20/08/2023

The Week In Small Caps: August 20

The Golden Goose

There is not a week that goes by when the mainstream media points out the “desperate” moves being made to restore the City’s position amongst the major financial centres of the world. This is of course after nearly 30 years of regulatory and Government moves to kill the Golden Goose via tax and red tape. Now we are apparently complaining about the lack of eggs. Even better, the journalists who are covering this ongoing story are the very people who delight in entrepreneurs and investors (trying to get richer than them) losing money. Coverage of the stock market remains feeble, and perfunctory. It is written by either people who have no direct experience of the stock market and have an axe to grind, while those who are City people either cannot write, or simply tow the line.

The Annual Fund Raise

There are two main reasons that the London market is struggling, one is tax and over regulation, and the second more obviously, we are in a bear market. At the same time there is absolutely no incentive to list. On AIM you are looking at a £500,000 a year cost just to play the game, with Stasi like rules, meaning that you need to raise money annually just to stand still. IPO’s on AIM have recently struggled to raise even £2m, and many have struggled to fill their annual fund raise.

The Politics of Envy

If things go wrong, or there is a delay in your timelines, management get it in the neck in the wake that no private company would. Indeed, it is still far easier to raise money privately, than it is on the stock market at the moment, all the abuse notwithstanding. Of course, raising cash is the whole point of listing. It looks like this state of affairs is not going to change any time soon. We need nothing short of an economic boom to turn things around on the stock market, or massive incentives, far more than things like the current ISA arrangements, to turn things around. However, the main problem the stock market has is an image one. In an increasingly envious society, no one has any sympathy or wants its participants to succeed. Oh yes, and how is the abolition of stamp duty on shares going?

The Big Short

Just to add to the gloom this week it was reported widely, of course, that Michael Burry, of Big Short fame, had placed a $1.6bn short on the market, almost his whole worth. This was against the Nasdaq and the S&P 500, both of whom have rallied hard this year off the back of the Artificial Intelligence bubble. To be fair, according to sentiment is bang on the money. In fact, one might even suggest that it is amazing that there has not been the Great Crash of 2023 already. Indeed, the only thing that may prevent him from being correct is that not only are so many people in agreement, but more importantly for much of the recent past massive positions in put options / negative bets on the market have already been in place. It should also be remembered that it is not necessarily the level that a market is at, but the amount of liquidity. For small caps in London, the liquidity crunch has been the horror of the past year.

Special Situations

One of the main reasons for following the small cap space, which can be regarded as a plus at a time of economic woes is that one can hone in on special situations that are relatively detached from the macro picture. For instance, a mining company making a giant discovery, like Empire Metals (EEE), is not going to be affected by the latest inflation numbers, or a pharma company getting the nod from the FDA like Futura Medical (FUM).

Simon Mann / Hydrogen Utopia

A situation which looks sure to develop in coming weeks is that of waste plastic to hydrogen group Hydrogen Utopia (HUI). Here we read in the Sunday Telegraph that CEO Aleksandra Binkowska looks to have pulled off a coup (pun intended) in appointing ex-SAS mercenary Simon Mann as Chairman. The company has already managed to pull various rabbits out of the hat, moving Aquis to the main market, getting an option on a medical cannabis company to secure its revenues, and flying the flag on the waste plastic crisis. With Mann as Chairman one would expect HUI’s journey to its goals to be significantly accelerated. This is said especially in the wake of this week’s bunfight with the shorters regarding the company’s cash position. It reaffirmed in a RNS that it has a 12 months cash runway. Given that Mann is clearly quite capable of handling bunfights, the question that the bears will have to ask themselves is do they feel lucky? HUI shares were up 25% during the week.

Speaking of pulling rabbits out of the hat / positive surprises in a bear market, Beacon Energy (BCE) was up by more than two thirds as it revealed it had found oil reserves in Germany. This was a joint fundamental win, as the stock ended the week at 0.15p, hitting the chart target in the Bulletin Board Heroes video earlier in the week.

Abingdon Health (ABDX) pulled off a coup of its own in being able to announce that its saliva based pregnancy test Salistick is appearing in Tesco. The shares were up 25%, and one would assume that at least while above recent 9p support, they could head back to the former June peak at 18p.