Oct 5, 2024 · 22 min
Deep-value investors weigh bargains against value traps
IC036 So Many Bonkers Bargains Right Now – How Do We Keep Up
The episode shows how investors can pursue overlooked small-cap opportunities without ignoring strategy changes, weak cash generation, volatility, or diversification.
- 1Time Finance and Alumasc illustrate how difficult conditions can create attractive opportunities in fundamentally sound smaller companies.
- 2Gemfields highlights deep-value potential, while XP Power shows how an investment case can deteriorate when operations and markets turn against it.
- 3A bargain deserves reconsideration when management changes strategy, dividends disappear, or cash generation and alignment weaken.
Don't miss
XP Power becomes the episode’s clearest warning: a formerly successful business can invalidate its investment case through operational and market setbacks.
The brief
Chris Cote and Lord Lee frame “bonkers bargains” as fundamentally sound companies whose shares look unusually cheap after difficult conditions, especially across smaller UK stocks.
Time Finance and Alumasc provide the constructive case: a lender and a construction-materials business became more compelling as investors reassessed their prospects and businesses.
Gemfields brings the deeper-value dilemma into focus, with a discount to its historical cash-generation potential balanced against mining risk, value traps, and the need for diversification.
XP Power is the cautionary example: a formerly successful business encountered operational and market difficulties, showing why a low share price alone cannot preserve an investment case.
The episode’s practical test is ongoing monitoring: reconsider a bargain when management changes strategy, rhetoric replaces delivery, dividends vanish, or cash generation weakens.
What was said on this episode
26 statements · 20 positive · 4 negative · 2 mixed
Investors should examine smaller quoted companies for potential opportunities.
“I would implore people to look at smaller quoted companies.”
Listen at 0:59
Investors should maintain watchlists because small-cap buying opportunities are abundant.
“you should have loads of stuff on your watchlist at the moment because there are some great buying opportunities in our opinion.”
Listen at 1:06
Small-cap bargain investing may involve losses before eventual gains.
“you've got to be prepared for a bit of pain before gain.”
Listen at 2:21
Small-cap bargains may decline further but can have substantial recovery potential.
“They may fall further, but wow, the recovery potential, as we can illustrate with one of our successes over recent years, has been substantial.”
Listen at 2:29
Time Finance has substantial further upside potential.
“Still got a long way to go.”
Listen at 5:12
Time Finance’s latest first-quarter trading update was positive.
“The first quarter trading update after the year-end was really positive.”
Listen at 5:34
Time Finance has performed strongly and may continue delivering returns.
“it started to deliver in spades, but it took a lot of patience. And it hopefully will continue to deliver.”
Listen at 5:48
Time Finance generated approximately a 253% return from the selection.
“you can get it anywhere. 253%.”
Listen at 6:35
Falling interest rates should strongly benefit construction-materials businesses.
“if we see interest rates coming down, as it's going to be the case, these businesses should start to fly.”
Listen at 8:07
Alumasc shares rose approximately 60% since coverage began.
“The shares have up about 60% since we started covering for the Bonkers Bargain.”
Listen at 8:42
Alumasc offers an attractive valuation and approximately a 4% dividend yield.
“even now the rating's good and you get a 4% dividend yield.”
Listen at 8:52
Gemfields trades at approximately a 41% discount to tangible book value.
“It's a 41% discount to its tangible book value.”
Listen at 10:41
Gemfields’ free-cash-flow yield can reach approximately 59.5% in a good year.
“the free cash flow yield in a good year is about 59.5% of the current value.”
Listen at 11:30
Deep-value investments can become value traps and stagnate for years.
“if you get stuck in a deep value, you run the risk of a classic value trap and it goes nowhere for years.”
Listen at 12:58
Deep-value investments should generally target growing underlying markets.
“the underlying market should be growing.”
Listen at 13:14
Small-cap stock pickers should balance growth companies with deep-value investments.
“you should really have a good balance between the growth stories and deep value.”
Listen at 13:21
Investors should screen for forecast dividend yields of at least 3.5%.
“Look at the dividend yields and those that are running elevated dividend yields, say 3.5% and above.”
Listen at 13:39
Investors should diversify across the main market, smaller blue chips, and quoted companies.
“I would spread a, have a good balance around the main market and smaller blue chips and smaller quoted companies.”
Listen at 14:10
XP Power shares doubled from their lows but remained approximately 35% below selection price.
“while the shares have popped up off lows, actually they've doubled off lows, they're still down about 35% since we first picked them.”
Listen at 16:50
Investors should be patient because XP Power could become a major bargain opportunity.
“I would urge some patience here because this could be a big, great sort of bargain opportunity, hopefully.”
Listen at 17:13
A company’s former bargain case may no longer apply after a major business-model change.
“the bargain related to how it was doesn't apply because its business model seemingly going forward is very different.”
Listen at 18:22
The unnamed company’s strategic transformation may set it back approximately three years.
“For that, we are going to have to go backwards for 3 years.”
Listen at 19:04
Many tax-affected AIM companies remain good, growing, attractively valued businesses.
“they're still good companies that are— many of them are growing and look excellent value.”
Listen at 20:30
Tax-affected small-cap companies could perform strongly; investors should avoid selling at the worst moment.
“they could deliver in spades, and people would be crazy to bail out at the worst possible moment.”
Listen at 20:35
Risk-tolerant investors may have better odds of doubling money in these shares than elsewhere.
“you've probably got a better chance of doubling your money here than you have elsewhere.”
Listen at 21:13
Deep-value investing can produce magnificent gains when successful.
“The gain when it comes, as we've highlighted with Time Finance, is magnificent.”
Listen at 21:32
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
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