Is it the time to buy?

April 11, 2020

I don't think that we will see the lows that we saw 2 weeks ago again, well not at least in the small and micro-cap sector.  The selling was extreme and irrational, with many companies priced for complete business failure as a result of total capitulation from investors either dumping all their shares to go to cash or just exiting all their small and micro-cap positions.  As a result many of these companies have rallied strongly over the past 2 weeks.  We have been the beneficiary of some of these gains.


The Great Depression recovery

 

 

 

Looking at how the market recovered in the great depression you can see that there was a bear market rally at the bottom.  The current situation involves a huge stimulus package but we also need to remember that government wage subsidies don't promote economic growth they only reduce the depth of the recession.  A portion of the people claiming benefits now will not have a job to return to when isolation rules are relaxed.  Many smaller businesses will not survive this period.  The extent of business failures will not be known.  

 

So while this  is this all doom and gloom, it's in these periods when the greatest opportunities arise to buy businesses at greatly reduced prices.

 

The following quote is worth remembering.
 

 

 

The exception is the rule is that nobody can pick the bottom and anyone who does or states that they have is just guessing.  If you remain unemotional about it, companies look a lot cheaper now than they did 6 months ago.  If you have a 5-10 year holding period and you are not concerned about your investment going broke (because its a solid business), having to raising a huge amount of capital or the fact that the next year or two will look pretty average, then you are looking at buying companies at pretty low levels which is always a good starting point.  Buy low, sell high.
 

Recession
 

There appears to be a reasonable consensus that we will have a short recession.  That does indicate that there may not be a V-shaped recovery in the market.  However, equity markets are reasonably efficient at looking through cycles and if they feel that they can see business conditions normalising at some point in the not too distant future they will price that into their valuations of businesses.
 
Downgrades

 

One thing that I don't really think that he market has its head around is the extent to which companies will have to downgrade their earnings forecasts in the short term.  We wont see the full extent of these downgrades until June, July and August.  Cash flowing into businesses will be weak and companies will be stretched paying employees, suppliers and other commitments while revenue is reduced.  This will hinder companies who are not directly impacted but who may not be getting paid because there is a shortage of cash at bank in their clients.  You only need 10%-15% of your clients to have an issue and then all of a sudden you have an issue.
 

GC1  - A Screaming Buy (a bit of self promotion)
 

Actions speak louder than words.  I have been buying.  So its more of a case of putting your money where your mouth is.

  • GC1 has 45% cash at the moment to take advantage of opportunities

  • 32 cents in cash and a share price of 53 cents

  • GC1 Has outperformed for the market for the past 2 quarters

  • Trading at a significant discount to NTA

  • Large margin of safety

  • You're not buying at the top

Some of you are investors in our SMA portfolios.  For those portfolios you get the price that reflects the underlying securities in the portfolio.  GC1 is not alone trading at a discount, it's a characteristic of most LICs.  They have been oversold as are any small cap equities when there is panic. Unlike a trust you don't need a buyer to redeem your investment but the manager has to sell the underlying portfolio most often at the wrong time. So while the discount is annoying, its also something you can take advantage of to your benefit.

 

This is well illustrated in the chart below which shows that most small LICs are trading at reasonable discounts to net asset backing.

 

 

 

 

 

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