Small Cap Value Report (Tue 5 Sep 2017) - IQE, G4M, EGS, SPSY

Tuesday, Sep 05 2017 by

Good afternoon. Apologies for me running late today - I've been preoccupied with some very volatile share price movements, on newsflow from 2 of my largest positions - IQE & G4M.

Anyway, the decks are clear now, so I'll spend the rest of the afternoon & early evening writing up on newsflow from: IQE, G4M, EGS, Spectra (reader request), and anything else I have time for.


(at the time of writing, I hold a long position in this share)

This one is now well above our usual market cap limit here of c.£400m, being now valued at a whisker over £1bn, taking into account today's price rise. It's such an interesting company that I hope you will permit me the indulgence of commenting briefly.

I read today's interim results first thing, and was left feeling rather underwhelmed. Adjusted profit before tax for the 6m to 30 Jun 2017 actually fell 5% to £9.6m. That's hardly compatible with a £1bn market cap.

EDIT - here is the link to the investor presentation slides, at the meeting this morning which was confined to just "City analysts and institutions". Everyone else (including me, for the first time ever) was denied entry.

So early doors, the share price plunged from 138p to about 120p. As it's my largest, leveraged position, I was forced to sell some, as a couple of my smaller spread bet accounts had gone onto margin calls.

However, at that point I collected my thoughts, and recalled why I had bought the share in the first place. Namely for the growth potential of multiple new product lines which are coming on stream over the next 2 years. The narrative contained enough red meat on that to satisfy me that holding, and riding out any further price falls, was the right thing to do. Then I did what I often do in situations like this - went back to bed!  I'd made my decision, on a rational basis. So now the main risk would be allowing emotions to take hold, and panic selling if the price fell some more.

The good news is that when I awoke for the second time this morning, the market panic had subsided, and IQE was now up 6p on the day. What caused such huge volatility intra-day? I think it must have been…

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IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

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Gear4music (Holdings) plc is engaged in the online retailing of musical instruments and equipment. The Company sells its own-brand musical instruments and music equipment alongside with other brands. The Company offers over 1,500 products, which are sold under approximately eight brands, including Gear4music; Archer, which offers string instruments, such as violins, cellos, violas and double bass; Redsub, which offers bass guitar amplifiers and pedals; SubZero, which offers guitars, amplifiers, mixers, speakers and audio electronics; Minster, which offers digital pianos; Rosedale, which offers woodwind instruments, such as clarinets, flutes, oboes and piccolos, and Brass Instruments, which offers trumpets, trombones, tubas and French horns. The Company has developed its own e-commerce platform, with multilingual, multicurrency and responsive design Websites covering approximately 19 countries. more »

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eg solutions plc is a back office workforce optimization software company. The Company's software is used in various industry sectors, including financial services, healthcare and utilities. Its principal activity is that of information technology (IT) and software support services business providing improvements in operational management. It uses software packages and an operations management methodology based on production management techniques. It delivers measurable operational improvements in back office environments. The Company provides IT and software support services by operating two companies in the United Kingdom (EGUK) and in South Africa (EGSA). The Company, through its subsidiaries, is engaged in the consultancy and software business. The eg principles of operational management training is designed to coach and support operational and team managers to understand workloads and to balance demand with available resources. more »

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

41 Comments on this Article show/hide all

ricky65 5th Sep '17 22 of 41

In reply to post #215458

Hi Paul,

Thanks for clarifying that you can buy/sell inside the spread through Spreadex via phone. I couldn't see any information on their website about that. It begs the question - why not have a facility for buying/selling at best price within the spread on the web platform?

I assume you can set a stop loss for all shares on the phone too? I find it poor and inconsistent that for a lot of small caps there is no option on the web platform to set a stop loss.

Kind regards


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Paul Scott 5th Sep '17 23 of 41

In reply to post #215473

Hi Ricky,

Re stop losses - you can't really use them (nor would I want to) on micro/small caps.

When you place an order with Spreadex, they buy a CFD in the underlying share. So if you want to sell, they have to sell the CFD position first. Hence stop losses are really not workable for illiquid micro caps like that.

It's a big topic, but the reality is that if you want a tax-free wrapper on your small/micro cap picks, then Spreadex is perfect. But you have to really know what you're doing - which means you shouldn't want or need a stop loss. Stop losses are really for punting on jam tomorrow stocks, or for short term traders. They're not for serious investors. Especially in smaller, more illiquid stocks. The SB company has to exit their CFD position first, then & only then can they close your SB.

People should remember that there is no obligation to use gearing with SB a/c's. The smartest people I know just use Spread Bet accounts as a tax-free wrapper, and use little to no gearing.

Regards, Paul.

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jonno 5th Sep '17 24 of 41

Hi Paul
A bit late in the day but I would have been interested to hear your thoughts on Alumasc and Stadium, both of which reported today. However I appreciate that you have limited time available and are unable to cover as much as you would like.

Best wishes


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runthejoules 5th Sep '17 25 of 41

In reply to post #215443

Thanks for kicking the tyres Ramridge!

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clarea 5th Sep '17 26 of 41

In reply to post #215408

Hi where would I find that stat on the stock sheet ?


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clarea 5th Sep '17 27 of 41

In reply to post #215378

Never tire of hearing about your comeback Paul shame you never decided to go ahead with your book.
Re proper analyst I work in wealth management and meet a lot of the fund managers and there minnows who hold some of the horrors you have warned about on here won't name them but two companies who have been over aggressive on accounting you and Graham have been highlighting what crocks they are and its now caught up with them both in the last six months.

I'm like why are you letting them get away with this but they look at you like your an idiot hell of a lot ego;s in this game that think they know more than god and can;t see whats steering them in the face.

Take it from me your reports are so superior its like comparing Mike Tyson at his peak against Stan Laurel. The bottom line is if they really new what they were doing they would be trading there own account from home or on a beach somewhere hot rather than going through the hell of the tube and daily commute.

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gary3980 5th Sep '17 28 of 41

Hi Paul, thanks for the write up. Would also have been interested in hearing your thoughts on Stadium who reported today. Cheers

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Nick Ray 5th Sep '17 29 of 41

In reply to post #215493

Hi where would I find that stat on the stock sheet ?

It's not in the stock report. But if you have the stock in a portfolio you add Volatility as a column in one of the tables. Alternatively you can create a screen (such as this one) which includes "1yr Volatility %" and then use it as a checklist on the stock you want to check.

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barnetpeter 5th Sep '17 30 of 41

excellent stuff on spreadex. / spreads. Been short on ftse / Wall Street since Friday myself and made a few £££ tonight. I think the main mkts look very toppy to me. Thing about small cap is the spread. Can widen ....look at ige for instance. Mentioned last week and spread now nearly 10 per cent. Long on it on spreads but now down because of the widened spread.

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ricky65 6th Sep '17 31 of 41

In reply to post #215478

Hi Paul

" shouldn't want or need a stop loss.Stop losses are really for punting on jam tomorrow stocks, or for short term traders. They're not for serious investors. Especially in smaller, more illiquid stocks."

I'm going to have to respectfully disagree with you here. I think stop losses are a must for all stocks - you can't manage risk without a stop loss. A platform where I can't place a stop loss is not suitable for me. Personally, as I have a job and can't monitor the markets all day, I always have at least a worse case scenario stop loss with my broker, even on my small cap illiquid stocks. I've lost count of how many times this has saved me from big losses. For example, say a company issues an unscheduled bad trading update during trading hours - I'm among the first in the queue to sell.

I'm going to leave with a section from Minervini's latest book as I think it's pertinent (no offence intended) : "I've heard some pundits say that trading with a stop-loss is foolish. Only a fool would make such a statement! I have never met a stock trader that consistently produced big returns but traded without some form of stop-loss protection. my experience, those who trade without a stop eventually stop trading." I think this is profound coming from somebody with over 30 years experience and survived many bear markets.



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Paul Scott 6th Sep '17 32 of 41

In reply to post #215533

Hi ricky,

As you say, if you're trading, punting on blue sky, or cannot monitor the market full time, then stop losses are great. Or if your stock picking is more like gambling, then I would say stop losses are essential.

Whatever works for you. We're all different.

My approach these days, is to filter out crap stocks beforehand. Hence why I ride out spikes down, like this morning's IQE plunge. The early morning plunge was maybe designed to trigger stop losses from amateur traders?

Anyway, look my strategy works for me, and yours works for you. There are many ways to make money in a bull market! :-)

Best wishes, Paul.

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Paul Scott 6th Sep '17 33 of 41

In reply to post #215463

Re IQE - the guy who excluded me from the meeting is called Chris Meadows, at IQE.

The advisers (Instinctif Partners) suggested I ring him, which I did. I left a voicemail for him. Shortly afterwards, Instinctif emailed me, to say that Chris Meadows of IQE had instructed Instinctif that the meeting was only for "City analysts and Institutions". Therefore a mere mortal like me was not allowed entry. Make of that what you will.


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Paul Scott 6th Sep '17 34 of 41

In reply to post #215513

Hi barnetpeter,

Trouble is, with small caps, the published spread are not the real prices!

There will often be much tighter prices inside the spread. You can do a dummy trade on an electronic trading platform, which will reveal much tighter prices via a system called the RSP.

Or you can ring up a proper broker, and just ask for the real prices! I often buy at or below the mid price with small caps.

So don't be put off with the quoted, wide spread prices on small caps - those are NOT the real prices!

The market is rigged basically. Just put in a dummy trade on an internet dealing account, then cancel it before the 15 seconds. That tells you the real price on the RSP, which is often within the quoted price. Or look at the published small trades, which will be done via the RSP.

If I'm buying in size in a micro cap, I just name my price. If the other side wants it, a deal is done. It doesn't have to be withing the quoted spread, although usually best to, as brokers don't like investigations for trades outside the quoted spread.

Regards, Paul.

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Paul Scott 6th Sep '17 35 of 41

In reply to post #215553

As it happens, I quite enjoyed the extra couple of hours in bed today, and the time I had to wander round to my nearest Turkish Cafe and have a mega breakfast with tea & toast, for £5.70. So I don't bear a grudge! I'm a man of simple pleasures.


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Howard Adams 6th Sep '17 36 of 41

In reply to post #215563

Hi Paul

Excellent coverage as usual, many thanks.

I had a look at Spectra Systems (LON:SPSY) today as well. In addition to the attractive numbers catching my attention, I also looked at major shareholders and the board. The board seem an illustrious bunch. But the key shareholders are less clear cut.

With regard to major shareholders. Spectra Systems (LON:SPSY) site reports as of 22/09/16 there were six with 56.23% of shares NOT in public hands. See below cut/paste from their site.

The first entry Worsley Associates LLP, 15.18% seem to be two rather elusive characters. My limited research suggests these are a two-man activist firm consisting of - Blake Andrew Dixon & Max Tamati Lesser. Both of whom have virtually no digital footprints.

The second on the list Ousssama Salam 7.94% seems to be a NED who left the company 12/04/16.

The third, Mr. & Mrs N. Slater 7.09% are also key shareholders in £USP Ultimate Sports Group, a VC firm.

Hargreave Hale 5.50% will be known to us all.

The fifth, Nabil M. Lawandy (Director) 4.05% is the CEO.

Sixth and last is Hans F Heye 4.01%. I cannot find anything about this person.

Shares Issued
There are 45,251,370 shares in issue (as of 22 Sep 2016).
Major Shareholders
Significant shareholdings as of 22 Sep 2016:
Name Shareholding
Worsley Associates LLP 15.18%
Ousssama Salam 7.94%
Mr. & Mrs N. Slater 7.09%
Hargreave Hale 5.50%
Nabil M. Lawandy (Director) 4.05%
Hans F Heye 4.01%

Shares Not in Public Hands
Insofar as it is aware, at 22 Sep 2016, 56.23% of the Company’s AIM securities were not in public hands.

I'm not quite clear how I feel about these findings other than I think watching major shareholdings might be an important part of trying to understand whether Spectra Systems (LON:SPSY) could be a good investment. I perceive if one or more of these decided to sell the share price could change quickly for the worse. That said, I recognise this must be considered in light of this being an early-stage Micro cap.

Paul/Graham, your thoughts would be welcome as would other Stocko commentators thoughts would be welcome (I know Herbie74 is a watcher),


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shanklin100 6th Sep '17 37 of 41

In reply to post #215378

Hi Paul

Many thanks for your post 5 on this thread detailing your highly developed approach to risk management. This is a topic that is hardly ever discussed on bulletin boards, so it is very interesting to hear what you do.

My personality means I choose not to use any leverage and am now holding a lot of my investment resources as cash (50%'ish). However, with great assistance from Stockopedia metrics, I seem to be investing the remaining 50% much more effectively than in the past. I will aim to return to this subject at a later time/date as I really should be reading RNSes currently.

Thank you and Best Regards, Martin

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shanklin100 6th Sep '17 38 of 41

In reply to post #215553

Hi Paul

A very strange decision from IQE. Given the "inflection point" alluded to in the results, I guess IQE wanted to be 100% certain that nothing distracted from the message they wanted to get out, but who knows...

FWIW, the powerpoint presentation is available at:

Regards, Martin

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cig 6th Sep '17 39 of 41

In reply to post #215558

Sometimes you even get close to the other side of the spread. A couple of days ago something I was interested in was listed 60/75. Electronic RSP quote 63 to buy.

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peterthegreat 6th Sep '17 40 of 41

Hello Paul,
I wonder if your exclusion from the IQE analyst meeting might relate to the company's view that communications with private investors are already working superbly well for them via a regular poster on a number of boards, including ADVFN and Interactive Investor. He has such a high profile that I reckon about of third of IQE posts on Interactive Investor relate to him in some way. His posts do appear to be remarkably knowlegeable and he even appears to have direct access to senior personnel at IQE's customers in the US, who he quotes directly. All his posts are, to put it mildly, very positive on IQE. He spends more time posting about IQE than you would expect from a private investor. Perhaps IQE's view is that he does such a good job, they don't need anyone else communicating directly with private investors!

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Trident 6th Sep '17 41 of 41

I have a small stake in IQE (LON:IQE) and I am pleased to see it go up, but the results the interim results they showed were a bit unexceptional, as Paul remarked. They were also slightly flattered by a currency tailwind (10% I believe). This is a potential growth stock, but there is no mention of order books by the Company, just production capacity growth. Maybe there are disclosure restrictions on suppliers by retailer, but I would have thought that through the supply chain retailers such as Apple would need to commit to forward orders in order to meet their supply needs. If the iphone8 is imminent (discuss what is imminent?) amongst other things, then this must be on the horizons of the supplier chain don't you think? I don't have the expertise to know.

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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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