Thomas Streater's  Instablog

For five years Esprit has been in steady decline. Now with the lowest market capitalisation in the Hang Seng Index it is in danger of dropping out of that benchmark. That fourteen of eighteen analysts have a "Sell" recommendation on Esprit speaks for itself.

The apparel retailer is suffering from an identity crisis. With lines too expensive to be considered value and no longer fashionable enough for their price tags, Esprit has steadily lost market share to rivals.

Gap had much the same problem, but improved designs and skillful marketing won it back some of the popularity formerly enjoyed. Compare this to Esprit's recent advertising campaigns. The hiring of supermodel Gisele Bündchen was a desperate attempt to change direction that showed Esprit was unaware of its own position in the market. It makes sense for Burberry to hire Kate Moss but Esprit is just not in that sector.

Esprit's failing business model is more important. Unlike Fast Retailing, Esprit has not been offering functional, basic clothing at reasonable pricing. Unlike other "fast fashion" businesses like Inditex or H&M, Esprit has been unable to react quickly to the latest fashion trends. Esprit also suffers from slow turnover thanks to its wholesale segment accounting for nearly half its revenue. The associated inventory risk has proven costly.

Since September 2011 Esprit has been undergoing restructuring, er, sorry, its "Transformation Plan". The stock is priced accordingly. With negative earnings, EV/LTM sales is a useful metric. At 0.54x Esprit is discounted compared to its more desirable rivals (Gap is the cheapest main rival at 1.1x).

Appropriate comparables therefore, would be stressed apparel brands that were taken private last year such as Kenneth Cole at 0.5x (by Mr Kenneth Cole) or Benetton at 0.7x (by the Benetton family). This could be Esprit's route to a less painful restructuring, away from annoying analysts. Michael Ying, Esprit's leader during the glory days of the nineties, holds around 10% of the company. By teaming up with private equity, Ying could prove that, after Cole and Benetton, three makes it a trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Gross savings (% of GDP)

Data from World Bank

Forbidden Technologies plc (London Stock Exchange AiM quoted: FBT, www.forbidden.co.uk) develops and markets a powerful internet video platform, which is used by broadcasters, in professional web video, in education and by consumers. Forbidden's video post-production platform, FORscene, is one of the world's most advanced browser-based applications.

This is my highest conviction idea and I am an investor in this company. I say "I am an investor" and not "I am long" because "long" implies you are trading, but this is a very substantial investment in my portfolio. Normally, I always employ a stop loss strategy for risk management purposes, however in this case the medium to long term risk/reward is so good that I have been and am employing a Value Averaging strategy to take advantage of changes in Mr Market's mood over time.

Also, for this blog, it will be unique in the sense that the company is listed and headquartered in London but this will be an Asia focused blog, however FBT does have sales in Asia (along with UK, Europe and North America, and recently Africa).

FBT is the world leader in Cloud based video tools. Their business model is similar to hugely successful ARM Holdings (ARMH) in the sense that they design world class technology and then license it out and collect royalties. This means they can leverage their partners' strengths in sales to achieve fast growing revenues without high sales and marketing costs. This keeps the bulk of costs focused on world class R&D. The technology has been recognised by tech and media giants such as Google / YouTube (GOOG) and NBC via partnership agreements.

Rather than write a whole lot, I am going to point you to video interviews with the Chief Executive here and here which talk about the history of FBT and explain why the company is very likely to take market share from rival Avid Technology (AVID).

In terms of institutional investors, those smart guys at Octopus Investments in London own a small percentage. Academic research shows that once the first institutions invest in a small capitalization stock, others will follow. It is the difference between a small cap staying a small cap and a small cap becoming a mid or large cap.

You may have noticed that the CEO shares the same surname as me. So in the interests of full disclosure, yes, I am related to Stephen, he is my cousin. But I'm first and foremost a capitalist, other family members work at listed companies such as Facebook and Heinz but I don't choose to invest in these companies. FB and blue-chip HNZ are growth companies too, but they have much stronger competition in their own markets and business models definitely not similar to ARM. I believe FB will do very well in the coming years, but I think the bulk of the returns have been made by the VC investors in that company. HNZ, well Berkshire Hathaway is taking it private, so what can I say?

If a few years ago you could foresee the growth of smartphones and tablets then ARM was a great way to play that theme, given their edge in designing powerful energy efficient semiconductors. The basis for FBT is that video production and distribution is moving away from physical hardware dominated systems towards access on-demand cloud based systems with real time internet collaboration ability. A similar, although less commercial, analogy would be the development of massively multiplayer online games where players game together in real time often sitting in different parts of the world. Here, video can be streamed, edited and produced more efficiently removing the element of restrictions due to physical location and high physical video editing suite hardware technology costs.

It is difficult to put a target price on FBT, but their technology is game changing and I believe ARM like returns beckon. I am not biased as my focus is only on my own total returns. Depending where you bought ARM if you saw and understood their edge in semiconductors a few years ago, it has been at least a "ten-bagger". In my expectation, FBT will be at least a "ten-bagger" with some patience.

The bulk of FBT's revenues is and will be from FORscene which is used by the professional broadcast production and video editing sector, however if you like making videos yourself, then you can check out the consumer version App, Clesh available here.

Recommendation: Buy and hold like Old Mr Partridge*. Friday's closing price: GBP 0.25

*A reference to advice from a character in Reminiscences of a Stock Operator.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no positions in ARMH, AVID, or GOOG and no plans to initiate any positions within the next 72 hours. However, I am long Forbidden Technologies plc.