Weekend Rebel Review Jan 20th, 2024

The bulls are back in town – Breakout on the S&P!

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. Please do your own research, know your own risk profile, understand what you are buying and make your own educated decision to buy and sell.

Well as we go through yet another week on the market, things are getting interesting. The S&P fell back to test the first line I pointed out in last weeks review but it hasn’t fallen through, in fact Friday night it has broken out to the new all-time high I’ve been expecting. A new all time high after 2 years is a bullish a sign as we have had in that time – and time for the markets to crank up. There are fewer more bullish signals imo.

Meanwhile UK CPI data came out on Weds and slightly disappointed. This is CPI over 8 years. You can see early 2012 and Ukraine kicking off and inflation taking off in early 2022. You might notice this has big falls then a few months sort of consolidation. After Wednesday’s tick up it is likely to have a bigger fall next month imo. I watch inflation’s trend over as few months rather than take one month’s number as a call to action:

This is monthly PPI (Producer Price Index) output. You can see early 2012 and Ukraine kicking off PPI output costs too (prices producers sell to business at). This topped just before CPI.  Numbers are now negative and should go towards lower CP going fwd.

All in all, I am pretty happy with how markets are moving although it seems the UK gets bigger wallops than the US ever does.  It is starting to show though now, we are seeing stocks frequently rally 20% on trading updates and the bids keep coming, with WIN attracting a bid at a 52% premium on Friday.  All in all the market has been pretty firm if not advancing. The one fly in the ointment here is retail.  A lot are announcing headwinds and the retail numbers released Friday show Retail sales fell 3.2% in December from November, coming in well below market consensus. A monthly decline of 0.5% was forecast.  I’m pretty much out of retail now after Thursdays debacle with WOSG (more below) and my only retail exposure being M&S which I reduced further this week. After the poor retail numbers recently, I want to see that priced into retail before buying the sector. April sees pensioners get a 10% rise in pensions when inflation will be way lower, this may boost retail in May and going fwd.  We will likely have a tax give-away budget then too, which may help retail from that point.  Until then, I am concentrating my funds elsewhere. If retail stays weak, that may mean rate cuts are hastened.

The biggest caution I have at this moment is the VIX.  That bowl on the right is now looking a bit more worrisome – not that I would sell up here but I’d be a bit cautious until this broke down. However, with the S&P breaking out at the same time, it’s hard to see why the bowl on the VIX should go much higher. It may well have been driven by the S&P testing the highs and punters hedging, but tat may also mean a lot of shorters’ stops getting hit here too.

Little surprise the VIX has risen with Israel, Yemen, Pakistan and Iran all disturbing the commercial peace. Investors just have to climb this wall of worry, what with the inflation misses here and in the US as well.  

So with the US so strong, the DAX and CAC recently hitting new highs, then the FTSE looks grossly under-valued imo, more than 20% off its high.  The recent takeover action can only increase if overseas stocks continue to out-pace UK stocks.  Stocks here will get taken over and just move to foreign ownership and re-rate abroad – easy pickings.

Onto the best bit - stocks:

AVON: having mentioned last weekend how these had been firming sharply, Monday duly revealed the reason why, the company announced a nice contract win. The contract is for rebreathers, these are devices to allow divers to re-use their exhaled air to breathe longer under water.  A contract with the German Navy for ‘multi-million Euros’ which I took to mean 3m Euros or more.  On Tuesday, The Times put out a ‘Buy’ recommendation and suggested it is for ‘double digit million Euros’ which I take to be 10m Euros or more.  This is good because rebreathers have been in development for 10 years and Jos Sclater, CEO, was saying at the last capital day that they need to start selling them now.  The Times suggested there could be US orders to come too, possibly.  It is no surprise it was the German Navy ordering them – remember the bombing of the Nord Stream pipelines?  These were believed to be done by Ukrainians from a yacht. I think it has made countries realise how undersea pipeline and telecoms infrastructure are vulnerable to bad actors so possibly more rebreather orders with the German one now in place. Worth looking at these pieces of kit imo: https://www.avon-protection.com/products/mcm100/5230

So, having sold of the armour business last year and now out of the way, we have a company that makes the world’s best helmets, gas masks and rebreathers – sat right in the faces of the big US defence companies. With the balance sheet all cleaned up at the last results, paying a decent divi and well into recovery,  saying ‘come and buy me big boy’.  AVON have their AGM next week, Friday 26^th which usually has a trading update with it, although the trading update may not be till Feb 8^th on the Capital Markets Day. The price has firmed nice though and touched £10 this week before a bit of profit taking. A 400% move up needed to get back to the high.

Tuesday was the update I have been waiting for, CARD. I had already reduced my holding a lot as I have posted here several times. Holding a 30% position in my portfolio was too scary with the share-price action which I had been expecting to race away to 150p+ by now.  It’s difficult to post full summaries on Twitter too, with the short messaging, so this was my thought process.

There was obviously a seller whenever we got to 115p in recent months which seemed to be Teleios but there’s been no RNSs for a while. My first real spook was the lack of November trading update. After several ‘materially ahead’ updates from the company the earnings forecast had doubled. When you have that sort of momentum it doesn’t just stop normally. The rise in postage price never bothered me at all but no trading update when they had regularly done one was strange. Co’s like to tell you good news but it was possible there was corporate stuff going on so they might not be able to. I also heard several people suggest CARD should buy The Works (WRKS)which was something that wouldn’t have pleased me.  CARD had been a great place to be while the market crumbled, With the shares up at 110p or so in December, there couldn’t be many people who bought in the past 2 years that were under water so it was at worst a good place to park cash or a one bagger, depending on their timing.  With the market bouncing in October there has been lots of places to make money so CARD didn’t have the attractions it once had. I was under 10% and with the recent weakness up to the results I reduced to under 5% going into the result. Now the results which in my view were good, and the stock looks cheap, but they were not up to what I expected.  Firstly, the eps was not as high as I had expected, in fact it was flat with last year.  While in-line with last year, H1 eps this year was up 2.5p on last year. This means if the full year eps is flat then H2 eps is down 2.5p on last year, and that’s their Christmas half.  If sales are up too then I assume there has been a drop in margins. If that’s the case then why?  They have higher NI so that might play a part.  Are the margins on gifts a lot lower than the vertically integrated Cards they print for themselves on fab margins? Another issue may be the recently announced £1 an hour rise in the living wage.  With 9400 staff, how many are going to get another £2000 a year?  Proportionately, CARD have a lot of staff, sales per staff is low compared to many businesses but I don’t know how many fall into that band. Further, if you do raise the wage of staff on the living wage then it starts to get close to that of workers further up the scale and differentials need to be increased.  These are issues that only arose since November and the budget and something that has made the investment less attractive.  So at the end of the day, when things change you have to reassess. Brokers have tweaked next years eps up from 13.6p to 13.9p, it’s on a PE of 6.5 – that’s cheap. However, my long-term hold criteria is a stock has to look like it could one bag in a year and CARD no-longer hit the mark for me.  I’m down to a small amount now just to keep them on my screen. The results will be all revealing. If they are still generating loads of cash and paying down debt then based on cashflow they are cheap imo. The margins and what they say about a divi will matter too, so I’ll look out for them at the results.

So onto Thursday and having dodged CARD to most extent, the stock where I put my proceeds, WOSG, duly warned! After being so upbeat in the November long term plan to double sales in 4 years and reiterating it in the interim results in December, just a month later it is all change and recent volatility means they have reduced full year sales guidance by circa 10% and margins by circa 0.5%.  That’s pretty shocking.  Retailers seem to be feeling it but these have low numbers of staff so it’s unlikely the living wage rise causing headwinds and they shouldn’t affect sales, just margins. Are the Rolex thefts in London having some effect on the price?  I had been tracking the Rolex prices and up till a month ago they had started rising and the chart was making a bowl, but recent weeks it came off and the bowl broke down.  I definitely think something happened over recent weeks and it coincided with the stuff on the news re Rolex thefts so perhaps that hit UK sales? Jewellery was hit too so it seems we are foregoing the bling to have a good time as restaurants, bowling allies and holidays have been having a hot time. The 30% drop in what was my second largest holding hit me for over 3% as I sold out through the morning.  I always have myself prepared for a 3% hit if I get a WOSG event and if I get out better than that it’s a bonus, I actually ended up feeling good about it then. I only hold 10-12 stocks as long term investments so I am likely to get bigger drops and rises individually.  AVON, (now my largest holding after WOSG drop) was up 20% since the start of the year a couple of days ago.  So while a 30% drop in one stock looks painful, if you hold a tight portfolio then that is the price you pay to have stocks that can do big rises like that too - and hopefully more rises than fallers. I prefer to move on if I can’t see a quick rebound, make up the hit elsewhere and revisit WOSG down the line perhaps. One would expect if a co puts out a positive upgrade in December which suggested £150m extra sales in H2 than forecast, they had more than a month’s forward visibility and knew how Christmas was likely to pan out but there you go, every day is a school day. My advice to WOSG - keep schtoom till it’s practically under the belt and you are sure. Anyway, we all have these hits, it’s part of investing and trading – ‘it is what it is’ as my builders kept telling me as the price of my self-build went higher. What matters is how you deal with these events. On events like this I decide whether I am going to hold, sell part or sell all. I spread my sells out so I get an average rather than take a low price and see a bounce. I sold a third at 440p in the opening auction which turned out to be the near high of the day, a third at 415 and a third at 405.  With a close at 371p it felt like a win at the end of the day. Redeployed the cash immediately into KIE, AT., W7L and GFRD, redeployed before my broker could book the trades. I find selling in 3-4 trades through the day prevents me selling on a big low and then seeing a bounce or prevents me holding on and watching the thing keep tanking.  Averaging in and out when buying and selling is a good policy for risk control imo. When I get a hit like this, it is just an occupational hazard, part of the game. Forget it and move on. If you dwell, if you obsess about making up the losses or trying to trade on the bottom to reduce your hit, then you will miss the next opportunity and not grasp it with both hands. If you allow yourself to feel injured you will never invest with confidence for some time.

KIE helped out with a great update on the same day. Trading inline, debt falling well and a divi being reinstated at the interims, it rallied 10%. KIE has one bagged in a year but perhaps another bagging in a year is possible?  After this week’s rise they are still trading on a PE of 6.15 falling to 5.65, debt plummeting and a yield 3.7 rising to 5.2. Perhaps there’s scope for at least a 50% rise over the coming year and more still if they beat forecasts. I was holding as a trade but they sound that good here that I will be holding to see what the results say, they have said they will be reinstating the interim divi.  Results are in March so I’m expecting the punters to be buyers in the run up imo. A lovely bowl too.

This whole sector has been ignored in recent years. What with the Carillion mess and other construction co’s relying on unrealistic margins and contracts that went bad, investors have shunned the sector. But really, many in the sector have revised their model under new management.  Keller (KLR) recently announced they were materially ahead, twice. I’ve warmed to the sector here because margins are improving, balance sheets look far better and punters are still ignoring them to a large extent. One that I have also been buying is Galliford Try (GFRD).

On Wednesday GFRD said they were 5% ahead of forecasts both on sales and profits.  GFRD demerged from their housebuilding business three years ago.  They now trade on a PE of 11.9 falling to 10.4.  They pay a progressive yield of 5.4% having returned an additional special divi of 12p too. They have also bought back 7% of their own shares this year which should help increase dilute eps for the coming year.  They have no debt and £135m net cash, half the market cap. Strip that cash out and the PE is 5. Forecasts have to be upgraded and with those stats above investors have clearly avoided them to their cost – in a bull market that will likely change imo. The results webcast is well worth watching imo

https://www.gallifordtry.co.uk/investors/

The sector is a bit of a hedge against a Labour election win as Labour tends to spend more on infrastructure than Tories. With both KIE and GFRD breaking out this week then I think they will pick up pace.  KIE and GFRD both have results in March.

With my holdings having moved from retail to other sectors, defence is now a big part. In addition to holding AVON, RR. and MSI, I have started buying CHRT after looking at it closer.  A director bought 15k shares this week which added to my confidence. Interims in March. These also have a lot of subsea stuff which I suspect is the new rush to defend after Nord Stream.

Midwich MIDW  Results were inline but even with the shares having halved the market wasn’t buying.  I had already sold at just under break even to buy TRST a while back that has solid upward momentum – that has worked in my favour thankfully.

Those are the major portfolio moves and my main stock interest recently.

I will be doing the Mello Bash on Monday night, presenting a stock and looking at two others. If you want a 50% discount you can use the code RCBASH5

https://melloevents.com/upcoming-event/

That’s this week’s trading and market post mortem from Rebel HQ – I go into the coming week with a Bull Rating of 5 (out of 5)

Results and trading updates this week (approximate if not indicated by ‘confirmed’) amongst many others. 

22^nd YU.           Trading update approx

23rd ABF         trading statement  confirmed

23^rd  CRST        finals confirmed

23^rd PFD           trading statement confirmed.

23^rd KNOS        finals approx.

24^th LORD        Finals approx. confirmed.

24^TH JDW         interims

24t AT.             trading update approx.

24^th EZJ            trading update confirmed

24^th SAGA        trading update approx

25^th HFD          trading update

25^th WIZZ         q3 TRADING UPDATE

26^th ECEL         trading update approx.

26^th YU.           trading update

26^th AVON       AGM and trading update probable

26^th SMWH      trading statement confirmed

26^th OTB          trading update approx

30^TH LUCE        trading update confirmed

30^th SYNT        trading update

Enjoy the coming week, it could be fun. Remember I am no analyst, this is just my diary and meaningless thoughts, not recommendations in any way.  Do your own research, make your own decisions, you are the person pressing your buy or sell button and responsible for it.

Rebel