Rerbel Weekend Review 13/4/2024 FTSE break out

Small Caps lead the way

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

While we all wait for an end to this relentless rain, the good news is the market feels a little sunnier at last.  We kicked off with a good start to the new financial year on Monday with a 1% rise on the FTSE250 but hesitation crept in at the close and by Tuesday investors positioned for the US CPI data on Weds – which disappointed. The market was also spooked a bit by Fed speak regarding interest rates. I always pay close attention to the UK small cap indexes, they tell you a lot.  Aim 50, Aim100 and Aim All Share were the best performing indexes in Europe’s main indexes on Monday, something I haven’t seen in a couple of years.  On Tuesday they repeated their strength and on Weds they were up there and firm again.  On Wednesday the FTSE Small Cap Index broke out and went positive, year to date, for the first time.

The Small Cap index, in doing this, looks uber positive imo, now positive for the year and a break out, all in one.  More interestingly, the Aim indexes have led the UK all this week, out-performing the FTSE100 and 250 – that hasn’t happened in at least 2 years or more from my memory. Aim All Share has broken through resistance as has Aim 100 and there’s a small bowly formation:

There definitely feels like a positive change towards small caps. The world container index has continued to fall since the Red Sea spike, coming off nearly 30% from the high recently, a positive for importers and exporters.

That’s helping inflation.  We had our March energy bill this week, it was down 40% on the previous month and it’s April when the recent cut kicks in.  If that’s being reflected in most people’s bills then they will have a lot more cash this month in all likelihood, along with a rise in the Living Wage by £1.02 an hour, 8.8% rises in pensions and a cut in NIS, plus rises in other benefits. I also saw this from economist Julian Jessup this week re inflation too:

All in all, there’s a lot of downward pressure on inflation here and a big boost to the average pocket which likely means quite a feel good factor for the consumer in the coming months – you could be forgiven for thinking there’s an election coming 😊

The Russell 2000 and the Dow Transport along with the S&P have given back a bit but the US really is due a pull back. There’s a lot of things to worry about in the market, especially with this week seeing more fear creep in from a possible retaliation from Iran. A 5% drop from the high on the S&P wouldn’t be alarming imo.  5000 would be a very natural bounce point, in fact I think the market wants to go there, simply because we haven’t had a pull back of note on the S&P for a while, markets need pull backs at times, it allows new money in. I suspect keen punters might not let it go quite that low unless the middle east escalates. The VIX has spiked through the 18 resistance I mentioned last week so we’ve got fear in the mkt now which is good for buying imo, I suspect the Vix may test 22-23. with Fear/Gread now below neutral at 48.

Next week we get UK inflation data on Weds – that has scope to move our market up strongly if the numbers suggest rate cuts are close. The FTSE 100 breached the all time closing high on Friday, hitting 8045, nearly 20 points higher than the previous closing high but 3 points short of the all time intraday high. It gave a little back into the close but it is really heartening that as the US sold off, the UK never plunged too. The main catalyst for this week’s strength was UK data which showed Manufacturing and Industrial production up 1%+ month on month. The UK is growing stronger than any of the main European economies and set to be the third fastest growing major economy over the next 4 years according to the IMF.

Onto stocks. I trimmed M&S and RR. early this week. I’ve had fab returns from these two, one bagging and more M&S in just over a year and RR. in 9 months. I usually like to trim my holdings on a double, if you take your initial investment out when one bagged and more then you’re playing with pure profit in that stock then, but it’s only worth doing if you can find better performers going forward.  Fortunately, there seems to be huge potential in many places in this market among the small to mid caps now, that were not there 12 to 18 months ago, and sentiment has improved.  I’m looking for stocks that can one-bag in a year, which are likely to show up in the mid-small cap sectors.  RR. and MKS may be able to double in a year but the likelihood of them doing that is lower than likely from a small to mid caps.

On Tuesday, Warpaint London, W7L put out an unscheduled trading statement two weeks before results are due. They said this year will be further ahead, even having told the market several times with upgrades over the past year.  They also said Q1 this year was up 30% on last year.  The results are in two weeks time.  They also said they had built up stock for and expected high demand in H2.  Brokers say their estimates must be 10% below where they should be at least, but will do a full upgrade come the results.  I hold these and increased my holding this week. They look way too cheap, eps for the coming year should be more like 25-30p if Q1 is 30% up on last year  - operational gearing suggests that would be 50% up or more as far as profit goes imo as they say margins have remained strong. These have done 100%+ eps growth 2 years running and you wouldn’t bet against another year on this one imo.  If they do 50% eps growth this year the fwd PE is 14. A 3% yield looks likely too and they have net cash of £7.5m. This is one Aim stock that’s helped the Aim100 and it just look way too cheap, I like increasing my winners.

Wednesday saw a strong start to the day with the FTSE just 30 points from an all time high, only for it to be ruined by the reaction to the US inflation data that came in a tad higher than expected.  The UK sold off and the FTSE250 ended the day flat.  Had we had a better inflation number the FTSE would have flown to a new high imo.  All of this positive data in the UK has started creating an appetite for stock and with UK inflation data due next week, and likely to be good, I don’t think any sell off will be as strong in the UK as it may be in the US, if we do have a sell off.  So I am pretty cool, still fully invested and looking forward to a lot more stunning statements ahead and more of those 20% rallies. Tesco posted bumper profits on Wednesday but in the small cap arena THG was perhaps the one that got the attention.  Nearly 4 years on from the float and 90% down from the  float, this should be a recovery play chart to watch, but is it?  I can’t see this share doing anything till Matt Moulding has gone. He sings a great tune but it’s like watching Stars in Their Eyes – ‘tonight Mathew, I’m going to be Richard Branson’ …………..no you’re not! Bad boards don’t become good boards imo.  The market wasn’t impressed and that’s what matters – it has gone nowhere again.  XP Power. XPP also had a trading update and for once it never got sold off on it.  There was a less negative tone to the last two statements that I found encouraging.  I don’t know if this was the catalyst but LUCE saw a very strong rally late Friday, even having gone XD on Thursday for 3.2p a share, it closed the week on the cusp of a break out. If you add back the divi this week the stock hit a new two year high.

Thursday saw a couple of near 20% screamers on statements from LOK and POLR, both posting updates which positively surprised the market.  I’ve kept saying this would happen and so it does on nearly a daily basis where stocks have been grossly under valued.  It’s worth paying attention to these bounces, even if you think they have got away, when they are up 15-20%.  Stuff like CMCX and FDEV and others have had initial rallies like this on trading updates but gone on to near one-bag or more in short order.  20% seems like a psychological level which often a stock has trouble breaching in a day, but if you do your research fast and check the valuation and what’s behind the statement you can see that some stocks are still fundamentally way under valued when sentiment is so negative, even after rallies like this.  In a new bull market you get a lot of FOMO and you get a lot of genuine value but you also get a lot of hype too.  Doing research and distinguishing what is what is the way to make good gains in my opinion. Often, PE’s may look up with events but you have to look at the hidden stuff like cash generation, balance sheet assets and a range of things like wording nuances even.  A lot of bid targets are likely to get more urgent attention too when the shares are rallying and while the indexes are telling the casual observer ‘there’s nothing to see here’, on an individual stock basis there are some thumping movers for good stock-pickers.  Big moves on a stock at the open often signal two things, one is traders piling in to scalp the stock on momentum.  The second reason is that investors often see something that’s a game changer.  Many one baggers start with a big initial rise but it often takes weeks or months for a stock to properly re-rate as the news gets around. It’s always worth researching the big bouncers even if they are up 20% or more on the day and not just thinking ‘I’ve missed it’ – that bounce alone often tells you there’s something interesting to be priced in in my opinion.  I’m not afraid to buy even after a big rally if I’m convinced there’s far more to come, in fact buying after a big rally is often somewhat reassuring in many ways, it tells me there’s some other investors around, that see what I see.

Friday was a typical Friday, in fact Mondays are becoming the same, where many directors are working from home, knowing that brokers and analysts are also often working from home. This means much of the news is just desk-tidying stuff and not price-moving in the main, transaction in own share notices and other dull stuff so it’s mainly Tuesday to Thursday where I expect the real news condensed into three days, when most important news surfaces.

The end of the week did see a strong rally in BMY – I’m not sure what triggered it, oversold, or perhaps another trading update soon if sales are really on a gallop.  AVON also hit a new recent high this week.

I have been buying Dowlais, DWL this week.   In March 2023, Melrose Industries announced that it would demerge GKN Automotive and GKN Powder Metallurgy from GKN as Dowlais Group. It has had a very under-whelming performance since, having missed expectation twice.  The shares have nearly halved since float.  Capital Group have been selling down and seem to have trashed the share price and at the last RNS they had 8.4%.  This week huge volume has gone through and looks like Capital are out or nearly out after 3-5% of the co shares were traded on several days.  Directors have been buying heavily.  They are trading on a PE of 5.5.  They are doing a 50m (5%) share buy back.  The yield is 5% rising to 6.2% and that will be even higher with fewer shares in circulation.  The stock goes XD on the 18^th April next week for 2.8p final divi.  These are a FTSE250 stock that look to have been shunned while Capital have been selling down.  The director buying has been relentless and strong for the past year so they are showing good confidence. I don’t know if it has the one-bagger in 12 months status to hold for 12 months but it’s a diversified place for potential good gains until a better one bagger candidate turns up for me.

I have to thank Paul Hill for highlighting them on the interview he did with me last Friday on VOX.  The whole interview is here along with a chat on a number of stocks I hold.

Do your research, this isn’t a tip, just my diary.

CMC Markets, CMCX has carried on up and looks a stunning chart and I’m sure many will be tempted to scalp their gains but I’m holding for more. Last weekend on Twitter I pointed out broker consensus forecast had risen nice and then yesterday I saw it has risen again.  Here are the 3 consensus charts off of Stocko and their increases:

They have literally gone from 2.46p in Jan to 12.6p at the start of April to 14.2p today, which is huge momentum.  Results are on June 10^th.  Forecasts for 2025 is 17.1p which just looks way too low as they said 2025 would be the year they benefit from the £20m cost savings identified and new products like SIPPs together with an increased focus on B2B.  They are net cash and slated to pay 7p divi this year but the  scope is higher with this momentum.  The operational gearing is driving earnings up fast and the fwd PE is only 14 on the current forecasts still which seem very conservative. I’m holding all mine and have added this week.  In 2020 they were doing 29.9p eps on sales 30% lower than forecast this year, and there are less shares around now.  It’s little surprise these have risen nearly 150% in 3 months, without a pull back and I think they could still rally strongly from here imo

Apart from the above and a few odd trades, I’ve not done much else, aside from increasing FDEV and SYNT.  While there was little news on Friday, Synthomer ‘s week ended well when they announced refinancing of some of their debt, which should mean covenant tests in 2025 is no longer an issue I think.  One thing I did notice is Sharepad’s forecasts are a lot higher than Stocko:

I have seen these rise pretty astronomically in the past on recovering markets when they were known as Yule Catto. If this years forecasts are conservative I think 2025 could see big upgrades, that’s what I’m banking on, that fwd PE of 8.1 being too conservative by far as recovery picks up.

As I said last week, the Synthomer webcast is worth watching, and the last 10 mins of the Q&A in particular. That’s been the week for me.  I’m still very bullish and accept the middle east may create a bit of market jitters but there is fundamental real value in this market imo, any fear may provide great buying opportunities.  UK inflation data is out on Wednesday and could be a big catalyst for a rally in the numbers are positive.

Ashtead Technology, AT. and Liontrust, LIO report this week, which I’m looking forward to.

Remember, this is just my own actions after my own research, don’t follow me blindly, I could easily be wrong. Do your own research and know your own risk/reward levels/safety.

Have a great weekend and hopefully enjoy some sun if it shows.

Rebel