Small Cap Report - SBRY, TED, GRG, ZTF

J Sainsbury (LON:SBRY)

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.

Ted Baker (LON:TED)

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!

Market Makers

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!

Greggs (LON:GRG)

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;
http://equitydevelopment.co.uk/index.php?p=news

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