Small Cap Value Report (Wed 29th Dec 2021) - Placeholder

29th Dec '21 by Jack Brumby

38 comments 6372 reads

Hello, it's Jack here - not much news out today so we're just putting this up as a place for people to comment and chat. Sharw has also set up a user-generated SCVR, so many thanks for that (see here). Do check it out and feel free to comment over there if you prefer! I hope everyone's had a great festive period so far.

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About the Author

Jack Brumby

Premium Member

I'm looking for compounding investments. I started off in Leisure - a part of the market I still love, but an area where stocks can appear "cheap" for years without going anywhere. It made me realise that valuation is only one part of the puzzle. Now I sift through a much broader universe of stocks in search of small, high quality operators with large addressable markets, strong and maintainable margins, and clear share price catalysts. CFA charterholder. more »

38 comments

BurglarBill

29th Dec '21

Interesing seeing what others hold. Here's mine. Trimmed Kainos recently and added speculative upstart Mobile Streams. The rest are intended to be long term holds. Good luck all.

Kainos (LON:KNOS)

Redde Northgate (LON:REDD)

Legal & General (LON:LGEN)

Stagecoach (LON:SGC)

Atalaya Mining (LON:ATYM)

Flowtech Fluidpower (LON:FLO)

Jarvis Securities (LON:JIM)

Newriver Reit (LON:NRR)

Watkin Jones (LON:WJG)

Mobile Streams (LON:MOS)

mojomogoz

29th Dec '21

Thanks to all sharing their top 10 picks.

illiswilgig -> why Zytronic (LON:ZYT) and Tekmar (LON:TGP) ? What don't people see correctly in these stocks? Why do they have durability and surprise?

doug2500

29th Dec '21

My top ten holdings:

Fundsmith
Advanced Medical Solutions (LON:AMS)
Diploma (LON:DPLM)
Somero Enterprises Inc (LON:SOM)
Xp Power (LON:XPP)
Focusrite (LON:TUNE)
Smithson Investment Trust (LON:SSON)
Bioventix (LON:BVXP)
Aptitude Software (LON:APTD)
James Halstead (LON:JHD)
Ig Group (LON:IGG) (in case anyone wants top 10 individual shares)
Tracsis (LON:TRCS)

These probably amount to 60 something percent of my total.

And in reply to another question - to me long term is indefinitely. I think the newest is Smithson Investment Trust (LON:SSON) which was bought at ipo. Focusrite (LON:TUNE) and Xp Power (LON:XPP) are next, held since 2017. Most of the others are over 10 years.

I edited it to add 2 shares in case we're not including collectives. IGG is only held since 2018.

geoffish62

29th Dec '21

O.K. - don't often post here but here goes for my current top 10 by value :

1) Dominos Pizza (held since 2001)

2) Impax Asset Management (held since 2017)

3) Belvoir (2019)

4) National Grid (from mid 90's as an employee)

5) Beazley (2014 initally, but mid 2020 + for the majority, bought further after the COVID liability fears - also with an interesting cyber security arm now). Seems to have grown some legs recently - not unexpected.

6) Volex (2020)

7) Liontrust (ties with VLX on value) (2016)

8) Smithson I.T. (2018)

9) Fundsmith Equity (OEIC) (regular investments since 2015)

10) Redde Northgate (2020)

I believe that both Stockopedia (via the daily SCVRs and general comapany data available) and more recently the on line MELLO events and the great PI WORLD interviews have helped my portfolio immesureably over the the last 4 years - thanks to Paul, Jack, Roland , Graham, David and Tamzin - and of course all the contributions to the bulletin board .

Have made many mistakes, particularly selling IPX and LIO after "merely" doubling. Oh well......

Turning to short / medium / long term definitions : up to 18 months / 18 months - 4 years / 4 years plus would define it for me (give or take). Each to their own.

Best of luck to all for 2022.

Geoff

eltorero

29th Dec '21

I hold Fundsmith, Is there a reason why this cannot be added to Stockopedia. Other funds are on and it seems a strange omission!

cheers

Dan

abtan

29th Dec '21

Thanks to all for sharing. Very interesting to see how regularly Somero Enterprises Inc (LON:SOM) features.

My Top 10:

888 Holdings (LON:888)
Bloomsbury Publishing (LON:BMY)
Air Partner (LON:AIR)
Litigation Capital Management (LON:LIT)
HFG (Hellofresh)
Ig Group (LON:IGG)
Burford Capital (LON:BUR)
$MEDP (Medpace)
Best Of The Best (LON:BOTB)
WEW (Westwing)

Tracsis (LON:TRCS) , Somero Enterprises Inc (LON:SOM) and Spectra Systems (LON:SPSY) complete my UK top 10.

David Talbot

30th Dec '21

Fundsmith Equity is not included on Stockopedia because it is a Unit Trust / OEIC and Stockopedia only includes listed shares traded on a Stock Exchange. Other "funds" are not included on Stockopedia when they are Unit Trusts / OEICS, but listed shares which have a collective investment nature such as investment trusts and ETFs are. Therefore, for example, Fundsmith Emerging equities Trust is included on Stockopedia, because it is an investment trust traded on the London Stock Exchange.

mark1308

30th Dec '21

Thursday ??????

BnB

30th Dec '21

interesting to see $MEDP crop up in a portfolio of predominantly UK small/mid caps. I also hold - good picks and shovels genomics play.

Brilliant Leader

30th Dec '21

Thanks to all for the sharing today - very interesting to see the top 10 lists. Here’s mine FWIW, weighting in brackets.

Anglo Asian Mining (LON:AAZ) (11%)

Games Workshop (LON:GAW) (4.7%)

Jarvis Securities (LON:JIM) (4.3%)

$ARQQ Arqit Quantum (4.1%)

Fonix Mobile (LON:FNX) (4%)

Impax Asset Management (LON:IPX) (4%)

Ekf Diagnostics Holdings (LON:EKF) (3.8%)

Polar Capital Holdings (LON:POLR) (3.8%)

Ediston Property Investment (LON:EPIC) (3.6%)

Somero Enterprises Inc (LON:SOM) (3.3%)

33 holdings in total.

My best wishes to Paul, Jack (phenomenal job this year guys) and all Stockopedia staff and subscribers for a happy, healthy and prosperous 2022.

Cheers
Simon

Caper4

30th Dec '21

my top ten

Boohoo

Saga

Belvoir

Wynnstay

Royal Mail

Tharissa

SCS

SMIT

Games Workshop

Approximately 30 % of my total portfolio is in the first 2 listed and I continue to buy both on weakness .

JonnieRed

30th Dec '21

My top 10 shares (by value):-

Cerillion (LON:CER)

Ashtead (LON:AHT)

Focusrite (LON:TUNE)

Belvoir (LON:BLV)

Impax Asset Management (LON:IPX)

Howden Joinery (LON:HWDN)

Ergomed (LON:ERGO)

Computacenter (LON:CCC)

Allergy Therapeutics (LON:AGY)

Norcros (LON:NXR)

(30 holding in total.)

For the long term I like investment trusts, so here are my 12 ITs.

Blackrock Greater Europe Investment Trust (LON:BRGE)

Caledonia Investments (LON:CLDN)

Digital 9 Infrastructure (LON:DGI9)

Fidelity Asian Values (LON:FAS)

Harbourvest Global Private Equity (LON:HVPE)

Icg Enterprise Trust (LON:ICGT)

India Capital Growth Fund (LON:IGC)

Industrials Reit (LON:MLI)

Jpmorgan American Investment Trust (LON:JAM)

Migo Opportunities Trust (LON:MIGO)

Nb Private Equity Partners (LON:NBPE)

Vietnam Holding (LON:VNH)

However my single biggest holding is in fund Fundsmith, which over the last 10 years has given a fairly consistent annual gain of around 19%.

illiswilgig

30th Dec '21

Mojo – and I was hoping nobody would notice!

why Zytronic (LON:ZYT) and Tekmar (LON:TGP) ? What don't people see correctly in these stocks? Why do they have durability and surprise?

Good Question. Shame I can’t answer it as succinctly. I never use one word when 10 will suffice :-)

But I’ll try. Are you sitting comfortably? Good - then I'll begin...

I think what others are not seeing is – the future. Or to be more accurate – a potential future as I don’t have a crystal ball either.

I think we can all see the past and the tendency is to extrapolate the past to the future. Most of the time that works to some degree. But not always. There is no correct or incorrect here – it’s just different views of the future based upon our interpretation of the past. The only tool which will distinguish which view is correct - if any - is hindsight.

Short story long – why I think this applies to both of these companies. And I apologise – I’ve not found a way to explain this in one sentence, or even one paragraph. You shouldn’t ask such good questions?

So looking at Zytronic (LON:ZYT) this is what I think people see. It’s a tiny illiquid 20m mcap tiddler. The only figures out there are managements own figures via the house broker and they are very cautious. There are no analysts following and no broker forecasts so who is going to do the research? The company has been in decline for years as management have failed to win further contracts in their main market – ATM touchscreens – which is in terminal decline. At the same time revenues and profits have been in decline – 5yr CAGR revenue -11% and profits -30%. It’s trailing P/E is 56x and forward P/E 23x – these figures are approximate from memory – but the point is that - at a quick and superficial look its a declining company in a declining market. Ok it’s sitting on a pile of cash almost 50% of the market cap, and the ev/ebitda is around 7x – so perhaps I could modify terminal decline to – value trap?

As I think Paul said when he reviewed the recent results in the SCVR ‘Why is this company even listed? The management should take it private.’ I toyed with replying then – and failed. So here goes.

I’ve been looking deeper and I don’t see a company in terminal decline – I see a company in transition.

But then this is the kind of company I look for. New products and growth prospects funded by an established cash generating business sitting on a pile of assets, including IP, patents, property and cash. I’ve even made up an acronym for it – VSUP – Value Shares with Underappreciated Prospects. If that’s not contrived – I don’t know what is.

I back the management in not chasing lower margin ATM contracts and instead running it for cash. I also back management in not being distracted, acquiring businesses and new products. Instead they’ve stuck to what they know well and have funded the research, development, IP, patents, production process and facilities for entirely new products and built a world-wide sales team for new and growing markets. Initially driven by the gaming (casino) market these rugged, high performance contactless multi-touch multi-user screens are being marketed into education, public information, advertising, public health, entertainment, corporate and industrial sectors. No doubt finance will continue to buy a few – maybe not for ATM’s – but the highest growth sector in the last year was unattended retail – albeit from a low base.

Of course, despite all the IP, patents, sales and marketing they may not succeed. Or not succeed hugely. In which case I can move on with a modest profit?

Over the last couple of years with the markets inaccessible and sales collapsed they have reset the cost base of the company, continued the research and development and using a tender offer reduced the share base by around a third and are still sitting on a cashpile around 50% of current mcap. It doesn’t need a lot of growth for profits to increase rapidly. Though it does depend upon order mix as the very large screens (can be upto several metres) are higher margin now that they’ve got the production yield nailed.

The cash is already feeding through with the ebitda but somewhat hidden by the depreciation and amortisation charges at profit level. H2 sales were 44% up on H1 last year, and the recent results mentioned that the first 2 months were up 77% yoy or 33% on H2. That’s unlikely to be sustainable and it will settle down – but it only needs sustainable annual growth rates in double digits to transform this business within a couple of years and thats not a very high target to hit?

So that’s what I see in ZYT. It ticks my boxes – but it’s probably not got wide appeal – and as a growth prospect there is risk. Luckily for me I bulked up my initially small holding just before the tender offer and have added occasionally on weakness. Am now up around 40% or so and am happy to wait whilst this plays out – I don’t anticipate it being rerated anytime soon – more a case of waiting on results.

Tekmar (LON:TGP) is a different beast. But essentially the same underappreciated growth prospects. The market is focusing on the past rather than the future. Understandable as a lot of investors will have lost money since the IPO. And there appears to have been some kind of falling out or boardroom coup resulting in the CEO getting the boot shortly after the start of the pandemic.

Less cash, less cashflow – much bigger market opportunity. Or at least the size of market demand coming down the pipe is quantifiable based upon the awards for windfarm licences and aspirations for power generation.

TGP are market leader, with IP and production expertise. They also add value through their subsea geo-technical and subsea installation and repair subsidiaries. Which can give them an edge in selection as preferred contractor by improving their value to the client. Bit of a rough patch to get through right now as they have maintained capability rather than lose it whilst project starts have been delayed through the pandemic – funded by a CbiL loan. Contracts they have been awarded have been lower margin – largely because of the logistics costs soaring. The award of multiple large contracts and most recently a very large home market contract just down the road (so reducing the logistics costs) mean that margins will be rebuilt once this scale of manufacturing is producing. But I don’t think that’s what the market is looking at. Yet.

Share price has risen sharply. Quite possibly as the largest shareholder Schroder’s had been selling down as the share price sank – and following recent contract news has bought back the 2% it sold. Luckily I took advantage of the lower price and bought then so am already in profit. Certainly doesn’t always happen that way for me and there could yet be a bit more rough before we get to the good times.

Europe and the UK in particular have a large proportion of the globe’s shallow continental shelf. The future of windfarms lies with floating windfarms in deeper waters. Cabling will need just as much if not more protection when exposed and TGP are positioning themselves for this future market as well – icing on the cake?

The chairman who has stepped down to become CEO through this rough patch is well regarded in the industry. Apparently carried out a similar turnaround and rebuild with a company called wellstream – subsequently taken over.

Ticks a lot of the same boxes for me. Less cash but the market position more established as is the market growth. Suspect it will re-rate in the next 12months once the underlying cashflow is apparent and sales awarded become clear.

Durability and Surprise? What an intesesting approach. For both these companies Durability is there through the IP and continuous developmen. Particularly the know-how in production and installation which adds value for the customers – market demand is growing. Surprise is that investors are distracted by the past and not giving enough weight to the market opportunity and the product development now being marketed. Of course the surprise might be on me – but I don’t see a big downside relative to the upside for either of these.

Hope this helps explain my thinking?

Cheers

Mark

mojomogoz

30th Dec '21

Great and interesting response. Thanks Mark.

Aside from Vianet (LON:VNET) which of your other top 10 align highly with your VSUP or crouching tiger hidden dragon style as articulated above?

Revs8

30th Dec '21

I'm enjoying reading the top 10's. The radio channels are all playing the top pop picks for the year so why shouldn't we have our "Top of the stocks!"

Here are my top ten SIPP holdings from largest to smallest holding...

1. Indivior (LON:INDV)

2. Somero Enterprises Inc (LON:SOM)

3. Rm (LON:RM.)

4. Smiths News (LON:SNWS)

5. Photo-me International (LON:PHTM)

6. Medica (LON:MGP)

7. Revolution Bars (LON:RBG)

8. Hostmore (LON:MORE)

9. Brandshield Systems (LON:BRSD)

10. Sthree (LON:STEM)

The top 2 are significantly larger than the other positions and I increased on recent dips. They are high quality choices and have largely held up my portfolio during the recent small cap pull back since September.

There are several re-opening (end of Covid?) investments and an out and out punt on Brandshield Systems (LON:BRSD) I like the quality client list Brandshield Systems (LON:BRSD) are building and the model for recurring revenues. Can they break even before another fundraise?

I appear to be a shorter term trader than many of the commentators but I've only been doing this for 15 months and Rm (LON:RM.) is definitely not a short term investment (I'm expecting to hold for years).

Thanks again to Paul, Jack, Roland, Ed and the rest of the team. Happy New Year to All. I hope 2022 is a successful one.

LeopoldAlcocks

30th Dec '21

It would be a good feature to add though. Else anyone who holds these needs another way to take a total view of their portfolio

illiswilgig

30th Dec '21

Mojo - Ha! You are too kind.

I had to go and look up the meaning of 'crouching tiger, hidden dragon'. That seems far too grand a title for what is basically sorting through junk looking for gems hidden in plain sight.

Ms International (LON:MSI) and Portmeirion (LON:PMP) are very much aligned with my underappreciated prospects although all of the others have some form of underappreciated asset in plain view.

I would also have suggested Airea (LON:AIEA) but its currently stress testing the downside value protection part of the hypothesis - the dragon having temporarily flamed out. It's on 0.66x TNAV at a price of 28p and book value 42p at end H1 - more like below 0.6x TNAV at end H2 assuming the same cashflow as H1. Always a useful reminder that the market can stay irrational longer than I can stay solvent. That's what I expect for messing with such tiny illiquid microcaps.

cheers

Mark