The Weekend Rebel Review 20th April 2024

Small is beautiful again

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.

It has been a difficult week for the market, opening down on Monday from the Iranian strike on Israel and ending the week on Israel’s retaliation.  It is very easy to get jumpy on these occasions. I’ve lived through many issues like this when I look back.  Of the ones that really stick in the mind, the attack on Iraq after they attacked Kuwait in 1990 was one incident, then we had 9/11, followed by Bush and Blairs war on WMDs.  In between all of those there was the Foot and Mouth outbreak, Bird Flu, Swine Flu, London Terror attacks and we had Covid and Ukraine and probably others too – the secret is to remember, markets bounce back.  It’s easy to sell out but in my experience it’s not often you get out right near the top and rare you buy back in with enough aggression to have saved any meaningful amount over staying invested. I sold out early on 911, the US was closed for a week and the yanks were saying they thought the punters would buy the market to be patriotic, when the market re-opened. Yeah, right. I’ve never known many be patriotic with their life savings, people invest all over the world, patriotism rarely comes into it. So I sold as fast as I could. I don’t think by the time I bought back I had saved myself an awful lot, the dealing and spread and getting the timing right is tough.  I sold out less than 5% from the top in Covid. I could see the market just ignoring the news coming out of China about a new virus but the market, which already looked stretched, just plodded on for a week or two before it started to tank. That was fab timing and I sat and watched the market tank while I was all cash, 100% and I just watched.  Then on Lockdown day, the market pretty much bottomed but that was the day my body went nuts and I lost all my sodium and potassium from the GP giving me two drugs that I shouldn’t have been on together.  Intensive care for 4 days then home and laid up in bed for 5 months, I‘m told only one in four come out of intensive care alive with sodium and potassium levels as low as mine, my GP’s had never known anyone with a sodium level as low as mine and live! So I was the daily subject in the practice’s meeting each morning and with just numb finger tips on my right had, I got off very light.  I never started even looking at shares till May and missed the bottom by some way, but even then I doubled the portfolio in little over 6 months.  That was a one off, I’ll never do that again because the fall had been so deep and so sudden, just like the bounce. Unfortunately, many that had decided to hang on through the fall, likely sold in panic near the bottom and missed the bounce too.  It can be hard to buy back in after selling, the fear is you will make a mistake and the market will fall again. It’s easy to say just hang in there but real life is different when you see your wealth diminishing. I’d say the best approach on average is to hang in there with half your portfolio and trim half on the way down in bits and average out if you are scared. Likewise average back in on the way up with the bounce. That way you don’t do something really big and daft right at the worst time.

With this pull back in the US, 5k looked a decent support considering how high the S&P has gone but that got breached on Friday. Looking for bounce points like these lines or as strike of the 100 or 200 day moving averages is a good idea in my opinion.

I find it important to look for potential bounce points on charts.  Rather than just guess where a stock or index may bounce it’s good to have an idea where the market might be keen to buy.  With stocks you often get volume which gives you a clue to a seller getting rid of a line of stock that ends an overhang of more selling than buying.  With charts for stocks there’s no volume to go by so one good indicator is a previous obvious low.  As humans we look at a chart and say ‘I’d buy if it hits ****’ but we usually base that on an obvious previous stand out point on a chart, or sometimes a round number like £2 say. I mark up points where I think a chart will likely bounce. It might be round numbers, it might be previous lows.  I know I’ll likely be wrong especially trying to gauge small falls like we have had here but at least you are basing a potential buy point with reasoning, rather than randomly saying ‘I’ll buy here’ and crossing your fingers.  The RSI is the other indicator I watch too.  That’s the red line at the bottom of the charts – when it goes oversold, through the white line, I get ready to aggressively buy.  More recently I have been using Weis Wave to gauge buying and selling points. Again, it isn’t full proof but it gives me another indicator to time my trades better. At the end of the day, nobody knows the future and cannot tell you when a market or stock will bounce.  You can look back at history though, and that’s the best guide to the future. An extra 1 or 2 percent here and there compounds over time and gives you an edge.

Obviously, if this thing escalates then we may go lower but with Israel firing off one missile, they seem to be trying to dial it down. It’s always worth remembering the old mantra too – ‘buy on the first sound of gunfire’. The natural thing to do is to want to panic when a war or an incidents kicks off but really, taking advantage of a sell off as people panic, and buying on the first sound of gunfire is an age old mantra that goes back to the Napolionic wars I believe.  It is basically saying, when you look back you’ll see it would likely to have been better buying now than selling. I have stayed fully invested and plan to just increase my favourite holdings if they dip with the limited cash I have or I’ll close a trade or two to get the cash to increase my long termers.  To be honest, who is panicking anyway?  Since this kicked off the FTSE Small Cap Index has come off just 1.5% and Aim has hardly given back anything – which screams to me that money is heading down the food chain here.

The positive thing to all of this is that there’s cash on the side and in mid to large caps, wanting to get into small caps in my opinion.  Look at Aim on Friday, right up there and out-performing the FTSE250.  It has been like this for over a week or two now, small cap indexes and Aim have been the best performers and that hasn’t happened for well over 2 years.  I reduced my RR. and MKS a week or so ago and increased my small cap favourites because this has been starting to happen. More remarkably it is happening as the world becomes more uncertain and you would expect risk off.

The Drewry Shipping Container Index shows further falls helping ease import/export costs even more.

The VIX has  spiked to 22 – that now makes a nice line of peaks in a trend and I’ll stick my neck out and say unless there is an escalation, that’s the high for the VIX here:

Fear/Greed is right round into Fear at 32, that’s a much more comfortable level to be buying shares imo.

All in all I’m pretty cool and looking forward to a positive market again here soon.

Stocks

There was little stock news on Monday, it seems like most company directors only engage on a 3 day week basis, Tuesday to Thursday these days, along with brokers and analysts.  Tuesday was a different kettle of fish.  Ashtead Technology, AT., one of my larger holdings, posted results for the year and stunning they were.  Here are the headline numbers but you can read the full RNS yourself:

These results beat expectations but on a day that was laced with fear after the S&P sold off on Iran/Israel fears, traders just took profit where they had big profits and there were not many places with big profits like AT. Selling your winners is rarely a smart move just because the market has a bad day in my opinion, and with just 1 month of the Ace Winches acquisition in these results so 11 months more coming from them in 2024 which should amount to a further £40m sales. Couple that with the ‘low double digit’ organic sales the company is guiding and you can see they are well up to hit the £162m sales forecast for this year.  With adjusted eps up 73% this year on top of 50% last year, this in a high growth business, hence the share price chart, up 300% in 30 months or so.  33.4p adjusted eps was well above the 29.7p eps forecast and with 10%+ organic growth and another circa £40m sales to come from Ace Winches this year the current eps forecasts of 37p for this year looks more than do-able by some way seeing Ace did EBITA of £10.0m last year, about 30% of what Ashtead  achieved, and that’s without the cross-selling opportunities they referred to. A lack of liquidity can be an opportunity, AT. was off 16% Tuesday morning, my bet is it's back to the highs before long, and some, having already bounced somewhat in the past couple of days.  The company had a results webcast yesterday, well worth watching imo.

https://www.investormeetcompany.com/meetings/investor-presentation-611

BERENBERG RAISES ASHTEAD TECHNOLOGY PRICE TARGET TO 775 (700) PENCE - 'BUY'

RBC RAISES ASHTEAD TECHNOLOGY PRICE TARGET TO 780 (695) PENCE - 'OUTPERFORM'

Of the other shares of note on Tuesday, Superdry, SDRY said it was being taken private, losing 24% on the day – good riddance.  I have been sick of hearing Julian Dunkerton’s bluster.  I maintain you can’t sell the same style clothes to 20 year olds and 50 year olds – one size doesn’t fit all, nor does one style.  Dr Martens came out with a trading update that said US wholesale was down and they had a PBT headwind in the region of £25m.  There’s a further £15m in costs to retain and incentive talent that would repeat next year.  They have large warehouse costs to hold excess inventories.  CEO Kenny Wilson, who I thought came across well in their presentation a couple of years ago and seemed a humble guy, who gave up the option to become a pro footballer (ok, Scottish footballer but I’m not going to upset Scottish readers by making cheap jokes about them always losing to England 😊 ) is stepping down.  It’s going to be a while till they recover and as soon as they do look on the up they’ll likely get taken over on the cheap by a bigger fashion/designer entity in my opinion.

Wednesday was busy for news, though not much to set the market alight.  Liontrust, LIO, which I hold, had their trading update.  Outflows of over £6b through the year including £1.6bn in the last Q didn’t sound great by any shot.  But recent trading was said to be improving, With small caps looking increasingly like the place to be and interest rates looking likely to come down by the summer, investors seem to be looking through the poor news and out to future prospects and the 11% yield on offer. The shares rallied 8% and are testing the recent highs, though still 70% off their high. 

Wednesday was quiet but I did start buying Gooch & Housego, GHH

I have been doing a bit of research regarding Photonic Technology (as you do)  and it seems there is expected strong demand going forward in the defence sector. Powerful light beams or lasers basically.  I’m not that technically minded but I do know GHH are one of, if not the best UK play in this arena and I held them during the tech boom and several times after too. I stumbled across an article on Linked In about the compound annual growth rate over the next 6 years which got me interested. Photonics is expected to see 8% CAGR and it is a huge market, roughly $1Trillion in 2030 this article said, elsewhere I have seen near $2Trillion.  They are used in defence, telecoms and medical, all three sectors having strong demand.  Post Ukraine, there has been a big inventory build up which has affected most electronic based businesses.  Increasingly I am hearing co’s say inventories are starting to deplete and so inventory rebuild is likely soon, albeit likely to be gradual. It does sound like it is happening though, listening to Luceco and others.  GHH trade on a PE of 18.9 falling to 13.9.  I believe these would be double this if they were in the US and that must also make them a bid target.  I have noticed recently that every time they put out mildly disappointing news, the shares dip and get bought quickly. In their recent statement they say “destocking slowing, end-market revenue to return to growth year-end”. It also says semiconductor, sub-sea cable, aerospace trading remains strong”.  I feel if inventory destocking picks up, as the whole global market seems to be firming, then these could have great growth.  Short of cash I had to sell my recent purchase of DWL once it went xd on Thursday to pay for them, GHH looks capable of one bagging in a year while DWL didn’t in my opinion. It may need a little patience and if something screamingly exciting showed up then like DWL, I might be tempted to move the cash there but with small caps starting to get attention, this might be one to gain positive sentiment soon on the back of any positive news from the electronics market.

No bowl on the chart, not all recoveries have them – directors have been buying recently tho and the stock is way off its highs.  In the past they have done 44p eps on sales 10% lower than they are forecast to do this year, and no dilution, so if they can return to historic margins….

Thursday was a pretty quiet day. Hipgnosis Song Fund, that well known spelling mistake, got a bid to make it yet another stock likely to disappear from the UK market. Along with CTO, Tommy Clarke also getting a bid this week, more and more small caps are getting taken out and leaving the UK pond depleted.

And so with a lot of fear in the market I just spent Friday adding to a few existing positions.  The highlight of the market was watching W7L hit all time highs on a really crumby day – with results approaching on Wednesday.  Should be interesting. They have said they will beat again.  Register now for their webcast on the 30^th April:

https://www.sharesoc.org/events/sharesoc-webinar-with-warpaint-london-plc-w7l30-april-2024/

Rolls Royce. RR.  Jefferies said this 19 March:

JEFFERIES RAISES ROLLS-ROYCE PRICE TARGET TO 470 (390) PENCE - 'BUY'.

Last night they said this:

JEFFERIES RAISES ROLLS-ROYCE PRICE TARGET TO 530 (470) PENCE - 'BUY'

So a 15% upgrade one month after the last upgrade.

So, GHH is where the money went this week along with adding to existing holdings. A bit quiet for stocks this week, more a week about the macro.  Remember I’m not tipping anything, do your own research, his is just a diary of my week for amusement only and I’m talking about shares I own so I am biased.

Have a Marathon of a weekend.

Rebel