Michael Taylor reviews three companies that he believes could be primed for success in the months ahead.
A new decade. Will this be a repeat of the Roaring Twenties? I certainly hope so. The FTSE and UK equity markets have trailed their US peers for years now. That’s understandable given that the FTSE 100 is comprised of industry heavyweights and stalwarts that are reaching maturity. Contrast this with the US which has the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google).
There are 100 companies in the US tech industry alone that are bigger than our FTSE 100 constituents. The UK market, for all of its prestige and history, is a sorry shadow of its previous self.
Could this change? With the vaccine now being rolled out rapidly across the UK this brings fresh hope for equities in 2021. Not that UK equities are performing poorly – the market is pressing all-time highs and this is being matched globally too. This is despite a raging pandemic which is steadily killing more and more, and a march on the Capitol building in Washington DC last week.
It seems that nothing can shake the markets. Indeed, traders of my generation have only ever known low interest rates. We’ve also learned that stocks only go up, because any time they ever go down, the government steps in to prop it up with magic money created out of thin air.
This might not be normal to you. But it’s normal to a lot of people. The same way those who were born in 1920 and lived through the depression will have completely different expectations and experiences to someone born in 1940.
There are still a lot of people to buy stocks too. Back in the Dotcom bubble, I’m told that it wasn’t uncommon for over half the office to be talking about stocks. But how many people outside of your investing circle actually own stocks? My guess is very few.
Then there is talk of all of these bubbles. People were calling Bitcoin a bubble in 2013. But it didn’t stop rising until it popped in 2017. And even though it eventually came down to below $3,000 – it’s now over $40,000 (at time of writing). People can call it a bubble as much as they want, or say that it has no intrinsic value until they’re blue in the face, but the fact is lots of people made a lot of money – bubble or no bubble.
The same goes for Tesla. That one has been a “slam dunk short” since 2018. But here’s the thing. If there are plenty of people saying Tesla is a bubble – then maybe it’s not a bubble? If it was a bubble, then nobody would be calling it a bubble. That is a bubble. It’s when there is no one left to buy because everyone is singing from the same hymn sheet that you want to be selling it short.
So, for now, the merry-go-round continues. There will always be doomsayers and pessimists, but stocks historically have favoured the optimists.
SIG plc (SHI)
This stock is often confused with Signature Aviation, which has the EPIC code (or ‘ticker’) SIG. But SIG plc, or SHI, is a building materials specialist that operates both in the UK and Europe.
It had a large chunk of debt on its balance sheet but this has been strengthened by a placing done at 25p and 30p with CD & R Sunshine.
The full year trading update in January showed a recovery in revenue which was ahead of the board’s previous expectations. The outlook for the stock remains positive, and the company is well capitalised to benefit from the sector recovery.
Here is the chart.
We can see the stock bottom around March as the volume picked up. We saw it tag 40p and since then it has consolidated in a narrow range for around nine months.
I think the stock has upside now it has been financed and if it breaks through 39p I would like to be long. Volume and volatility are both coming down, showing the stock is reaching its equilibrium point, and fundamentally the stock is strengthening too.
Brand Architekts (BAR)
Brand Architekts is the former Swallowfield. It was previously a contract manufacturing business which has now been disposed of leaving the creation of a new business model – that of producing and selling its own brands.
The sale of this business for £35 million has left the company with a strong balance sheet. The company holds £18 million of net cash against its market cap of £24 million – giving Brand Architeks an Enterprise Value (EV) of £6 million.
A new board consisting of a chief executive, a chief financial officer, and a commercial director have all been appointed in 2020, with the chief executive having been in this industry for many years and even having worked with The Real Shaving Company previously in his career.
The board has decided to hire and build a Direct to Consumer (DTC) team which will see the business sell its own brands direct from its website. Marketing is going to be scaled up with the target of tracking performance digitally and effectively. The new business is a step change from the old and former Swallowfield.
There are almost no broker notes out there aside from N+1 with a brief coverage – and no financial guidance either. Brand Architekts was profitable in 2020 – just – but expects to see growth come in H2 2021.
Looking at the chart, we can see the value destruction in play at BAR. The stock well and truly rolled over in the autumn on 2018 and only recently has the stock started to look like it is stabilising.
The 200 moving average is now pointing upwards for the first time, and with a new story and a new investment case there could be upside here. However, this is dependent on management executing.
The downside is relatively protected at these levels, but if management burn through cash and fail to produce tangible results, then the shares will likely trade lower.
I am long BAR for a small position. If management prove their ability and the chart breaks out then I will add more.
Science in Sport
Science in Sport is another stock that sells consumer products – but instead of beauty products it sells sports products (or “performance nutrition”).
In its recent trading update in December, the company saw online growth of 39%, and online sales as a percentage of revenue grow to 51% of total revenue for the full year compared with 38% in 2019.
To me that sounds like a growth business, as well as the fact that group gross margin is improving too. The company generated cash of £0.5 million after having invested in its production capacity and technical platform, and is now well financed with cash of approximately £10 million.
The chart is looking better too. After a long stage four downtrend the stock is now perking up a bit. We can see the volume increase in the autumn of 2020.
Looking closer, we can see that the stock spent most of 2020 trending sideways.
With the stock now breaking out I am long. There is a trading update due at the end of January which will further detail the company’s strategy.
For the coming year I believe 2021 will be the year of the small-caps. I have been selling down larger names and exiting positions and repositioning into uptrending small-cap stocks.
This is because I feel the risk/reward is better in these stocks. Does that mean I won’t trade larger names? Absolutely not – I will be long SHI if it breaks 39p. But with SHI having a market cap of over £300 million the upside is somewhat different to SIS which is currently trading below a £60 million market cap.
The advantage of small cap stocks too is that they are often unresearched and unloved. For those who are looking to go hunting for gems, I suggest that you give it a try. You never know what you might find.
- Michael has released his UK Online Stock Trading Course. Master Investor readers can download Michael’s book and learn more about the course by visiting www.shiftingshares.com/online-stock-trading-course
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