Small Cap Value Report (Wed 20 April 2022) - VLX, CARR, WINE, SFR

20th Apr '22 by Paul Scott

64 comments 8718 reads

Good morning, it's Paul & Roland on SCVR duty today.

Agenda -

Paul's Section:

Volex (LON:VLX) (I hold) - a reassuring update for FY 3/2022 year end. Ahead of expectations (only slightly for profits). Lots of other positive remarks, including continued ability to pass on higher costs. Supply chain disruption could even be a positive, with customers increasing forward orders for certainty of supply. Even after a 14% rise this morning, this share still looks a bargain to me.

Naked Wines (LON:WINE) - trading update is in line. I'm wary of this business model.

Roland's Section:

Carr's (LON:CARR) - this agricultural feed and engineering business has underperformed the market in recent years but has a strong long-term record. Commodity market conditions put pressure on margins in H1, but this should unwind in H2. A strategic review could result in improved focus and growth potential. I can see decent value potential here.

Severfield (LON:SFR) - the structural steel group appears to be trading well with a strong order book. Full-year results are said to be in line with expectations, although I can’t entirely dismiss concerns about cyclical risks here. Even so, the shares do look decent value to me at current levels.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to

Paul’s Section

Volex (LON:VLX) (I hold)

247p (pre market open)

Market cap £390m

Trading Update

Volex plc (AIM:VLX), the global…

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RutlandRam

20th Apr '22

Interesting Mark and thanks for sharing. It would be interesting to get your views on Team17. They have had some awful PR this year which has brought into question both the ability and behaviour of senior management. This triggered me to sell as I lost confidence in them. Perhaps I was wrong ?

rmillaree

Volex (LON:VLX)

To be honest volex was probably a bit of a basket case share back in 2018 - i really think any comparison of where the business was then compared to where the business is now is meaningless - obviously things needed to change back then and the raising of £36.00 million pounds by issing 48 mill new shares at that time was a really material event.

If you judge the company on what it has done since raising that cash and diluting shareholders at the time then the proof of the pudding is a most tasty feast. They raised funds when shares were at probably under 80p a share and 4 years on the shareprice is not far of trebling. I doubt you will find any long term shareholders who see that large dilution as generating anything other than fantastic results for shareholders. in summary that was a material event and should be judged on its own merits from that bygone era the end results being fantastic - anyone who didnt want to be diluted could have stumped up more cash and been well rewarded with the investment that was made at that price.

If we look at the last 3 years the increase in shareprice has been very non material - that being the case i would say giving the impression that they are issuing new shares at 11% a year is highly misleading -with regard to recent past Note as the shareprice is that much higher now a similar raise would create a fraction of the dilution that that "material event created"

Could they have succeeded without that capital raise and acquisition in 2018 - who knows they always had decent "turnover" - but facts of the matter they were going nowhere did that big raise and their fortune turned for the better soon after so one has to say their plan of attack has certainly worked very well and they have kept later dilution to vey manageable levels.

I used to post on here that this company was complete basket case (nearly £2 bill of sales over approx 6 years making nil profit !) - i kinda guessed at first they may have got lucky when trading started to pick up but i must say management had hardly put a foot wrong since 2018.

Mark B

Does this business fall within your circle of competence? I have been in IT for the last 23 years professionally and an engineer before this. I think I have an edge in this business. Do you have an edge can give you conviction when things go wrong? For me it's an opportunity as this unfortunate management decision will pass and be corrected. If you trust management, which is integral to my buying process, they are correcting and I am a big fan of Debbie and believe she has learnt from past mistakes and will probably make more in future but the aggregate of good and bad decisions will be far in away on the positive side.

cmpeckham

"Will these companies beat the market over the next five to ten years? I have no idea"

Then why not own the market instead? By owning a small number of stocks, you are taking a huge risk that you don't need to. Studies of long term returns in the most successful stock market in the world (the US) showed that between 1926 and 2016, more than 50% of stocks had negative lifetime returns. Just 4% of stocks accounted for 100% of the wealth created by the market. Just imagine what the results are for some of the less successful markets e.g. AIM.

The majority of professional stock pickers underperform the market. The average amateur probably does worse. If you rely on stock picking, your success depends on finding a few needles in the haystack and you start with the odds against you.

You have objectives, so why not think through whether an investment in the market index can meet those objectives. If it can't then maybe it's wise to re-think the objectives. If it can, then why not do it?

Harry Hindsight

We spend a lot or a little as time allows on deciding. I hold Volex (LON:VLX) and Supreme (LON:SUP) and appreciate Paul's comment "held the line". Did the fundamentals change enough to make the business something else or just macro 'noise'.

If I'm taking pain then always take some (saddo) comfort in that the institutions are hurting far more than me.

90% of Male swedish drivers think they are better than the average. This fact, Charlie Munger describes in his almanac, is very relatable to the private investor. To get yourself into the 10% you have to have an edge. Your circle of competence and your knowledge of it so you don't go outside that, gives you your edge.

timarr

I really don't want to be in the 10%. I would imagine that the 10% who think they are worse than the average are probably quite bad (or they're depressed, but that's a different piece of research).

The point that Munger was making is that most people - especially men - tend to be overconfident about their abilities. Hence people trade too much - remembering that every trade is an opportunity to make a mistake.

Munger's edge, of course, is to be brilliant and not make too many mistakes. The rest of us need to spend more time with the Highway Code:

https://fs.blog/great-talks/ps...

Someone really needs to research their moat - how difficult to replicate a 'cable'. Ok a nice reliable cable and none of that cheapo copy cat stuff which melts when we turn on the bitcoin mine. Bit like ceramic brake disks - just not so sure can defend the castle. Thanks to Paul.S flagging up the share issues for growth as a contrarian view. Volex (LON:VLX) look a safe hold but not buying more. Sorry don't have time for DYOR - momentum follower.

KevinS1

Hi Michael,

I learnt a lesson in 2021 (the hard way) regarding cutting my losses, and one of the stocks I learnt the hard way was Volex (LON:VLX) when I was left with a small profit after watching a large profit disappear.

I try now to cut losses a bit sooner and try to maintain some winners once they drop a certain amount from their highs, but I still get too attached to some stocks and watch them slowly shrivel up and lose their flowers. For example, I am still holding Hostmore (LON:MORE) despite it being 44% down on my average price.

Another is Gear4music Holdings (LON:G4M) which I probably should never have bought but was tempted in by the story. Also I hold onto a small holding in Baillie Gifford Shin Nippon (LON:BGS) but I class this one as more of a "hang on and use it as a reminder to watch it and buy more once it turns".

It's a constant debate in my mind as to whether to get out of falling stocks or just wait for the good times to return. I remind myself I am a longer term investor so shouldn't worry, but its difficult to watch your investments keep falling day after day - I am trying to be more ruthless, but its a constant battle.

Good luck with your holdings. I seem to get the feeling that there maybe a bit pore positivity around at the moment and things may not be all gloom and doom. Results are frequently good, and the inflation threat looks like it might peak in the next 12 months - wishful thinking maybe, but I try to remain optimistic.

Best. K

buy the book. It's a great read. Expensive for a book, invaluable as a tool.

buy the book. It's a great read. Expensive for a book, invaluable as a tool

To quote from my copy:

"How many of you have fifty-six brilliant insights in which you have equal confidence? Raise your hands please. How many of you have two or three insights that you have some confidence in? I rest my case".

are you a business owner or just an owner of a ticker symbol in the market. Investor, trader, speculator, gambler. If you don't know, you are a gambler. I'm going to get hate from this but if spend time researching you will change.

men? I only see men here. We are in an echo chamber

TheFloatingInvestor

Thanks for the info rmillaree, I appreciate it...you have been around this game much longer than me, and yes I agree seems the share issue was required, and winding the clock back as been good value.

If they have as much pricing power as they suggest in the resent RNS then they indeed seem to have some kind of moat, but would like to see a little better operation margins, although i guess it keeps the competition out!

Thanks

Paul

MichaelFBS

Thx cmpeckham. Firstly, it is impossible to say whether a company will beat the market over the next x years, so it was a statement of fact but one works with probabilities. I believe they will be otherwise I wouldn’t be in them.

Your comment in your second paragraph is interesting because that is precisely what I am doing. I am pivoting the portfolio so that will own:

BRK.B - 25%

VUSG - 25%

Large Tech - 12%

Balance small caps

The timing is flexible but the aim is to have the portfolio structured like this over the next couple of years.

As to my own returns I am reasonably content with them but it has been a tough two years of Covid for various reasons but the full picture is:

31/12/2008 -7.10%
31/12/2009   27.40%
31/12/2010     9.10%
31/12/2011 -16.40%
31/12/2012 4.50%
31/12/2013   76.00%
31/12/2014 -24.20%
31/12/2015   16.00%
31/12/2016   30.70%
31/12/2017   36.40%
31/12/2018 -11.60%
31/12/2019   27.00%
31/12/2020   0.00%
31/12/2021 -15.30%

This is give or take an 8% return (the long term rate on the S&P) but achieved at much higher risk. Up until 2019 it was closer to 11.2%.

Very volatile, which is what I would like to reduce.

Regards

Michael

Thanks Kevin.

I sold out of almost everything on March 19th 2020 when I was down from the portfolio ATH by about 45% and I clawed my way back to break even for the year. (If I had done nothing all year the portfolio would have been up 36%, so a very expensive mistake)

Yes I should have top sliced (as I have done with Ergomed (LON:ERGO)) but I am as convinced as I can be that this is not the time to sell. I think these are good companies that I am happy to be invested in.

this is opinion. You have a choice. Statistically you will make the wrong one. It's close to crazy what I am about to say because the general consensus will be against me. And yet, you are wrong. If you understand this, you will see the opportunity ahead. If you don't, your world is probably going to be very negative for a lot longer than mine, but you will be comfortable that most people agreed with you.

Bullsnbears

I have no idea what you're saying. Sorry.

21st Apr '22

Absolutely. And if you can't get through the whole thing Buffett says that chapters 8 & 20 are must reads. Personally I loved the book and will re-read after reading Security Analysis, which I am finding very hard going but I think it is warming up as I get into it!

I would disagree tough as I think it is very much a book for "traders, speculators or gambler" as it may stop themselves on what is, for MOST, a futile path -

"The Financial Conduct Authority has studied a sample of spread-betting customers and found that 82% lost money on products offered by the industry..."

https://www.theguardian.com/bu...

Small Cap Value Report (Wed 20 April 2022) - VLX, CARR, WINE, SFR

Paul’s Section

Volex (LON:VLX) (I hold)

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