Small Cap Value Report (Wed 7 Feb 2018) - W7L, R4E, GATC

Wednesday, Feb 07 2018 by

Good morning, it's Paul here, suitably refreshed after my sickie yesterday (thanks for covering, Graham).

Well, what a roller-coaster it's been of late.  My view is that markets in the USA just got too expensive, and needed to correct. I don't see any particular read-across for UK small caps. Actually, it's felt quite bearish in UK small caps for several months now, with many shares having fallen considerably from previous highs.

I'm reviewing the debris of recent market moves, to see if there are any bargains on offer. Sometimes when people panic sell, they sell off good things, too cheaply. My hedging strategy worked very well, which was a relief. It's great to have some short positions generating profits in a market downturn, because that gives you peace of mind that you won't become a forced seller. So you can keep a clear head whilst all around are panicking.

Anyway, a correction from excessive levels, and a bit of fear coming back into the market, is a very good thing, in my view. Markets that just rise inexorably, without a pullback, are crashes in the making. I think it's important to remember that bear markets don't just happen randomly - they are caused by the market anticipating economic slowdowns/recessions, and hence reduced corporate earnings. With the world economy now doing well, almost everywhere, these seem very good conditions for businesses. Sure, there's a bit of fear over Brexit, and probably more fear about a Corbyn Government, here in the UK. Jacking up Corporation Tax to 26% (as their first move upwards, probably to be followed by further rises), that would make a dent in UK company earnings. That would hit share prices across the board here. So it's a big worry.

I can't think of a worse time to consider increasing Corporation Tax, than when Brexit uncertainty is probably already making some companies consider whether to stay in the UK or not. Our low taxes, and flexible employment laws, plus a population who speak English as their first language, are big attractions for companies to stay in the UK. So I fear that a Corbyn Government would be absolutely disastrous for the UK economy. In a globalised economy, you can't tax the rich - they just move their money somewhere else, to avoid being taxed. Or they just leave, with their money, and we get precisely zero in tax revenues…

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Warpaint London PLC is a United Kingdom-based company engaged in color cosmetics business. The Company sells color cosmetics in the United Kingdom and overseas, principally under the W7 brand. The Company operates through two divisions: close-out and own-brand. The own-brand division consists primarily of the Company's flagship brand, W7. The W7 brand contains over 500 items, which are sold into high street retailers and independent beauty shops across the United Kingdom, Europe, Australia and the United States. The W7 brand focuses on the 16-30 age range. more »

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reach4entertainment enterprises plc (r4e) is engaged in providing creative, advertising, marketing and other services to the theatrical, film and live entertainment industries, including media strategy and buying, marketing and sales promotions, signage, and publishing and merchandise. The Company operates through three segments: New York operations, London operations and Head Office. The New York operations segment is engaged in marketing, design, advertising, promotions, digital media services, publishing and merchandising. The London operations segment is engaged in marketing, design, advertising, promotions, digital media services, publishing and merchandising, signage and fascia displays. The Head Office segment is engaged in providing finance and administration services for the Company. In London, the Company operates through Dewynters Limited and Newman Displays Limited (Newmans). The New York operations include the activities of Manhattan Inc. (SpotCo). more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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  Is LON:W7L fundamentally strong or weak? Find out More »

60 Comments on this Article show/hide all

zho 7th Feb '18 41 of 60


>>The leading tax haven within the European Community is Luxembourg*. The Finance Minister of Luxembourg from 1989 to 2009 was Jean-Claude Juncker.>>

Yes, of course. He was the prime mover in what I referred to as a race to the bottom.

>> I suggest not holding your breath regarding a challenge to tax avoidance.>>

Perhaps, but I've been encouraged by some of Margrethe Vestager's rulings on Apple, Google and Starbucks.

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Zoiberg 7th Feb '18 42 of 60

In reply to post #311723

Was that you on twitter bemoaning the fact that you had lost £250k through switching from short to long at the wrong time?

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Lord Zion 7th Feb '18 43 of 60

In reply to post #312053

God no!

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jonesj 7th Feb '18 44 of 60

The new generation haven't seen socialism here, but if they cared to look, they would see the results all around the world.
Some previous comments indicate Corbyn is quite an admirer of Venezuela, which is indeed a fine example of what socialism does to countries.
The younger voters are probably unaware that Gordon Brown was borrowing almost as much as Greece when he finished & the previous Labour government required IMF assistance in the 1970s.

If anything, Corbyn seems considerably worse than either of those, so if he's elected, even the middle classes should be thinking about emigrating.

He is by far & away the largest threat to the economy. Whether it be a hard Brexit or remaining in the EU is of little significance in comparison to the threat of extreme socialism.  

That would affect post tax profits, dividends, investment returns, pensions & employment.    I'm certainly taking the risk into account when considering investments.

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jules2k6 7th Feb '18 45 of 60

In reply to post #311863

Hi Runthejoules
I have an ISA with £IG. and their dealing charges are cheaper than HL at around £5 and I believe their fx charges are lower. However they charge £100 for corporate actions. So I prefer Hargreaves Lansdown (LON:HL.) if I want to attend AGM's. Incredibly I have found international stocks in the past to be tradeable in HL but not IG. Did you know you can alter the timeout settings on the HL site in account settings?

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cig 7th Feb '18 46 of 60

In reply to post #311778

Increased taxes do mechanically increase corporate revenue though, as the government spends them on services, salaries or benefits to people who in turn buy more stuff.

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runthejoules 7th Feb '18 47 of 60

In reply to post #312068

Hi Jules2k6, thanks for your reply - I will alter those settings now! Been with them about six years and not realised... by corporate actions, does that include dividends / special dividends or just stock splits or m&a? I'm not rich enough to pay £100 for a dividend!

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runthejoules 7th Feb '18 48 of 60

Can we please just not mention C****n, or we'll never get to talk about stocks...

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tomg23 7th Feb '18 49 of 60

In reply to post #311848

I find Minervini trys to predict a sell off about once a month after his risk model flashes sell, when nothing happens he adds about 10 stocks to his buy alert list. It was only a matter of time until he called one correctly

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jules2k6 7th Feb '18 50 of 60

In reply to post #312083

Hi rRunthejoules IG Group (LON:IGG) 's charges can be found here
They don't charge for normal dividends but do if you want to go to an agm or excercise your vote.

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doublelutz 7th Feb '18 51 of 60

In reply to post #312013

But would a UK business have replicated Starbucks? Maybe. After all we do have Costa Coffee but Starbucks was one of the first to develop coffee shops on this scale. If we were looking at someone like, say, Amazon then I don't think they would be replicated by a UK company.

A bit pedantic of me but a company does not pay a 5% dividend tax. It is 7.5% paid by individual basic rate UK taxpayers not by the company. Dividends are ignored in calculating the 19% CT. I don't know whether "AND all of the relevant UK taxes" refers to some other tax of which I am not aware. In the past UK companies have done similar things although obviously more difficult now.

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jsatchwill1 7th Feb '18 52 of 60

In reply to post #312103

Brings to mind the saying, "If you're going to forecast, forecast often"

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sharw 7th Feb '18 53 of 60

In reply to post #312058

If he thought it was you he must be taking the same stuff as the person who posted:

"I'm so pissed off with myself. I was sure this was a 1987-style situation, with a sharp correction due. Loaded up on Dow shorts a while ago, then got too cocky & reversed them to longs last night. Threw away £250k today :-( Idiot!!! "

("last night" having been spent in Amsterdam).

No names, no pack-drill.

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davetparkes 8th Feb '18 54 of 60

In reply to post #311973

re Gattaca (LON:GATC) - i usually avoid companies with silly names - eg globo ..

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xcity 8th Feb '18 55 of 60

In reply to post #312158

"Loaded up on Dow shorts a while ago, then got too cocky & reversed them to longs last night. Threw away £250k today"

Sounds like a portaholic

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xcity 8th Feb '18 56 of 60

Re Gattaca (LON:GATC) I can't help but be concerned about the size of the debtors. Banks may be happy to finance it, but it leaves them very vulnerable to payment delays and customers going bust. Unless they are all insured. Very big tail, very small dog. With Carillion they said they were mostly insured, but not all. Some managements I would trust to be on top of risks, but can't do that here.

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Carey Blunt 8th Feb '18 57 of 60

Glad my challenge saved you some money Paul. It perhaps goes some way to pay you back for all the money you have saved and made for me since I became a subscriber to Stockopedia.
I like the Investing is a team sport mantra!

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Carey Blunt 8th Feb '18 58 of 60

Glad my challenge saved you some money Paul. It perhaps goes some way to pay you back for all the money you have saved and made for me since I became a subscriber to Stockopedia.
I like the Investing is a team sport mantra!

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brownrigg 8th Feb '18 59 of 60

Gattaca. I see the COO Keith Lucas sold shares at 270p on 15 January and a trading statement was issued about three weeks later. This stinks - is there any sanction?

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rmillaree 8th Feb '18 60 of 60

In reply to post #312123

"But would a UK business have replicated Starbucks? Maybe. After all we do have Costa Coffee but Starbucks was one of the first to develop coffee shops on this scale. If we were looking at someone like, say, Amazon then I don't think they would be replicated by a UK company."

i guess my point here is that all we really need is a genuine business paying the proper corp tax in the uk on the "real"profits made - it may be a pipe dream but the "the government" should be able to sort this out and they have chosen not to - thats their fault. IMHO its a vastly unfair situation for a one person company or small close company chain (or larger uk chain even) competing and paying the 29%-25% tax on their profits and seeing starbucks paying nowt. I am well aware the company doesn't pay the 7.5% dividend tax per se but if the profits are distributed by a uk company to owner shareholder managers there often will be approx 5% paid on top (by the individuals) that would not be paid where funds are extracted to switzerland to pay for the mighty fine coffee that that country exports.

Its exactly the same situation for other similar things like a retailer who had to compete with no vat jersey sellers of cd's and now no vat china based sellers of the various nick nacks we all love to buy off ebay and amazon.

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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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