What a week!

What a week, especially in the US where CPI data came in slightly hot on Thursday and showed no signs of falling. The market instantly tumbled by 3%. A few hours later the market was up nearly 3%! Is this a sign of a bottom? Many historical signals of a bottom, the lows of a stage four downtrend, show exactly this, the market acting irrationally on news. Or could this just be a bear market rally with shorters, shorting the CPI read and then buying back their shares causing a squeeze, in turn forcing a FOMO effect onto the market. I don’t know, but I made some exciting day trades with one of the most profitable days I’ve ever had.

All eyes were focused on the US CPI data with a 0.2% increase predicted, which then came in at 0.4%, raising y/y CPI to 8.2%, despite commodities and energy costs coming down. CPI is a lagging data, reporting on something that has already happened, and more focus should be put on leading indicators such as energy, supply chains and commodities, which are all falling and will eventually lower inflation. Cathie Wood, the Chief Investment Officer at Ark Invest wrote an open letter to the FED this week, she raises these exact points and indicates the FED is acting too aggressively on lagging data. Some analysts now expect the FED to increase interest rates to 5%. This will affect the UK and hopefully, the BOE will be able to position itself accordingly. The biggest risk to the economy right now is policy error by all central banks.

Watching the market and listening to CNBC anyone would think that CPI is raising 5% m/m, but it’s not. As I said above it’s a slight increase and nowhere near the increases seen at the begging of the year. It appears to me inflation in the US is levelling off and if this levelling persists next year CPI compared to now will be flat or slightly up, maybe at expected levels of 2%. If Cathie Wood is correct the FED could send us into a deflationary environment.

UK CPI data y/y is due next Wednesday, it would be great to have some good news, but I very much doubt it. This week the Bank of England said all bailouts to the pension companies would stop on Friday, firmly stating their position to dodgy suits in the city that think the bank will not bail them out every time. They are not there to pick up the pieces of bad management and over-leverage. I like this show of strength from the bank, but this could now signal in the coming days how bad things are going to get, I have constant reminders of 2008, watching the potential domino effect about to start.

I’ve had Hollywood bowl on the watchlist since the beginning of covid. I watched with admiration as the management time rolled up their sleeves and went around with cleaning products to battle covid. This showed me strong management who truly cares about the business and employees.

The company goes from strength to strength in dire economic conditions. If you asked me what business would fail going into covid, the Hollywood Bowl would be near the top. We should be carefully watching these companies displaying strength through pandemics and recessions.

Hollywood Bowl operates ten-pin bowling and mini-golf centres in the United Kingdom and Canada. The Company’s principal activities are the operation of ten-pin bowling and mini-golf centres as well as the development of new centres and other associated activities. The Company has 69 bowling and four mini-golf centres, each equipped with an average of 24 bowling lanes (or three, nine-hole mini-golf courses), a licensed bar, a diner, and an amusements zone featuring games designed to keep everyone entertained. The company was incorporated in 2016 and is headquartered in Hemel Hempstead.

The company reported this week that the Revenue was up 43.3% to £184.9 compared to FY19, which met expectations.

FY22 (30 September 2022) EPS is estimated to be 20p giving us an (f)PE of 9.9. Due to the growth this business displays and the potential growth to come, home and abroad, I think this business is cheap on some levels at present. The thing that holds me back is no one knows how bad things are going to get, where and when is the point that families decide there’s no more money left to pay to throw a ball down a lane.

My confidence that Hollywood bowl could survive a recession is supported by the management team and would add this company to my watchlist. Could I pick this up for a lower price or wait until the clouds part and some confidence and momentum return to the stock market? Let’s watch patiently.

An excellent trading update on Thursday from this ‘Cellular Materials Technology’ Company, no I don’t know what they are either.

A quick bit of research informs me that ‘cellular materials technologies’ are characterized by their porous microstructure that is comprised of solid and void networks. Many biological systems such as bone, honeycombs, marine sponges, wood, and cork have strongly influenced and promoted the emergence of the cellular materials field of study. Still none the wiser. As the company name suggests the company produces foams, many types of foams, used for a wide range of purposes including packing, construction, the automotive and aerospace sector, and many more.

The company has three main products:

• Azote
• ZOTEK
• T-FIT

Today’s trading update informed us that the company is trading ahead of expectations with revenue being 24% ahead of last year.

The company is benefitting from its wide range of diverse customers throughout the world and the current currency issues benefit the company as most of the revenue is collected in Dollars. But as a previous hedging policy is in place the company has not felt the full benefits from this.

As with most commodity prices in most industries, they are now on the decline. Polymer prices declining from all-time high levels, which is improving margins. Energy risks that were once thought to impact margins considerably are now lower due to the UK Government’s pricing actions.

Outlook

“Demand entering the final quarter remains encouraging and we have good visibility of confirmed orders for the remainder of 2022.

the Board now expects adjusted profit before income tax to be significantly ahead of market expectations

Cash generation also continues to be strong and so the better-than-anticipated earnings performance should contribute to an appreciable reduction in both net debt and leverage.”

My quick back-of-a-beer mat calculations

Previous EPS estimates for FY22 (31^st December 2022) are 13.7 – 14p giving us an (f)PE FY22 of c.20x

No numbers are given today but digging around I see that analyst estimates for PBT are around 11.6m, assuming a tax rate of 20% this gives us an EPS of 9.28m, split between the 48.6m shares outstanding, I get an EPS of around 0.19p. which in turn gives us (after today’s 22.5% rise in the share price) an (f)PE of 15x.

With revenue growing at around 24%, margins improving and a solid balance sheet I think Zotefoams is deserving of a much larger PE Ratio. Outside of current macro events, in good times, the company normally trades on a PE of around 25. So, I think Zotefoams could be a contender for the watchlist and ride the share price back up to deserving levels in better times, which will come.

I still want to look at the industry a little further, which would include products, customers and competition and dig a little deeper into the financials.

Loungers operate in the hospitality sector, as of October 2022, operating 206 sites in England and Wales across two distinct but complementary brands, Lounge and Cosy Club. A Lounge is a neighbourhood café/bar combining elements of a restaurant, British pub and coffee shop culture.

Before I even opened the trading update on Friday, I thought this is going to be bad! The media has drilled the fact that most of the public has no money left and the little that has, keep a tight hold of it to buy candles for the upcoming blackouts.

I was pleasantly surprised, sales are up 17% in the 24 weeks to Oct 2^nd, claiming it is significantly outperforming the market. It is continuing with its growth plans to open another 30 sites this year. It has ambitions to have 500 sites in total and currently advertises job vacancies for 567 positions. The financials were compared to that of 2019, the last normalised period of trading. During the manic times of 2021, with people mostly doing nothing and getting paid for it, loungers’ revenue jumped 202% compared to 26% in 2019. Which explains this decision.

It is undeniable that inflation and costs are increasing, and Loungers informs us it is mitigating these well and continues to offer value for money. I have never been to loungers and have no experience with their prices or services and do hope the costs are being passed on and the company is not taking the hit to keep the custom. The company states that many people are still working from home and spending local, it has not seen sales impacted by the economy

This is not a business I want to get involved with right now. Things could change very quickly once bank accounts do start to fall into low levels. I went to a pub recently serving the working community in an area where most people had very little disposable income, the landlord looked depressed, he told me business was slow and the cost-of-living crises was showing in the local area. Later that day I visited a different pub only two miles away, with mostly middle-class customers located next to a golf course. The landlady said business had never been so good. I think the cost-of-living crisis is slowly eroding bank accounts, with the more well off not feeling the pinch quite yet, but I feel it is coming. You can see this by comparing companies such as Boohoo and Burberry.

With Operating margins at around 10.7%, some cash in the bank from the massive revenue last year, a manageable debt of £32m and a strong experienced management team, I think loungers will be able to make it through the dark times to come, but careful consideration will need to be put into the growth plans to ensure there’s enough cash ready for those dark nights