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OPINION

Running bumper gains

Running bumper gains
June 29, 2015
Running bumper gains

Of course, using traditional valuation techniques in order to ascertain fair value of a company’s equity is no guarantee that other investors will come to the same conclusion. That’s what makes a market. Indeed, the eye-watering valuations ascribed to dot.com companies at the start of this century is testament to the fact that investor sentiment can become extremely bullish at times, not to mention irrational, with the direct result that valuations detach themselves from what any reasonable individual would ordinarily assess as fair value.

That’s the main reason why I didn’t get involved in the TMT boom 15 years ago as it was nigh impossible to come to any other conclusion that share prices in hundreds of UK technology companies had reached unrealistic levels no matter whatever valuation approach one adopted. I would much rather miss the boat than end up seeing an investment being washed away as when the hot money stampedes to bail out.

That’s not to say that I will not run profits on profitable holdings based on sound fundamentals even when my own assessment of fair value has been hit. Sometimes I can be too conservative in my estimate of fair value, a point I will readily admit, so it can pay to ride profits and let other investors take the risk with new capital to drive share prices higher. Bearing this in mind I make the decision to bank or run profits on a case by case basis after taking into account a number of different criteria including: the technical set up and share price chart; potential for positive newsflow; peer group comparisons; scope for earnings upgrades; read across of sectoral trends from competitors; seasonal investing trends; economic and general market risk; and interest rate and currency risks.

It’s not an exact science, but in recent months I have advised running profits on shares in 14 of the companies I follow after they hit my original target prices. If you missed any of my updated articles on these companies, an archive of all my recommendations over the past eight months is available at the end of my online columns.

These companies are Leeds-based property company Town Centre Securities (TCSC:290p); Stadium (SDM:115p), a specialist provider of niche electronic technologies; Cambridge-based set-top box designer of digital entertainment systems for IPTV, Amino Technologies (AMO:139.5p); buy-to-let lender Paragon (PAG:425p); telematics and data provider Trakm8 (TRAK:180p); financial services company STM (44p), a specialist in the administration of assets for international clients in relation to retirement; Tristel (TSTL:99p), a maker of infection prevention, contamination control and hygiene products; AB Dynamics (ABDP:230p), a designer, manufacturer and supplier of advanced testing systems to the automotive industry; property fund manager First Property (FPO:45p); building materials group Epwin (EPWN:134p); housebuilder Inland Homes (INL:71p); engineer Trifast (TRI:119p); uPVC window company Safestyle (SFE:220p); and Bilby (BILB:93p), a provider of gas heating appliance installation and maintenance services.

It has made sense to run profits too as I would have been kicking myself if I had banked gains after my first target price had been hit and without reassessing the investment case. For instance, shares in Inland have trebled since I initiated coverage; First Property are ahead by 150 per cent; Trifast is up by 125 per cent; Trakm8 have soared 90 per cent in little over four months; Tristel and Amino are showing 67 per cent gains and Stadium is ahead by over 50 per cent. If you followed my earlier advice I would continue to run gains on all 14 companies although I may top slice some holdings in due course if the share prices start running away.

 

Banking some profits

That said, I am not shy of banking profits outright when I feel that valuations have gone way beyond fair value. For instance, a few months ago I called the top for one of my most successful buy tips ever, Aim-traded software company Netcall (NET:55p). The shares had hit my 70p long-term target, having risen more than five-fold after I initiated coverage, and the risk:reward was no longer favourable. Other investors clearly concurred with this view as Netcall’s share price subsequently de-rated to 48p before the company received a recommended cash and shares bid from larger rival Eckoh Technologies (ECK:42p) last week and one valuing the equity at 63p a share. It looks a fair offer to me.

I have also banked bumper profits on a number of other companies including property investment company Daejan (DJAN:5,820p), financial services company Jarvis Securities (JIM:420p), and the nine FTSE 350-listed housebuilders shortly before May’s general election. I have no regrets over any of these decisions even though the election of a Conservative administration put a rocket under the prices of the housebuilding sector. The point being that I could only assess short-term prospects for the sector based on the most likely course of events, and the odds at the time were 13/1 against the Conservatives winning an outright majority. Moreover, a 20 per cent average gain on the housebuilding trade in five months was good enough for me given that my rationale for buying in the first place was to exploit the sector’s tendency to outperform the stockmarket in the first three months of the year.

 

Targeting value asset backed investment plays

In any case, I have maintained some exposure to the sector through Sheffield-based construction and property company Henry Boot (BHY: 230p), property investment company Mountview Estates (MTVW:12,250p), and Aim-traded Inland Homes (INL:71p).

Mountview is in the news right now, having just reported a bumper set of full-year results: pre-tax profits rose 13 per cent to £40m and with EPS up by a similar rate to 818p, the board increased the dividend by 38 per cent to 275p a share.

To recap, the company owns more than 2,400 residential properties under regulated tenancies, 329 life tenancies and 1,127 ground rents. Rental returns are below open-market rates, but the payback comes when property is sold and the company reaps the full vacant market value. It’s therefore worth noting that the open market value of these rental properties was £695m at the end of September 2014, or double the value in Mountview’s latest balance sheet. Mark these properties to market value and net asset value per share is around 16,300p rather than the IFRS reported figure of 7,380p. Adjusted book value could be even higher now given the steady rise in residential property markets in the past nine months.

It was the deep discount to book value per share which attracted me to the shares in the first place when I included them in my 2015 Bargain share portfolio at 11,096p. So with the share price discount to adjusted book value at least 25 per cent, and the housing market receiving a boost from the more stable political backdrop, then I continue to rate Mountview’s shares a buy at 12,250p.

Inland is of interest to me too as the company has just received planning permission for the redevelopment of the former Meridian TV Studios site in Southampton. The development, Meridian Gardens, will provide 351 homes, retail and office space, an extension of the local park to the waterfront and a new waterfront walkway. The site has a gross development value of £70m.

The company appears to have got itself a bargain, having made an initial payment of £500,000 for the land on exchange of contracts over a year ago to secure the site pre-planning. The balance of the consideration, around £6.2m, is being made on a phased basis. This equates to only £20,000 per plot! I can only reiterate my recent advice to run profits to my conservative price target of 80p. In a bid situation, analysts’ sum-of-the-parts valuations of 100p a share look a sensible take-out price if a larger housebuilder comes prowling.

 

Exploiting a benign environment

It’s only fair to say that the small-cap sector in which I specialise in has enjoyed a bumper year to date: the total return on the FTSE SmallCap index and is 10.6 per cent, outpacing returns on the FTSE 350 by over three percentage points.

Clearly, risk appetite has improved markedly from what was a poor year for small caps in 2014, helped in no small part by the sovereign bond buying programmes of the European Central Bank which has forced investors higher up the risk curve. Some of the excess capital exiting the government bond markets has also found its way into European equity markets, but there has been a fair degree of stock picking too which is why a large number of the companies I have been writing about have enjoyed sizeable share price gains this year.

That’s not to say that there aren’t value opportunities still out there to exploit as I have initiated coverage on 23 new companies since February including: software company Globo (GBO:58p); oil exploration and production company Faroe Petroleum (FPM:86p); asset management group Walker Crips (WCW:45p); investment company Crystal Amber (CRS:161p); sup-prime money lender Non-Standard Finance (NSF:105p); software firm Software Radio Technology (SRT:30p); care home provider Caretech (CTH:238p); accident vehicle replacement services group Redde (REDD: 127.5p); fund manager Miton (MGR:29p); healthcare group Bioquell (BQE:151p); concrete equipment levelling specialist Somero Enterprises (SOM:153p); investment company Marwyn Value Investors (MVI:232p); toy firm Character Group (CCT:470p); litigation finance company Burford Capital (BUR:150p); hotel group Elegant Hotels (EHG:112p); and Ensor (ESR:110p), a Manchester-based products and services company focused on physical security products and packaging.

Some of these companies have been covered in online only columns and can be found in my online archive. I would also point out that there are dozens of companies I have looked at and passed over during this risk assessment process.

It makes sense to source new companies to add to my active buy list while at the same time offering updates on past recommendations, the vast majority of these are published in my online columns. That’s because six of the companies I follow have either been taken this year or are in the process of including: IT security firm Accumuli (ACM); vehicle repair group Nationwide Accident Repair Services (NARS); energy group Fortune Oil (FTO); and environmental engineer Tinci (TNCI). Finance company Inspired Capital (INSC:19p) and telecoms network testing company Anite (AIE:128p) both received cash bids earlier this month.

Of course, I have had my failures; cutting paper losses sooner would have protected sizeable paper profits on previous winners (Netplay TV (NPT:9.5p), Thalassa (THAL:63p) and Greenko (GKO:56p) spring to mind) and avoided the losses I crystallised on Aim-traded companies SeaEnergy (SEA:11.5p), Polo Resources (POL:5.3p); Camkids (CAMK:15.25p).

But overall, it’s been a very productive year so far for small caps. My 2015 Bargain share portfolio is showing a total return of 11.3 per cent in the past five months, over three times the return on the FTSE All-Share. So giving the positive sentiment, my strategy for the next six months is simple: continue searching out similar small-cap special situations for you to take advantage of.

I am on holiday this week and will update my view on the following companies on my return in light of their recent trading statements: 600 Group, STM, WH Ireland, Redde, Stanley Gibbons and Cohort. Please note that my next online column will appear at 12pm on Tuesday, 7 July 2015.

MORE FROM SIMON THOMPSON...

At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies:

Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)

Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)

Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)

Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)

Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)

Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)

Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)

Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)

Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)

Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)

Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)

Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)

B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)

Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)

Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)

Market strategy ('Financial Market Watch', 9 June 2015)

Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)

1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 June 2015)

Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 June 2015)

First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 June 2015)

Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small cap wonders', 17 June 2015)

Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 June 2015)

Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 June 2015)

GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A tripple play of small cap picks', 23 June 2015)

Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p (‘Soaring small caps’, 24 June 2015)

Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p (‘A slick investment’, 25 June 2015)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'