A share sale and a cautionary note

I haven't posted on my blog since April for the many reasons that I have already outlined. However, here's a brief update on a fairly recent share sale. The company in question is Cloudcall. It's been a love/hate relationship with this particular company as outlined in my previous blog post over a year and a half ago. Here's the link below:-

http://michae1mouse.blogspot.com/2016/11/another-bad-call.html

As you can see I originally bought shares at around 150p, and perhaps against my better judgement at the time, bought more at prices around 55p. The company had become unloved and many investors abandoned ship thinking all was lost. That is generally the best time to purchase your shares. In the case of Cloudcall, it was a fairly speculative investment and hence I bought a relatively modest holding for me.

In recent weeks, I've taken profits. Overall, I made a healthy 103% profit. Not stellar but I'm happy given it was never a conviction buy.

Whilst all of the bull points I outlined in my previous posts still exist, and the company still appears to be achieving excellent growth, I sold for the following reasons.

I currently sense that some overlooked value/growth stocks offer better value and I felt this week's trading statement was a tad underwhelming relative to a market cap of more than £30m (predicted revenues of just £9m in 2018, still burning cash and making losses). Whilst revenue was up 31% on a comparable basis to H1 2017, from memory it was only up around 11% from H2 2017. Not as impressive, although reasons were given and I assume that they still expect to hit market expectations. In summary progress is slower than I had hoped.

If Cloudcall goes onto multi-bag from here then that would be great for holders, but of course there are always opportunities elsewhere, particularly amongst the micro and small cap companies.

The cautionary note is this. The bull market has been running for a long time now. It may have further to run. We haven't seen irrational exuberance yet, although some instances are now beginning to emerge.

Even experienced investors become complacent in long bull runs and begin to believe that this is the norm. It's not. Firstly, think about interest rates. They are still at historic lows. Even a 1 or 2 point rise from here would be alarming to some people. Those of us old enough to remember have seen interest rates at 10%-15%. Even 3%-5% may send shudders down the spine of some people. 3%-5% would be more normal.

As regards the stock market, my major concern is that many investors have got used to growth stocks on heady p/e values of 50 or worst still are valuing early revenue stocks on multi-million pound capitalisations before their business models have even been proven. Even for growth stocks, a p/e of 25-30 is pretty heady since it implies that they'll increase profits by 25%-30% year in year out. Asos is the exception that proves the rule (although it looks like growth at Asos is now beginning to slow). If growth slowed to let's say 15% a year at Asos and the p/e dropped to 25 then based on 2017 earnings it's share price would plummet to £19.30. Now if you bought Asos early and sold recently then no doubt you're a multi-millionaire that doesn't give a monkey's, but I've used the current share price as an illustration of what happens when growth slows or in some cases doesn't materialise at all.

Finally, back to Cloudcall, I often ask myself would I now buy this company at this market cap. given the current information. The answer was no and I sold. Of course it does depend on your long term view re:possible growth, but as already mentioned, I perceive better opportunities may lie elsewhere.

As ever, it's a personal blog and my opinions are not meant as advice.

Reproduced from the ADVFN Stilo thread - FYI

russ505 - Re:twitter. Just using it for my own personal use at the moment FYI. Appreciate the links and info you've posted throughout the years. Trouble with social media is that trolls (you're NOT one obviously) follow you around with their lies and abuse whilst feeding off your ideas. Weird but true. In short, I've stopped posting my ideas on social media (certainly for the foreseeable future) for very many reasons. Mostly explained here in 2016:-

hTTps://michae1mouse.blogspot.co.uk/2016/01/the-last-post-well-not-quite-probably.html

I haven't drawn attention to any of my new holdings since this time, albeit a small number, but I'm pleased to say that four of them have more than doubled in value already with good performances from all but one of the others. I gain nothing from sharing my ideas though (just abuse but rarely thanks), and indeed luckily for me, my investing strategies have enabled me to live a lifestyle that I enjoy. Maybe too much free time? Perhaps it would be better to leave the trolls and spivs to it, and I shall try to do this in future, although I have always been of a combative nature where I see obvious wrong and poor behavior from others.
Here's an example to illustrate some duplicitous behavior. SL hang your head in shame:-

hTTps://uk.advfn.com/forum/search?q=avesco&post_poster=on&post_post=on&index=posts&thread_id=25760470
https://uk.advfn.com/forum/search?q=stilolosses&post_poster=on&post_post=on&index=posts&thread_id=35066820

I wish you well Russ, but if I discuss ideas in future it would be behind a pay wall, but since there is no requirement for me to do so, I think this is highly unlikely.

Good luck with your investing, and well done (so far) with TERN.
I shall reproduce this post on my blog to inform others.

Finally, just a quick thanks to all that read the blog on a regular basis. I may make the occasional contribution in future so do pop in.

Stilo results 2017/2018

Stilo International released their results on Thursday which were steady and in-line with what could have been anticipated from their interims.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/STL/13567489.html

"8% increase in sales revenues to £1,894,000 (2016: £1,761,000).

·    Profit before tax of £309,000 (2016: £318,000).

·    10% increase in operating costs, net of capitalised development costs, to £1,578,000

(2016: £1,437,000).

·    Increased investment in total product development to £656,000 (2016: £538,000) of which £213,000 capitalised (2016: £204,000).

·    Improved cash position of £1,621,000 as at 31 December 2017 (2016: £1,466,000).

·    Final dividend proposed of 0.05 pence per Ordinary Share, providing an 11% increase in total dividend to 0.10 pence for the year (2016: total 0.09 pence)."

Not bad, but not spectacular either.

The outlook statement was mixed:-

"The Directors are aware that material orders from two key customers for OmniMark and Migrate will not be repeated in 2018 and the revenue shortfall will need to be offset by new business sales to maintain the current level of revenues. To support this we are undertaking additional investments in sales and marketing with the objective of further broadening the customer base and accelerating the growth of AuthorBridge.

We are encouraged by the sales pipeline for new business prospects, but at the current time it is far too early to know what the outcome will be for 2018. However, Stilo has the balance sheet, and product portfolio, not to shy away from incurring costs today in order to steepen the Company's long term growth curve and to deliver sustainable value growth to investors."

Firstly, let's deal with the contracts that have now terminated. The Migrate contract relates to a 3-year deal with a major semiconductor manufacturer which has now come to an end:-

http://swindon-business.net/index.php/2015/05/20/major-us-contract-boosts-swindon-tech-innovator/

and if the Omnimark contract is of a similar magnitude then the short fall in revenue will be around £300,000-£350,000 for 2018/2019. That's assuming they fail to convert sufficient business in the sales pipeline to make-up this short fall.

With an increased spend on sales and marketing, a worst case scenario, if they don't make up the revenues for the contracts that have now ended then it's possible they will just about break even or even record a small loss in 2018/2019.

So why would I continue to hold or buy? There are quite a number of good reasons:-

1) You need to look at the long term picture. It's a very small company and they'll undoubtedly have an occasional blip, but since I've been interested (2015), revenues, the cash balance and dividend payment have risen every year. That's a very good sign and the balance sheet strength keeps the company in good stead for an occasional disappointing year.

2) 100's of thousands of pounds make a big difference to Stilo's bottom line. 2018/2019 may turn out to be a poor year. However, as AuthorBridge is adopted by more organisations in future years, revenues will quickly pick up again, and profitability can shoot up very quickly on relatively small revenue increases. Gross margins are an incredible 99%. Therefore any dip in profitability can quickly and easily be reversed.

3) For a very small company, it's a pretty safe bet in uncertain times. It has a market cap. of a mere £4.5m, but boasts £1.6m cash, NAV of £3.7m, a dividend yield of 3% (and rising), it's profitable and generates cash. In other words, unless something catastrophic happens then bad news is already priced in. The company is debt free which adds another huge level of security.

4) Stilo has paid a special dividend in the past, and there is no reason that it won't in the future. It may make an acquisition. It has hinted at one or both in a relatively recent trading statement (May 2017):-

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/STL/13229595.html

5) It may indeed become a target for another company. Perhaps a much larger concern that already has a large sales and marketing capacity, and could accelerate sales of Omnimark, Migrate and AuthorBridge far more quickly. Imagine how attractive Stilo would be, I'd guess at this juncture an offer of £10m (more than 100% premium) would be a starting point.

Finally, as outlined, I have already run the figures through what I'd deem to be a worst case scenario, and believe that medium/long term, the upside potential is far greater than any downside risk. I'd guess that anticipated bad news is largely priced in for 2018/2019. Therefore any unexpected good news will see a rapid recovery in the share price.

Revenues, cash, and NAV have been growing in recent years, although this may not be the case in 2018/2019. However, at the moment, Stilo is attractive as a value proposition as we wait for future growth. If both eventually come together then that's when the larger rewards will happen.

For now I'm happy to hold and keep adding when it suits.

As ever my blog only records my own thoughts and does not offer advice.