Small Cap Value Report (Wed 11 March 2020) - DTG, SOM, DTY, COST, KCT, LOOK

11th Mar '20 by Paul Scott

92 comments 10501 reads

Good morning, it's Paul here with the SCVR for Weds.

This post is initially a "placeholder" - i.e. just an introduction, put up at 7am, so that readers can add your comments below, whilst I spend the rest of the morning & early afternoon writing up the main sections.

It's Budget Day today in the UK, which starts at around 12:30.

Estimated timings - I'll need to get the main report done by 12:30, so that we can then focus on what the Chancellor, Rishi Sunak, has been told to say by Dominic Cummings!
Update at 12:30 - today's report is now finished.

Volatility continues, with another huge rally in the US markets last night, which has almost completely dissipated in the futures overnight.

I went on a shopping spree yesterday, buying smallish new long positions in small caps, and increasing my existing small cap positions, but then got cold feet last night and decided to re-open my short on the Dow, as a hedge. Probably like everyone else, I really haven't got the foggiest idea where markets are heading. It seems to me that the headlines now are far worse than I'd been expecting - e.g. talk of Italy needing a large-scale financial bailout. Also the trajectory of new coronavirus cases in Europe, and USA, means this looks like the start of a wide-scale outbreak here. I just cannot imagine markets are likely to shrug off a wave of imminent terrible newsflow. Hence I'm now worried about another possible lurch downwards. Bottom line is - I have no idea what's going to happen next.

Breaking news - the Bank of England has cut base rate from 0.75% to 0.25%. It's also announced a package of measures to support SMEs. It looks like policy-makers want to be seen to be doing something to combat the economic impact of coronavirus, and of course trying to further prop up asset prices with ultra-cheap money.

Trying to prevent the banks from pulling essential credit lines to SMEs seems very sensible to me, given that this is a temporary factor - the last thing I would want to see is fundamentally sound businesses being put into administration due to short term cashflow problems.

As for interest rates, it seems increasingly likely that ultra-cheap money is now a permanent thing - markets are addicted to it, and it can't be withdrawn without…

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Meldrew

11th Mar '20

That's all I have to say about Covid-19. I'll get back to talking about shares. I've got a list of companies on my watch lists to consider investing in when the time is right. SOM is among them.

bryans1311

Split the difference. 10% for us, rest to you and Graham for your wit and wisdom... and new Twitter account ;)

mark1308

12th Mar '20

It's not racist at all to say that some foreign based Aim cos in particular have lost punters a lot recently !

stevelikesdylan

Dignity. Saw the word insolvent and that was enough for me, sold all of it as there would be more sellers tomorrow and true enough there are down 15% today versus a market of -6%. So many thanks Paul

Wilbraham

Off topic, but is it just me that can't view any comments on today's (Thurs 12 March) thread? All I get is a revolving circle saying "Loading comments". Other threads (eg this one) seem OK still. Thanks.

Rickyromania

I am having the exact same problem and it’s driving me nuts, like I don’t have enough stress already.

Rusty2

I don't have any problem.

HumourMe

Old site loads fine; new - not so much. If you have the option switch back for now.

I never use the new site, too many issues for me, too slow being one of them.

Thanks for the info but I have only been a member for about three months and so I am not aware of an old site and cannot see how to access it on my screen. This is the one of those days I really wanted to see what others were thinking and possibly doing as it would have given me a feel for the market from some very experienced investors. Hopefully tomorrow it will be back to normal.
Best wishes.

simoan

Yes, it's pretty embarrassing how slow it is. I tried my best to use the new site but gave up earlier today because I had the same problem with the comments not loading and the page updates are positively glacial. It's a shame because I'm sure that behind the scenes there's a lot of effort being put in, but this is not being reflected in the user experience.

All the best, SI

I see, yes I have heard new subscribers can't access the old site which I think is a pity as some things on there are not available on the new one.

RustySpanner

same for me now (16:49)

timarr

I imagine the new site is getting its first proper stress test at the moment by people repeatedly hitting "refresh" in the hope that something will have changed :-/

This is the one of those days I really wanted to see what others were thinking and possibly doing as it would have given me a feel for the market from some very experienced investors.

If investing since the 90s counts as experienced (not sure it is long enough) then it is likely that people will identify with several behavioural types and be a blend of many of them. Here is a tongue in cheek range of possibilities until you can get access to those wiser than me.

The momentum traders who got stopped out. Waiting for signs of recovery. Currently happy they practiced risk management. Now should be practicing patience and/or just following their system.
Buy the dippers/ bottom fishers. This strategy isn't working just now - at least when not waiting for an uptick. But it will. Real soon now. Swing trading worked for years. Its time will come again. Fibonacci rules! (on arbitrary pullbacks, precisely measured)
Long term 'quality' investors. Sale is now on, however, positive feedback will eventually assert itself positively. In the meantime it is good that retirement is 20+ years away. Probably buying selectively. Wondering if stops might have helped.
Value investors. Sale might be now on. Probably forgot how to 'do value' during the long bull run. Hope someone woke them up. Probably buying selectively.
People who follow tips. Confused. Will sell when they get back to even. In the future if enough of them do this Traders will refer to this as resistance.
People who over leveraged. Broke or feeding their accounts. Waging a battle between confidence, doubt, hope and horror.
Macro investors. Trying to factor Corona and Cobra into the equation. Would be better off doing a taste test for now.
Small cap investors. May have discovered what liquidity and spread mean.
Investors in institutional products. Now less keen on the idea. Discovering what liquidity means.
Institutions. Dumping liquid shares to shore up capital structures and meet redemptions. Those with cash are taking advantage. Those who had cash are probably wishing they had waited.
Shorters. Just like longs, are wondering if it is over yet. They'll have difficulty borrowing more from the institutions as they are running out due to redemptions. Redemptions here will eventually close the shorts?
People who hedged with Gold. Happy?

Everyone. Amazed and confused.

This sort of event will roll around every 10-20 years. They are great learning experiences. Volatility is likely to persist for a while, as in itself, it forces quant institutions to rebalance portfolios, contributing to more volatility. There will be opportunity. The recovery will either be prolonged, v-shaped or steady, rapid or prolonged! No one knows, however, the consensus is probably wrong.

My objective is to buy quality/yield, cheaply - but I need to see signs of strength as capital preservation is key. I'll revert to quality-momentum when absolute strength returns. If screaming bargains are presented I'll treat them with suspicion, before approaching with caution and investigating.

Discovered you might be able to see some comments if you go to the old site (stockopedia.com with no 'app.' prefix) and don't login, ie appear as a non-registered user. You can't read the articles but the comments may be viewable.

You'd have to be very experienced to have witnessed a day like today ... it was Black Monday, 33 years ago. Ahem ... well, of course, I was around, wet behind the ears and sure I could cope. Michael Fish proved himself as adept at weather forecasting as all the financial pundits were at market predictions and I wobbled about like a drunk on a skateboard.

What everyone forgets is that the following day was worse ...

You have to go through this to understand what investing is really about. It's easy - too easy - to make money when everything's going up - and equally easy to lose it when it goes down. That's why Graham talks about needing a plan and Paul warns against leverage - when the markets turn they do so savagely.

Two things destroy returns - leverage and panic. Leverage in a downturn is horrible. If it's personal you're a forced seller at stupid prices - and many prices quoted today will prove to be stupid. If it's corporate then you're holding a company that is living on the edge, a single misstep can see them go bust. You can't recover a total loss of capital (I've had four, all horrible).

Panic is the result of not having a plan - it's selling good companies because their price has fallen or buying crap companies for the same reason. It's buying on the rallies and selling on the dips. It's about lack of emotional control. If you are going to panic - do it early. But you'll panic more often than there are crises, you'd be lucky to win playing that game.

History tells us markets recover - but it can take a year to eighteen months so you need to make sure you can survive that long without needing the cash. And it's all so much easier if you buy good companies at fair prices and otherwise sit on your hands.

Today I sold some bond funds to free up cash, placed a load of limit orders and missed all but one of them by a whisker. I did end up with some Schroders (LON:SDRC) which I'm sure will be a constant companion for me in the long self-isolating nights ahead.

Be lucky but - better - be prepared.

Thank you HumourMe and Timarr for your replies I much appreciate them. I have a plan but this volatility is quite something . I have hesitated as a couple of shares that I had earmarked to purchase have overshot to the downside making me question the validity of my decision, although I still believe in them long term they may go down further as the USA is having another bad day. On the other hand two others are doing the opposite and are holding up really well so perhaps these may be the better choice. I will see what tomorrow brings, just hope I can access the comments section because so far no luck.

Best wishes.

Yes, I can understand that, but as an engineer it doesn't matter what you're designing, you have to stress test it yourself before calling it a product and selling it to someone else. In my experience, paying customers do not like being the Beta testers for your product.

I'm no expert on building websites, but if a teenager can build a bot network in his bedroom to stress test the Pentagon, I'm sure a half decent web designer can do the same to check the performance of the website he's just built when under a high load of page requests. If I'm sounding a little cheesed off by being caught in purgatory between two different sites, it's because I am.

All the best, Si

fundtechinvest

13th Mar '20

Dart (LON:DTG)

Paul - a couple of comments on Dart

Hedging - you are correct in your interpretation of hedging losses.

The annual report and accounts to March 19 (p22) say that at Mar 19 DTG had hedged 90% of its fuel requirements (in line with formal hedging policy) for the next 12 months. 2019 accounts also tell us that fuel costs were £305m.

Per IATA (https://www.iata.org/en/publications/economics/fuel-monitor/) jet fuel price at 6 Mar 20 was down in price 32.4% versus a year ago and 18.1% versus a month ago.

We also know from this weeks trading update that summer capacity was increased year on year by 16%.

So, all other things being equal, fuel cost for this year would be £353m (£305m * 1.16 to reflect 16% capacity increase). The question is how much of the circa £353m fuel cost is excess to requirements and what’s the hit on excess hedges - difficult to put an exact figure on it but if capacity is cut back by say 15% and there is a 25% hit on fuel price then we are looking at circa £13m - imprecise I know but I think we could be looking at low double digit £m

Cancellations

Re your questions on cancellation I think this is a two part answer - for those people who have booked a flight only then I believe these are paid for at time of booking in full with no refunds if customer decides not to travel for their own reasons.

More importantly for those people booking package holidays (flight and hotel) there is a deposit payable at time of booking which seems to be £60 per person. Cancelling 70 or more days before departure incurs a loss of deposit only, so a relatively low cost at that point for those inclined to cancel. Cancelling at 70 days or less incurs a loss of between 30% and 100% of holiday price. So at this point in time anyone who has already booked for Jun onwards could cancel for £60 per person and then wait and see how the virus situation goes and rebook at potentially lower price.

Clearly If Dart cancel the flight/holiday then there would be an alternative or a full refund.

Another point to bear in mind is that there is likely to be an excess of fx hedges in place as well as fuel. 2019 accounts stated that accommodation costs were £1.1bn so dependent on rates hedged at there could be a hit on these as well depending on degree of capacity cutbacks.

I like the culture of this company and its product is good too. Long term I think it will continue to do well and like you I am looking for a good entry point. However I think there are a lot of unknowns at the current point in time and it is highly geared to the virus situation so will wait for some clearer information on summer bookings as there is, as you say, a chance of another lurch down.

Small Cap Value Report (Wed 11 March 2020) - DTG, SOM, DTY, COST, KCT, LOOK

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Paul Scott

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