Login Register

Free Stuff

Get your FREE two week trail HERE

 (No payment details required)

Am I an assassin or a rabbit, a raider or connoisseur?

I have just finished one of the best investment books I have read in a long time; it contains some great little gems, which I hope will improve my returns. One never stops learning; I continually strive to become a better investor and what better way than by learning from the mistakes and insights of others.

“The Art of Execution; How the world’s best investors get it wrong and still make millions” by Lee Freeman-Shor, took no more than a couple of hours to read, can be found HERE and comes highly recommended.

Background

The author appointed 45 investment managers to manage concentrated portfolios, valued from $20m to $150m, between 2006 and 2013. He instructed them to invest only in their best 10 ideas and he not surprisingly got very divergent results. In this book he observes the differing methods of the managers; he found that in general, all the managers were much of a muchness when it came to picking stocks; of the 1866 investments made only 49% made money but what separated the winning portfolios from the also rans, was execution. Some of the “legendary investors” were only right 30% of the time!

He found the managers fell into five categories. When it came to handling losing investments they were either assassins, hunters or rabbits and when dealing with winners, either raiders or connoisseurs.

In short:

  • An assassin is an investor who deals promptly and unemotionally with his failures; cuts early, or at least at a pre-determined level and moves on.
  • A hunter tends to watch, analyse and then at the right time add, in attempt to average down and salvage the investment. Many were successful with this strategy; never perhaps regaining the whole loss but at least reducing it.
  • A Rabbit! Need I say more. They watched the investment continue to fall, neither cutting or adding. The rabbits tended to have the worst performance by far.
  • Raiders were managers who snatched at any profit they made; 10-30% was enough. The money was then re-invested and as we saw earlier, only with a 50%ish chance of success.
  • The connoisseur however, let the winners run, perhaps trimming now and then but at least having a decent exposure to the holding for the duration. These were the investors who made 100% or more from investments.

The best combination was the assassin/connoisseur and by far the worst were the rabbit/raiders; they invariably ended up being sacked.

In conclusion, an excellent read and hopefully one that will sharpen the investment skills. 

Lessons for me

An assassin or a rabbit?

Over the last four years, since I launched the JIC Portfolio in January 2012, I have considered myself more of an assassin than anything else. I have cut some holdings quite quickly, say after a 20% loss and in most cases those stocks have continued to drop. To be honest, whether they dropped further or promptly rebounded is slightly irrelevant; the point is, I sought to minimise damage to the overall portfolio and move on.

In a few cases, I have acted like a hunter, adding to losing positions but I think my success rate here, has been no more than 50:50.  In the last six months or so I have noticed a few rabbit like tendencies creeping in; I currently hold three stocks of my 30, which are down 33%. The problem with a stock that is down 33% is that it has to gain 50% just to get back to break even! I will come up with a battle plan for those stocks and others in the Portfolio in the coming days. Going forward, I will endeavour to banish any rabbit like leanings and keep my assassin’s rifle loaded.

I will also rethink my strategy around “Stop Loss Review Levels”; it is all very well reviewing but there is always a good reason to put off doing anything. Perhaps setting a firm stop loss would remove the emotion. I have always found that once done, selling out of a losing position leaves a wonderful feeling; you no longer spend an inordinate amount of time worrying about what to do with the holding but can move on and re-invest the capital, hopefully in a winner.

A raider or a connoisseur? 

When it comes to the winners, I believe I have acted more like a connoisseur than a raider. I have always believed in running winners and if the position is not too large, adding. I have also been happy to give a position a haircut when it becomes over extended; not only does this lock in some profits but it enables me to pick up stock on any setback. I still have decent holdings in stocks such as Crawshaw, (first bought in Nov 2013 at 13p), Baillie Gifford Shin Nippon (April 2013 at 280p), easyJet, (Jan 2012 at 408p), AdEPT Telecom, (Sept 2013 at 125p) and DixonsCarphone, (Oct 2012 at 138p) to name a few.

How many holdings?

The final point was on concentration in the Portfolio. The author found that the greatest success stories came from the fund managers’ best ideas, which begs the question, why not put more money into the best ideas, rather than dilute one’s efforts and returns, by adding more stocks? At the end of the day the number of stocks one holds is a personal choice but one has to be careful that in attempting to build a diversified portfolio one is not involved in an exercise of diworseification; Warren Buffett puts it another way; do put all your eggs in one basket but watch it very closely”. The number of holdings in the JIC Portfolio has been as low as 22 and as high as my self-imposed maximum of 30, which I am currently at, with the top 10 positions making up 51.4% of the Portfolio. I think there is some scope to rationalise the Portfolio and bring the number of holdings down again, focusing more of the Portfolio on my winning positions.

If in a year’s time, if I have benefited from sharpening up my discipline around execution and it has had noticeable results, I will contact the author and buy him lunch!

 

23rd March 2017 – Satellite Solutions Worldwide:

Diary notes following presentation by senior management

SAT

Satellite Solutions Worldwide (SAT.L, AIM, Market Capitalisation: £44m, 8.25p, 1.2% of JIC Portfolio and 0.0% of JIC Top 10):

I went to a presentation by the senior management team last night, (22nd March)

Conclusion: I thought the team was impressive with a very clear strategy for growth. The CEO, other directors and staff own 25% of the company and are clearly determined to create shareholder value. A year ago, one could argue that the company looked interesting but might have had doubts about its ability to successfully execute its plan. I think the step change over 2016 has proven that it has the management to grow the business and take advantage of its strong position in a rapidly growing space. I think the fall in the share price in the last few days has left the share looking interesting. At 8.0p the market capitalisation of £40m is pretty much in line with current forecasts of £38m of revenue in the current year. I think that forecast will be upgraded as the year progresses. I also think that as it grows investors will appreciate the business model and the prospects of significant free cash flow after it has gone through this rapid growth phase. I have added a little to my existing position. Very Happy Holder!

See JIC Portfolio tab above for transaction details and updated portfolio

Main Points:

  • The reason for the 9-hour delay in the release of the results was put down to its new advisers being more thorough than its previous ones and not allowing the results to be released until they were completely happy with its content. Simply, they did not have enough time to get the results out at 7:00am.
  • At its year-end, it had 79,000 customers. It is currently up to 85,000.
  • The operational management were impressive and it has a strong Board, with Michael Tobin, ex Telecity, non-exec chairman.
  • Its market is being driven by a greater demand for connectivity as households use more and more products. The demand for greater speed and reliability is never ending.
  • Governments around the world are acknowledging the politics of the “digital divide”. Those living in areas where fast broadband is unavailable are receiving grants covering the cost of the original equipment. In 2014 France introduced a scheme and last year the UK Government launched a voucher scheme; after a slow start, it gained traction in November. In Norway, there are grants for fixed wireless communities.
  • In Europe, the EU has mandated that all citizens are to be connected by 2020 with at least at 30Mbps and with 50% of citizens above 100Mbps. Satellite and wireless is the only solution!
  • In Australia, the Government covers all costs of installation, supporting up to 400,000 satellite customers.
  • 2016 was a transformational year given the step change in its customer base through acquisitions and organic growth. It has given it a great platform for growth with it proving that its “Global Hub Model” works. Gross profit margins stepped higher, with further expansion likely as revenues increase. There will be real scale benefits going forward as overheads as percent of sales fall. Last year they fell from 34.8% to 28.3%.
  • It is currently seeing annual organic revenue growth of 12%. With 85,000 customers if it does not substantially beat its 100,000 target for the year end I will be amazed. Further acquisitions are likely.
  • The acquisition model is working well with new customers being slotted into its Hub network. Customer are happy because they are receiving a far superior customer service.
  • They are conservative with a policy of amortising intangibles, (goodwill) which comes with its acquisitions, over two years, resulting in a hit to profitability. Cash flow is fine but is being ploughed back into further acquisitions. There is a land grab and it makes sense for SAT to grow its customer base a quickly as possible. Ultimately, customers are its assets.
  • Currently the model is based on providing faster broadband to households who are too far away from exchanges to achieve fast connectivity down copper wires. Further out, technology is driving down the costs and increasing the speed of satellite broadband. By 2020, it is likely that it will be offering 100mbps at a cheaper price than offered by fixed line providers. That could open a whole new market to potential customers who just want a reliable service. (I pay Virginmedia for 100 mbps but rarely get over 50mbps as I am further away from the “box” than is ideal)
  • The three acquisitions announced earlier this month cost £1.8m for 5,500 customers generating revenue of £2.0m and EBITDA of £0.4m. As the customers are transitioned into its Global Hub EBITDA margins should improve. It’s a quick payback on investment.
  • It is very disciplined about marketing spend. No point in wasting money on tv advertising. It targets specific post codes where it knows broadband speeds are slow. House to house direct selling and existing customer referrals are important as well as working with local councils and communities.

Screen Shot 2017-03-23 at 09.49.19

29th January 2017  Weekend Roundup: Complacent markets?

Dow Jones went through 20,000 after knocking on the door for the last month. Over the week it rose 1.3%. The wider S&P 500 index rose 1.0% and the technology heavy Nasdaq 100 gained +2.1%, closing the week at an all-time high. In other markets the Nikkei 225 was up 1.72%, the German Dax, +1.6% and in the UK, the FTSE All Share was down 0.13%. Oil gained 0.4% to $55.72 per barrel and sterling had a good week gaining 1.4% against both the $US and € to 1.2549 and 1.1728 respectively.

The JIC Portfolio had a good week, gaining 0.5% so that it is now up 5.4% in January, compared to 0.7% for the FTSE All Share (TR) Index. Two of the largest positions in the Portfolio drove the performance with BlackRock World Mining and Bioventix both up 5.4%.

Two trades last week; the complete sale of two holdings.

Renew Holdings went ex-dividend 5.35p and Elegant Hotels, 3.5p per share on Thursday.

Next week sees interim results from Conviviality tomorrow, a trading update from Gattaca on Wednesday and full year results from Royal Dutch Shell on Thursday.

Volatility

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Wikipedia describes is “The VIX Index is a trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options; the VIX is calculated by the Chicago Board Options Exchange”.

Since Donald Trump won the election in November, the VIX Index has fallen dramatically with the last 12 weeks seeing the largest percentage decline in the VIX Index since its inception in 1990. Since its inception there has been 1413 weeks; Friday’s close was the 13th lowest weekly close.

Screen Shot 2017-01-29 at 09.11.34

This suggests to me that there is a degree of complacency. Periods of such low volatility have in the past been followed by a jump in volatility, normally accompanying a market sell-off, even if short lived. I don’t know what will trigger it or exactly when but all it needs is something to happen which causes traders/investors to think “perhaps I better have a little more cash!”

The chart below shows the VIX over the last three years. Spikes up such as last November around Trumps election, last June with the referendum result, last January when we were told to “sell everything”,  August 2015 and October 2015 stand out very clearly. The chart below it shows the FTSE 100 over the same time period. I think that it does not need too much imagination to see that spikes up in Volatility are normally accompanied by a drop in the FTSE (following the US), and falling Volatility, a rising market. Unfortunately I cannot draw vertical lines to demonstrate this, so you will have to get a ruler out to see for your self.

Screen Shot 2017-01-29 at 08.56.08

 

Screen Shot 2017-01-29 at 08.57.15

I have let the cash level in the JIC Portfolio drift up over the last few weeks and anticipate it rising some more; selling/reducing the odd stock which reaches a short-term target and introducing some stop losses.

I’m not going all bearish on the longer-term outlook but think that some caution is merited in the short term given current complacency. Always nice to have a little cash in a pull back.

26th January 2017: A Picture Tells a Thousand Words III

Yesterday the Dow Jones went through 20,000, causing lots of excitement in the markets. The S&P 500, Dow and Nasdaq all closed at new highs as well.

Screen Shot 2017-01-26 at 08.23.08

Table below shows the dates the Dow achieved each 1000-point landmark.

Screen Shot 2017-01-26 at 07.29.54

A few observations:

It took 15 years to double from 1972 to 1987 but this was followed by a golden period: 8 year from ’87 to ’95, 5 years from ’91 to ’96, 2 years from ’95 to ’97, 4 years from ’95 to ’99. Oh, for those halcyon days again! After that we returned to slower growth: 10 years from ’96 to 2006, 10 years from ’97 to 2007, 16 years from ’97 to 2013, 16 years from ’98 to 2014, and last,  a horrible 18 years from ’99 to 2017.

The big question is, how long until Dow 40,000? 10 to 18 years or 2 to 6?  !’m going to plonk for 6 to 10!

During the period 1972 to 2017 in which the Dow rose 1900% US national debt rose by a massive 4,352% (Source: Charlie Bilello of Pension Partners). I guess as long as someone out there is prepared to buy your debt, that’s fine but…..

The Dow is a strange index. It comprises 30 of the largest and most important companies from a cross section of US industry, (the full list is shown below). It is price weighted rather than market cap weighted, which means that the stocks with the largest share prices have the biggest impaction the Index. It is worth noting, despite all its faults, that if you had invested in a Dow tracker in January 1984, when the FTSE 100 was born, you would have made 1460% in the Dow, way ahead of the 617% in the FTSE 100. (Not including dividends or exchange rate fluctuations.)

Is having no direct exposure in the JIC Portfolio to the US stock market something that needs to change? Needs some thought.

Screen Shot 2017-01-26 at 13.29.41

7th January 2017: Weekend Roundup: Good first week!

Weekend Roundup

The first Weekend Roundup of the New Year. After 1.6% of the trading year the JIC Portfolio is up 2.6%, helped by a positive market back drop all around the world. The FTSE All Share (Total Return) Index gained 1.1%, the Nikkei 225, 1.8%, the S&P 500, 1.7%, the Dax, 1.0% and Russia, 2.3%. Gold gained 1.8% but oil was flat with Brent crude holding steady at $56.85 per barrel. Sterling was weak, losing around 0.5% against both the €, to 1.167 and the $US, to 1.229.

Of the 29 stocks in the JIC Portfolio, 24 were up on the week, led by Geiger Counter, +21.7%, Redstone Connect, 17.0%, XLMedia, +12.9%, Accrol, +11.8% and Crawshaw, +8.8%. Five stocks were down, with the worst being the 4.7% fall by DixonsCarphone. DixonsCarphone will report on Christmas and New Year trading on 24th January.

Two trades last week. I increased xxxxxx to 2.0% on a dip in the share price following the publication of its interim results on Wednesday and I doubled up on xxxxxxxxx, where I think the valuation is extremely attractive with it standing on a prospective yield of 4.8%. The dividend is forecast to grow at 10% per annum out until 2020.

On Thursday, Character Group went ex-dividend 8.0p per share.

Next week sees many more trading updates but I can’t see any scheduled for any of the current holdings in the JIC Portfolio. On Thursday, Patisserie Holdings goes ex-dividend 2.0p per share.

I am fairly relaxed about the overall levels of the market but I am getting slightly nervous about the markets seeming willingness to pay ever increasing valuations for growth. For example, there is a stock out there which was up 18% last week, to a market cap of £328m. Now, I may be missing something but that seems steep for a company with forecast sales of just £16.5m in 2018.

23rd December 2016: A Picture tells a Thousand Words II

The chart below shows Sterling against the $US since it’s recent high in July 2014.

The rectangles show periods of consolidation before the next lurch down. I guess the big question is will the pattern change and the latest rectangle prove a bottom or is sterling about to drop again.

Calling currencies is notoriously difficult and if I was a US$ or Euro based visitor to London I reckon I would find it good value. However, these things often over shoot and if the Trumpflation play has a further to go and worries about Brexit grow ahead of the UKs triggering of Article 50, I wouldn’t bet against another move down. I’m planning a trip to the US next year and have bought some $US just in case!

Screen Shot 2016-12-23 at 09.29.27

10th December 2016: Weekend Roundup

and Fairpoint Group (lessons learnt)

FullSizeRender

The Italian referendum produced a “NO” result, Renzi, the Prime Minister resigned, the markets shrugged and the Italian MIB gained 7.1% on the week. Another case of the market reacting positively to the removal of short term uncertainty. Elsewhere, the German Dax was up 6.6% and the Japanese Nikkei 225, +3.1%. The Trump rally in the US continued with all four major indices, (S&P 500, Dow Jones, Nasdaq Composite and Russell 2000), closing the week at all-time highs again. In the UK, the FTSE All Share (Total Return) Index was up 3.0% with the FTSE 100 leading the way. Banks and mining stocks were particularly strong. Gold was down 1.5% to $1161.4 per oz., Brent crude down 0.6% to $54.1 per barrel and sterling gave up 1.2% against the $US to 1.2577.

The market is in a very unforgiving mood, hitting shares hard on any disappointment. Last week, in the FTSE 250 alone, CMC Markets was off 44.7%, IG Group, 42.7% and International Personal Finance, -42.5%. Unfortunately, the JIC Portfolio was not immune, with Fairpoint Group down 63%.

Fairpoint Group: At the end of this month, the JIC Portfolio will be five years old. Fairpoint has been my worst holding by far.

The table below shows my worst six investments in terms of monetary loss and, for some perspective, the best six.

Screen Shot 2016-12-10 at 09.03.24Screen Shot 2016-12-10 at 09.02.41

You can clearly see just how poor Fairpoint Group has been, costing £10,354; all things being equal, the JIC Portfolio would be worth some 3.0%+ more if I had not invested in it. What lessons? It’s easy to moan about the announcement coming late on a Friday afternoon or about management misleading with its comments on the dividend at the September interims or expressing scepticism that things have got so bad in one month that it merits the dividend being cut. The truth is, at the end of the day the chart was telling me all I needed to know and I should have cut the position some time ago. Probably when the 130p level did not prove a base, (see bottom chart). So why didn’t I cut it? I think I let the management cloud my judgement but also I believe there is another more important factor. About 18 months ago I introduced a column on my portfolio view where I put a price target for each holding: see below.

Screen Shot 2016-12-10 at 09.17.18

With hindsight, I think this has been unhelpful. It has made it more difficult for me to change my mind. Having publicly said that I think a stock will go to Xp, it’s psychologically a much bigger deal to change one’s mind and cut the position. I have decided to remove the target price column from the view. I will stick with the Stop Loss Review Price and will be much more assiduous at implementing it. Taking losses is an important part of investment success. At the end of the day, all that matters, is the overall portfolio performance. One should not get emotional about individual stocks or as reader put it, “they are not members of your family!” Finally, as a reminder, I have installed the Fairpoint Group stock chart as my screen saver!

On a happier note, Revolution Bars was up 11.0% last week and is now up 29.0% since I bought in October. BlackRock World Mining Trust gained 6.8% and Character Group, +5.0%. Redstone Connect was down 7.3%, XLMedia, -6.7% and Bioventix, 5.5%.

Just three trades last week.

Next week sees interim results from DixonsCarphone on Wednesday.

I will wear the Fairpoint hair shirt for the remainder of the weekend but then on Monday morning its back to work and onwards and upwards.

Screen Shot 2016-12-10 at 08.15.13

 

 

2nd December 2016: “A picture tells a thousand words”

Screen Shot 2016-12-02 at 08.26.33

The chart below shows the oil price over the last couple of years

Following OPEC’s agreement on Wednesday to cut production by 1.2m barrels per day from January, it has rallied sharply; the price of Brent crude is up 14.7% in two days. By the way, 1.2m barrels per day is close to a 3.5% cut.

Last night it closed at $54.23 per barrel, the highest closing price since August2015, breaking through the price of $53 per barrel which proved a ceiling in June and October this year.

Since OPEC’s announcement, all the strategists or oil watchers opining on the OPEC agreement that I have read or listened to, have almost all been sceptical:

“It won’t last!”

“OPEC members will cheat.”

“Russia and other non-OPEC members will not keep to their word to cut production by an additional 600,000 barrels per day”

“The agreement is only for 6 months, then what?”

“US Shale gas companies will boost production keeping a lid on oil prices.”

An alternative narrative might be:

After two years of sub $60 per barrel, which has hurt the finances of many an OPEC producer, not least Saudi Arabia, there might be a little more resolve this time. Also, markets are clearly excited about the prospect of Trump reflating the US economy; maybe if US and global growth is a little higher next year, demand might turn out higher than currently forecast.

All or some of the sceptical statements could of course turn out to be true but I can’t help feeling that in this case it might be better to “follow the money”. The sharp move of the last two days could be closing of short positions and most probably, there will be a pull-back. In fact today it is off a little in early trading, however, if I was a betting man, I would wager it being short lived.

They say a picture tells a thousand words. My guess is, having broken out, the oil price is more likely to head up towards $70 per barrel than head back down to the mid $40’s.

I have some exposure to oil though a £365m market cap Exploration and Production company but do I have enough?

 

RedstoneConnect

My  entries since adding the stock to the JIC Portfolio on 15th June

Screen Shot 2016-06-15 at 14.36.45

25th August

RedstoneConnect (REDS.L, market capitalisation: £27m, 1.75p and 1.5% of the JIC Portfolio)

RedstoneConnect announced, this morning, that it had appointed Cantor Fitzgerald Europe as its NOMAD and joint broker. At the time I did not think it worth commenting on.

On reflection, and after a nudge from a subscriber, I think it is worth a quick comment. It is mildly positive that Cantor are prepared to be NOMAD but from a shareholder’s point of view it is probably more important that Cantor will be writing research on the company and hopefully pushing the story with its clients.

I like the way the share price is performing and have just, (at 14:21 hrs) added another 50,000 shares at 1.745p, taking the holding to 1.5% of the JIC Portfolio. If the share price keeps going up from here that will most likely be my last purchase, although if it drops back, I reserve the right to add more!

18th August

RedstoneConnect (REDS.L, market capitalisation: £25m, 1.6p and 1.2% of the JIC Portfolio)

Further to my earlier posting, I have just increased Redstone Connect to 1.2% of the JIC Portfolio. See transactions tab above for transaction details.18th August

18th August

RedstoneConnect (REDS.L, market capitalisation: £25m, 1.5p and 0.9% of the JIC Portfolio)

Conclusion: This is what we want from a recovery story; a continuous drip drip of good news. We don’t know the exact figures but as the CEO says it removes the cash drain associated with the lease but also removes a distraction. 100% focus on its profitable Redstone Connect business from now on. I like the way the share price has been behaving and was thinking of adding before today’s announcement. This gives me the confidence to add a little more. More contract announcements before the year end could help the share price on its way. Happy Holder!

In an announcement with the title Completion of operational restructuring it says it has achieved a successful early exit from a lease on the 20,761 feet surplus office space in Stokenchurch, Bucks.

This was not due to expire until September 2018. It does not give any financial details but we do know that it had provided £1m in its 2016 accounts for this lease. This covered 75% of the Stokenchurch lease through to 2018 and so today’s announcement must be seen as a positive development.

Mark Braund, CEO of RedstoneConnect, commented: “Having already provided in our last accounts for 75% of the Stokenchurch office space through to completion of the lease in September 2018, to exit this commitment early is a positive development for the Company. Not only does it remove the cash drain associated with this lease, it also allows us to focus entirely on our profitable RedstoneConnect business, unencumbered by legacy issues.”

28th July

RedstoneConnect (REDS.L, market capitalisation: £19.6m, 1.25p and 0.5% of the JIC Portfolio)

Conclusion: This is just the sort of announcement I want to see. It demonstrates that its “Smart Building” offering is gaining traction. It improves the overall quality of the business with the longer term nature of the contracts and higher margins. Hopefully there will be more to come during the remainder of the year but on its own this gives me the confidence to build the holding up a little. Very Happy Holder!

I have just added 0.25% to the holding, taking it up to 0.75%

See Transactions Tab above for transaction details

It has announced a new contract win this morning. It has secured a three-year agreement with UBS to deploy its workspace management software solution. It says “the newly agreed Software as a Service (SaaS) contract provides UBS with a flexible pricing model based on the number of desks being managed by OneSpace™, allowing UBS to rapidly add new desks and office locations, as required, throughout their global estate of 788 offices.”

UBS had trialled the system at its Golden Lane office and found that it achieved increased occupancy levels and reduced operational costs. It added that employees benefit from a digitally enhanced work environment with real time workspace management tools that improve mobility and productivity.

Mark Braund, CEO of RedstoneConnect Plc, said: “This annuity contract win is another significant milestone in our planned rollout of OneSpace™ as a next-generation software solution, bringing to life the material benefits of smart building technology. This expanded deployment for UBS demonstrates OneSpace’s™ capability in both new-build and legacy real estate structures, and across both individual offices and portfolios of properties. 

“Early adopters of OneSpace™ have significantly benefitted in the optimisation and productivity of their office space, ultimately reducing operational costs as well as improving work force engagement and working environment.”

29th June

RedstoneConnect (formerly Coms plc) (REDS.L, market capitalisation: £20.0m, 1.3p and 0.3% of the JIC Portfolio)

On Monday I attended the AGM of Coms which from yesterday, was renamed RedstoneConnect plc with the EPIC code, REDS.

Conclusion: I think a good and trust worthy Board and senior management team. It has a sensible strategy and I think has the means to successfully execute. If I’m correct, I think substantial shareholder value could be created over the coming years. On current forecasts from its house broker, the shares are valued at 26x January 2017, 13x January 2018 and 9.3x January 2019. On those figures alone it looks okay and to buy, I think you have to have faith that the management team will succeed in growing the business at a faster rate than currently forecast.  Hopefully we will get into a virtuous cycle of news flow leading to regular upgrades to earnings and a revaluation of the stock. It is the smallest market capitalisation company in the JIC Portfolio at £20m with all the inherent risks but also hopefully, good upside.  I will be doubling the holding to 0.6% imminently and will then look to increase as I see signs that my investment thesis is proving correct.   

STOP PRESS: I have just doubled holding to 0.6%. See Transactions tab above for details

RedstoneConnects operations: It is now focused around the old Redstone business where 60% of revenue is in one-off contracts in two areas, Design and Installation and Smart Building. Design and installation involves cabling systems and is fairly low margin. Smart Building involves ad hoc projects involved around energy saving in offices. The other 40% of revenue comes from recurring/annuity type contracts where for instance, it might manage a network infrastructure. Generally, these are three year contracts with re-bid and are higher margin, c.6.0% and have good visibility of revenue. It has some top class clients such as Glaxo SmithKline.

The main strategy of the new management team is to increase the percentage of “annuity” business. In other words, longer term, annual contracts, funded more out of clients’ operating expenditure rather than capital expenditure. Currently the 40% of revenue falling into the “annuity” category, accounts for 57% of profits, given higher margins.

The recent acquisition of Connect IB was aimed at improving the mix. The contract win announced last month, from a south coast shopping centre, (Brighton), consists of an upfront payment and then three annual payments going forward. One would hope that in three years’ time the contract is renewed.

Connect IB is essentially a software business. The margins in the “annuity” software business are in the region of 80/90%. The founder took over half the payment for the business in shares and is tied in for three years. He has been appointed Chief Technology Officer at RedstoneConnect.

Redstone and Connect IB had worked together in the past. “They knew they could work together and with customers.”

Further acquisitions will be aimed at executing and accelerating its strategy. They are likely to be infills and “must be accretive.”

Overall impression

The current Board looks excellent. The Chairman, Frank Beechinor was I thought impressive, (he is also non-executive chairman of DotDigital, which has been a great stock over the last five years). Mark Braund, the CEO since last July, clearly has good PLC experience and talking to him afterwards it is easy to see why he grabbed this opportunity. Following the resignation of Dave Breith as CEO in March last year it extricated itself successfully from its loss making telecoms business and Darkside Studios. This left the door open for a good management team to create a successful business and create shareholder value. The current management have plenty of skin in the game. The CFO also came across well and seemed on top of all financial.

As well as owning a decent amount of the equity there is a generous option scheme in place. If the CEO and FD manage to get the share price over 5.0p they will share options worth c.£3m. I won’t begrudge them that given it is about 4.0x the current price.

The acquisition of Connect IB looks inspired but the proof will be in the pudding as it wins further contracts. Braund knows how the market works and was very careful not to raise expectations. He understands that “promising low and beating expectations” is the way to a rising share price and higher rating.

It is good to see Henderson Global Investors support the management with around 10% of the equity and Helium Special Situations, who will know Braund from his time at Interquest, hold 16%.

When asked about the longer term I liked the response that it will get taken out at some point. The Chairman said, before then the Board needs to maximise value and reminded us that they were all significant shareholders. I believe that at the nadir of the company’s fortunes it received an offer which for the management was “seminal moment” as it helped them appreciate what potential lay in the business.

15th June

RedstoneConnect PLC (REDS.L, market capitalisation: £23.3m, 1.5p and 0.3% of the JIC Portfolio)

Conclusion: The more I look into this the more I think I may be on to something. The AGM is on Monday 27th June and so today, I have bought a 0.3% holding in order that I can attend the AGM as a shareholder and hopefully have a chat with Mr Braund following the meeting. I will then share my diary entry and anticipate either increasing the holding, (scaling up), or selling.

To see the website click HERE

I am loathed to mention this stock, (it was previously known as Coms plc), having cut the holding at 3.05p on 10th November 2014 for a loss of £4016. That was the second worst “mistake” I have recorded in the JIC Portfolio.

I think quite an interesting situation may be developing.

In March last year, the then CEO David Breith resigned. In July 2015 Mark Braund, who had been appointed a non-exec director in May, was appointed CEO. Braund was previously CEO of Interquest, another JIC Portfolio holding, where he was considered to have done a good job.

Since his appointment, Braund has been busy. The Group sold its loss making telecoms business and has focussed on Redstone, its smart buildings business and has strengthened the offering through the acquisition in March, of Connect IB. At the same time, it raised £3.125m gross through a placing at 1.4p per share in order to fund the £1.028m cash element of the IB acquisition and to fund future working capital.

Results in May, for the year ended January 2016, showed that the continuing business of Redstone had performed ahead of expectations and the outlook statement suggested that 2016 had got off to a good start.

It has announced two major contract wins this year, one in February and one on 26th May. The latter was won by the recently acquired Connect IB, and came from a “major city centre shopping centre on the South coast”.

Having hit a 2.0p closing high in early January the shares have drifted back since then. I think it’s fair to say they probably got ahead of themselves in what is still early days in this recovery story. I cannot see any forecasts for the current year ending January 2017 but think that this may be looking cheap. The current enterprise value £22m compared to revenue in the continuing operations of £40m in the last year looks attractive, especially when seen in context of the outlook statement in May; “Strong order book and new business pipeline from both new and existing customers in current financial year to 31 January 2017”.

At the year-end it had net cash of £1.0m on the balance sheet.

Mr Braund has invested a reasonable amount of his own cash in the shares and I believe currently holds 14.2m shares.

It has the backing of two significant shareholders; Henderson Group with 10% and Helium Special Situations with 15.9%.

See Transactions tab above for transaction details.

2016-07-31_10-57-09

 

 

24th April 2016: Weekend Roundup and

the Unfortunate Guide to Future Pensions

Weekend Roundup

 Yesterday, I went to the Master Investor Show and as always, enjoyed Jim Mellon’s speech. It was entertaining as well as thought provoking. It’s always interesting to hear his thoughts on some of the big trends affecting markets. Tomorrow, I will write more on this and his top tips for the year ahead, but I thought I would share one slide, the “Unfortunate Guide to Future Pensions”. There is a message for all but especially the younger; don’t rely on the state to look after you and as you probably do not have the security of a final salary pension scheme, understand the power of compounding and start saving as much as you can, in the most tax efficient way, now!

(If you click anywhere on the slide it should get bigger!)

IMG_0275 (1)

 Last week

In general, major equity markets had a good week: the Nikkei 225 bounced back 4.3% after a poor run, the German Dax was up 3.2% and the S&P 500 gained a further 0.5%. In the UK, the FTSE All Share (TR) Index gave up 0.4%. China was the worst performing market, with the FTSE China A All Share down 4.4%. In commodity markets, oil showed further strength with Brent Crude gaining 5.6% to $45.49 per barrel and Gold continues to consolidate, falling just 0.2% to $1233 per oz.

The 0.4% fall in the FTSE All Share (TR) Index means that it is now up 2.0% in April, 1.6% year to date and +40.9% since inception of the JIC portfolio in January 2012; over the respective periods the JIC Portfolio has returned-1.5%, +1.9%, -3.1% and +114.9%.

A week ago in my weekend Roundup I finished by saying, “I cannot see any scheduled results for stocks in the JIC Portfolio next week but I’ll be ready at my desk each morning at 7:00 ready for any surprises.’ Well, on Monday I received a rather nasty surprise in the form of a profit warning from Sprue Aegis, which saw the share price drop 55% on the week; it has final results for 2015 this coming week and it will be interesting to see whether they can reassure the market that last week’s profit warning puts a line under it recent problems; is this a good company with a leading market share in a growing market, which has hit an air pocket leading to a huge buying opportunity in the shares or is there something more amiss? I will be interested to see what they do with the dividend, given its strong balance sheet. It was the first profit warning I have been hit with for sometime; these things happen and are a hazard of equity investing. So Sprue caused most of the damage with just Next, -5.3% and Baillie Gifford Shin Nippon, -5.4% falling more than 5.0%. The positives were On The Beach, +10.4%, Interserve, +6.3% and BlackRock World Mining, +5.4%; BRWM is now up 54% since January’s low point.

Last week I made two changes to the Portfolio as result of Firm stop-losses being triggered. I booked some nice profits in ********, when my Firm trailing stop loss on 25% of the holding, was triggered. I like ****** very much indeed but at over 10% of the Portfolio I was starting to feel a little uncomfortable; after the sale it is still the Portfolio’s largest holding at 8.1%. It is worth noting that it is up over 60% since last August’s low point. I am also relaxed about the halving of the position in Next; I have clearly got this wrong over the last six months; I understand the changes that are going on in the industry but feel that the market may be underestimating the ability of its management to adapt to new trends; whatever, I need to make a decision on what to do with the other half of the holding. I also increased my holding in ********** on the fall, to 0.9% of the Portfolio; I know this looks like catching a falling knife but I think the share’s look extremely cheap, (enterprise value/to forecast sales of about 0.55) and on a year’s view will be a lot higher. Ideally I would add more but will wait until my views are confirmed by the market!

Next week sees interim results from Character Group on Wednesday and final results from Sprue Aegis, also on Wednesday, I believe.

Have a good week and Happy Investing!

Screen Shot 2016-04-24 at 13.46.58

Screen Shot 2016-04-24 at 13.50.11

 

Am I an assassin or a rabbit, a raider or connoisseur?

I have just finished one of the best investment books I have read in a long time; it contains some great little gems, which I hope will improve my returns. One never stops learning; I continually strive to become a better investor and what better way than by learning from the mistakes and insights of others.

“The Art of Execution; How the world’s best investors get it wrong and still make millions” by Lee Freeman-Shor, took no more than a couple of hours to read, can be found HERE and comes highly recommended.

Background

The author appointed 45 investment managers to manage concentrated portfolios, valued from $20m to $150m, between 2006 and 2013. He instructed them to invest only in their best 10 ideas and he not surprisingly got very divergent results. In this book he observes the differing methods of the managers; he found that in general, all the managers were much of a muchness when it came to picking stocks; of the 1866 investments made only 49% made money but what separated the winning portfolios from the also rans, was execution. Some of the “legendary investors” were only right 30% of the time!

He found the managers fell into five categories. When it came to handling losing investments they were either assassins, hunters or rabbits and when dealing with winners, either raiders or connoisseurs.

In short:

  • An assassin is an investor who deals promptly and unemotionally with his failures; cuts early, or at least at a pre-determined level and moves on.
  • A hunter tends to watch, analyse and then at the right time add, in attempt to average down and salvage the investment. Many were successful with this strategy; never perhaps regaining the whole loss but at least reducing it.
  • A Rabbit! Need I say more. They watched the investment continue to fall, neither cutting or adding. The rabbits tended to have the worst performance by far.
  • Raiders were managers who snatched at any profit they made; 10-30% was enough. The money was then re-invested and as we saw earlier, only with a 50%ish chance of success.
  • The connoisseur however, let the winners run, perhaps trimming now and then but at least having a decent exposure to the holding for the duration. These were the investors who made 100% or more from investments.

The best combination was the assassin/connoisseur and by far the worst were the rabbit/raiders; they invariably ended up being sacked.

In conclusion, an excellent read and hopefully one that will sharpen the investment skills.

Lessons for me

An assassin or a rabbit?

Over the last four years, since I launched the JIC Portfolio in January 2012, I have considered myself more of an assassin than anything else. I have cut some holdings quite quickly, say after a 20% loss and in most cases those stocks have continued to drop. To be honest, whether they dropped further or promptly rebounded is slightly irrelevant; the point is, I sought to minimise damage to the overall portfolio and move on.

In a few cases, I have acted like a hunter, adding to losing positions but I think my success rate here, has been no more than 50:50.  In the last six months or so I have noticed a few rabbit like tendencies creeping in; I currently hold three stocks of my 30, which are down 33%. The problem with a stock that is down 33% is that it has to gain 50% just to get back to break even! I will come up with a battle plan for those stocks and others in the Portfolio in the coming days. Going forward, I will endeavour to banish any rabbit like leanings and keep my assassin’s rifle loaded.

I will also rethink my strategy around “Stop Loss Review Levels”; it is all very well reviewing but there is always a good reason to put off doing anything. Perhaps setting a firm stop loss would remove the emotion. I have always found that once done, selling out of a losing position leaves a wonderful feeling; you no longer spend an inordinate amount of time worrying about what to do with the holding but can move on and re-invest the capital, hopefully in a winner.

A raider or a connoisseur?

When it comes to the winners, I believe I have acted more like a connoisseur than a raider. I have always believed in running winners and if the position is not too large, adding. I have also been happy to give a position a haircut when it becomes over extended; not only does this lock in some profits but it enables me to pick up stock on any setback. I still have decent holdings in stocks such as Crawshaw, (first bought in Nov 2013 at 13p), Baillie Gifford Shin Nippon (April 2013 at 280p), easyJet, (Jan 2012 at 408p), AdEPT Telecom, (Sept 2013 at 125p) and DixonsCarphone, (Oct 2012 at 138p) to name a few.

How many holdings?

The final point was on concentration in the Portfolio. The author found that the greatest success stories came from the fund managers’ best ideas, which begs the question, why not put more money into the best ideas, rather than dilute one’s efforts and returns, by adding more stocks? At the end of the day the number of stocks one holds is a personal choice but one has to be careful that in attempting to build a diversified portfolio one is not involved in an exercise of diworseification; Warren Buffett puts it another way; do put all your eggs in one basket but watch it very closely”. The number of holdings in the JIC Portfolio has been as low as 22 and as high as my self-imposed maximum of 30, which I am currently at, with the top 10 positions making up 51.4% of the Portfolio. I think there is some scope to rationalise the Portfolio and bring the number of holdings down again, focusing more of the Portfolio on my winning positions.

If in a year’s time, if I have benefited from sharpening up my discipline around execution and it has had noticeable results, I will contact the author and buy him lunch!

15th December, 2015

A grim first half of December with the FTSE All Share down 8 days in a row, the first time since inception of the JIC Portfolio in January 2012, so that as of last night it was down 6.7% in December and 4.6% this year; over the same period the JIC Portfolio has been relatively resilient, falling just 2.2% in December and gaining 11.4% since the start of the year. It is worth noting that since January 1st the FTSE 250 has gained 6.9%, the FTSE Small Cap, 5.2% and the AIM All Share, 3.5%; its the FTSE 100 Total Return, down 7.2%, that has done all the damage.

It’s worth getting out the old chart of the FTSE All Share with the vertical lines at points where the Relative Strength touched 30, which has represented a good buying opportunity over the last four years. It didn’t quite hit 30 yesterday but nevertheless we have a better day today; it will be interesting to see if this holds or if we are in for a bit more turbulence.

Tomorrow we have the interest rate decision from the Fed; I can’t help feeling that every one on the planet must know they are going up!

As for the oil price, Goldman Sachs might be right and its heading for $20 but equally they might be wrong: once I hear every hedge fund and its dog is shorting you know we are near the bottom. I wouldn’t want to be short when SaThere have been some pretty horrible moves in individual stocks, often on very little volume, but overall the Portfolio has held up pretty well. Of course there are stocks I wish I didn’t hold; I estimate BlackRock World Mining, Gem Diamonds, Vislink, Centaur Media and Communisis have cost me 6% of performance and that does not include the opportunity lost from the money not being invested in some of the better performing stocks in the Portfolio. I need to be a little more robust with my decision making on losers in the Portfolio and am considering introducing a rule that when a stock loses 20%, I have to look at it afresh and write a diary entry justifying why I would buy the stock at that level; if I can’t, then out it goes!udi Arabia changes tack which will happen suddenly at some stage. BP is back near the price I paid at the end of September, yielding 7.9%; time to be bold perhaps and add.

I also feel that the markets are not focusing on the net gain to the world economy from lower oil; filled up yesterday and can’t remember when I last paid less than 100p per litre!

Statpro Plc analysis of the Portfolio shows a few interesting points; It calculates the Value At Risk (VAR) of the Portfolio at 0.92%; i.e. for 95%, (2 Standard Deviation) of the time it reckons that my maximum loss in a day should be restricted to 0.92%. This compares with 1.37% for the FTSE All Share. (At 99%, (3 SD) of the time this increases to 1.84% for JIC and 2.52% for the All Share). It is really just looking at the make-up of the Portfolio and based on the historic behaviour of the stocks held, calculating the likely volatility.

Given the performance of the Portfolio this should not be a surprise; it has generally fared better in more volatile markets.

var

The table bellows shows the main contributors to the VAR calculation in the JIC Portfolio; put simply if I wanted to reduce my Value At Risk I could do that by reducing some of the names near the top of the list and putting it in cash!

topvar

Finally, this table shows the performance stats of the JIC Portfolio since inception. The point I am most pleased about and need to keep going, is that despite the performance of +113% compared to 30% for the FTSE All Share, the annualised volatility over the period has been 10.4%, very slightly less than the 10.5% of the All Share.

summ

Weekend Roundup: Saturday 14th November 2015

Weekend Roundup

After the strong rally in equity markets during October, this month we have seen some of the gains given back; last week the FTSE All Share (TR) Index fell 3.3% so that it is now down 3.2% in November and back in negative territory, -1.6%, since the turn of the year. Commodities have again been under pressure with the oil price dropping 8% on the week and heading rapidly back down towards August’s lows; see chart below. In the US the S&P 500 was down 3.6%, in Germany the DAX gave up 2.5% but in Japan the Nikkei 225 defied the general trend, gaining 1.7%.

The JIC Portfolio was reasonably resilient falling just 0.9% over the week and is now down 0.2% in November but up 10.3% since January 1st and 110.1% since inception in January 2012; this compares with the FTSE All Share (TR) Index return of -1.6% since January 1st and +35.1% since January 2012.

It’s pretty hard going at the moment with it feeling as if there has been a jump in the number of companies issuing disappointing trading statements; not only that but the response to poor trading has been severe: FTSE 100 company Rolls Royce was down 26% on the week after its trading update on Thursday, Brammer dropped 28% and you have to feel for anyone who was holding DX Group which warned yesterday and saw its share price drop 73%! That is not a typo!

Thus far the JIC Portfolio has tip-toed through the mine field reasonably successfully: Adept Telecom’s interim results on Monday were excellent with a 33% increase in the dividend and the share price finishing the week up 8.0%. The wonderful Bioventix gained 6.1%, Safestyle was up 5.8% helped by a share purchase by the CEO which highlighted its value and St.Ives gained 4.9% after a “capital markets day” which apparently went down well with analysts and investors. The worst performers in the Portfolio were Communisis -14.2% and Centaur Media, -10.8% which both dropped after slightly disappointing trading statements; they are quite small holdings in the Portfolio so did not have too big an impact. For the time being I am holding onto both until I can get more of a handle on how big the downgrades to earnings forecasts are but I think most of the damage has been done.  BlackRock World Mining Trust gave up 7.2% and BP 5.7% in response to falling commodity prices.

The only change to the Portfolio was to increase the holding in Gem Diamonds following its trading statement, which showed increased Q3 production and robust pricing for its Letseng sourced diamonds in what has been a soggy market for diamond prices in general. Matchtech went ex-dividend 16.32p per share on Thursday.

Last week I said “I cannot see any scheduled announcements for stocks in the JIC Portfolio due next week but as ever am sure there will be some surprises”: In all there was one set of results and four trading statements! Looking ahead to next week, full year results from easyJet are due on Tuesday but apart from that nothing else is scheduled!

oil

 

allsh

 

16th October 2015

Yesterday I attended presentations by two companies; Keywords Studios and NWF Group

Keywords Studios (KWS.L, AIM, Market cap £99m, 218p) provides services to 21 of the top 25 global games companies, (by revenue), employing over 1400 people worldwide at peak times, and working in over 50 languages in more than 15 countries. Game companies are increasingly outsourcing services such as artwork, functional testing of new games, localisation services (i.e. adapting a game to different markets), testing and customer support. In what is a highly fragmented market, KWS provides all these services and has grown both organically and through acquisition. It owns no IP and charges monthly on a time based model. Its competitive advantage is both its reputation; with development costs of $150m + on a new game the big game companies are not going to risk that on a small outfit. It is very difficult for new players to break in and business is generally very sticky. Given its scale it also has the advantage of operational efficiency over smaller local competitors. 80% of the business is recurring, so with that and natural growth in the industry, (about 8% per annum,) market share gains and further acquisitions it should see good growth for the foreseeable future. He sees Art outsourcing as a key area of growth “given the buoyant market for the creation of art assets (items seen in the games such as characters, vehicles, landscapes, cityscapes, etc.). Game development services like art creation provide an early entry point to the video games lifecycle for Keywords”. In August it increased its resources in this area through the acquisition of Liquid Development LLC.

KWS floated on AIM in July 2013 last year at 123p but the share price has really started to move in the last 6 months helped by strong trading; in the first half it saw a 74% increase in revenue including acquisitions, 23% organic and earnings per share up 63% to 4.29 €cents. It had net cash of €7.5m after spending €1.7m on acquisitions. In the first half it won new clients such as: Oculus VR, Amazon, Gearbox, Fincon and NetMarble.

I liked the CEO, Andrew Day, who seemed very ambitious, which is understandable given that he owns 11.4% of the Company. Other major shareholders include the founders of the Company with 25.3%, Schroder Investment Management with 9.0%, Liontrust, 8.0%, Artemis, 6.9%, Invesco Perpetual, 6.1% and Hargeave Hale with 4.9%.

Valuation; the shares have had a strong run since the interim results and on consensus forecasts are valued at 21.7x December 2015 earnings but given 24% growth next year this drops to 17.5x. It pays a small dividend: the 2015 prospective yield is 0.58% rising by 10% to 0.64% in 2016.

Conclusion: Difficult one this as my guts are telling me that there will be upgrades to next year’s earnings, bringing the valuation down and that although the shares are at an all-time high they will perform from here; I am not surprised yesterday’s presentation has tempted in some new buyers this morning. The market currently seems willing to pay up for growth stocks but my brain is telling me not to get carried away after such a strong run, especially given a valuation which is not, in my view, compelling; a high valuation requires the constant oxygen of upgrades and there is little protection from a slip-up in growth. Definitely one to add to the watch list though.

kws

I’m very excited; the Rugby World Cup starts today; A bit of fun

It’s got me thinking; are there any similarities between a successful team and a successful portfolio?

A successful team needs to have good players in each position, who are all working together with one objective, the team winning, and as Sir Clive Woodward, the manager of the World Cup winning 2003 Team said, you need people who can think correctly under pressure or TCUP.

A great aspect of Rugby is that it is played by people of all shapes and sizes, all having their parts to play within the team; you couldn’t have a successful team of 15 similar players. So what are the similarities between a team and a portfolio? A successful portfolio should be comprised of good stocks, i.e. ones that you expect to go up in price otherwise you really shouldn’t be holding them, but there is scope for all shapes and sizes; your large cap, solid, dependable dividend payers, a prop forward perhaps, such as Next plc in the JIC Portfolio and your smaller, faster growth stocks, a try scoring wing perhaps, such as Bioventix or Crawshaw.  Succesful teams generally do not entertain mavericks as although they can change a game all too often they are disruptive to the overall teams progress.  Is there a part for mavericks in  a portfolio. I guess Fox Marble could be described as a maverick; not making money and regularly disappoints. I justify its inclusion on the basis that if it succeeds it could be a multi-bagger and I only have a 1.0% holding to compensate for the risk,  but if that 1.0% had been in another small but profitable fast growing company such as Bioventix over the last two years it would be 3.0% of the portfolio now; food for thought!

The important thing is that all the holdings should be contributing to portfolio performance. At the end of the day the only important measure is how the overall portfolio has done. As a manager of a portfolio there are lessons to be learnt from the manager of a team. How long do you give an under-performing player/holding? When do you replace a player with one from the bench/watch list? Its all about opportunity cost. I remember Mark Slater saying that he liked “Positive recent trading statements and investing in companies that are doing well now, not hopefully at some stage in the future”. Scroll down to see my write up from his March 2015 presentation.

Vislink:

This brings me on to Vislink; does it still deserve a place in the team? Clearly interim results the other day were not good, it has been caught greedily eating donuts (the recently announced overly generous Value Creation Plan), and is ultimately being disruptive to the team’s overall performance. Is it time to say enough is enough and replace it with stocks from the bench? It has a supporter, Polar Capital Technology Trust, which has used recent share price weakness to buy one million shares, taking its holding to over 3.0% as it clearly sees the potential for results to improve. I am going to listen to the Vislink results webinar at 1:15pm today but next week I need to make a decision; hold, sell or reduce!

27th July 2015

Holding size!

I have been asked a number of times what criteria I use when deciding what weighting to give an individual stock in the Portfolio. I don’t think there is any right or wrong answer and that ultimately it is all about what one is comfortable with.  I think it is all about judgement; what’s the upside, is the valuation on my side if things go wrong, how convinced am I that it will deliver to my expectations?

I think that it is more an art than science with different investors taking different approaches. Neil Woodford for instance currently holds 95 stocks in his Equity Income Fund, with the largest 10 making up 45.5% by weight. Stock number 31 is less than 1.0% of the portfolio and the 14 smallest holdings comprise just 1.0% of the portfolio!  He has clearly been very successful with this strategy; the larger, safer holdings provide steady growth and income whilst the smaller holdings have the potential to provide a boost to overall portfolio growth and no doubt, whilst there will probably be some failures in the bottom 40 or so stocks there could be some multi-baggers to which he will probably add. Anyway, that’s enough about Woodford, what do I do?

I prefer to have a more focused portfolio with between 20 and 30 holdings, (currently 25) and am keen, that in general, all my holdings are contributing to performance; I try not to have too many sleepers which I think will come good at some stage in the future.  This does not preclude me from holding the odd small growth stock where I think there is substantial upside if things go well; current examples might include Bioventix, Fox Marble, Gem Diamonds, Tribal and Avation. I am quite happy to start with smaller weightings in these types of stocks, i.e. around 1-2% and then if they start to deliver, as I hoped when I initially bought the holding, I will add.  Tribal for example; I think the valuation looks very attractive and that it has the potential to grow at a decent pace over the coming years. last year, delays to new contracts hit the share price, presenting me with the opportunity to buy an initial exposure but before I would consider increasing the holding above the current 2.5%, I would need to be convinced that last year’s problems were a blip and are now behind them.

As a general rule my largest holdings will be focused on those stocks which I judge to have the greatest upside and where I have the highest conviction that my expectations will be achieved. I try also to take a stab at what the downside might be if things go wrong. For instance, earlier this year I bought a holding in FlowGroup, but only 2.0%, as although I was excited by its potential the valuation was not priced to withstand disappointment. Had everything gone swimmingly well I could have added to the holding but sadly news from the company pointed towards slower order flow than expected. I ended up cutting at a loss and although painful, it did not hit overall portfolio performance too badly.

Currently, the three largest holdings are investment trusts, (and 5 of the top 10), where my main risk is getting the theme wrong rather than individual stock risk. Sure, if Japan does not do what I expect and starts to fall, then Baillie Gifford Shin Nippon is unlikely to emerge unscathed; equally it is also highly unlikely that I will come in one morning and find it down 30% due to a profit warning! The same goes for European Assets Trust, Worldwide Healthcare Trust and the other investment trust holdings.

Finally, I am happy to push holding sizes up in the short term if I am expecting some sort of catalyst that will drive up the share price but will then be happy to book some profits and pare the holding back a little after a good short term run. Take Crawshaw for example: it got sold down at the start of the year providing an opportunity to build up the holding but then by late June had recovered some 65% from February’s lows. In the mid 60p’s, although the longer term story still looked attractive, the valuation looked rich in the short term, so I booked some profits and pared back the holding. A more recent example is Matchtech; I took the holding up to 4.0% a week last Monday as I am hopeful that its first half trading statement due early next month will drive the share price up towards my target price of 680p. The valuation looks attractive and recent statements from the company give me some confidence that I won’t be disappointed. So, why not 5.0% or 6.0%? Ultimately it’s all about judgement and what I feel comfortable with, as I could of course, be wrong!

In future, in my diary entries, I will focus on the holding size a little more.

21st June 2015

Cutting positions or taking a loss

Since launching the JIC Portfolio in January 2012 the portfolio is up 114.5% as of Friday 19th June 2015. I have had some losses along the way but in general I have tried to cut losses before they inflict too much damage. The table below shows the nine worst losses in the JIC Portfolio since inception in January 2012. Apart from Gem Diamonds, which I still hold, all the others were sold, or cut, crystallising a loss.

losses

My approach to “cutting” positions

“It’s not a member of the family!”

The biggest obstacle to cutting a position and taking a loss is our own psychological frailties. In general we hate to admit we are wrong and thus find it painful contemplating taking a loss; I find that once I cut a holding from the portfolio, that I have been fretting over for days or weeks, I actually get an enormous sense of relief; I don’t have to stare at it anymore with it taking up a disproportionate amount of my time and sapping my energy. The most important thing to me is the performance of the overall portfolio; that’s all that matters, not what one individual stock does. Don’t get emotionally involved, after all, as one of my old colleagues says “it’s not a member of the family!”

My view, learned through bitter experience, is that you are best cutting losses quickly. Conversely you should let your winners run. As Warren Buffet said “cut out your weeds and water your flowers”! All too often we are tempted to do the opposite. We add to our losers as it reinforces our original decision to buy it: “I was right to buy it at 100p so I must be even more right to buy more at 85p, after all it’s cheaper. Oh, and I will fund my purchase by selling part of my holding in another stock which is doing really well!”

I think it’s best to sell and move on; it saves a lot of emotional heart ache as well as money. The only stocks I really worry about are the stocks that I hold, after all they are the only ones that can damage my wealth should their share prices collapse. Stocks that are going up that I do not hold are purely “opportunities lost”. In other words, if I cut a holding because it looks like it is going to damage the overall portfolio, I do not beat myself up if it bounces afterwards!

When to cut; “When my information changes, I change my mind. What do you do?”

If things change: If you bought a stock because you thought the market was underestimating the potential growth in the business and that earnings would be upgraded and then suddenly it starts to disappoint and earnings start to slip. As the great economist and investor John Maynard Keynes reportedly said after being criticised for changing his view, “When my information changes, I change my mind. What do you do, sir?”

Profit warnings: If I am unfortunate enough to hold a stock that issues a profit warning I tend to get out. Humans are generally optimists and management rarely communicate how bad things really are, either because they cannot see how bad it is or because they have an innate optimism that things will get better, or that they can make them better. Things normally get worse before they get better and as the old saying goes “profit warnings are like buses – they come in threes.”

Change in share price trend: One of the triggers I use is when the trend in the share price clearly looks as though it has changed from moving upwards to downwards.  A few years back a City chartist showed me a simple rule which I quite liked; if you put a share price chart up on the wall and step back to the other side of the room, you can get a pretty good idea what the trend in the share price is. If it looks like it has rolled over then that’s time to ask yourself why you are holding this stock.

Gut feel; sometimes it just does not feel right. The worst that can happen is that the stock goes up!

Automatic stop losses

I do not put automatic stop losses on with my online broker; I like to have control of when I sell and in any case I tend to look at the closing price each day. I don’t like being taken out by an intra-day spike down in the share price which proves temporary.

What happened to each of the nine stocks subsequently?

Coms PLC, sold in November last year has fallen another 80%!

Chariot Oil & Gas, sold in December 2012 has fallen a further 64%

Cape PLC, sold in August 2012 has been volatile but is up 36%, (however the JIC Portfolio has pretty much doubled since then).

Polo Resources, sold in December 2013, along with Anglo Pacific and Agriterra is down a further 73%. Anglo Pacific has halved and Agriterra has dropped 64%.

FlowGroup, cut on the 8th May this year is down 46% after last week’s profit warning

International Biotechnology Trust is up a lot but I decided at that time to focus my exposure to biotechnology through the Biotech Growth Trust, which has also performed extremely well.

Run your winners

Just for completeness, and because the list of losers makes pretty depressing reading,  I have shown below the nine most profitable holdings in the JIC Portfolio since inception; of the nine, eight are still in the Portfolio. “Run your winners!”

winners

19th May 2015

Craw

Crawshaw Group (Aim All Share, Market capitalisation: £43m, 55.25p and 4.9% of JIC Portfolio): Last night I attended a presentation by Noel Collett, who is 12 weeks into his new job as CEO at Crawshaw Group.

His background: He joined Lidl straight from university 17 years ago and at 27 became its youngest Board member as COO of the UK business. He oversaw a decade of double digit store growth during which it went from 200 stores to 615 and annual turnover grew from £700m to £4.5bn. More recently Lidl had focused on its fresh food offering with meat and poultry growing from £63m to £330m in a few years.

His move to Crawshaw came about because of a “mid-life crisis”; he was approaching 40 and started to think about where he would be in 10 to 15 years and came to the conclusion he was in need of a new challenge. He was approached about the Crawshaw vacancy and initially thought it did not fit the bill but after spending a day out in the business, visiting a number of stores and meeting Richard Rose, Chairman of Crawshaw, his mind was made up. He came to the conclusion that “Crawshaw was the most exciting, scalable retail project out there”.

The key initiatives in his first year or so will be to reappraise and invest in the store portfolio. It currently has 23 existing Crawshaw outlets and 11 stores that came with the Gabbotts acquisition. It will be opening 6 new Crawshaw stores this financial year taking it up to 39 in total followed by 15 next. After that the store opening programme will accelerate to 20 and then 25 per year. It has converted three Gabbotts stores to Crawshaws to see what effect it had on business and thus far has seen the best like-for-like sales of any of its stores so I guess the remainder will be converted over time. He emphasised the importance of getting the HR function right as undergoing a step change in the growth of the business puts all sorts of strains on management; maintaining the culture of the business is key. Systems will also need to be upgraded; “they are okay at the moment but 18 months out will need development”.

Acquisitions do not feature in its growth plans: “there will be no more Gabbotts with future growth being organic, store by store”. He sees the potential to get top around 70 stores without “spreading its wings” too much outside its traditional heartland. Once it gets to around 70 stores its current distribution centre will be “sweating” so it will look to open a new centre, probably opening up a new geographic region. It would have a factory outlet attached which would hopefully emulate the success of the factory outlet attached to its Hallaby centre which runs at 2.5x the sales of its other outlets.

On financing he believed that it had a strong enough balance sheet to see it through to 200 stores. Capex per store currently runs at £250,000, down from £500,000 two years ago and heading to £220,000. Payback is within two years and stores are immediately profitable, “generating loads of cash from day one”. Given the cash flow characteristics of the business he believes that it can fund all the growth internally, moving into debt for only a short period of time and that they “do not see a share placing at any point in the future”.

I liked his answer to a question on the recent fall in like-for like sales growth; he said that as a business you had to decide when to push for margins or for sales growth and that when up against like-for-likes of up to 35% the year before and whilst the cost of meat was currently advantageous, it was better on balance to push for maximising cash margin.

He was asked about his access to Richard Rose, given Rose is currently chairman of 6 listed companies. He meets him once a month at management meetings but has found him accessible by phone and email whenever he’s needed it. In an answer to a question on the share price/value he said that he did not have a lot of experience in a plc environment. I reckon he could teach a lot of FTSE 100 CEOs a thing or two on clear and concise presentation style; he was most impressive.

Valuation: Looking at the current valuation it is very difficult to argue it is cheap. On January 2016 earnings forecasts the shares are valued at 92x falling to 39x January 2017, (although I think both those forecasts are likely to be upgraded). It has an enterprise value, (market capitalisation plus debt) of £34.5m which is about 1.1x forecast January 2016 sales. To hold the stock you have to believe that it will achieve the rapid growth to 200 plus stores over the next 7-8 years and that in a few years’ time the growth will have more than caught up with the valuation.

Conclusion; I thought Noel Collett was a most impressive individual and that Crawshaw is very lucky to have lured him away from Lidl. He has the experience of overseeing the rapid expansion of a retail business, in one year Lidl opened 80 new stores, and fully understands the risks and pitfalls involved. If anyone can help Crawshaw succeed in achieving its target of 200+ stores he can.  I mentioned valuation earlier on and to hold the stock I think you have to believe that by 2022 it will be approaching 200 stores with turnover in the ball park of £200m per annum.  Conceivably the market capitalisation might at that stage be approaching £200m giving an annualised return from the current share price of around 20%. The problem in the short term is that the price seems to be up with events and despite the skillset of the new CEO, there are no guarantees that it will achieve its goal. I am happy I have a holding and am excited about the potential over the next five years or so but as with all share prices they can get overdone both on the upside and the downside. I currently have a 4.9% holding and when setting a 12 month target price a few weeks ago I set it at 60p. Above that level I will be tempted to lock in some profits, at least selling the stock I bought at 42p in January, reducing the holding down to 3.5-4.0% but I definitely want to continue having exposure given the longer term potential.  Happy Holder!

Craw

 1st May 2015

AdEPT Telecom (Market capitalisation; £38.0m, 173p and 5.1% of JIC Portfolio): It has announced the acquisition of Centrix Limited, a UK based “specialist provider of complex unified communications, Avaya IP telephony, hosted IP solutions and managed services”. It is paying £7m cash plus any cash balance on Centrix’s balance sheet at completion; a further £ 3.5m may be payable in cash dependent on the trading performance of Centrix post acquisition.

In the year ended 31st December 2014 Centrix reported turnover of £8.75m and profit before tax of £2.26m. This increases AdEPT’s annual turnover by around 30%. Approximately 80% of Centrix revenue is generated from recurring revenue streams. AdEPT Telecom expects the acquisition to be earnings enhancing from completion. Centrix skills and product set will complement and enhance AdEPT’s existing services as it offers its clients the delivery of complex unified communications and managed service solutions, which is an increasing requisite for AdEPT’s existing and targeted enterprise and public sector customer base.

Centrix offers smart building technology via the Medusa product, which is five products rolled in to one. Medusa is a bandwidth shaper/slicer, a firewall, a switch, a reporting engine and a billing engine. Medusa allows multi-tenanted buildings to take one or more internet connection and to share those connections to multiple businesses and then to report and bill those end users independently for their usage. It provides high end communication solutions to larger enterprise customers, particularly in the public sector, business centre and healthcare sectors which account for approximately 70% of Centrix total revenue.  Therefore the Centrix customer base complements that of AdEPT. It is anticipated that the proportion of revenue derived from public sector and healthcare customers for the AdEPT Group will more than double as a result of the acquisition. AdEPT and Centrix have both adopted capital asset light strategies and are dedicated to offering a full suite of flexible data and unified communication strategies.

Ian Fishwick, Chief Executive of AdEPT, said “We are delighted to have acquired such a high quality, well-run and profitable business with a strong management team.  Centrix is an excellent fit because, like AdEPT, it is asset-light, complements and builds upon AdEPT’s existing expertise and skills, and further extends its offering in the unified communications space.  Centrix has a high level of recurring revenue and offers a well-developed customer base with long term relationships across a range of medium and large enterprises, including the related vertical markets of public sector and healthcare.  The acquisition is expected to be earnings enhancing from completion.”

Conclusion: When you are borrowing money at just 2.8% it is not difficult to see how from a financial point of view this acquisition will be earnings enhancing, (an interest cost of around £300,000k per annum for £2.26m of operating profits in 2014), but it’s not just about financial wizardry; this looks a very sensible acquisition from a strategic point of view as it clearly enhances AdEPT’s skill-set and product offering. The acquisition should not be a surprise given recent statements and the CEO’s recent 2 minute videos and, given the extent of its new banking facility it has scope to make further acquisitions in due course. As a shareholder in AdEPT I welcome today’s news and expect it to lead to further share price strength. Even before forecasts are adjusted for today’s earnings enhancing news the shares looked good value to me on 11.7x March 2016 consensus earnings forecasts, 2.6% dividend yield and 12.2x free cash flow. On Compound Income scores www.compoundincome.org it has a CI score of 92 and on Stockopedia a StockRank of 90. Happy Holder!

 

To receive FREE email alerts when there is new posting on this page please click HERE

Red Letter Day! 18th March 2015

Yesterday, 18th March 2015,  was a red letter day for the JIC Portfolio. For the first time since inception it closed the day over 100% up on the starting value of £151,110 at £302,542.

In the screen shots below from ShareScope I have shown the top twelve contributors to performance in money terms and also the bottom twelve losers! The important column is P&L Realised + unrealised, (which also includes dividends received).

I currently own nine of the top twelve positives, (run your winners) and four of the bottom 12 losers.

I will be doing my utmost to repeat the performance over the next three and a bit years but compounding at 24% per annum is a pretty tall order!

top12

bottom 12

Mark Slater’s presentation at the Mello Bloomberg Event on 12th March 2015

I attended the Mello Bloomberg investor event last night and what a good event it was; some excellent speakers and “refreshments” afterwards in Bloomberg’s high tech office in Finsbury Square.

The first speaker was Mark Slater, the manager of the Slater Growth Fund, who has a superb record over the near 10 years since launch of the Fund in March 2005. It is up some 280% v around 120% for its benchmark, the IMA UK All Companies Sector.

Cumulative performance to 31st January 2015:

salter chart

 Individual years to 31st January 2015:

slat ind

The Slater Growth Fund is one of those that I benchmark myself against; if I can’t beat him I might as well give up and invest in his fund. I often have a glance at his Portfolio to find ideas to follow up. Since launching the JIC Portfolio in 2012 it was up some 89% over the three years to 31st January compared to 65% for the Slater Growth Fund; I need to keep that performance going!

He described his investment approach and made some excellent observations, notably that he believed private investors had a distinct advantage over institutional fund managers; private investors can move more quickly and are also able to run more concentrated portfolios. He said that if he was managing a private portfolio “personally there was a strong argument for having only 5-10 holdings!”

What Slater looks for in an investment:

  • Low PE relative to growth; unashamedly he is a GARP man thinking that pigeonholing oneself in either Value or Growth is fine but not for him. Ideal company might be on about 15x forecast earnings and a PEG Ratio (PE Ratio/earnings growth) of 1.0 (i.e. 15% earnings growth).
  • Strong cash flow; it’s all very well looking at earnings per share but they can be, and often are, manipulated. Cash flow per share is the real measure of the strength of a company.  It’s okay if a growing company has a short period of poor cash flow providing it is investing for growth but he would want to understand why and expect it to be positive over 5 years. Free cash flow is very important; it’s what pays the dividends.
  • Positive recent trading statement; he likes investing in companies that are doing well now; I liked that as all too often investors, me included, are blinded by the excitement of the upside if such and such a company achieves success in two years’ time; so called “blue sky” companies. Investors invariably pay far too much for the “potential” which is rarely delivered.
  • High Return on Capital Employed and margins. It says something about the quality of the company and its potential to keep on delivering growth for shareholders.
  • Rising sales per share; too many companies are easily seduced into issuing new shares to fund acquisitions or growth, by investment bankers greedy for fees. Sales per share growth demonstrates that you have found a company where management is really growing the company organically and adding value.
  • Directors dealings; it’s good to see directors buying shares in their own company
  • He likes “clonable” businesses; Dominos Pizza is a classic example where it has been able to open more and more franchised stores at little capital outlay thus driving increasing cash flow and returns. Tremendous operational gearing in the company from new openings.
  • He doesn’t like IPO’s; the odds are stacked against you! He showed a compelling chart showing the poor performance of IPO’s over time. They are invariably overpriced and the people who are selling the company know more about it than you. When you buy shares in an existing listed company there is every chance that you know as much, if not more than the person who is selling!  The same chart showed that the longer the listed life of the company the better performance has been. He likes “a company to have a bit of history”.

Other little gems:

  • Keep it simple. Simple businesses; if too complicated don’t go near it.
  • Einstein’s 8th wonder of the world: Compounding; those who understand it receive it, those who don’t pay it!
  •  T-Rowe Price; cardinal sin is treating a really exceptional holding like the rest of them!
  •  Don’t buy hope!

He finished by talking about three stocks which he is currently keen on:

Hutchison China Meditech; it has been a great performer on the back of its exposure to growing health care spend in China which he expects to continue. In addition it has a potential pipeline of new drugs, whose development is being funded by big pharmaceutical companies, which he thinks could add $3-5bn on to the current valuation of HCM of around $1bn. Chinese companies listed on AIM do not have a great reputation or record but in this case there is a degree of comfort from it being a subsidiary of Hong Kong based Hutchison Whampoa, which has a long history of looking after its minorities.

The other two companies mentioned were Dotdigital and First Derivatives. Dotdigital is an example of a company that is currently taking a growth pause as it invests to grow its business internationally. He expects a huge payoff from this investment from mid 2016 onwards. First Derivatives is a relatively recent acquisition; the company provides software and consulting services to the investment bank market, the derivatives technology industry, the foreign exchange market and the provision of technology sales services to the information technology sector. Slater believes it is currently in a “sweet spot”.

Top 10 holdings in the Slater Growth Fund as at 31st January:

top10slater

Conclusion: A highly entertaining talk with some great insights. I will follow up on some of the investments mentioned and check the JIC Portfolio against the list above; I know there are a few stocks that would fail!

To go to the Slater Investments Website click HERE

To receive FREE email alerts when there is new posting on this page please click HERE

 

 

mtec

Recent purchase; Matchtech plc

 

Matchtech Group (MTEC.L, Aim All Share, Market Capitalisation: £127m. 507p and 2.0% of the JIC Portfolio): I have bought a new holding in Matchtech this morning. From its small beginnings in 1984 Matchtech has grown to become a leading provider of specialist recruitment in the Engineering & Professional Services sectors and is now the 12th largest recruiter in the UK. In the “About Us” section of its website, www.matchtechgroupplc.com there is an excellent description of its Purpose, Vision, Strategy and Business Model which I think explains why it has achieved consistent growth in recent years and why it should, barring a recession, continue to do so.

The shares have come back nearly 20% since last April’s highs and in my opinion look good value at these levels. I am attracted by the PE Ratio, on consensus forecasts, of 12.4x the year ending July 2015 for 16% earnings growth, falling to 11.2x July 2016 for a further 11% earnings growth. A dividend of 21.3p is forecast for the current year, giving a prospective yield of 4.2%, and is forecast to grow by 8.2% to 23.1p, giving a yield of 4.6% in the year ending July 2016. It has achieved a return on capital employed of over 30% in the last three years and the business is highly cash generative. Net debt has dropped from £16m in 2011 to just £3.7m last July. It is valued at only 10.6x free cash flow according to Stockopedia.

The last news from the Company was a trading statement on January 28th covering its first half finishing 31st January. It said that since its last update on 14 November 2014 it had continued to see strong demand in the UK and worldwide for skilled engineers. It went on to say “the Board believes that the Group is well placed to continue to benefit from this demand due to its market leading position, balanced business model of Contract and Permanent recruitment and our niche focus within the engineering and technology sectors” and most importantly, “The Board expects the results for the full year to be in line with its expectations.”

On the same day it announced the proposed acquisition of Networkers International through a cash and share offer valuing it at approximately £58m. On completion Networkers International shareholders will hold approximately 17.9% of the total Matchtech Group shares in issue. The rationale for the acquisition: “the Matchtech Board believes the Acquisition will accelerate its vision to become the market leading specialist recruiter in engineering and technology, in the UK and internationally”. It says that it expects the deal to be earnings enhancing in the first full year. Initially debt will rise given the cash element of the Networkers’ deal is £28.6m, but given the strong balance sheet and cash flow at the business this should fall back quite quickly. At the time of the announcement, agreement had already been secured from holders of 72.9% of Networkers shares so it is pretty much a done deal; completion is expected in early April.

Over the last year earnings forecasts have drifted up from 40p to 41p for the current year ending 31st July.

eps

On Stockopedia it has a stock ranking of 93 comprising 84 for both Quality and Value but unsurprisingly given the last year’s share price performance, only 63 for momentum. On my friend and former colleague, Jamie Streeter’s excellent Compound Income scorecard, ( www.compoundincome.org ) it has a high CI score of 82 and on another of his measure’s, EVER, which looks at the price/value paid for expected return (expected return is based on dividend yield and dividend growth), it scores well.

GVQ

Conclusion; this ticks the box on a number of factors; its fits my growth at the right price criteria, it scores well from a value based dividend approach and looks good on Stockopedia rankings. The acquisition of Networkers International seems a sensible deal for which it looks like it has not overpaid. The next news from the Company will be interim results on April 9th when we will get more detail around the recent trading statement but I suspect of more interest will be an update on current trading and prospects and the Networkers acquisition. I have bought a 2.0% holding initially. (See transactions)

mtec

 

 

 

 

 

 

Back to Top