It has been a little over a year since my article highlighting five speculative Aim shares for 2021. It was a year of two halves, as a football commentator would put it. We saw a stonking rally in smaller companies, or small cap stocks, in the six months after news of the vaccines broke in early November 2020.
But in the summer of 2021 many stocks suffered cash outflows – death by a thousand cuts. Much of the liquidity in small caps is provided by private investors. So when they are spooked and start selling, it can trigger an avalanche of sells as the fear spreads. Timing the swings can be highly profitable, as we can see in the table below.
It shows that only two of the five stocks closed the full year in the black, despite all five producing hefty gains at some point. Picking a portfolio of stocks for a year for newspapers or magazines is difficult: if a profit warning appeared just two months into the year, for instance, I would not be willing to hold onto the stock, yet it remains in the portfolio chosen for the magazine for a year.
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I always feel that if a tipster tells you to buy, then they must also tell you when to sell. This is hardly practical, of course, so annual selections such as these should be viewed as starting points for research rather than buy lists.
Cloudcall was the subject of a takeover bid in early December, which propelled the share price from 47p to its current level around 80p. I think more takeovers will follow as many British stocks offer tremendous value. The problem with buying a stock in the hope of a bidder arriving is that you may be waiting a long time. People have been calling Fever-Tree a takeover target for years now.
This year’s selection is based on value and improving fundamentals combined with an uptrending stock price as a catalyst to drive the stock higher. By following established trends, I am placing a bet on the movement enduring rather than waiting for a stock languishing in the doldrums to turn upwards. This year’s selection is a mix of profitable small caps and a unique natural-resources company. These are stocks that I feel offer upside based on the stock’s valuation and macroeconomic tailwinds.
React Group is a specialist cleaning-services provider. It would be easy to decide that cleaning is low-margin and write this stock off, but React does a lot of the cleaning that nobody else wants to do. This includes prisons, rail fatalities and commercial tenancies.
Clearly, if a train can’t travel because of debris on the tracks, then this can cost the train company a hefty packet. React can deploy its emergency-cleaning service across Great Britain within four hours and provides services to several of the big facilities-management companies. One of the company’s stated aims is to increase its offering to its existing clients, as well as expand both organically and through acquisitions. React wants to become the “800-pound gorilla” in the sector by taking advantage of a fragmented market.
So far, the board has done a good job of turning the company around and bringing it to profitability. On projected earnings of £684,000, the stock trades on a price/earnings (p/e) ratio of just over ten. It is expanding and generating cash. The market capitalisation, however, is £7.2m, making it a real minnow.
The stock is illiquid and it’s certainly not one for traders. If something goes badly wrong you will find it hard to exit: the stock trades only a handful of times a day. I hold React and believe that if the company can continue to grow its sales and profits, then the share price should follow.
Shoe Zone is a well-known high-street brand that has emerged from the pandemic a far better business than it was pre-Covid-19. The shoe retailer has accelerated its digital offering and revenue has grown to £30.6m in 2021 from £10.6m in 2019. The board is now investing in its digital arm as well as transitioning from the traditional smaller high-street unit to bigger “box stores”, which boast much more floor space and are also more profitable. These units can stock more ranges of shoes and also require fewer staff, implying a boost in revenue per employee.
Shoe Zone is cash generative with net cash of £14.2m compared with £6.3m in 2020. We also know the business has been performing well recently as the full-year trading update on 13 October was followed by an upgrade to profits a few weeks later, on 1 November.
The directors have increased their already weighty positions recently. Brothers Charles and Anthony Smith, the chairman and CEO respectively, own more than 50% of the stock, with Anthony holding 29.85%. This surely reflects confidence – if he bought any more stock he’d be forced to make a bid for the company (the threshold is above 29.99%).
Clearly, one big risk is further restrictions or another lockdown. Online sales are still far from the dominant source of revenue and, while they may receive a fillip in the event of shops shutting, it’s unlikely to be enough to cover the shortfall. The growth in Omicron cases is not good news for the company.
Shoe Zone is trading on a p/e of eight, which means the market currently either doesn’t believe in the company’s future potential, or its strong prospects have been overlooked. I’m hoping it’s the latter.
Iofina is known for being one of the lowest-cost producers of iodine in the world. However, that won’t count for much with most of the shareholders, who are underwater on the stock.
One thing I like to look for in turnarounds is evidence of improvement, and the green shoots are starting to show here. In September the company refinanced its debt and paid down $5m from its cash reserves. Not only is the balance sheet now stronger but the company also pays between 3.5% and 4% on the smaller debt pile, down from an eye-watering 7%.
Iodine production is growing , while the price of the commodity is strengthening. The board believes that the price should remain strong owing to robust demand – iodine is used in pharmaceuticals and disinfectants as well as X-rays and LCD displays.
Iofina is another stock trading on a single digit p/e. Looking at the recent interim results, and assuming, conservatively, that production won’t grow in the second half (although we already know growth is part of management’s plan), and that the iodine price stays the same – it has in fact already increased – then the company is on track for £3.65m of net profit.
At a market value of £34m this equates to a p/e of just above nine. However, the risk is that the production of iodine is reliant on brine water (a waste product of the oil and gas industry). That means that in an energy-sector downturn, supply of this waste product may hamper Iofina’s production.
Yellow Cake is a play on the new uranium bull market. It doesn’t explore or produce – it simply buys and stores the nuclear fuel. The uranium bull is a theme repeatedly highlighted in MoneyWeek. The market has been oversupplied since the Fukushima disaster in 2011. But recent events such as the gas-price spike and blackouts caused by a lack of energy call for a reliable source of power: nuclear.
Nuclear energy is always on and it doesn’t emit carbon – useful if we are to manage the transition from dirty fossil fuels to clean renewables. Note that the EU has just opted to classify nuclear energy as “climate-friendly”. Another bullish factor is the appearance this summer of the Sprott Physical Uranium Trust (Toronto: U.UN), a North American version of Yellow Cake. It is mopping up excess supply in the spot market.
Yellow Cake listed in 2018 and hasn’t seen much activity until recently. The company placed new shares at 364p in October to raise new capital to buy more uranium. It does this at a pre-agreed price to avoid moving the price with its own buying. The company trades at a small premium to its net asset value (NAV), which according to its interim results is 326p per share. It boasts 13.86 million pounds of physical uranium valued at a spot price of $43.
I think the uranium bull market is just getting started, given the projected increase of demand for uranium and diminishing supply in the spot market. However, there are never any guarantees. Any nuclear disaster could easily kill this trade completely.
Michael Taylor holds long positions in REAT, SHOE, IOF, and YCA.You can get Michael’s monthly Buy The Breakout newsletter for free at shiftingshares.com. Follow Michael on Twitter @shiftingshares
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