Weekend Rebel Review July20th, 2024

Russell2000 spike says markets are going up

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.Well that’s the election over at last but really it’s just the start. 

This really is a good market by stealth in my opinion.  It’s easy to look at the FTSE250 index or the Small Cap index and think the momentum is weak and it’s tough to make money, but on a stock-picking basis there are some real firm stocks that are making great gains.  I think it’s important to look at indexes for what they are, just an average mix.  The Aim index is up 3% year to date so if you are in an Aim tracker you are likely hardly to feel excited. But there are stocks in that index that have done far better year to date. MPAC  has doubled   W7L up 70%, CHRT up 50%, AT. up 40%, IGR 40%, FDEV 100%, FTC up 250%, FCH  up 150%.......they have all featured here, they are all on Aim, and this has been the index that has performed the worst.  So for me it’s definitely about stock picking. Obviously there are some that haven’t faired quite so well like WOSG off 45% but they are far fewer and there’s always going to be a few, this isn’t about being 100% right, just much more right than wrong.  iIf you have a system of buying value and making sure that if you feel you’ve made a mistake you sell early and add to your winners instead, then it’s a good market imo.  There’s been some great winners in the main market too.

I think it’s important to have a stock selection of what meets your criteria, and try to have a criteria that defines a stock you are prepared to buy, rather than a scatter gun approach.  In my early days of investing, I’d be buying everything, techs, pharmas, oilers, miners, builders, insurers…………….that’s fine for funds that want to spread their risk and volatility. As an individual trying to outperform these funds, what are you doing buying so diversely?  What do you know about all of these sectors, the competition, how they work?  I know jack about miners and oilers, how deep one of these has to go, the chances of hitting a duster or finding iron ore instead of gold. I don’t know what the tech competition is like out there for a share I might buy on a huge PE.  You are having to spread you grey matter across so many sectors to learn them well. You can read the chat rooms and follow what Harry Oiler or any other oil expert or mining expert says but how can you be sure he or she is right and feel comfortable holding large positions that might make you a fortune but can also lose you a packet?  Far better, in my opinion, to stick to stuff you can easily understand.  I find retail, manufacturing, industrial, builing and construction, consumer service etc pretty easy to understand.  You make something or you do something and you sell that product or service.  Retail is simple – you buy something and you sell it for more. If someone makes a new killer drug and you go and pay a huge PE for the shares, what happens if someones comes out with a new better drug that you were not aware of?

So I like to find simple businesses, easy to understand both the business and the likely competition. In particular I like recovery stocks.  A ‘recovery stock’ is quite subjective but I  look on them as stocks that have hit an issue and seen the share price plummet.  It may be they have failed to invest and the competition have been allowed to steal a march, it may be they have just hit a production problem that is proving hard to fix.  They could have just fallen out of fashion or they may be run by an incompetent board.  The type of co I like as a recovery play is where it has taken far too long to resolve and the board appear out of their depth. The great thing about these companies is that you can look back and see how they have done in the past, what they could achieve again under the right board.  I think there is currently a lot of opportunities  around for recovery plays to bounce.  Investor apathy to the market has been high and most investors want to buy something that is moving along nicely.  Taking risk in beat up companies with battered balance sheets isn’t the preserve of most investors in a market like this which is when the big bounces occur, rather like CPI over the past fortnight, nearly one bagging.

So on to what’s happened this week.  Tuesday Ocado report.  Ocado had a pretty decent update wih retail doing quite well and sounding pretty upbeat but after an intitial bout of excitement if lost the fizz. Burberry who reported on Monday said if the next Q didn’t improve they will likely make a loss.  I read that as they are going to make a loss.  BRBY is getting to the point where it goes on my radar.  A new CEO and CFO from Wednesday this week, I need to watch closer to what the company says going foward now, see whether the new board can reverse the fortunes, which won’t start to happen for six months in all likelihood, so onto my watchlist but not a buy just yet. Wednesday saw the UK inflaion data with CPI flat at 2%.  A dip to 1.9% was expected.  Commentary seems to say that this means interest rates won’t be cut as soon as expected.  I don’t believe rates are coming down much at all.  Where we are now is more like the norm, 0.5% to 1% rates were never normal.  Think about it, where is ther incentive to loan money at 1%?  I grew up with 3% rates in the 60’s, 8-9% in the 70’s and mortgage rates of 15%+ in the 80’s.  There wasn’t interest only mortgages back then so people are paying far less in repayments if they have that sort of mortgage so you need higher rates to control that. The negative side to that is that when rates do rise it is very painful on interest only mortgages as the payments are all interest and none of the capital.  It’s a very different world and interest rates will have to be different to the 60’s but the sub 3% interest rates are over unless we have some other financial disaster imo.

The US has continued to travel north on the S&P, Nasdaq and the Dow.  The stand out though is the Russell 2000 which has had a major break out.

Lower interest rates in the US look likely soon and this index is responding to it.

The Dow Transport has also pushed on up in a very positive move – a very bullish indicator for those hat follow Dow Theory which says this is the early indicator of positive forward activity.

Amazingly, as these indexes rise, and markets move steadily higher in the US, the fear/greed indicator is sat bang neutral still, so no overbought indications here.

I’m going with the flow, letting the trend be my friend and hunting down those great value, oversold stocks that many miss in the smoke of battle, just looking for OBIAYs (potential One Baggers In A Year) or multi baggers in a year and do what I’ve always done – although multi baggers are a lot easier to find at this stage of the market than at the highs.  A small few recovery plays might let me down but I believe the majority will come good.

Kier plc, KIE, posted their full year trading update on Thursday. There was numerous good stuff  in the results, justifying the recent high on the chart this week imo.  The company highlights were as follows:

There’s lots more in the trading update so worth a proper read imo. I highlighted the bowl at about 70p just over a year ago ad the shares have gone on to one bag, which has been better than even I was expecting.

The chart has broken through some long term resistance in recent weeks so that’s interesting, and with a new Labour government set to trigger as much construction spend as they can to stimulate growth they seem to be in a good place for the year ahead imo

Carclo. CAR had their full year results on Thursday. I did mention these a month or so ago, the shares have had a great rally since April, rising 200%

I have followed Carclo for a long time, it has long been a potential recovery play that I have kept a watch on – I particularly liker stocks that have underperformed for years and have a new board.  I did think these may have had a recovery in place shortly after Covid, in fact I bought at around 11p and held them all the way up to 70p and back down again to around 40p. Nick Sanders had taken over as CEO. He was touted as the right hand man to John Molton of Apex Partners fame, a very successful recovery expert.  Sanders appointed Frank Doorenbosch and Eric Hutchinson as non-exec directors.  Sadly, progress was slow.  A year ago, Sanders stepped down and Doorenbosch took over as CEO, Huchinson as CFO. I found it interesting that in Sanders last year as CEO, he was paying Doorenbosch on a consultancy basis. I was wondering why they were doing this but it now seems to me Doorebosch was employed by Sanders for his talent which he was prepared to pay for.

So with Doorenbosch in charge as CEO, they have a guy with some long term experience including a long stint at RPC

https://www.linkedin.com/in/frankdoorenbosch/details/experience/

 Eric Hutchinson has spent 40 years at Spirent,10 years as CEO.

https://www.linkedin.com/in/eric-hutchinson-8b582290/

Carclo had a presentation on investormeetcompay on Thursday:

https://www.investormeetcompany.com/meetings/preliminary-results-60

This is well worth watching imo – tho I’ll warn you the mic clarity wasn’t the best and Frank’s accent might not be the easiest, but he definitely comes across as a man with ideas and ability.

It’s worth reading the results through. Debt has fallen but still high. The pension deficit has grown but these things are quite complicated as far as the valuation goes and how it affects co payments. The presentation highlights they expect a large fall in the technical provisions liability going forward.

The first thing I would say about Frank is he understands investor frustration.  One of his comments were ‘In the past, Carclo has promised the world and not been able to deliver’.  The fact he has recognised that and said it means he’s aware, and he’s likely not going to want to be another CEO in a list of failures imo.

The company announced reduced debt and better cash genration.  An underlying eps of 1.1p was way above the 1.37p loss predicted by broker consensus a few weeks ago.  Having lost 0.5p eps in H1, that’s 1.6p eps in H2.

Highlight of the divisions was aerospace – they hit a 40 year high for this division.  Aerospace interests me, rather as with Filtronic, this will be the the big growth area of the future imo.

I won’t go through all the details but reading the results and watching the presentation will inform people who are interest.

The shares are up 200% in a few months so no surprise punters were snatching profits at the open on Thursday, and whjile the shares were off 3p+ in the morning, by the close they were off just 0.7p.  I have been buying and have a decent size holding – it’s my sort of recovery play with big potential recovery and a new board. Sounding much more positive, chart turning up, CEO and CFO having skin in the game. The have closed the Tucson, Arizona factory and making big savings and efficiencies for the year or two ahead.

I think they are undervalued.

Panmure Liberum said FY24 prelims were ahead of their recently upgraded forecasts with Adj. PBT coming in at £1.0m against a breakeven expectation. This enabled net debt (inc. leases) to decline from £34.4m to £29.4m against an expectation of £30.4m. For now, they leave our FY25 and FY26 Adj. PBT forecasts unchanged at £2.4m and £5.2m respectively but lower their net debt estimate. They also upgrade their target price from 25p to 30p and maintain a BUY recommendation saying  “while Carclo is up c150% YTD, its recovery has still a long way to run.”

Margins are expected to increase further in 2025 and into 2026.  I think it’s a recovery in action now as they move into growth phase.  Do your own research obviously, I hold so I would say that.

Bored long term investors, private investors looking at them as boring, debt, pension deficit – what is there to like?  Exactly, and that’s what is priced in imo.  I’ve bought, I’ll wait, and I’m confident these have a great chance of multi-bagging. No share dilution from that 180p high where they were doing over 12p eps on sales not much higher than today – and the co increasing margins at a decent clip. I hold these of course so I’m biased and talking my own portfolio up so treat everything I say with a pinch of salt and do your own research – I don’t get every one right and never will.

Thursday also saw results from Creightons, CRL, the UK cosmetic company. This is another co I have held in the past which dramatically let me and others down when it bought Emma Hardie cosmetics on a huge valuation back in 2021.  I don’t know what got into Bernard Johnson the MD but having been mostly a private label and contract manufacture and having successfully developed their own brands, they went on an acquisition spree which seemed like his swan song from the MD, sounding almost cocky in his web presentations – pride comes before a fall.  They clearly paid way over the top for Emma Hardy leading to a £4.62m impairment.

Bernard Johnson and William McIlroy, Chairman, have now taken a back seat and the very able Pippa Clarke is MD with support from Martin Stevenson. Paul Forester is now Chairman.  Here’s the forward outlook:

There’s a lot more to read in the full results.  Pippa Clarke has always come across as a very capable person and has a total grasp of the co. Reinstating a 0.45p divi, the whole results looked to me like a ‘bottom in’ signal and commitment to investors so I bought a decent starter  amount on the results.  There has been a tiny bit of dilution but these were doing near 6p eps in 2021 on £61.2m sales, currently £53.2m and 1.42p adjusted eps. It’s a ‘back Pippa’ type investment buy and of course, the bowl on the chart seems a bit too good to ignore too.  Remember of course, as I’ve said before, I could be a complete numpty and totally wrong so do your own research, then you can feel comfortable in knowing what you hold. CRL closed the week up nearly 40% and still miles of that high on the chart.

Coming up this week

Next week we have Greencore. GNC with their Q3 trading update, which has usually been around 26-27^th July.

There’s potentially a lot to like here imo.  Not only had Dalton Phillips started increases sales and margins but they are also doing strong share buy-backs.  Recently they raised guidance 5% at the interims and a return to paying a divi has been touted. Debt has fallen from £501m in 2018 to £199m last year and while their debt rose at H1 to £244m, that is set to fall below the £199m again by year end.

Dalton Phillips is from DAA in Ireland and has a good track record and he brought Catherine Gubbins (CFO) with him from DDA. Though Dalton has been at GNC now for 2 years, the shares bottomed in December 2023 and have now trebled from there.

Major investors Oasis Management have been agitating for greater speed in recovery and the payment of a divi, they doubled their holding in GNC on the 11^th July.

At the interims they said this:

STRATEGIC & OPERATIONAL HIGHLIGHTS

·    Strong progress across "Horizon 2", driving efficiency, rebuilding profitability and enhancing returns

·    Outstanding operational service levels of 99.2% achieved in H1 24

·   Continuing to enhance performance across manufacturing footprint and will consolidate soups business into single site providing efficiency gains

·    New large ready meals contract win will be onboarded at the Kiveton site in late Q4 24

·   Transformation programme launched in H1 24 addressing outdated IT infrastructure, targeted at improving process efficiencies across the Group

·    Expect a reduction of £9.8m in annual UK pension funding contributions from September 2025

Having closed one of their factories they have reappropriated it to serve a mega contract for Aldi

Here is the chart:

What is interesting is that in 2018 the number of shares in circulation were 704m – today it’s 460m, 35% less.  That means the previous high with less shares about is circa £4.  10.5p eps forecasts when they have already done 12p eps in the trailing 12 months means forecasts look conservative imo. Let’s see what Q3 trading update says this coming week.

Also coming up this week should be CMCX with their trading update.  The changes here are dramatic, going from a spreadbet co dealing with lots of private punters to now not only providing them with SIPP and ISA wrappers but moving into B2B, offering the likes of Revolut the ability to provide their clients a range of forex and equity dealing products on a white label.  There could be more clients to come as they expand in Asia.  High operational gearing means earnings could soar too.  Well worth getting familiar with the company ahead of any update, the results webcast on their website is a good place to start imo.

Synthomer, SYNT, should have a trading update soon so my eyes will be open for that and waiting  Is the turnaround still coming along nicely?

Rolls Royce, RR. – will they have a trading update this week?  They had one last year ahead of the result on July 26. They might go straight to results in August this year but having had a t/s last year, I won’t be surprised by a repeat this year.  Well off the 488p all time high hit in June.

Synthomer should have a trading update this week – while I have reduced from the very large holding I had, I still have a decent holding.  Looking forward to hearing from Michael Wilome soon.

And with not much news of Friday as usual, exacerbated by Crowdstrike software issue, that’s it for another week.

I’m off up the pub with my builders now to thank them for the great work they have done on my oak gazebo – should be finished next week and the noise back down to a sensible level. Looking forward to an interesting week.

Have a good weekend

Rebel