Small Cap Value Report (Wed 19 Apr 2017) - Election/forex, LRM, ALT

Wednesday, Apr 19 2017 by

Good morning!

As we all know, political events can have a big influence on markets. So it was interesting to watch what happened yesterday, after Mrs May announced that she's holding a snap general election on 8 June.

This triggered a big move upwards in sterling, which currently stands at just over $1.28. I'm flagging this point because a surprisingly large number of shares have been boosted by weak sterling. Dollar earnings make up the bulk of the FTSE 100, for example - hence its plunge yesterday. However, plenty of smaller caps also have seen their sterling earnings boosted considerably by forex.

Therefore, I am currently reviewing my portfolio, and considering whether to bank profits on shares which have received a large boost from forex in the last year.

Looking at the sterling:dollar chart below (courtesy of IG), you can note the big moves as follows:

June 2016 - a sudden devaluation of sterling from the Brexit vote

Oct 2016 - another sharp plunge in sterling, although I can't remember any specific reason for that at the time

Oct 2016 - Apr 2017 - sideways range, around £1 = $1.25

Now - who knows, but sterling is looking stronger, in the short term anyway


Importers have been struggling with weak sterling, as it's increased the cost of imported goods. Hedging arrangements only defer the pain. So weak sterling has been one of the woes hurting shares in UK retailers.

IF that pressure is now alleviating, then this could perhaps be a good time to reconsider whether it's time to snap up some bargains in the retailing sector? As mentioned previously, the only conventional retailer that interests me at the moment is Next (LON:NXT) - whose shares seem bizarrely cheap to me at around £42.

I think there could be a better outlook for Next than its extremely gloomy outlook of a few weeks ago suggested.

Going back to the election, markets seem to be anticipating Mrs May winning a bigger majority than her current, wafer thin majority of 17 (per the TV news last night). A bigger majority should make Brexit negotiations (and implementation) easier, so I think the market is probably right to cheer this move.

Anyway, it's a good time to monitor sterling, and to consider how your shares may be affected. Looking at the chart above, by Oct 2017, the year-on-year movements…

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Lombard Risk Management plc is a holding company. The Company's principal activities include provision of trading, valuation and risk management systems, regulatory and transaction reporting systems and compliance systems to the financial markets, including banks, fund administrators, investment firms, asset managers, energy companies and other firms operating in financial markets and the financial industry. It focuses on collateral management, regulatory and compliance. The Company operates in two segments: Regulatory Compliance software, which is for regulatory, anti-money laundering and compliance systems to financial markets, and Risk Management and Trading software, which provides trading, valuation and risk management systems to the financial markets. The Company's software products include COLLINE, OBERON, REPORTER, REG-Reporter, LISA and ComplianceASSESSOR. It has operations in the United Kingdom, Americas, Asia Pacific, Rest of Europe, Middle East and Africa. more »

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Altitude Group plc is a technology and information business providing services to the promotional merchandising and print industries across North America and the United Kingdom. The Company operates through Technology & Information segment that enables the buyers and sellers of products to interact and trade, through the provision of technology, catalogues and exhibition services, in the promotional merchandising and printing sectors. The Company provides technology services, specializing in cloud and server based software. Its Technologo offers a range of interactive image solutions, which are used for increasing engagement from online business-to-business (B2B) and business-to-consumer (B2C) buyers, and reduced cart abandonment rates. It also provides a Website solution for companies in the promotional product industry. It publishes catalogues annually for the promotional products industry, which include Spectrum and Envoy. It also hosts the Promotional Product Roadshows. more »

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33 Comments on this Article show/hide all

Jax 19th Apr 14 of 33

Tax Systems results were out today ,were you not going to comment on them from memory.
I thought you had said you would wait until results and then comment but I may be mistaken ?
Seems to have a lot of debt and has turnover not decreased ?
Be interested in your thoughts I find these things hard to fathom.
Shouldnt there be clearer rules for reporting results, alomng this line,
We made this
We lost this
It cost us this to make what we did.
Next year we expect to make this.

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roland33 19th Apr 15 of 33

In reply to simoan, post #6

Michael Gove and his friend Boris, made a number of outrageous promises in the referendum campaign that the must have known could never be honoured. Unfortunately this deception carried the day. Many of the older people who voted out won't have to be worried about the longer term impact but it the younger generations who will be permanently poorer.

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simoan 19th Apr 16 of 33

In reply to InvestedGeordie, post #7

If you think the Tory's won't win a landslide, you are either delusional or don't understand sentiment, polling & FPTP. We are already seeing polls swinging to back Brexit, and it certainly appears to me the hardline stance of some remainers is softening towards acceptance, excitement in some cases!

For the avoidance of doubt, I expect the Tories to win and get the majority they are looking for. My stance has nothing to do with how I voted in the referendum, but is all to do with who lied the most and the loudest during the Referendum campaign and Tories on both sides of the debate did so like troopers. And then our local Tory MP who represents a constituency that voted Remain decided to vote for Brexit in passing it through the commons. She can go swing as far as I'm concerned, more interested in her career than representing what her constituents voted for. My one hope is that Gove & Co. lose their seats and that Boris isn't even an MP come 9th June, let alone Foreign Secretary.

All the best, Si

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peterthegreat 19th Apr 17 of 33

I think the election announcement and accompanying strength in sterling is a good example of why you should ignore movements in currencies when investing in shares. It's good to be aware of what is happening in the currency markets but I'm afraid I lack the ability to predict events such the election announcement, so I can't predict currency movements in the future which is why I don't attach much importance to them when making buy or sell decisions.

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InvestedGeordie 19th Apr 18 of 33

In reply to JohnEustace, post #11

Yes, I'd go along with some of that. I'm not entirely sure she is 'betraying', although it is pretty opaque tbh. She believes a new, clear and well defined mandate will give the EU what for in negotiations. She doesn't want anyone (Lords, Pro-EU MPs Tory or otherwise) frustrating the process and stalling negotiations.

I think she is doing the right thing both in terms of 'Brexit' and for her party. Whether this will leak into other areas of Government is up for debate. I saw a potential Royal Commission on the NHS mentioned this morning, and we all know she is a fan of Grammar Schools.

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simoan 19th Apr 19 of 33

In reply to purpleski, post #13

As for the GE I will hold my tongue. I don't want to come between InvestedGeordie and Simoan!:-) All I hope is that the SCVR comments do not get like it did pre and post referendum in the run up to the GE. 

Yes, I'm sorry for commenting on the General Election. I normally only comment on topics Paul mentions in his reports so felt it was OK today but agree it would be very tedious if it was debated every day between now and June. I will desist in future.

Apologies to all, Si

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InvestedGeordie 19th Apr 20 of 33

In reply to simoan, post #19

Agreed, I will pack this in, as counterproductive in truth.

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pj8 19th Apr 21 of 33

The counter view on the GE is that the structural problems in the economy are still there - a high fiscal deficit and balance of payments deficit; anaemic growth despite rock-bottom interest rates. The call for the early election could be seen as designed to avoid an election once the actual implications of Brexit become known - these might well disillusion a lot of people, making a 2020 election more risky. So: an election called now for party political reasons to exploit a fragmented opposition. A renewed mandate with a larger majority? Most probably. But a stronger economy and a stronger pound? I see the current recovery of the pound as temporary, rather than structural - and am watching with interest those forex earners. Buying opportunities beckon.

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purpleski 19th Apr 22 of 33

In reply to peterthegreat, post #17

Peterthegreat agree entirely.

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Mike888 19th Apr 23 of 33

Re Sterling, I can't in reality see it gaining any real momentum over the next few weeks, a snap election from my perspective changes nothing in respect to Brexit, the decision is already in play and I very much doubt a change in either party or approach. Any stocks that have had a blip because of this are either buying or shorting opportunities in my opinion depending upon whether they are exposed by, or supported by, a weak pound.

Personally I saw yesterday as a bit of a buying spree for some stocks that I felt were overly punished, and today I'm up on most of them and I hope to be up on them all over the next few weeks. We'll see what happens, obviously I could be completely wrong, who knows, my stops are guaranteed and tight just in case ;-)

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dscollard 19th Apr 24 of 33

Paul's point refers to changes in trend of GBP and not individual movements: some very significant movements can be a signal for trend change. Those are the ones to pay attention to and watch for evidence that either supports or refutes the hypothesis. The market is a discounting engine and some of the moves yesterday in correlated stocks support the currency trend- change hypothesis. Buying on that weakness is just another value trap if earnings are re-rated by appreciation of the repatriated currency

To my mind, when you are buying anything heavily denominated by a currency, it is madness not to pay attention to the likely trajectory of that currency unless you are good at hedging (and therefore not ignoring currency by definition)

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Fangorn 19th Apr 25 of 33

In reply to simoan, post #16

" My stance has nothing to do with how I voted in the referendum, but is all to do with who lied the most and the loudest during the Referendum campaign "

Guess you forget Clegg's "There is no EU Army,no plans for an EU Army,nor will there ever be!"

Plenty more lies Remain side than Leave I recall - much of which came from likes of Clegg, Farron,and the dimwits on Labour's front bench...

Funny that.

A vote for libdems is a wasted vote - you'd be better off voting Labour. At least that would count.

"And then our local Tory MP who represents a constituency that voted Remain decided to vote for Brexit in passing it through the commons. She can go swing as far as I'm concerned, more interested in her career than representing what her constituents voted for"

Equally vocal with regard to ALL those MPs voting "Remain" despite their constituencies voting Leave? No thought not.

"My one hope is that Gove & Co. lose their seats and that Boris isn't even an MP come 9th June, let alone Foreign Secretary"

Gove was superb.Don't see what your beef is with him. Boris, well, a decent Mayor of London, humourous, does put his foot in it but so what.Incredibly smart & charismatic - beats pants off most in HoP.

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ISAallowance 19th Apr 26 of 33

To drag us back on topic, RTC (LON:RTC) put out a positive sounding trading update with the AGM statement today, and the share price is up somewhat.

(Small long position)

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smatthews1 20th Apr 27 of 33

If there is a change in trend in currency this could prove an interesting situation for some stocks out there.

For example take Alumasc (LON:ALU). Not the cheapest out there  . With previous report shows decent all round trading with some areas showing record revenue, their margins suffered a bit with the fall in Sterling , but have have already acted upon this by increasing prices.

Their H2 results should show their margins coming back in line again. If Sterling were to strengthen again this could improve earnings nicely. 


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Paul Scott 20th Apr 28 of 33


Yuk - I am NOT liking the silly political comments today. We don't want that kind of nonsense cluttering up the comments section here please. Keep the politics for Twitter rants, like I do! ;-)

I had hoped to comment on more companies today, but unfortunately there were some technical glitches this morning. Also, I only had a couple of hours available to write, because this afternoon I was being a NED for one of the small businesses I assist - setting up a new accounting system on Xero.

I do find it's useful to sometimes just switch off from the markets, and do something more practical & hands-on.

We've decided to apply to go on Dragon's Den - so watch this space, I shall keep you posted!!!

Regards, Paul.

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Paul Scott 20th Apr 29 of 33

Going back to the currency issue that I mentioned in today's report - it sounds like some readers have got the wrong end of the stick.

My point is that it makes sense to calculate how much of the earnings increases in our portfolio holdings have been driven by forex gains (often not terribly clear from company results), and then strip out that factor (which can be huge).

You might find that there's not very much underlying earnings increase at all, once one-off forex movements are eliminated.

Ignore this issue at your own risk! It's worth checking - which was the intended message in today's report, even if not everyone got the message.


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Paul Scott 20th Apr 30 of 33

In reply to kidznet, post #1

Hi kidznet,

You asked;

I noticed that you sold out of Somero from your fantasy portfolio after the election announcement yesterday. Was that due to your thoughts on currency earnings or was something else behind your decision? I know that you've only been selling to buy in better ideas recently, so was interested in your rationale.

As always, it's complicated! I've banked some profits on my personal & family portfolios with Somero Enterprises Inc (LON:SOM) as it's had a great run. A lovely business, but it tends to be valued on a fwd PER of 10-12, and has now reached about 15. Perhaps that's high enough for now, I don't know? Also perhaps the main benefit from the strong dollar has now been had?

Although, on the other hand, I haven't sold any SOM in my SIPP, which tends to be a handful of long term holdings. So I'll probably continue to hold there.

BMUS tends to be a bit of a hybrid, between my mid and longer term ideas. There's not really any particular structure, or set of rules behind it.

Bottom line is this - my selling decisions are very often absolutely terrible!

A good example - I sold BOO way, way too early.

So you'd have to be a complete idiot to follow my selling decisions, as they're usually bloody awful! I'm a lot better on buying decisions, but even then, plenty are wrong. Most are right, or rightish though. My selling decisions are hopeless though, so please ignore them!

Everyone has to make their own buy/sell decisions anyway. I'm not a guru, and don't want to be anyway. It's just a view, at a snapshot in time here. People can often then take my best ideas, and do much better with them than I do, which is great.

Regards, Paul.

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ridavies 20th Apr 31 of 33

Paul have you ever had a look at £SMS? Reported at the end of lats month and seem to have lots of potentila as well as good performance currently. Accept they are not highly rated on Stockopediaprinciples, especially on Value. Just a thought when things are relatively quiet. Would welcome your thoughts, or anyone else on here. Thanks

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simoan 20th Apr 32 of 33

In reply to Paul Scott, post #30

As always, it's complicated! I've banked some profits on my personal & family portfolios with Somero Enterprises Inc (LON:SOM) as it's had a great run. A lovely business, but it tends to be valued on a fwd PER of 10-12, and has now reached about 15. Perhaps that's high enough for now, I don't know? Also perhaps the main benefit from the strong dollar has now been had?


I have had similar thoughts myself but they quickly subsided! Somero Enterprises Inc (LON:SOM) is my largest holding mainly because I've just let it go without top-slicing. I don't believe a PER of 10-12 is correct for this company. Yes, I realise it's in a cyclical industry but then again most cyclical companies do not enjoy anything like the kind of margins that Somero Enterprises Inc (LON:SOM) is able to sustain. It is to all intents and purposes a US company, only the share price is in GBP. If it were listed in the US rather than the UK it would be on a PER of 20, no problem.

With regard to currency movements I have no idea what will happen and I am happy to admit that. As a private investor, I find there is a great power in acknowledging my "known unknowns" and not wasting time on them. Once you acknowledge this you can spend your time on more important things, like more time researching to find the "unknown knowns".

BTW I don't feel it's right that you should be made to feel accountable for what you buy and sell and wish people would stop asking as it clearly places pressure on you which I personally do not find acceptable.

All the best, Si

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herbie47 20th Apr 33 of 33

In reply to ridavies, post #31

If you click on discuss it will show the posts, nothing since 2011. My first glance, debt is soaring but profits are not and yes VR is only 9. EPS forecasts not high and latest EPS is down. So not one for me at this time. Also must be vulnerable to changes in Govt. policy. I have a smart metre but it's waste of time because I changed supplier so it no longer works as a smart metre, that reminds me I have to do some metre readings.

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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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