Small Cap Value Report (Wed 15 July 2020) - PMP, GFRD, MCS, AIR, CARR, ARC

15th Jul '20 by Paul Scott

114 comments 12516 reads

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

Estimated timing - I should be mostly done by 1pm, but will probably need a bit more time to get everything done, so let's say 3pm.
Update at 14:34 - sorry, I nodded off after lunch (trainee pensioner!) so will keep going until 5pm.
Update at 16:40 - today's report is now finished.

Please see the header for the shares I'll be reviewing today. I've included a couple of reader requests.

Vaccine hopes

Every now and then the US markets get excited about the prospects for a covid-19 vaccine. I've been glued to CNBC (American financial news channel) for months now, following events. The positive attitude there is astonishing, compared with the seemingly all pervading negativity of UK small cap investors. Whatever problems the economy and covid throw at the markets, they just brush it off as temporary and irrelevant in the USA, chasing share prices higher. The argument goes that whatever problems emerge, the Fed and the Govt will just keep throwing ever more stimulus, and back-stopping borrowings to enable even normally insolvent companies to continue trading (the one exception so far being Hertz). Plus a vaccine is supposedly going to eradicate covid, so why worry about it? Doesn't this strike you as overly optimistic? It does me.

Last night after hours, vaccine hopes caused the futures to gap upwards. I got stopped out again. It's proving very expensive taking a bearish view on the US markets, so think I'll have to just admit defeat there. However, I'm seeing so many similarities with 1999-2000, it's uncanny. E.g. the Robinhood (a free dealing app) traders, who are chasing momentum shares ever higher, and buying every dip. The experts are scoffing at their naivety, but (so far anyway) they're making money.

With casinos & sports shut, the assertion is that people are instead gambling on the stock market, concentrating into wildly speculative valuations on things like Tesla (where I'm still short). This is clearly the euphoric last stage of a bull market in my view, I think conditions are setting up for a market crash, or at least a very big correction - at least in the pockets of crazy over-valuation. IPOs are booming across the pond, and generally going to a big premium. Again, another feature of a manic bull market. Yet it feels completely different…

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MichaelFBS

15th Jul '20

It is that Amazon has been A growth stock and considered over valued almost since IPO’d but history has proved that not to be the case.

I first bought Boo in 2015 for 37p when it was considered to be over valued and I think it is fair to say that many commentators have said it was over-valued from there all the way up to 415p.

zebedee

Yes similar with Major Drilling Group, MDI in USA. There should be a cyclical upturn in metals drilling if precious metals stay high and other metals esp Copper are recovering.

Thx for looking at Arcontech (LON:ARC) (which I now hold). I am back home now and have been able to check Leon Boros now has a 4.033% holding.

Any chance you might have him back for an interview? I think you did a couple with him in one of which he mentioned £BVXP. In his recent PI World webinar he mentioned 4basebio 4BSB

So I think you might have a reasonable amount to chat about!

Can understand that you might be to busy.

Have a good evening.
Michael

eltorero

Reassesed this position and sold, I misread the RNS this morning and had overlooked the significance of the short term margin drop. Will wait for the results. My major concerns are a loss on large orders would wipe out the cash reserve. While I don't think this is likely it made me realise the risk reward is not as great as I first assessed.

peterthegreat

Looking forward to the publication (allegedly tomorrow or Friday) of Phase 1 clinical trial results from the COVID-19 vaccine being developed by the Oxford group in collaboration with AstraZeneca. The vaccine would not have been advanced to international Phase 3 clinical trials without positive safety and immungenicity results so the Phase 1 results will be positive. I shall be looking for any hints about the possible effectiveness of the vaccine and if these are provided, this could mark the beginning of the end of the pandemic.

ridavies

Who are you talking about please?

Thunderball

By your response I can only assume you are disgruntled Shorter? I am not going to get into a argument, but I hold Tesla, and only after a lot of research. The references I make are facts that are freely available to those who which to look into it. It was also based on the caution of more casually informed opinion that prevails amongst those who lazily compare Tesla’s business against conventional car manufacturer's.

I will add some items for clarity and context: my opening comment was about Paul shorting Tesla. My first paragraph stated that the current valuation is detached from its fundamentals, I am not arguing this point or trying to justify it, far from it. The point I was trying to make was that it was possibly foolish to short Tesla at the moment due to the impending S&P500 listing and its liquidity issue where I see the price only going higher on the trading update due on the 22nd if, as expected, they post a profit in a difficult QTR. After all they beat Wall Street production estimates by 30% last time which coincided with the last big bump. My sentiment around shorting and Tesla’s real value has nothing to do with the current share price. It’s only my view. My Tesla holding can fall a loooong way before it loses money.

But the statements I made are not from “swallowing coolaid good and proper”, it is information out there in analyst reports, journalists and matters of fact. Tesla is a growth company, its financials are completely different to established mass market car firms. Tesla, like many tech growth firms, are heavily reinvesting to ramp production facilities and establish market share.

Tesla production is centred around their 4 Gigafactories. The Gigafatories are being built on a roll-out basis are growing production every year. Significant efficiency improvements through investment are being realised year on year at established Gigafactories which is also improving profitability and production volumes.

Tesla doesn’t have meaningful inventory - look at their own website which will offer only a handful of completed units in each model. Also inventory aggregators such as Tesla-info.com/inventory will show you what new stock is available - basically nothing. Try any other brand and see what its says?

Sales are growing every year despite your assertion otherwise, see here: https://cleantechnica.com/tesla-sales. Free cash flow is over $1B. It has been ‘profitable’ for the last 3 qtrs and likely this one too despite Covid. But declared profit only just enough to assuages the shareholders, the real ‘profit’ is currently better employed on R&D and cap ex. That has served Jeff Bezos pretty well to date.

They will be best placed to be first to market with fully Autonomous driving because they have invested heavily in the technology. Every Tesla on the road already has the cameras and tech on board and is sending data back to Tesla HQ Consequentially they have over 2billion of miles of data vs second placed GM with 1.3m miles. They will likely achieve licensing ahead of everyone else.

Tesla’s commercial vehicle the ‘Semi’ is due for release in late 2020 and only delayed due to battery shortage. This is fact.

Average selling price is declining because Tesla is entering the volume market and its niche £80-100K Models S & X are being dwarfed by the mid market Model 3 and Model Y. They cant build them quick enough. They will only enter the lower priced, lower profit sectors of iD3 & 4 when their production facilities are in place.

Why take my word on the Cybertruck cost vs Ford’s F-150, I am only referencing respected industry expert Sandy Munro’s Munro & Associates assertion that the Cybertruck was ‘genius engineering’ and owing to it using high grade stainless steel in flat panels as a exoskeleton, it used little cost and resource on forming body panels and no requirement for a paint shop (a major production cost). Read it here, its not my “dreamland”:

Vehicle teardown and costing guru and the CEO of Munro & Associates Inc. just appeared on the Autoline After Hours show and presented his expert analysis on the Tesla Cybertruck tooling costs and estimated capital expenditure (CapEx) on yearly production.

Interestingly he compared the CapEx of the Cybertruck vs. Ford’s F-150 with respect to an annual production rate of 50,000 and 600,000 units — according to Sandy Munro, at the rate of 50k units the Cybertruck CapEx will only be $30M a year while for the F-150 that is $210M and if Tesla succeeds in producing and delivering 600k Cybertrucks a year, the CapEx for Tesla will only be $125M vs. F-50’s $615M.

Tesla Cybertruck can be produced at only 15% to 20% CapEx compared to a Ford F-150, this gives the Cybertruck a huge cost efficiency advantage and big potential for being profitable, the simple design and straight lines of the Cybertruck are a winner here.

As I mentioned, Teslas advantage is multi faceted and their superior Supercharger network and battery technology which squeezing more real world miles out of their batteries than anyone else and ability to charge far quicker is part of it, you admitted as much yourself.

DYOR.

smatthews1

"Yesterday in the intraday swings, it gained nearly a whole Ford, then lost more than a whole Ford before regaining nearly a whole Ford"

I found this genuinely hilarious! top marks. Also quite outstanding statistics to get your head round.

Cavendish1

Great comments on Boo as always, thanks Paul. Tom Winnifrith spoke to Mahmud last night for an hour and then talked about it at length in his bearcast today... I think everyone here would be far more interested in any interview ‘you’ do with Mahmud so I’m all for it! If he’s willing to talk to Tom, hed be a fool not to talk to you

abtan

Open Orphan (LON:ORPH)

Ah, thank you. It seems that the company incorporation is so recent that Google hasn't yet had a chance to scrape the Companies House page yet!

I think the fact that Open Orphan (LON:ORPH) have announced an "option" to buy a company that is <6 weeks old is enough to rule me out.

a) Why not just buy it?

b) Why buy anything that has just been incorporated?

I'm sure there might be a reasonable explanation, but I'm already put off by something that appears unnecessarily complicated.

GLAH

mojomogoz

Reading comments today is like back to the future....

Its like 1999 all over again but actually even more bubblicious. In 99 most of the market cap wasn't in the TMT wonders....yeah they were on super high multiples of zero (haha)...but many were generally concept stocks or real tech business but with high endless capex spend (as they operated in a real world not virtual).

Blast from the past -> Amerindo https://en.wikipedia.org/wiki/Amerindo_Investment_Advisors

These guys were the genius asset management visionaries of the times. They were seeing the shapes that no one else could see. They were being drenched in $$$$....they went boom in hubris.

There were more mundane ones like Nordea's growth team. They created a 3 stage innovation discount model where the stage one was what you had today, stage 2 was what you were investing to create 3-7 years from now and stage 3 was the genius of innovation you earned and profited from due to your darn innate innovative soul...if you were right breed/culture/etc. That way they could justify infinity prices for Nokia. Alliance Capital were the US version of Nordea and bigger too...but the Scandis just did it with more panache...I actually loved them even though it was clear bs (they believed it of course)

Nordea and Amerindo where yesteryears version of ARK. I love ARK. They are darn smart and interesting....and its so their moment. They will be right about a lot of stuff but then fail to make money out of being right. By design they're not going to sell Tesla and buy US Bancorp when its time....and lots of their portfolio wont work out...zeroed capital. But they will be heroes whilst it runs.

But 1999 was a period of relative positivity about the broad future of western societies (particularly US obvs) and the mega multiple went into fairly mundane mega caps - Coke, GE, heck even some retailers and financials. Rates coming down and 'great moderation' also helping push up the multiple along with passive flows from mid 90s on and early quant-momentum strategies. Party, party, party!

2020 is more bubbly in the tech names. Not as they aren't real businesses (well some of them...is Uber a business or a p1ss take?)....its more bubbly as it posits an impossibility that the world is screwed except a few exulted futurist businesses. This is a mad narrative. It is an impossibility that our world collapses into these names. Mainly for financial and capital reasons...but also for social and political ones. The forces required to support that dimensional collapse into a handful of exulted names and those names to be stupendously dominant and valued would be like a societal forging and revolution like we've never seen before.

In my trading account I'm shorting mega tech. Not as I think its for sure peaked out but as I want to feel the burn as it goes up. I want to have the pain and lose some money (its small relative to proper portfolio). I want to feel the pain of resisting the 'inevitable' brave new world. I want to doubt my judgement and feel anxious about my views. If I capitulate I want it to be a hard won capitulation just so as I can feel even more disgusted remorse when the bubble breaks and I didn't stick with it.

Its really not about making money or being right. Its about pacing myself in the scream of the insanity.

I've got no idea when this ends....macro pimps the ride...up and down.

Yee-hah! Ride it boys and girls....or slip your Tesla into perpetual ludicrous mode....

Night night don't let reality bite

mojorealitydouche out
xxx

Paul Scott

Hi Sunday Trader,

Yes that's right. I've asked several brokers over the years why RNSs sometimes use the term "board expectations" instead of "market expectations". The reason seems to be that analyst forecasts are for the full year. Therefore performance during the year cannot be technically in line with market expectations, as brokers have not produced part-year forecasts. So they switch to "Board's expectations instead".

Personally, I think this is a silly distinction. Plenty of companies say that part-year performance is consistent with full year market expectations, and that's all we need to know.

Therefore it seems to be inconsistency between brokers, advising companies in different ways.

In a similar vein, some brokers fiercely tell companies that they cannot give guidance to the market. Whilst many companies do give perfectly clear guidance in their RNSs.

It's a big failing of the City - who are trying to protect their big fees, by being gatekeepers to information. Long overdue that the vested interests were swept away. Let's write to Dominic Cummings!

Regards, Paul.

I appreciate it, thanks Francis! Sometimes I need the whole day to let things gestate,

brucepackard

16th Jul '20

Leon talks about Arcontech in the PI world interview. https://www.piworld.co.uk/category/education/leon-boros/

I don't own it, but fascinated by the company. I used to work for large banks in equity research, so I feel like I should understand the product...but I don't. There doesn't seem much background information on it, Bloomberg, Capital IQ, Datastream and the others have an Excel add in, so I can't figure out what Arcontech are doing that is so valuable.

Company does not seem to do investor presentations either, or at least not much available on website.

From their website, if anyone can translate this into English let me know:

CityVision Excelerator: A Tier 1 client sought to deploy a high performance transport layer for market data across the enterprise. There was a major issue however in that their incumbent Excel Add-in used by hundreds of internal consumers of market data was not able to talk to the proposed transport layer.

After testing Excelerator and another solution in great depth for over six months, Arcontech emerged as the clear winner in the selection process. Since then Arcontech has worked closely with both the provider of the transport layer and the Tier 1 client to build a bridge to the transport layer via Open MAMA and at the same time further configured Excelerator to meet the specific packaging and internal protocol needs of the Tier 1 client. Excelerator has now been rolled out to two hundred users on a global basis.

Arcontech (LON:ARC)

For any interested I actually used Excelerator about 10 years ago in what is now a FTSE100 company.

It's simply a clever Excel Add-on.

I remember being impressed with it, but the fact that the company is still the size that it is after all these years implies to me that underlying long term growth is limited.

As an aside I was also put off by the large customer concentration (59% with top 3 customers) and Asia revenue actually decreasing (27k to 2k - not sure what currency that's in from my notes).

In any case good luck all holders.

HollandSmith

Ilika (LON:IKA) really doesn't know if it wants to be over or under the 100p mark today - could just finish directly on the £1 to keep everyone happy.

Round numbers do seem to be the strongest of all support and resistance lines.

pka

Hi Paul, you wrote:

"It's a big failing of the City - who are trying to protect their big fees, by being gatekeepers to information. Long overdue that the vested interests were swept away. Let's write to Dominic Cummings!"

Are you implying that it's more effective to write to the unelected Cummings than to our elected MPs?

Tommy H

17th Jul '20

If you want to know about what the sort of things that happen in this business, just look at the projects like the Aberdeen Western Bypass, this is one of the projects that sunk Carrillion...

https://www.constructionenquirer.com/2019/02/13/galliford-try-construction-hit-by-more-aberdeen-bypass-losses/

Small Cap Value Report (Wed 15 July 2020) - PMP, GFRD, MCS, AIR, CARR, ARC

Vaccine hopes

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Paul Scott

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