Weekly Commentary: 23/12/19 – Lessons for 2020

Lessons for 2020

It has been rather enjoyable as the year draws to a close. The Boris Bounce was a pleasant experience for investors. Excitingly for some it was a rally in the value stocks. Top of the leader board was the FTSE Small cap rising 5.6% closely followed by those high yield stocks while the low yield alleged “growth” stocks brought up the rear. The FTSE Small Cap index has been the worst performing of this collection over the past 3 years since Brexit shenanigans started as risk aversion prevailed. Now with apparent political stability that risk aversion is starting to reduce. And we have bids appearing with the financial planner and wealth manager Harwood Capital going to private equity this morning.

Source: SharePad

Which now poses a new question as to whether markets are getting expensive. Once in a cycle markets are right to be expensive and once in a cycle they are right to be cheap, because they are anticipating changes in earnings that aren’t reflected in analyst estimates. This year the market has undergone the biggest increase in the forward PE ratio since 2009.

The market is anticipating earnings uplifts, which may well be correct. In reality markets follow earnings. If we put aside our biases and respect what the market is telling us we are going to have a very good 2020. This is not a time to take profits. Now is a time to take risks – as private equity are likely to do.

Review the year’s picks

The individual stocks covered in these notes is included as an appendix due to it being rather lengthy but it is worth reviewing. The date of the original note is annotated on the left-hand side so users can refer to the original note if they feel the need.

I have covered in these notes 100 stock situations this year. 22 of those covered I had a negative view on while 12 of them I was feeling neutral about so the remaining 66 stocks I had a favourable view on at the time. The average of the performance of those positive view stocks has been +13.4% since then while the average of the negative view stocks is +7.3% so it confirms my gut feel that I am no good at shorting stocks and for that reason I don’t. As well as the fact that the leverage involved makes shorting very risky.

It may be useful to review some of the outlying performers but first it is interesting to see that the average PE was 16 at the time of the review and today the average PE is 16.2 showing that the performance has been driven more by earnings going up rather than valuations going up. In my view investors spend too much time appraising valuations and not enough appraising earnings.

While markets have been driven up at the end of this year by multiple expansion that hasn’t been the case with the basket of 100 stock situations I have reviewed in my weekly. Which is one of the wonders of small cap investing. Their earnings can be far easier to predict than the large international companies in the FTSE 100. And – if we stick to what we understand – we have a chance of getting more right than wrong. Which brings me to Lord Lee’s point of view which is that small and well-run companies is a far more appropriate place for long term money to be invested than the large and mature companies in the FTSE 100. This view is diametrically opposed to the view of our regulator who is increasingly pushing private wealth managers to invest in FTSE 100 companies. The result is a growing number of Sharepad/Sharescope subscribers who have decided to take control themselves.

While it is always gratifying to focus on the good performers there is usually more to learn from the poor performers and the mistakes so I will focus on them.

Negative Bias Stocks

Of the 22 stocks I had a negative view on when writing only 8 have had a negative share price performance since then. Notable mistakes have been:

  • Hilton Foods 3 June 2019 +14%
    • I was concerned over declining ROE and remain so. Perhaps an issue of timing.
  • Kainos 29 July 2019 +30%
    • Concerned over valuation and still expensive.
  • Ibstock 5 August 2019 +39%
    • Put off by poor disclosure in the accounts
  • XPS Pensions 12 August 2019 +12%
    • Concerned over valuation of an ex growth business
  • Stanley Gibbons 7 October 2019 +54%
    • Volatility of a penny share in a loss-making business
  • Amino 11 November 2019 +23%
    • I had no understanding of this company
  • Trifast 18 November 2019 +14%
    • I was cautious as the company enters an investment cycle


Mistakes have arisen from putting too much weight on valuation. When a stock is performing and is expensive it can always become more expensive. This is a weakness that comes with searching for value stocks. The other lesson here is to make sure I understand a business. For that reason, I frequently avoid Biotech stocks and some technology stocks. However, some of these stocks I remain confident that reality is yet to catch up with the share prices.

Best Performers

Dart Group

  • 10 June 2019 +88% – My positive recommendation was not predicated on the demise of Thomas Cook which is what has given the shares the biggest boost since then, so luck plays a big part in investing. The company has experienced a rating uplift from a PE of 10.7X to 15.8X while the earnings have been upgraded c 27%. Which tells us how powerful it can be to buy stocks on low ratings and then patiently wait for the world to change.

Just Group

  • 2 September 2019 +84% – My positive view was based on value. The net asset value on the balance sheet is above 200p/share while the shares having risen by 84% since September still are at less than half the net asset value. Results in September evidenced that the company had slowed its growth rate and thus consumed less capital that is absorbed when writing new business. This has perhaps helped the market to appreciate the assets are real. Now as the company starts to generate more profits from its back book of business it may start to generate enough capital to grow faster as well as increase the dividend by 2022. This looks like it is the start of the journey rather than a one-off recovery and I suspect the share may continue to do well.


It serves as a useful reminder that buying value can create significant winners, but as mentioned above selling on value can lead to poor results.

Worst Performers


28 May 2019 -63.4%

  • This disastrous stock has fallen despite nearly all other property stocks rising over the course of the year. Workspace is up 26%, perhaps set to benefit from We Work’s problems while Land Securities and British Land are up 15% and 12% respectively. This lesson is about the risks of high leverage. With debt to assets at 57% at the half year the company finds itself forced to sell shopping centres at what must be one of the worst times to be selling a shopping centre. There are few buyers. The share price of 34p compares to the June NAV of 210p, which gives us a clue as to what the markets faith in the NAV is. With more properties to sell and declining rental income this one may not be through the eye of the storm yet.

Ted Baker

2 September 2019 -54.4%

  • In September I thought it was a take over candidate. Which it still may be, but I had under-estimated how dire current trading was. The profit warning on 10 December brought the company into cost cutting mode and the dividend was suspended as the company lowered profit expectation to £5-£10m, which from a turnover of £600m is thin. Again, this is a company with debt of c £141m so this is now looking risky in terms of covenants. With inventories and receivables of £171m of slow selling stock this may not be through the worst yet. I am not sure I would be looking forward to January when the retailers generally publish their trading statements. However, once it is past the worst it will be an attractive take over target for Ray Kelvin. The rating on the stock has increase from 10X to 17X since I shamefully reviewed it positively. It is the earnings that have done the damage.


Both these companies have a significant amount of debt so in 2020 I shall pay more attention to balance sheet leverage in value situations.

While in the flow of cathartic self-criticism I sense it may be useful to take a look at which of my weekly notes had the potential to be most value accretive or value destructive to a reader’s portfolio. Because each week’s note often centres around a theme it may help us to determine the best themes to adopt.

Most Accretive Weekly

  • The 10 June note about companies with the right culture was by far the most accretive note where I singled out Dart Group and K3 Capital as two companies which had excellent cultures. For this reason, it is particularly exciting that these companies have produced the best returns at +88% and +54% respectively. It is this culture that holds a company together in the difficult times and ensures it will prosper when times improve. The outlook for both companies has improved over the year. The rating of Dart Group has moved from 10.7X to 15.8X and the rating for K3 Capital has moved from 10X to 16X. Dart has experienced forecast upgrades but K3 Capital shares are starting to anticipate upgrades next year. I think this is likely and so would now regard these as medium-term holdings.

Most Destructive Weekly

  • Of the 29 weekly notes published only 3 produced negative returning stocks which is testament to the strong market we have experienced this year. The stand-out loser here was on 4 November when I suggested that Non-Standard Finance was a takeover target. That still applies now it is trading on a PER of 5X and yields 14% but, (as with Ted Baker) I had under-estimated how bad current trading may be. Investors need to be optimists by nature but sometimes that hurts.
  • The other significant detractor was on 12 August 2019 when I reviewed the litigation funders post the Muddy Waters shorting attack suggesting there could be a bounce. All 3 have experienced further declines as the credibility of the sector has resulted in a smaller pool of investors. Also, I suggested XPS Pensions was overvalued as an ex-growth stock while it has since become more expensive. On this occasion I managed to get all the stocks exactly the wrong way around. I recall writing the note in a hurry as the prices were moving fast at the time of publishing and feeling low conviction as I wrote it. When in a high-risk situation with rapidly moving share prices I shall remember not to enter the burning house in future.


It is fair to say that companies with culture was the note that felt most natural while the note that felt less natural was the litigation funders note. The implication here is that as investors we need to be in the right mindset to make the right decisions. When there are no ideas don’t do anything is a golden rule while sometimes it is easy to change our investing style, for example to that of a trader, when our natural disposition is that of a medium-term investor.


We have enjoyed some dopamine inducing rating expansion towards the end of the year. However, in small cap investing it is earnings that drive shares rather than valuations and as investors we spend, I believe, too much time trading around valuations. While it is important to buy stocks cheaply the time spent looking into valuations searching for our next opportunity can also lead to mistakes when selling expensive stocks. In 2020 I shall endeavour to focus on earnings, not suffer optimism while catching falling knives, not sell on valuation grounds, and most importantly of all focus on culture – the single most important factor for a medium-term investor.

Expecting a positive market in 2020 with AIM stocks disappearing at a fast rate, including Harwood Capital today, the squash in the doorway as the laws of supply and demand play out, could cause considerably more multiple expansion for companies with culture. (see 10 June note)

Weekly Note Coverage Appendix

2019 12 23 Jeremy G Weekly Commentary 31 2019 Coverage Appendix legend

2019 12 23 Jeremy G Weekly Commentary 31 2019 Coverage Appendix 1
2019 12 23 Jeremy G Weekly Commentary 31 2019 Coverage Appendix ii

2019 12 23 Jeremy G Weekly Commentary 31 2019 Coverage Appendix iii

2019 12 23 Jeremy G Weekly Commentary 31 2019 Coverage Appendix iv