The Micro-caps of today can become the Large-caps of tomorrow!

Two news items in this week's FT weekend have caught my eye. Firstly there is a full page article entitled "Pharma opens new front in war on cancer". The article is essentially suggesting that the big pharmas may be on the cusp of the biggest breakthrough in cancer therapy for decades, and goes on to describe how several companies including Bristol Myers Squibb, Roche, AstraZeneca, Merck and Glaxo are developing new block buster drugs which could be worth several billions of pounds in revenues should they prove successful.

First and foremost let's hope that most are successful, and that the breakthrough proves to be as exciting as oncologists believe it could be. These drugs could really open up a whole new front in the war on cancer, and potentially prolong and save the lives of many thousands of people.

From an investment point of view, if these companies are successful with their pipeline drugs then clearly their valuations will increase substantially by the boost to their earnings. However, there are a number of hurdles to overcome yet, and it's difficult to predict the potential winners from the also-rans.

It did get me thinking about a company I hold shares in though.

Angle at £35m, is a minnow in comparison to the pharmas mentioned above, but it's Parsortix device is potentially a pivotal tool in any big advances in fighting a whole range of cancers. A non-invasive (simple blood test) way of monitoring the effectiveness of existing and potential drugs (and combinations) in the war on cancer has got to be highly desirable.

A lack of newsflow in recent weeks has meant that Angle's share price has dipped from it's highs whilst the company awaits further feedback from Key Opinion Leaders. However, if the feedback for the Parsortix device continues to be favourable then I fully expect substantial sales to follow, and the share price to resume it's upward trajectory, although ultimately I expect the company to be bought out by one of the majors. Angle have already achieved CE approval for their device, and currently await FDA approval.

The FT Money section also includes a small article on insurance fraud. Most notable is a 34% rise this year in the number of bogus car insurance claims. In fact, motoring accounts for more than three-fifths of fraudulent insurance claims. How long before insurers insist on a Telematics black box in every car? Not long methinks. I'm hanging on tightly to my Trakm8 shares. Right place, at the right time? Here's hoping. Trakm8 is a profitable, cash generative company in a potentially explosive growth industry. The shares are very modestly priced given their prospects.

In a recent blog, I mentioned that buying shares in relatively illiquid small/micro-cap stocks required a "strong stomach" as price fluctuations are often quite severe. Trakm8 is a good example of this type of stock. In my experience, as a long term investor, if the story remains in tact, it's best just to buy and hold. The micro-caps of today can soon become the large-caps of tomorrow!!

Finally, talking of large -cap companies, John Lee has written a brief article in todays' FT and has mentioned that he recently bought shares in Morrison's based on a 6% yield, activist shareholder base and freehold property assets. John Lee is an excellent value investor and ISA millionaire.

If I was interested in an income based portfolio, I'd definitely be adding Morrison's, alongside Sainsbury's, Tesco, GlaxosmithKline and Direct Line. Quality companies which are highly unlikely to go bust anytime soon and pay dividends around the 5% mark.

Avesco - interims due mid-June

Avesco should be reporting interim results around the middle of June. This is an even year which includes the Winter Olympics, the World Cup and the Commonwealth Games. These events should boost earnings, and hopefully expectations for the full year will be in-line with management guidance.

I do expect some exceptional costs associated with their recent restructuring, but this is a cash generative company valued at a substantial discount to NAV which currently pays a generous 5% dividend. What the market may also have overlooked is that Avesco recently bought back 30% of its share capital. This should substantially boost future earnings, and indeed dividend payouts. I expect a hike in the interim and final dividend distribution. Please see my reasoning from a previous blog:-

http://michae1mouse.blogspot.co.uk/2013/12/proposed-share-buy-back-and.html

Other recent news items from Avesco's  website include "With CT around the world":-

http://www.ct-group.com/news/ct-around-world

"JVR and Creative Technology Holland Combine Their efforts:-

http://www.ct-group.com/news/%EF%BB%BF%EF%BB%BF%EF%BB%BFjvr-and-creative-technology-holland-combine-their-efforts

and

"CT Streamlines European Operational Structure":-

http://www.ct-group.com/news/ct-streamlines-european-operational-structure

For investors, it's worthwhile visiting their facebook page on a regular basis to keep abreast of the projects they are involved with on a global scale.

https://www.facebook.com/creativetechnologygroup

Avesco has been a fantastic investment for me since I first bought shares back in 2009. However, the company with a market cap. of less than £20m still looks incredibly cheap on all sorts of measures.

http://uk.advfn.com/p.php?pid=charts&symbol=LSE%3AAVS

Please note that the sudden dip on the chart from over £2 to the current price relates to a special dividend payout to shareholders of £1.10 per share.

Belgravium Technologies and Avanti Communications

Belgravium Technologies have released an encouraging AGM trading statement this morning, alongside a contract win for around £420,000 with a European airline operator. Trading in the year to date is "significantly ahead of the equivalent period last year", although they also add that "it has commenced more slowly than anticipated". They also state that their new sales strategy has created a good deal of opportunity, and that the separately announced contract is in addition to an earlier contract win of £1.1m with First Great Western.

Significantly, cash flow looks strong and they now have £1.9m cash on the balance sheet which is similar to that prior to the Feedback acquisition.

Last year's earnings were around 0.4p, so if they are significantly ahead of this figure then the forward PE will be a single digit for 2014. Broker forecasts for the dividend payout, at 0.2p, would be double 2013's distribution, and amount to around 4.7% at the current share price.

I like these small, profitable and cash generative companies which can demonstrate good growth at a reasonable price. In fact BVM looks cheap to me.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11967696

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11967603

In other news, Avanti Communications have announced yet another contract win.

Whilst an investment here is highly speculative, the quality and quantity of contract wins in recent weeks and months is very encouraging, and I intend to hold on and watch developments.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11967629

7Digital reverses into UBC

After nearly six months suspended from the stock market following it's stated intention to acquire 7Digital, UBC Media shares returned to the stock market on Tuesday. The share price immediately slumped by 50%, and has remained at around 3.125p since its reinstatement. Having been out all day, it was a bit of a surprise (to say the least!) to return and see such a dramatic fall. Before reading the RNS I assumed that the acquisition had fallen through. However, this was not the case, and the reason for the fall was the share issue priced at 2.7p to pay for the acquisition, and to raise additional working capital. UBC will change it's name to 7Digital, and the reversal will take place on 10th June if it is approved by shareholders at a General Meeting on the 9th June. The share capital will also undergo a 10 for 1 consolidation on the same date.

UBC's share price movement was in stark contrast to that of Audioboom (formerly One Delta) where the share price has more than doubled since it's reversal.

Whilst it's disappointing for UBC shareholders to wait six months only to see the share price fall so dramatically when it eventually relisted, some perspective is required.

Firstly when UBC's shares were temporarily suspended in November at around 6p, the shares had only recently been lifted to this price in a matter of days by speculators. The market cap. of around £11m would be difficult to justify given that UBC is loss making (and has been for a number of years) with recently reported year end revenues of just £2.9m.

Secondly, UBC needed to add considerable scale to it's business. It's done just that through the acquisition of 7Digital. You might argue that it should have just reversed in Audioboom, but whilst that may have had a more positive effect on the share price in the short term, for longer term investors I think a finger in both pies could be far more lucrative.

Thirdly, 7Digital (UBC) holds a near 20% shareholding in Audioboom. Any increases in Audioboom's share price will enhance the NAV of 7Digital. BOOM's current market cap. is worth just over £4.4m to 7Digital (UBC).

Both 7Digital and Audioboom are both highly speculative investments. However, Audioboom is yet to monitise it's business model whilst 7Digital boasts yearly revenues of over £11m. 7digital's unaudited management accounts for the quarter ended 31 March 2014 showed a 34 per cent. year-on-year increase in monthly recurring technology licensing revenue to £1,075,000 (2013: £800,000) with an overall gross margin for the business of 50.3 per cent. (2013: 45.2 per cent.). Furthermore,  at the end of December 2013 the normalised yearly run-rate of monthly recurring technology licensing revenue was £4.6 million (2012: £2.5 million).

When 7Digital reverses into UBC on 10 June, the enlarged group will be worth around £33m at the current share price of 31.25p (post-consolidation). That doesn't sound too outrageous to me for what has the potential to be a very exciting growth story, particularly when combined with its 20% shareholding in Audioboom.

7Digital will also boast a heavy-weight board of Directors who should be able to steer the combined company in an upward trajectory. Simon Cole CEO of UBC Media states:- "our joint management teams have already started winning business together and I am confident that the combination of our combined global networks in technology and media will create an opportunity on the London market for investors to benefit from the growth of this dynamic sector."

At Audioboom,  Rob Proctor CEO of the company states :- "We are working on a number of exciting developments, particularly in the US and Australia, which already account for a large proportion of our traffic, and have just opened our New York and Brisbane offices. We believe there are a number of potentially transformational deals for Audioboom in the US, Australia and Europe and I look forward to announcing developments in the near future."

Of course, 7Digital and/or Audioboom may or may not prove to be good investments over the longer term. However, at present I'm more than happy to hold on to my shareholding and watch developments with optimism and interest.

When you invest in small/micro-cap companies you have to be prepared to take the rough with the smooth, and possess a strong stomach for often volatile share price movements. However, with a reasonably good eye for spotting opportunities, and a long term buy and hold strategy, profits from your winners will more than make up for any losers in your portfolio.

Bull markets and Telematics

The bull market has been running for 5 years now, so surely we are due a bear market phase shortly. Not so according to Ken Fisher in his weekend article entitled "Back to the future as we rerun the nineties"

http://search.ft.com/search?queryText=back+to+the+future+as+we+rerun

You will need to be a subscriber or buy the paper for the full text.

It's an excellent article that draws a startling number of parallels between now and 1995 when the bull market ran for a further five years. He writes :-

"Then, as now, a five-year-old bull was still in its early stages. Small stocks had beaten large ones and US stocks had beaten the world. After stocks rose sharply in 1995, fear of heights was catching, just as it is today after 2013's big gains. Folks fretted that the bull was losing steam and couldn't fathom it lasting years more. It did.".

He talks about investors memories of the IPO frenzy, but points out that in the mid 90s mature firms such as Alcatel-Lucent, and Andarko floated and it was only at the end of the decade that companies such as Netscape - exciting technology that later became obsolete came to the stock market. He goes on "Those (later) memories drive jitters over Facebook today, but recent IPOs are mature, quality offerings such as Hilton and Container Store. This is a sign of rising optimism - just like the mid-1990s. No euphoria then, none now."

Whilst I consider myself a stock picker and long term investor with little interest in macro conditions, I believe that he may be right and this bull has a few more years to run yet.

I don't think investors have truly grasped the enormity of the financial crisis and deep recession or indeed the subsequent opportunity it presented to investors to pick up great stocks in  a sort of "sale of the century". I said at the time and still believe that 2009 was a once in a lifetime opportunity to build a great portfolio at ludicrously low prices. The events that took place were unprecedented in recent living memory and global recovery is still in its infancy.

Whilst many p/e ratios may looked stretched, they may look less so when economic recovery moves rapidly through the gears. Other factors to consider are whilst interest rates remain at historic lows with no immediate threat of increasing, where else can you get a decent return on your money? Finally it is interesting to note that many Directors are snapping up shares in their own companies like they're going out of fashion despite (in some cases) their shares have risen considerably in  the past 5 years. From a contrarian point of view, many traders and investment managers have already increased their cash piles. Bear markets are rarely anticipated.

I currently see no reason to sell any of my holdings, and touch-wood I have been very pleased with their progress where recent RNS releases have been very encouraging. As ever, I constantly keep my eye out for any bargains that may arise through irrational selling, or any other reasons. Mr Market always provides opportunities.

Moving on to one of my current portfolio favourites - TRAKM8 - this weeks Sunday Telegraph has made me think that as optimistic as I am about this company's future, its recent trading statement and tie up with Direct Line Insurance (sole supplier), perhaps even I've underestimated just what a potentially exciting area and company this could turn out to be. On the front page of today's Sunday Telegraph and in their money section we have:-

"Drivers to have a spy in the car"

http://www.telegraph.co.uk/finance/personalfinance/insurance/motorinsurance/10837263/Drivers-without-insurance-black-box-could-be-forced-off-the-road-within-10-years.html

Some of the key paragraphs include:-

"Drivers will within 10 years face inflated insurance premiums – or even be forced off the road – unless they allow their driving to be monitored at all times by tracking technology."

"Tom Ellis of Gocompare, the insurance comparison website, who spoke at the British Insurance Brokers' Association (Biba) seminar, told The Telegraph: "In 10 years' time there will still be customers who prefer not to have a telematics device installed, [but] it will be an opt-out situation, rather than an opt-in. "

"The technology will soon be fitted in new cars as standard. Under EU regulations, all new cars will need black box-style technology, known as eCall, from October 2015, to help emergency services find crashed vehicles. "

"Direct Line this year launched a self-install device available to all drivers, which it said could save young drivers up to 25pc. The firm said drivers with the best driving records could get a 40pc discount on renewal. "

It's worth reading the full article but it also includes this:-

"Penny Searles, managing director of the firm, said: "We are seeing a tipping point this year, where more insurers are making this technology available to the mass market. "

From Trakm8's recent trading statement they also talk about this year being a tipping point for their Telematics solutions. The market is potentially massive, and the sole supplier agreement that Trakm8 has with Direct Line is a hugely significant milestone.

Without trying to get too overexcited, Trakm8 are operating profitably with excellent cashflow, a high percentage of recurring revenues and gross margins (last reported) above 70% in a potentially explosive growth area. The market cap. is still just under £25m. If the company continues to develop in the way it has so far then it could potentially be worth  many hundreds of millions in the not too distant future.

Here's hoping anyway.

Trakm8 telematics - A Direct Line to success?

This is just a short blog after some reading and a little bit more thinking about the future of Trakm8 and telematics. Firstly, after wading through several hundred posts on the Advfn Quindell thread, I did actually read one that was useful which was simply the link below:-

http://www.telematics.com/telematics-blog/telematics-stay/

Whilst there is no mention of Trakm8 (Trakm8's clients now include Direct Line, Eon, St Gobain, the AA and Fujitsu), it does imply that telematics is at a key juncture which tallies with John Watkins' (Executive Chairman of Trakm8) outlook statement at the half-year where he states that a tipping point in mass market adoption of telematics appears to have been reached.

Bearing in mind Trakm8's Friday announcement of it's contract win with Direct Line as sole telematics supplier of self install devices, I then read Direct Line's recent trading statement which has this to say about its roll-out:-

"On 23 April 2014 the Group launched its self-install telematics proposition in the UK after a successful pilot. The Group believes this positions it as one of the leaders in developing the telematics market and enables it to offer telematics to a broader range of customers. Take-up remains strong in Direct Line new policies with one in five under 25 year olds electing for telematics."

No wonder John Watkins describes the partnership as a key milestone for Trakm8.

Even after Friday's share price rise, at 72p Trakm8 is still a minnow with a valuation of just less than £21m. With a short, medium and long term view I'm getting increasingly excited about Trakm8's prospects. Interestingly employees and others seem to share my enthusiasm and have been acquiring shares out of treasury with the last purchases at a price of 69.5p.

N.B. I don't have any interest in Quindell apart from its involvement in Telematics.

Ignore market conditions and take the long term view

Friday brought further good news for my holding in Trakm8 with the announcement it had been appointed the sole telematics supplier of self-install devices to Direct Line Group for the recently launched Direct Line DrivePlus Plug-in device. It was confirmation of the significant hardware order Trakm8 announced on 13 January 2014.

John Watkins, Executive Chairman of Trakm8 commented:
"This is a key milestone for Trakm8, as Direct Line Group launches a step-change in telematics for UK consumers. This proposition accelerates the awareness of telematics as an effective tool to improve driving skills and reduce fuel costs. We look forward to building on this relationship further as consumers adopt the Plug-in device."

Trakm8 continues to make excellent progress, and boasts a high percentage of recurring revenues which provide the financial stability from which the company can accelerate its growth.

The recent April trading statement was also very encouraging. The share price rose by 9% on Friday and the current market cap. is around £21m:-

http://michae1mouse.blogspot.co.uk/2014/04/trading-statement-trakm8.html

Avanti Communications also released news of a contract win on Friday with Avonline Broadband. This is a multi-million dollar contract extension, and follows on from a very encouraging rate of contract wins that the company has announced in recent months.

Whilst this is a speculative holding for me, the recent spate of newsflow fills me with cautious optimism, and I continue to hold the shares.

On a separate note, those of you who regularly read my blog will recognise that I am a long term holder of shares, and have very little interest in the general direction of the main indices, I am only ever interested in individual companies and whether or not they look cheap and are worthy of consideration. Buffet's recent letter to Berkshire's shareholder's is well worth reading if you haven't already:-

http://michae1mouse.blogspot.co.uk/2014/03/buffets-letter-to-shareholders.html

Particularly this line:-

"Forming macro opinions or listening to the macro or market predictions of others is a waste of time".

Consider this: in around 2002, all seemed lost in a group called Ashtead, and I distinctly remember watching the share price fall to 1.5p, and considered having a punt. However, I didn't, but did buy some later at 15p when the shares had already 10 bagged from this low point. I later sold the shares for a modest profit. Shares in Ashtead currently stand at £8.73. A £1000 investment at 1.5p would currently be worth £582,000, and at 15p £58,200. Not a bad return over 12 years I'd suggest. Financial crisis!! Who cares if you're a reasonable stock picker with a long term view?

BOOM.....!!! One Delta rises more than 100% on Audioboo reversal

Unexpectedly, Friday turned out to be an eventful day for three of my current holdings.

Firstly, on Thursday, One Delta released news that the acquisition through a reverse takeover of Audioboo had been agreed subject to shareholder approval with the new company to be rebranded as Audioboom. Whilst I don't hold shares in One Delta, I indirectly have a proportionate 20% stake in the company through holding shares in UBC Media. One Delta's shares returned to the market on Friday after a period of suspension, and soared over 100% in a day. It's highly speculative of course since the company is not set to make any meaningful revenues in 2014 whilst it concentrates its efforts in rapidly growing the volume of content, investing in technology, increasing the number of registered users, listens-per-user and content partners. At the current share price of 3.625p, the market cap. of the enlarged group would stand at just under £17m which clearly can't be justified on fundamentals, but compared with the multi-billion dollar valuations of other successful social networking sites, it could  turn out to be grossly undervalued (Twitter is currently valued at around $22billion).

This is great news for UBC Media holders, Simon Cole, CEO of UBC Media, will become a Non-Executive Director of Audioboom, and UBC will be its largest shareholder with around 20% (including warrants), and bodes well for their own reverse takeover of 7Digital.

7digital have grown revenues 289% over the past five years, and details of the reverse takeover are expected in May (I anticipate that this could be as early as next week) at which time UBC Media shares will return from suspension. It appears that investor appetite for these types of companies remains high, and I expect 7Digital's listing to be very favourably received by the market. Of course there are no guarantees, and we shall just have to wait and see, but I do like the potential synergies that exist between 7Digital, UBC Media and Audioboom.

N.B. Previous blog on UBC Media :-
http://michae1mouse.blogspot.co.uk/2014/03/ubc-media-trakm8-and-synety.html