Wednesday, January 9, 2013

Wed 9 Jan - SBRY, TED, GRG, ZTF

Sainsbury's (SBRY) is my favourite of the Listed supermarkets, simply because they seem to be executing better than the others. Also, it's intangible, but as a customer when shopping at Sainsbury's, I just somehow feel positive (maybe it's the colour scheme, store layouts, staff attitude, the product, who knows?). When I shop in Tesco, it feels the opposite - somehow more stressful and unpleasant. Can't explain it, but there has to be a reason for that.

With a positive Xmas trading update issued this morning, with LFL sales up 1.5%, it's put SBRY back on my shopping list at 329p, so have picked up a few. The forecast yield is almost 5%, and the PER 11, so those figures look attractive to me. Always the possibility that the Qataris, who own 26% might bid for the whole thing at some point, so I like SBRY as a nice each-way bet.

Fashion group Ted Baker (TED) once again shows how it's done, with an excellent trading update for the 8 weeks to 5 Jan. Retail sales rose 20.9% vs last year, and with sq footage up 13.9%, that means LFL sales are up roughly 7%, a remarkable performance in the current climate.

It just goes to prove what I've always said - if you get the product & the price right, it will sell, regardless of market conditions.

Profits at TED will be in line with expectations. The share price already reflects this strong performance, with a PER of just over 20. It's not for me, as it only takes one season's range to go wrong, and a profits warning, to trigger a 30% plunge in share price. So for me the potential reward does not justify the risk.
But I'll be the guy buying 30% lower if they do warn on profits at any point!

Today's rant has to be about market makers, and their ridiculous spreads again. Take Vianet (VNET), a share which I'm very keen on, as it's the ideal mix of value (fwd PER of 6.7 times next year's fc EPS of 17p, and 5% divi yield, with a sound balance sheet) and good growth potential thrown in for free.

There has been a fair bit of volume lately, typically 100-200k shares traded each day, if not more. So the market spread should be maybe 1-2% right? Wrong! Despite having 5 market makers providing quotes (of just 1,000 shares!), their resting position is a bid/offer spread of 7p. On a share that is just over a quid. Absolutely crazy.

Moreover, they don't compete with each other, they just rush to match each other's stance, leaving the spread so impossibly wide that they have effectively almost shut down the market in VNET shares. Nobody is going to trade if they have to absorb a 7% bid/offer spread, plus dealing costs. Get a grip please market makers! Either quote sensible prices, or don't bother quoting prices at all!

What makes it worse, is that the actual price of trades going through is well within the quoted spread. So why do they insist on quoting prices which are far wider than the actual prices they are prepared to deal at? It just creates hassle, and deters people from dealing. So instead we have to go to an online broker, put in dummy trades, to see what the price on the RSP actually is. A ridiculous waste of time.

My preference would be to have ALL stocks on the market as  SETSmm stocks, so that investors can place orders directly on the order book (if you have DMA), or instruct your broker to do so, by-passing the market makers altogether.

This is a serious issue, where the status quo is massively holding back the market in small caps. We need much tighter spreads, and more liquidity (which will flow naturally from tighter spreads). The market makers current strategy of extreme caution is greatly holding back the small caps market in my opinion. Action is needed!

Gregg's (GRG) didn't have a great Xmas, with LFL sales down 2.9% against strong 2011 comparatives. Although they do say full year results to be broadly in line with expectations. PER is 11, and divi yield 4.6%, but growth prospects look limited. So probably priced about right.

High performance foams maker, Zotefoams (ZTF) puts out a positive trading statement, with Q4 sales up 8%, and expectation of 2012 being in line. The valuation looks about right for a steady growth company, with a fwd PER of about 15.

Oh, just a quick plug for an investor London event next week, which I shall be attending. It's a similar format to Dave Stredder's "Mello" investment evenings, in that 3 Listed companies will be giving short presentations, followed by Q&A. Then drinks/canapes & networking afterwards. It's all free, and is being organised by Equity Development, who are sharpening their focus on private investors, hence why they are organising this event.

Should be a good evening, as the 3 companies are excellent growth small caps: Tracsis, Regenersis, and VP Group.

Details are here for anyone interested, as there are still some spaces left;

Right, I have to dash, so that's it for today. Back tomorrow.

Regards, Paul.


  1. Hi Paul totally agree with the issue on spreads and the MM’s.

    I just wont look at anything which has a spread of 3% -coupled with dealing costs it just doesn’t make sense when I have to cover the spread and dealing cost just to breakeven it puts me off straight away - totally agree tighter spreads would increase liquidity.

    But If I can ask just another question regards Vianet - if you recall a few days again that you said that the selling of stock by "New Solera Holdings Limited” – looked like & felt of a coiled spring to you. Which in turn pushed up the price?

    But I was under the impression that selling of such volumes of stock would have pushed the price down and not up. Is there anyway you could explain why this occurred?

    Was the increase due to the fact that buyers were merely sitting there ready to purchase the stock that the institution had sold?

    Thanks hope you can explain this as I have been scratching my head over the past few days trying to get my head round the increase in price after such a sell off.

    Many thanks as Ever


    1. Hi,

      If you look back over the daily trades information for Vianet over the last month or so, it is clear that almost all the trades going through each day are retail buys - i.e. the likes of you & me buying.

      Then towards the end of the day, there is always one or two large sells, which roughly equal the amount of small buys for the day.

      So putting 2 & 2 together, it is clear that New Solera were simply feeding the market makers with however much stock they needed to supply buyers.

      Hence all these transactions are price neutral. The price just remains static as buyers gradually hoover up the New Solera shares. New Solera can only sell them gradually, to meet demand.

      Remember that the market makers run NEUTRAL books, i.e. most of the time they only act as a middle man.

      Now that New Solera have gone, then the supply of VNET shares has dried up. So buyers must now push the price up in order to get stock, until the price has risen enough to attract sellers.

      Trouble is, the market makers have widened the spread to such a ridiculous extent, that nobody wants to trade either way! Which is extremely unhelpful.

      Hope that explains it!

      Cheers, Paul.

    2. Wow.Paul
      you explained that perfectly ! to such an extent i actually understood everything you said-hence i now see why you said it was like a coiled spring
      Thanks so much for again taking time out to explain, i have learnt so much from your site/you over the past few months..investing/trading is becoming clearer by the day !!!

  2. Remaining stock was bought up, probably by an institution and therefore no more spare shares lying around. So when demand comes in, the MMs have to raise the prices to try to attract sellers, to provide the shares. Prior to that people knew the MMs had plenty of stock from the known seller. Demand would also have been less with the known 'overhang' of shares available.

  3. Hello Paul

    Interestingly if you compare the Greggs numbers they had topline sales growth of 4.3% compared to Sainsburys 3.9%

    Greggs have had decent growth in Wholesaling and franchising (Frozen Greggs Stuff available in Iceland now !!)- add in the new coffee shops formats, Airports units, Train stations and Motorway service stations and there is life in the old Greggs dog yet - i can't imagine there is particularly much investment needed to increase the wholesale side of the business too.

    Best of all i can now go to the toon on a friday night and get a nice Greggs pastie at 2.30 am in one of the late opening units - i just have to be careful not to ask the bouncers if they get paid in pasties.

  4. Great to understand a bit better about the effect of institutional selling/buying. Thanks.

    Can anyone also explain why companies buy back shares at the market price (as is happening with Cupid at the moment) and what the advantages are to both company and shareholder (rather than keeping the money in the company for investment/dividends)?


  5. hi jane with respect of buy backs like cupid who i followed until recently (until the FD) sold off loads of shares. i view it as a negative as it simply drives up the there are less shares available and the way i see it the market must be underval them for a reason.
    But im sure if paul or someone with his knowledge replies i may be totally wro
    ng !

  6. Thanks Haich, so you see it as a ruse to drive up the share price to disguise some underlying weakness?

    Seems rather an expensive way to do it, and rather counter-intuitive...but this is why I'm not a businesswoman!


    1. Hi Jane,

      In Cupids case I think its a great business and can see these types of sites targeted by large social network business's but the FD selling of all those shares didnt help the price ( it fell ) I know Paul did a mention them in a prev article.
      But buy backs to me like you seem like a expensive way to drive up the SP.
      But as I said im sure paul or someone of his level would or could correct me.


  7. Thanks Haich, I've just found Paul's previous mention - not unfavourable, and also considered buybacks more positive than negative. Shall continue to watch and see what happens....


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