great spring !!
The renewal premiums may well increase but in a highly competitive reinsurance market,I suspect by not that much to cause investors any great concern.
I do hold Aviva but have been a long term shareholder and have no intention of selling .

We will have to watch the numbers in Iran as it warms up, hot countries have not been badly affected so far.

SundayTrader

Just saying I agree with Simoan's comments re COVID19, having to post since I can't get the Thumbs Up button to work.

Greggs (LON:GRG) I see thanks, did not seem to make sense from Susan's comments.

Paul Scott

Thanks Purpleski, we try our best! :-)

Re facemasks it depends what you mean, the N95 is probably what health workers are wearing when they test people for Coronavisa in the UK, there is a N99 version as well I believe which is even finer.

" An N95 respirator is a respiratory protective device designed to achieve a very close facial fit and very efficient filtration of airborne particles.

The ‘N95’ designation means that when subjected to careful testing, the respirator blocks at least 95 percent of very small (0.3 micron) test particles."

In one test I read it was quite effective.

James Weston

In a previous incarnation of self I was a farmer in Australia in an area that we could grow cotton. The cotton crop was a very important part of the local economy and very profitable to grow.

To put it into perspective though, I believe there is at least one Chinese cotton mill alone that processes more cotton than the entire Aussie annual production!

Their wool mills similarly process vast quantities of world production.

My point being, supply chain issues could arise.

Hi Paul,

That was another mammoth effort again today and you've evoked a lot of great comment threads.

VMT's

James

raggedtp

Thanks for your post, Ken. I'm sure it can be admissable, as you do mention two small-cap shares! I think it is important to realise that many here do follow diversified strategies, with large-cap, small-cap and investment trusts, especially for foreign themes. I hold, and have done for some while, the first three in your list and think that Legal & General (LON:LGEN) in particular is one for the pension. They have evolved over recent years to be, amongst other things, a serious developer of real estate to support their annuity payments, so they have more control than most of their own costs. Our parents' generation said, "Never sell Shell". I tell our children "Never sell LGen". 14% compound growth in DPS over the last decade, and if tomorrow's results go down with the market, I'll buy more. I think its internal asset management has turned into a Buffettesque Moat.

But I'll look at Zytronic at that price.

My small-cap rejoinder for these psychologically difficult days is Somero Enterprises Inc (LON:SOM), for a company that is plugging away, expertise in-house, cash-generative, debt-free (sympathy with Paul's balance-sheet concerns), operating a niche within a long-term growth industry, earning in $ to balance a UK post-Brexit slide. Forecast P/E around 8, div 7%+.

And if it weren't financial again, try Chesnara (LON:CSN), which is still small-cap. It may not be Legal & General (LON:LGEN), but I don't see any reason for a 13% drop in two weeks, to an imminent yield of over 7.5%.

dsmorgan

Coronavirus: I was brought up on that saying, just as your mum was. Apparently, 35% of people (and mostly the Younger Generation lol) are incredibly blase about it, as per the man in the lift you shared.
Tomb Sweeping Day in China falls on April 4th this year and is traditionally an event when Chinese abroad return home to celebrate their ancestors, particularly if they haven't been there for the lunar new year. I read today that the authorities are concerned they may bring the virus back with them, and expect cases to rise again.
I really value your thoughts and opinions so please keep them coming.
All the best,
Daphne

ken mitchell

4th Mar '20

Thanks JTG.

I hold Somero. Pleased with dividend increase from LGEN today.

Thanks for the Chesnara prompt. I regretted not buying many years ago and haven’t looked for ages.

Presumably the 13% recent fall is partly Coronavirus. Their results were late March last year so might wait for those for any Coronavirus comment and possible negative effect on their otherwise progressive dividend policy. Focus seems to be more on pensions business rather than annuities? If that’s correct a possible negative if Coronavirus deaths increase a lot.

Agree with your LGEN comments. I’ve held since that astonishing buy opportunity immediately after the Brexit vote, and a (more astute) friend has held since they fell to 60p, and now gets over 40% in (growing) annual dividends. Might be a better buy opportunity for anyone tempted if, as seems likely, more general market falls ahead. But that big dividend and confirmation today of no change in progressive dividend policy, should limit he downside

Zipmanpeter

Anther angle to think of is what % of final cost is fabric in a final garment and how much fabric do you need to source .

For this reason I am more positive about smaller & more premium priced fashion suppliers eg Sosandar (LON:SOS) then price driven, big volume sellers sellers eg Boohoo (LON:BOO) and Primark plus the supermarket brands. The former can be more agile and can absorb any cost hit better. The latter may even be forced to put prices up.

This also plays into the growing awareness of the environmental cost of throwaway fashion - so consumers can justify a change in habit away from 'newness' to 're-usability' of clothes. Obviously, this is at the margin but I think will be a cumulative trend

However, personally, I expect the specific 'Corona' induced supply chain issues to iron out within 6 months but with a bit of an inflationary bump (via lots of youngish Chinese workers sniffling but doing overtime and the switching of some sourcing to 3rd countries!).

peterthegreat

Additional thoughts on coronavirus. Please remember that it is likely that coronavirus is will show a similar periodicity to another respiratory virus, influenza. In the US and in countries in Europe this means that cases are likely to decline significantly as summer approaches (probably starting in April) as the weather warms up. The relationship between the duration of viability of viruses in the air and temperature is reasonably well established and this may help explain why such viral infections are often much less frequent in the summer. When I used to produce viruses (bacteriophages actually) while I was working in the Public Health Laboratory Service, they were always stored in the cold room, otherwise viability would have been lost quite rapidly because of this temperature sensitivity. Unfortunately coronavirus is likely to re-emerge in the autumn before a vaccine is ready so the problem is likely to recur then. I will leave it up to others to explain possible impact of the waxing and waning of these coronavirus infections on share prices.

Small Cap Value Report (Tue 3 Mar 2020) - RBG, VTU, GETB

Coronavirus thoughts

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

103 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...