Weekend Rebel Review Oct 19th 2024

The Budget Blues

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.

Is the market finally firming?  I have seen a number of small caps turn firmer lately and I suspect punters, investors, speculators are starting to buy ahead of the budget.  What do we know about the budget?  Well after the government’s business summit on Monday they showed they are keen to court business for growth.  The post-mortem of that saw Reeves, questioned a lot about National Insurance and it seems clear she is going to lump 1%-2% on employer contributions. I saw Starmer questioned about CGT going up to 39% to which he said that was way wide of the mark. What will it be? Currently 18-20%, if it goes over 30% that’s not way wide of the mark in my opinion though. I wouldn’t rule it out. I think they need to keep it below 30% to have any cred and even then it’s a bit rich saying you are pro-business and you are hiking NI and CGT.  So lets say the market now expects the 1% rise in NI and 30% CGT – what more is there to price in? Starmer’s first 100 days have been a shambles.  Energy prices have hit new highs and they are wasting £22bn on carbon capture which hasn’t worked commercially anywhere. Reeves is going to change the borrowing rules that she said she wouldn’t change so she can borrow more but the market will only let her get away with so much before she has her own Truss moment on the currency and gilts so they are going to need business to do a lot of the heavy lifting for growth.

I have heard lots of investors say they are 50%, 60%, 80% cash here and they wont be buying shares till after the budget. In doing so I have never heard so many investors reveal their hand.

I think with all these market-volatile events you need to have a strategy that works for you and stick to it.  I sold down massively into cash a couple of months ago.  It’s what I do when the market spooks me. You have to know your constitution and whether you feel cool riding out big falls. I am more cool than I was but I tend to beat myself up if I see a bit of potential turmoil down the line and don’t do anything when I pretty convinced the market will come off. The very worst thing to do is not to sell, hold on feeling you have the nerve to do so, then panic selling or capitulating right at the bottom. If you are not going to sell be sure you have the gut to hold on.  I suspect the market has done its worst here and the net buying will likely outweigh any selling into the budget so I’m buying back in here and have been over the past two weeks quite heavily.  I am over 85% invested now

A number of small caps have made a nice recovery recently.  Carclo, CAR has had a 15% bounce, Capita, CPI has been testing the July high.  Warpaint London, W7L as risen over 10%, FTC is 20%+ up from the recent low……it’s amazing how stocks make bottoms by stealth when market sentiment changes and fear turns to greed. As markets turn from bearish to bullish you can first of all see punters are in ‘snatch a profit’ mode but less so. Gradually, as a bit of profit builds a buffer, punters start to buy and hold a bit longer and this increases as confidence grows. Being able to gauge that helps a lot as markets start to turn up and can give you more confidence to buy and hold rather than constantly dashing in and out, but that comes with experience in my opinion, when I was a lot more novice at this game I found it harder and was far jumpier. It grafts itself onto your DNA the longer you do this game.

Wednesday saw inflation come in at 1.7%, well below the 2% expected and should pave the way for rate cuts from the Bank of England. The market’s opening reaction was limp though which goes to show how much fear is in the market ahead of the budget.  The government now saying they are looking to find £40bn now.  Promised not to raise taxes on working people, enticed loads of the world’s big businesses here this week for the government to try to get investment from them, saying they are friendly to business – so who are they going to tax then?  If they raise Nat Insurance after courting business to come here, what does that say?  It’s either idiotic or it is just plain lies. They need to be reducing the burden on small businesses, the growth drivers of our economy but they just want to spend other people’s money.

I have heard lots of investors say they are 50%, 60%,80% cash here and they wont be buying shares till after the budget. In doing so I have never heard so many investors reveal their hand. I’ve been buying ahead of then because it sounds to me there will be a lot of people buying then and all that is holding them back is the budget speech – we know she wants £40bn here, what downside surprise can there be now? With so many revealing their hand you can bet there’s a lot doing the same but saying nothing too. Seems to me buying ahead of these buyers looks a decent strategy. Of course there is also a good argument to wait and be sure so I’m not advocating doing what I have done.  I could be totally wrong obviously – this is just my opinion.

A number of index charts are giving a bit of support to being bullish.  The FTSE250 has been making a slow curve up on the chart:

You could argue this is a roll over too, but I suspect it more positive and that chart will play out before long and look more bullish.

The FTSE Small Cap Index is still trending towards a break out at the end of the month:

Aim is making a curved bottom by the look of things too and around previous support.  Meanwhile the S&P and Dow Jones keep rising relentless as the Nasdaq is testing the previous high.

Lastly, Greed is up to73 and pushing the extreme greed area so perhaps a bit of a pull back in the US soon, but unless it is steep, the UK seems to be decoupled to an extent these days.

One real issue to making great gains at the moment is the lack of volatility. Traders need volatility to trade and this in turn helps drive shares higher, faster.  Without any real rush on shares to move, they are rising but slowly when they do.  Lots of traders are trading US and other markets but this should change after the  budget imo.

On Tuesday, and old girlfriend of mine, De La Rur, DLAR, announced they were selling their authentication business for £300m. The Market cap was around £180m at the time. The operating profit at year end for that division was £14.6m so that looked a good multiple considering it had hardly grown this year. Net debt of £100m according to Stockopedia seemed to show they could get rid of all the net debt and after paying £30m off the pension deficit be left with circa £100m allowing for the proportion that was to be paid down the line roughly.

So they would be left with Net cash of £100m or so and the bank note business and the pension deficit. Not bad, but no fire starter I suspect, unless they can sell the bank note business and return all the cash to shareholders after sorting the pension.  With all that lot paid off they will likely have much lower interest payments which would boost eps substantially.  Could be good value if that was to happen – I think at 107p they look too cheap so picked a small few up once they came back. Probably a trade only, I don’t have the patience to wait for a sale of the bank note business if it happens but there are a lot of investors that will like this sort of thing in my opinion. I just can’t love this old blind date of the past.

On Tuesday I also noticed a new leg up on a great bowl on Quilter, QLT which I posted on Twitter.  It was the day before their trading update. Quilter are a wealth management company providing investment and wealth management services, multi-asset investment solutions, and financial advice through its subsidiaries in the UK.

The trading update was rather good in my opinion

The inflows look very good – you can read the rest of the statement in the RNS.

With 5.2p eps in H1 the 9.6p eps looks easily doable, even more so after this statement, in fact they look like they will double earnings this year from last years 5.4p eps. There’s a 4% yield forecast too.

I am not normally an investor in financials to be honest, I find them a bit complicated to fully understand. I know a fantastic bowl when I see one though and this is a bowl on the end of a bowl so having bought the day before the trading update I bought more at the open. Financials seemed to e the power of the day with XPS Pensions having a 15% rise on their update too. Avation and Volex also had updates and rose 14% and 7% respectively which sort of confirms my feeling that there’s a lot of businesses being underestimated in this market.

Thursday saw an agreed offer for N.Brown Group, BWNG owners of Jacamo, Simply Be and JD Williams among others. I noticed the shares firming recently but never fancied chasing them. Interest rates having topped probably acted as a catalyst and I expect we will see a lot more bids with the valuations out there today in the UK market. I have bought for the bowl and that steepening trend and expect that to run up much higher, even if my full understanding of the business isn’t what it should be. I pint it out to highlight it so do your research because I haven’t done the research I should do, the bowl is my guide.

A second stock to catch my eye this week was Games Workshop, GAW.  I’ve followed these a lot, bought on occasions but then got bored.  What excited the market big time was the news that GAW were to develop Games Workshop's intellectual property into film and television productions and for Games Workshop to grant Amazon associated merchandising rights. This could be huge, another Game of Thrones. The announcement was made in Dec 2022 and there has been nothing since, That will be 2 years this December which seems the sort of deadline you might expect for a deal agreement but who knows? Recently the share has been gaining strength and the chart has made an interesting bowl:

The chart broke out to a 3 year high on Thursday and stands about 3% from an all time high, that’s firm in this market. It goes D for an 85p divi on Thursday too.  I bought a small position because I just cannot ignore that bowl.

Friday ended with little news  the highlights seem to be both BooHoo, BOO and Future Plc, FUTR, both announcing that the CEO’s were going. BOO put out a naff trading update, FUTR provided nothing as to trading. CEO’s leaving like this often mean bad news coming, if it isn’t in the price already.  BOO down 8%, FTUR  down 19% late Friday.  Assess your risk before thinking about the reward – always, in my opinion.

That was this week – I dare say there will be a number of interesting opportunities before the budget but most businesses are keeping their powder till after it I’d say, if they don’t have to post news.

Have a good weekend

Rebel