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18 November 2023 By Maynard Paton
Today’s rough market for small-cap shares could be the exact time to hunt for your next great portfolio winner.
Take Judges Scientific, the £540 million group of scientific instrument manufacturers, which joined AIM at 95p at the bottom of the dotcom crash during early 2003:
These shares topped £100 earlier this year to give initial shareholders a staggering 100-bagger return. What can investors learn from this astonishing performer?
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14 October 2023 By Maynard Paton
Whisper it, but a few UK small-caps are still progressing well and maintaining resilient share prices in this difficult market.
Fonix Mobile is a good example. Recent full-year results from this £206 million business showed revenue up 21%, earnings up 10% and the dividend up 12%, which ensured the shares remain within touching distance of their all-time high:
Fonix currently appears on an old SharePad screen of mine that seeks respectable companies that have grown without acquisition. I have always believed the very best companies are those that can expand ‘organically’ and do not rely on purchasing other businesses for higher profit.
The screen’s filter criteria are:
Positive five-year turnover and operating profit growth;
A minimum of 15% for both return on equity (ROE) and operating margin;
Net bank borrowing of no more than zero (i.e. a net cash position), and;
I selected Fonix as it had exhibited the strongest revenue growth after Alpha Group — which broke its organic-growth history by announcing an acquisition last month — and VAALCO Energy — an American oil explorer that I had no desire to review.
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22 September 2023 By Maynard Paton
“Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworsifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximised.”
Market legend Peter Lynch never liked great companies that ‘diworsified’ into less appealing sectors in the quest for growth.
His book One Up On Wall Street recounted how many famous US stocks blew big money on foolish acquisitions to ensure losses were maximised during the 1980s.
Diworsification sadly remains a popular management strategy, and UK small-caps have not been immune from ambitious boardrooms undertaking low-quality acquisitions and trying to prove Mr Lynch wrong.
NCC is a prime example. The IT group was once dominated by a terrific subsidiary, but lots of acquisitions created a series of mishaps and the shares are now back to where they were twelve years ago:
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12 August 2023 By Maynard Paton
I have once again revisited a SharePad screen that applies two ratios favoured by ‘quality’ investors — operating margin and return on equity (ROE).
The exact criteria I re-used were:
An operating margin (latest and 10-year average) of 20% or more, and;
An ROE (latest and 10-year average) of 20% or more.
Any business with a persistent margin and ROE of at least 20% could be very special.
To narrow the field down further, I also sought companies that carried net cash (i.e. net borrowings excluding IFRS 16 finance leases of less than zero):
I selected Record because it was among the better share-price performers of the last twelve months that I had not already studied for SharePad. Let’s take a closer look.
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15 July 2023 By Maynard Paton
I love ‘owner managers’ — company bosses with significant shareholdings who live and breathe their business and want to build wealth for the long haul.
Typically entrepreneurs, the owner-managers who lead quoted companies do seem to think and act differently to standard chief executives.
A hefty investment complemented perhaps by substantial dividends should certainly focus the mind on fundamental business matters…
…versus more common executive considerations such as bonuses, LTIPs, adjusted earnings and career progression.
But seeking owner-managers is not a foolproof way to identify your next great multi-bagger. Hotel Chocolat provides a useful example of what can go wrong even with devoted founders in charge.
The upmarket chocolate retailer floated at 148p during 2016 and its shares reached 530p the other year…
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15 June 2023 By Maynard Paton
Today I have revisited a SharePad screen that applies two ratios favoured by ‘quality’ investors — operating margin and return on equity (ROE).
The exact criteria I re-used were:
An operating margin (latest and 10-year average) of 20% or more, and;
An ROE (latest and 10-year average) of 20% or more.
Any business with a margin and ROE of at least 20% is probably quite special.
To narrow the field down further, I also sought companies that carried net cash (i.e. net borrowings excluding IFRS 16 finance leases of less than zero):
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14 May 2023 By Maynard Paton
Let me start by confessing this article covers pension deficits.
What follows is therefore not thrilling and does require some concentration. But please stick with me, especially if you have ever fallen victim to a ‘value trap’.
You see, an onerous pension scheme is a common reason why companies trade on permanently low ratings. The market essentially believes too much of their future profits will have to plug a retirement ‘black hole’ instead of being paid out as dividends.
A good example is Reach, the newspaper publisher that used to be known as Trinity Mirror.
An update the other week confirmed a £95m profit was expected for 2023:
“Profit expectations for FY23 remain in-line with market consensus.(1) … (1) Market expectations compiled by the company are an average of analyst published forecasts – consensus adjusted operating profit for FY23 is £95.3m (range from £93.7m to £96.5m)”
…and yet the market cap is £265 million and the 83p shares currently trade on a P/E of approximately 3:
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18 March 2023 By Maynard Paton
You can become a better investor by occasionally visiting the stock-market graveyard.
One company that now seems destined for the cemetery is WANdisco, the software developer that the other week suddenly warned of “significant, sophisticated and potentially fraudulent irregularities“.
The shares have been suspended while independent investigators work out what exactly has occurred. Remarks including “significant going concern issues” make for grim reading:
“The identification of these irregularities will significantly impact the Company’s cash position and lead to a material uncertainty regarding its overall financial position and significant going concern issues. The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations.“
Read a set of company results, and chances are you will spot a reference to Trustpilot. Examples of quoted businesses mentioning the popular review website include:
AJ Bell:“Our operational performance indicators have shown excellent levels of customer service as demonstrated by our high 4.5-star Trustpilot score.“
AO World: “Over 350,000 Trustpilot ratings, averaging an “Excellent” 4.6/5 stars.“
Big Yellow: “We have over 3,200 reviews from the independent review site TrustPilot. These reviews average a 4.7 out of 5-star rating, labelled as “Excellent” on the TrustPilot ratings scale.”
Procook: “We are pleased to have retained our excellent-rated Trustpilot score of 4.8.“
Redde Northgate: “Customer satisfaction is the cornerstone of our business success and the ‘excellent’ satisfaction scores achieved across our businesses from Trustpilot.“
Redrow: “We continue to be rated as ‘excellent’ on Trustpilot.“
ScS Group: “Improved Trustpilot rating to the maximum 5 stars, maintaining our ‘Excellent’ rating with over 370,000 reviews.”
Travis Perkins: “The experience with Toolstation remains best-in-class with the business achieving a 4.6-star rating on Trustpilot.“
With so many quoted companies trumpeting their Trustpilot reviews, is Trustpilot itself worthy of a 5-star investment rating?
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20 October 2022 By Maynard Paton
Difficult market conditions have led to depressed ratings for many asset-flush shares.
Hence a new screen to pinpoint companies offering cash-rich balance sheets and market caps below their book value. I have attempted to avoid ‘value traps’ by demanding the shares pay a dividend and offer a history of trading above book value.
The exact filter criteria I employed for this search were:
A price to net tangible assets of no more than 1;
A dividend being paid during the most recent year;
A 10-year average price to net tangible assets of at least 1;
Net borrowings less total leases of no more than 0 (i.e. a net cash position excluding IFRS 16 lease obligations), and;
A share price denominated in pounds sterling.
I applied the screen the other day and SharePad returned 22 matches:
I selected Redrow from the five house builders at the top of the list because the group’s recent results included very clear guidance:
Redrow’s own projections put its 400p shares on a P/E of approximately 4 and a yield of at least 8%
Combined with a net asset value of 554p per share that gives a price to book of 0.72, the FTSE 250 constituent is very much trading at the ‘deep value’ end of the market spectrum.
A trio of upbeat trading statements caught the market’s attention this summer.
The first occurred during June and referred to “strong margin improvements“:
“29 June: Shoe Zone is pleased to announce that since the publication of its interim results in May, the business has been trading well andhas also seen strong margin improvements and cost savings, in particular as a result of rent reductions and good supply chain management, which are expected to continue into Q4 of the Company’s financial year for the 52 weeks to 2 October 2022″.
The second update followed in July, and revealed “stronger than expected” trading:
“26 July: Shoe Zone is pleased to announce that since the publication of its trading update on 29 June 2022, trading has been stronger than expected due to higher than expected demand for summer products, particularly in the last two weeks. The Company has also continued to experience margin improvements as a result of good supply chain and cost management.”
And the third update occurred last month, and confirmed trading had “continued to exceed expectations“:
“31 August: Shoe Zone is pleased to announce that since the publication of its trading update on 26 July 2022, trading has continued to exceed expectations due to continued strong demand for summer and back-to-school products throughout August. The Company also continues to benefit from the margin improvements as outlined in recent trading updates.”
The remarkable run of RNSs also revealed the group lifting its current-year profit expectations from “not less than £8.5 million” to “not less than £10.5 million“.
The profit upgrades and share-price surge will of course be welcomed by shareholders, although the company’s longer-term performance could mean the positive summer may not be a persistent phenomenon.
The shares joined AIM at 160p during 2014 and, eight years later, the price stands at… 160p:
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