Small Cap Value Report (Tue 7 Mar 2017) - BEG, REDS, CAMB, XLM, LAKE

7th Mar '17 by Paul Scott

45 comments 22281 reads

Good morning!

Today I intend reviewing the following;

Begbies Traynor (LON:BEG) - trading update

Redstoneconnect (LON:REDS) - trading update

Cambria Automobiles (LON:CAMB) - trading update

XLMedia (LON:XLM) - results

Lakehouse (LON:LAKE) - trading update & moving to AIM

The above is likely to take me most of the afternoon, so please refresh this page later for the full report.

Market & strategy update

The market's love affair with growth stocks continues unabated. Value investing hasn't worked very well at all for me, in the last 3 or 4 years. So I adapted my approach in 2015, and further again in 2016, to focus more on growth companies. Not speculative or blue sky rubbish, but proper growth companies - i.e. things that are already profitable (or close to it), and expanding fast, organically.

Specifically, I'm now focused quite tightly on these particular niches;

High quality roll-outs at reasonable prices (e.g. Revolution Bars (LON:RBG) , Fulham Shore (LON:FUL) and Patisserie Holdings (LON:CAKE) - which I think are the best ones on the UK market currently, all 3 of which I hold personally)
Internet-based businesses which are genuine disrupters of existing sectors, and have exponential organic growth potential (examples include Purplebricks (LON:PURP) , Gear4Music (G4M), MySale (LON:MYSL) , possibly Proactis Holdings (LON:PHD) might partially fall into this category, even little BOTB too - all of which I hold).
Anything else which is demonstrating strong organic growth, and crucially is beating broker forecasts. I've set up a terrific Stockopedia screen to identify companies which are receiving broker forecast upgrades, and it's working very well. This is a really good way of identifying companies which are most likely to beat expectations at results time - i.e. ones which have already been guiding analysts upwards before results.

It's worked tremendously well, as you can see from my fantasy portfolio. which has risen over 137% since a recent low, in July 2016. Not bad in 8 months. I was discussing this the other day,…

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dscollard

7th Mar '17

for a bizarre comedy-moment I read David Brent ... then I would be out as well

Ramridge

He too was a comedian but of a more lethal kind!

bestace

References to negotiations with local authorities is nothing out of the ordinary. Spot the difference in the last 3 years' AGM statements:

2017: "As is usual at this time of year there are a number of ongoing fee discussions with local authorities, again including the Living Wage increases from 1 April 2017. Whilst it is early in this process, initial indications are that the current fee environment is consistent with our expectations, which anticipate a positive change compared with 2016."

2016: "As is usual at this time of year there are a number of ongoing fee discussions with local authorities, this time including the Living Wage which starts from 1 April 2016. Whilst it is early in this process, initial indications are that the current fee environment is consistent with our expectations, which anticipate a positive change compared with 2015."

2015: "As is usual at this time of year there are a number of ongoing fee discussions with local authorities. Whilst it is early in this process, initial indications are that the current fee environment is consistent with our expectations which anticipate a small but positive change compared with 2014."

Keep going further back and it's still just a cut and paste job each year.

I was actually toying with the idea of buying into Caretech Holdings (LON:CTH) on the basis that funding shortages in this sector are now making the news, the government has already allowed local councils to bump up council taxes to fund this area and there is speculation of further government announcements in tomorrow's budget, all of which should be good news for CTH.

Nicowilson

Breith has moved on from Coms/Redstoneconnect (LON:REDS) - he now seems to have some connection with Hey Menu and in £TOOP

herbie47

Hi Ram, I believe David Breith left in 2015 so that should not be an issue. He is now part of Toople (LON:TOOP) which had an IPO last year, shares are not doing well.

andrea34l

Paraic84, I'd recommend in a general sense eating/drinking as much as you both can possibly consume, and preferably the highest-cost items... and then maybe we can look forward to a positive RBG trading statement in the near future :-)

You maybe interested in Castleton Technology (LON:CTP) this had some connection in the past to Redstoneconnect (LON:REDS), directors have been buying heavily recently and shares are up 10% today.

ridavies

If you look at the AGM statements for this year and that of 12 months ago, you will note that this para is exactly the same word for word - only the dates change. In that time, the SP has riswen from 236 to 377, even after today's small fall, perhaps rweflwective of a bit of profit taking. If we see anything like the rise in SP - hopefully from more acquisitions in this fragmented market - duribng the next 12 months, I will be a happy man / holder. Perhaps there will be others like you with a similar frame of mind, and they may present me witth a useful buying in point toadd to my holdings. On the other hand, I have not always been the best at choosing a selling point, so you may be right after all!

Reading in again, I see that Bestace beat me to it in sending a reply to you!
At the risk of going on...and on..., this is something I posted on a bulletin board this morning. I hope that it adds something to the debate.
'Not very different from last year's statement, and see what has happened to the SP in that time. Although this is a very fragmented market, Caretech Holdings (LON:CTH) stand head and shoulders above the rest. They are the true professionals. If anyone can think of another in this very specialised field, then please let me know!

Unlike the general care of the elderly, the local authorities have little alternative but to provide for the type of client CTH specialise in and manage so well. They - the clients represent a much smaller element of their responsibilities than the behemoth of care for the elderly - that they must be delighted that here is a highly professional organisation to frankly take the worry away. Do they worry about bad PR from a company like Caretech Holdings (LON:CTH). I think not (though I am touching wood, after listening yesterday to a covert recording of some care workers' behaviour towards elderly people living in their own homes). Therefore, they cough up, and gratefully.

As for the fragmented market, clearly from their acquisition programme over the last year and their continuing development of existing premises to cater for higher value client opportunities, there is a lot further to go. The constraints are that they grow effectively, absorbing and integrating the ones they take over. Also, they have the cost constraints of the capital required. Last year, they had pulled the rabbit from the hat with the ground rent scheme. These don’t come round too often. I believe that they will come to the market again and ask for more cash and that they will get what they need. This may cause a ST hiatus in the SP, although their reputation and results are second to none so they should not need to have a significantly discounted placing or rights issue. They should be able to grow and grow and in my view they are one of the long term bets for my steady portfolio element.

They could support a bigger dividend in my view - more than 3x covered. They have a PE of around 10, a PEG which hovers around 1, but with acquisitions could go below 1; they have a Stockopedia stock rating of 98 (out of 100!); of the 3 brokers rating them, 2 regard them as a strong buy and 1 as a buy.

All in all, they are a company that does the small things very well lots of times, thus making for a substantial company with lots of add on opportunities. They demonstrate that it is not unfair to make a reasonable profit from healthcare, especially when they are creating safe and reasonable opportunities for life enhancement for the less fortunate in our society, in no way the fault of their own. The local authorities who employ and reward them seem to have come to the same conclusion.

Perhaps the Stockopedia rating would be nearer 100 I believe if Caretech Holdings (LON:CTH) had not shown such SP growth in the last 12 months. In my view, they have come out of the shadows and investors are finally recognising that they operate as true professionals in a potentially difficult market but one where there huge growth opportunities.
'

JohnEustace

Thanks to you and to Bestace for the thorough replies.
I only bought in at the start of the year based largely on the Stockopedia NAPs rating and made a 20% gain. My usual style is a bit more considered and longer term which clearly helps with knowing if and when to sell.
I'm thinking I should buy back in - I'm just slightly concerned that they qualify for a short selling screen for a low Altman Z1 score which seems at odds with the very high StockRank so I'll look a bit more closely this time.

Paul Scott

Sorry, I didn't get round to looking at Headlam (LON:HEAD) . Another time maybe.

P.

Hi Boris18,

I can't see any reason why the Franco Manca pizza format operated by Fulham Shore (LON:FUL) would work well in London, but not outside of London. It's a low-priced, no-frills pizza company, with some really nice touches, which in my view has universal appeal.

I've re-read the most recent accounts (interims), and there's nothing in there to suggest new branches outside London are a problem.

The Brighton branch is popular, and usually busy. I've visited there several times.

The reason I like FUL so much is because, when I originally crunched the numbers, each new branch adds considerable extra profit. So it should be an excellent roll-out. But nothing's certain, we'll have to wait & see.

The TripAdvisor reviews for Franco Manca in Guildford are mostly positive, although they've clearly had some teething problems too, with about 10% of reviews being negative. Someone says the restaurant is "always busy", so maybe you visited on a quiet day?

Just realised I don't have any FUL in my fantasy portfolio, will have to rectify that error.

Regards, Paul.

Hi FoolishBen,

Thanks for flagging up that Tasty (LON:TAST) has come down a lot in price. I might revisit it.

I've never seen the appeal of its Wildwood format, but have never visited one.

The last set of figures looked OK, and I see it's well-funded, following a placing.

I'll do a report on it when the next set of figures come out.

Regards, Paul.

phil coates

Lakehouse - in the past a move to AIM would have forced selling for those who held in ISAs. Not so now

Hi Phil,

That's a really good point (post 39) re Lakehouse (LON:LAKE) .

Although I think there are some institutional holders who won't hold shares listed on AIM, who would still be forced sellers. That might be offset by IHT planning buyers of AIM shares, who knows? Probably a recipe for price volatility, over a few months anyway.

Regards, Paul.

8th Mar '17

Paul. You recently gave some good advice on getting better information on broker upgrades. You said you have bought into a relatively inexpensive service which is giving you better information. I have trawled back though your reports but cant find it. Can you please repeat the source. Best regards and keep up the good work.

rhomboid1

Research Tree iirc https://www.research-tree.com

Foolish Pat

I'm in the same boat FollishBlart. Would be interested to hear Paul's thoughts before deciding to take the plunge (so to speak)....

jonesj

Tasty made an announcement about impairment charges against 5 sites as part of their 6 month announcement performance on 06 September.

That would have been 10% of the portfolio, which is hardly encouraging, particularly considering proven management are one of the attractions.
The share price has been falling from that date.

There has not been much newsflow since then, but I suppose the full year announcement must be due soon, since the year end would be early February.
The share price has fallen 20% since early February, accelerating the downward trend.

Since I am becoming more wary of momentum, I've not yet added to a small position.

Redrichmond

16th Jun '17

LAKE was reported on 10 times in 3 months in 2016 by Paul - March - May.... Thousands of great other shares out there...

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Small Cap Value Report (Tue 7 Mar 2017) - BEG, REDS, CAMB, XLM, LAKE

Market & strategy update

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Paul Scott

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