This has been a profitable month and, if Twitter is any guide, I'm not the only one. Quite a few of my larger holdings have benefited from decent updates/results and I added a few starter positions in shares that I've been monitoring for a while. Whether or not it's the wrong time to reduce my cash buffer I don't know (on the basis that the next crash will throw up some bargains) but trying to time the market isn't my strategy. Instead all I ever try to do is identify a few promising companies, take an initial stake and then either reduce or increase my position depending on news-flow. This approach seems to work for me, unlike many other strategies, so I might as well stick with it!
Purchases
RM Bought 238p - July 18
My primary screens, which filter against quality, momentum and value, have been flagging up RM as a high conviction purchase for six months. There's no doubt that the company has made solid progress over the past 5 years with profits more or less doubling, without any P/E ratio inflation, and ROCE sitting at over 20% as margins have remained stable. Still I dithered about making a purchase on the grounds that selling into the educational market is difficult at the best of times. The tipping point came this week when interim results showed all three divisions to be making good progress and an indication that the board are confident of at least meeting current expectations. Given that the forward P/E is just 10, with a yield above 3%, I think that the group is relatively undervalued with scope for a positive earnings surprise in H2.
Bodycote Bought 975p - July 18
My position with Bodycote was pretty similar to that for RM in that all of my filters suggested a purchase and yet I was reluctant to pull the trigger. In this case variable earnings over the past few years suggested to me that the business wasn't a model of stability and this is always a concern. On the other hand earnings bounced back last year, up by 33%, and forecasts suggest a continuation of this trend over the next two years although at a lower level of growth. So it's reasonable to expect margins and ROCE to stay at a decent level, >15%, with strong cash generation putting the group in a net cash position. In addition a good trading update at the end of May indicated that earnings would be slightly above expectations and this boosted the share price to over £10.50. I didn't buy at the time but with the price recently falling back by >5% from this ATH, and stabilising, I figured that now is as good a time as any to take an initial stake.
Bloomsbury Publishing Bought 238p - July 18
I've known about Bloomsbury ever since they got very rich off the back of Harry Potter but as an investment they've looked like a dud for the last decade (with the share price bumping around in the 100-170p range). However with the final results in May the share finally, and decisively, broke out of its torpor on news that 2019 results would be well ahead of previous expectations. The drivers of this are manifold. Five major digital resources are to be launched in the year, there are new partnerships with the BFI and Spotify and there's a very strong book list (with one recently winning the Man Booker prize). A further area of focus is the Academic & Professional division which should be less seasonal than the main Adult book division. Couple this with excellent cash generation, decent quality metrics and an undemanding P/E multiple and I'm prepared to give the company a chance in my portfolio.
Gamma Communications Bought at 792p - July 18
After reflecting on their trading update last week I've come to the conclusion that an earnings surprise, to the upside, is a reasonable possibility. With just half of the year completed sales are pushing at management expectations and that's without considering additional sales generated by recent capex. From a technical perspective the share price is trending towards the 800p level and it feels as though I'm not the only investor who's waking up to Gamma's solid history of quality earnings growth and cash generation. My only concern is that the operating margin is a little low, at 11%, but this is on an improving trend and that's helping to boost the ROCE (which is already high at 26%). Happy to make this a full position.
Clipper Logistics Bought at 410p - July 18
I spoke about Clipper at last month's Stockopedia StockSlam and mentioned that it came to my attention when flagged up as a new partner for PrettyLittleThing (a Boohoo brand). Since then I've been thinking about the company, on and off, as I see it as a trusted partner to businesses in the growing on-line retail sector with a great opportunity for growth. The only thing putting me off was the low operating margin, of ~5%, although this doesn't stop the company achieving a ROCE ~30%. Then, just last week, PLT announced that they were pausing next day deliveries because they couldn't keep up with demand! Well, to me, this is a signal that Clipper is more than just a supplier of generic services; it's an expert within this field and once embedded within a client it plays a critical role within their business. This is a great position to be in and with increasing use of open-book contracts Clipper isn't tied into fixed price contracts and, instead, shares the burden directly with customers. On a P/E of ~26 the share isn't dirt cheap but forecasts are for 28% and 23% growth over the next couple of years and I can see these numbers being beaten if momentum continues. With results out on 2 August I haven't got long to wait for an update anyway.
dotDigital Bought at 82p - July 18
As mentioned below the end-of-year trading statement from dotDigital was very reassuring for the current year and positive for the year to come. With the share price massively beaten up, down at 73p, I figured that this might mark a turning point in fortunes and made a mental note to pick up a few more shares once at work. Well by the time I took a look the share price was already up to 78p but this didn't particularly put me off since it suggested that I wasn't alone in my interest. However when I actually requested a quote from my online broker they came back at the 82p level and this was a bit of a shock! Fortunately, in the 15 seconds allocated for making a decision, I realised that investor demand must be very strong indeed to cause such a disconnect and I really shouldn't quibble over a few pence. A good decision it turns out with the price continuing on to the 88p level! Fun times.
Burford Capital Bought at 1899p - July 18
Following the very strong HY statement from Burford I took some time to consider the analyst expectations around this share and their response to the results. What I find interesting is that while they've raised their targets for this year, which they could hardly avoid doing, they've lowered the following years despite the fact that the company is investing ever larger amounts of capital. In fact I find the narrative from the directors hugely positive about this investment and what it potentially means for the future. Obviously, and this is the key issue with Burford, the quantum and timing of returns from these investments is unknown and this is why the company keeps surprising to the upside. As a result I've upped my position by 50% as part of my policy around feeding my winners and starving my losers.
Sales
None although I have been sorely tempted!
Announcements
Plus 500: It seems as though every month Plus puts out a new statement indicating that their, and everyone else's, expectations are being increased. While this trend is exactly what I want to see from one of my investments it is a bit disconcerting to see them doing better and better; in a way it feels like trading is almost too good! Still it's a nice problem to have and this update does provide some clarity on the impact of ESMA. Essentially they think that 88% of their clients won't satisfy the Elective Professional criteria but these clients only generate 25% of the group's EEA revenue. Does this mean that a quarter of these sales will be cut off on 1st August? I don't know. Also, apparently, customers have to request reclassification and I suppose that not all of the 12% will do this at first? So while Plus are trading fantastically I'm not too upset that I halved my exposure last month. (Update)
Impax Asset Management: At the headline level this Q3 update, reporting AUM up to a record £11.8bn, seems pretty positive. The core asset management business enjoyed both positive new inflows and positive performance over the period although new investment activity was about half of the amount received this time last year. With the new US equity funds there was a small outflow from redemptions although good performance more than offset this decline. So reasonably positive overall and Ian Simm, CEO, seems happy about progress: "With sustained net inflows, AUM at a record high, and a healthy pipeline of new business, it is clear that investor interest in the transition to a more sustainable economy continues to gather momentum". (Update)
Robert Walters: Continuing the recent trend of improving results this Q2 update is a stunner with sales up across all regions and business lines. Overall gross profit is up by 16%, which matches well with expectations for the year, with Europe being the best performer at 23% up. With this level of growth Europe is quickly catching the UK, £24.6m vs £27.4m, as a key generator of sales. With the Asia Pacific region bringing in £40.5m there's no doubt that the group is diversified well away from local issues (such as Brexit). With no obvious weak spots I can see why the shares are trading at an ATH. (Update)
Gamma Communications: This telecommunications group really does keep a low profile and that's a shame given its track record of growth. This seems to be continuing with FY results forecast to be at the higher end of board expectations and this is at the HY stage. So if sales and margin growth are already pushing expectations then there's a decent chance that these will be upgraded in due course. On the new business front their high capacity national optic fibre network has been delivered on time and on budget while Connect, the fixed/mobile converged product, is now fully launched in the market. With these in place capex requirements should reduce a bit as the business is prepared for continued growth. Still even with this spending cash is up by another £5m to £36.9m and that's a trend that leaves me with a warm feeling. (Update)
Computacenter: Following up on an excellent 2017 this year is shaping up nicely. Strong momentum in all areas, but particularly Germany, leads the board to believe that FY results will be comfortably in excess of previous expectations. Given that these are for a 13% rise in profits to 70.2p I'm thinking that we could be looking at perhaps 15-16% growth this year; at the EPS level the impact could be even higher given the share buyback which took place in February (I'm rather glad that I didn't tender my shares now!). Lots to look forward to then. (Update)
Dart Group: Wow well that was an impressive reaction to these results - up by 35% on the day! I can see why though with earnings up by 44% to 74.6p (way above the forecast of 62.7p) although 70% of this variation was down to FX revaluations and taxation. More importantly FY19 forecasts had suggested a slight drop in profits while now, it seems, these expectations are going to be substantially exceeded. Given that this could mean a 10-20% rise in profits the forecast P/E for the group of ~12 looks rather too low. The key drivers of growth here are the standalone flights and package holidays offered by the Jet2 brand and having tried one of these packages last Christmas I can see why they're doing well; you get a lot of holiday for the price with all of the leg-work dealt with. Curiously these results are despite the average airline ticket yield falling by 15% as very competitive pricing took its toll last summer; if this pressure reduces I can see Dart doing well due to the much larger volume of seats that they now provide. So, apart from the Fowler Welch distribution business, this is a group really delivering results and I'm happy to stay for the ride. (Results)
Somero Enterprises: A very pleasing, in-line, trading update here with solid trading in the Company's largest markets. Specifically North America and Europe, the two biggest markets, are providing the most growth and this is a continuing trend. Only China and Latin America are down, compared to H1 2017, although expectations are that there will be some recovery in these regions. From a product perspective all areas, such as Boomed screeds and Ride-on screeds, are contributing to growth with new product development in place to deliver future growth. Nothing to worry about here at the moment. (Update)
Bloomsbury Publishing: It's always interesting to get a trading update just a week after making a purchase as it's pretty much instant validation (or destruction) of your investment thesis. Fortunately Bloomsbury is trading in-line with expectations with sales up by 3.7% (7.1% at constant currency) and new acquisition IB Tauris pulling its weight. There's activity on a number of fronts, with new books and digital resources, but the company seem particularly excited about their collaboration with YOOX Net-a-Porter. This involves making rare, historic fashion show footage available exclusively through Bloomsbury and I can imagine that this'll be very attractive to the right crowd. All good news really. (Update)
Newriver REIT: This is one of my more frustrating investments with the share price having slowly but steadily fallen by over 20% in the last year. The problem is that I rate the management team, believe that they're executing on their strategy and see the fruits of current investment coming good over the next few years. There are no surprises in this Q1 update but it's clear that the team have been busy with the purchase of Hawthorn Leisure, a doubling in the number of residential units which the portfolio can support and over 99% of Q1 rents already collected. With so much going on, and a quarterly-paid yield of >7.5%, I'm loath to part with Newriver at any price around or below the latest NAV of 292p. So I won't! (Update)
dotDigital: With a share price down by 30% over the past 6 months I've wondered, a number of times, whether I was missing something important with dotDigital. On one hand the company appeared to remain confident in meeting expectations while on the other GDPR, and the mass culling of marketing emails, suggested that trading might be difficult. Personally I see GDPR as an opportunity for dotDigital since they have the expertise to help clients with their regulatory burden and this is very attractive. Anyway it turns out that there's been no material impact here and the growth strategy (which focuses on product innovation, regional expansion and partnerships) is firing on all fronts. As a result FY profits will be in-line (25% growth) while cash balances are ahead of analyst consensus at £15m and momentum has continued into the current year. Also FY19 is trading in-line with expectations and this is for 28% growth in profits. Great. (Update)
FDM Group: Solid in-line HY results from FDM with EPS up by ~16% on pretty much flat revenue growth. The reason for this is that FDM are focusing on their in-house Mounties, which attract a higher margin, and reducing outsourced contractor revenue (by 80%!). This seems like a good plan as gross margin is up to 49%, from an already high 43%, and Mountie utilisation rate hit 97.2% for this period. To maintain this growth FDM is investing heavily in finding and training new Mounties in established and pop-up facilities. In this period alone training completions are up by 30%, while on-line applications to join the program increased by 31%, and this growth shows no sign of slackening. What I particularly like is how the company targets marginalised demographics, such as ex-Forces personnel and returners to work, and helps them tackle their new role. I imagine that this leads to loyal staff and a motivated workforce. Good progress. (Results)
3i Group: Since looking to break out after the FY results in May the share price here has looked decidedly weak and I was wondering if I'd underestimated the headwinds facing the company. Still in this Q1 update the NAV is up 5.1% to 760p and the board have been busy with new investment and realisations. In particular investments have been made in Royal Sanders, a contract manufacturer of personal care products, and ICE, a global travel and loyalty company. To offset this £835m came in from the sale of Scandlines although £535m of this was immediately reinvested. Of course the biggest investment remains, by far, the £2bn held in Action (the discount supermarket) and fortunately this seems to be trucking along with a 7% valuation increase in this quarter alone. Seems pretty solid to me. (Update)
Burford Capital: Heck of a HY statement here from Burford with profits up by 17%, total assets up by 37% and cash generation up by 61%. More significantly, for future returns, this HY saw substantial client demand with portfolio investments up by 70% to $205m and single-case investments more than doubling to 88%. Somewhat bizarrely the analyst forecasts for 2018 show anything from a 17% to a 30% drop in profits for the FY on moderately lower revenue. I'd say that there's a real disconnect between these numbers and reality because Burford, intentionally, give no guidance whatsoever on future profits as case resolutions are impossible to predict. Thus we can still buy this unique business on a P/E ~20 despite a history of amazing growth. Given this I'd recommend reading the HY Report in full to both understand the firm and revel in the clarity of explanation on offer. With this in mind I'll be increasing my position here. (Results)
Bodycote: As mentioned above I took an initial position here a few weeks ago on the basis that this is a quality business which has indicated that it's trading slightly ahead of expectations. With these HY results it's clear that the company is doing well with profits up by 16% on a sales increase of 6%. In other words margins are up, from 17.8% to 19.0%, and the company is seeing a decent return on its capital expenditure (as ROCE >15%). The bulk of this investment focuses on adding capacity in Specialist Technologies facilities and Emerging Markets facilities which makes sense since this is where the revenue growth, at higher margins, is to be found. Since it takes 3-5 years for these facilities to mature clearly the board are investing for the future. While this is a sector with limited forward visibility I'm impressed by the way in which management are growing the business and can see myself upgrading this to a full position in the portfolio. (Results)
Robert Walters: Since RWA put out a strong update just a few weeks ago it's no real surprise to see record HY profits (up by 30%) with the dividend being increased by a mouth-watering 45%. Remarkably all regions are delivering increases in both Net Fee Income and profit with this activity applying across permanent, contract and interim recruitment. I don't quite know why Robert Walters are doing so well compared to other recruiters but I suspect that they're in the right sectors (IT, legal, finance) and the right geographies (Europe and America specifically). On the other hand maybe their level of diversification means that some part of the group will always be doing well and they're quick to focus on less well-performing areas? Either way they're making excellent profits, which are converting into cash, and come across as very confident about the rest of the year. (Results)
Clipper Logistics: Well this one caught me by surprise. A quick skim of the results first thing and everything looked fine. An hour later and they're down 22%! What the hell? It turns out that while EPS is up to 14.2p (14% growth) the analyst expectations were for 15.6p - so a heck of a miss. Given that the board indicated that they were trading in-line just 3 months ago I feel pretty sore about this. In fact there's no recognition in these results that trading has been anything less than expected with only a few lines referencing the pressures facing retail clients. Drilling down into the numbers the main problem seems to be that costs have risen faster than revenue, hitting margins, and this seems to be down to investments being made for new clients where the full benefit will be felt in 2019. Supporting this theory staffing costs are up by 21.5%, which is in-line with the increase in employee count but ahead of the 17.6% in revenue growth. Ordinarily I'd cut any share putting out a profit warning but this is a business doing well - just not quite as well as expected in H2 - and I don't think that they're about to put out an actual warning. So I'm going to keep my half-position here even though I'm still annoyed. (Results)
XP Power: Solid HY results from this manufacturer of power supplies. Sales up by 16% (25% in constant currency) with own design products increasing by 20% (to 78% of total revenues). There are some pressures from component cost inflation and Sterling appreciation but the board expect the year to be in-line with expectations. Recent acquisitions, of Glassman High Voltage and Comdel, appear to be trading well and fitting into the group in a complementary way since now XPP can act as a one-stop shop for power solutions. What's interesting is that while all trade sectors remain buoyant it's the semiconductor sector which is really going well with this contributing 26% of sales (was 16%). It seems that the acquisition products, higher voltage and RF power, are attractive to this market and this is paying dividends. So with this positive outlook I'm happy to remain invested here. (Results)
Games Workshop: Expectations are high here for a 96% rise in earnings to 183p, after previous upgrades, and GAW doesn't disappoint with EPS coming in at 185p. Unusually though the FY report doesn't make a big deal about this past growth; instead there's a very lengthy section on how the company makes money, what it hopes to do in the future and how this will benefit both shareholders and employees. This overview really suggests that the board have got a grip on how to run GAW successfully while keeping their feet on the ground with respect to expectations. Still with a gross margin of 71.4%, ROCE at 120% (this is not a capital intensive business) and excellent cash generation I think that the business will continue to generate excellent returns. However with a straightforward outlook statement, "The board continues to believe that the prospects for the business are good.", I expect that the share price will pause at the current level for a while since FY19 estimates currently indicate a 20% drop in profits. This seems hard to believe but at least the estimate is ripe for being exceeded. (Results)
End of month summary
Well that turned out to be a busy month with 18 update/report statements to get through along with the constant background murmur that comes with the market. Thinking back I'm sure that there were several geopolitical jolts related to tariffs and Brexit but it's funny how, just a few weeks later, these feel like nothing more than noise. At some point one of these jolts will seem to tip us into a bear market but I see this as little more than coincidence; it'll be the accumulation of these shocks that does for the current market and who knows when this point will arise.
Anyway in my portfolio Impax Asset Management is the stand-out winner, up by a third following results last month, but not far behind is dotDigital which is up a quarter. Personally I'm pleased by the latter result as the share sat at my stop-loss for almost two months but I decided not to sell because I couldn't see any news to justify a sale - just speculation around GDPR. While this is just a single data point I think that it makes a lot of sense to retain some discretion around activating a stop-loss while still using them ruthlessly when required.
On the down-side the biggest annoyance this month has been my purchase of Clipper Logistics (on the basis that they were trading in-line with high-growth expectations) just before their full-year results which came in substantially below these forecasts. The business is still trading well, so I haven't sold, but I don't understand why the analysts were allowed to drift so far from reality. Still this does make the double-digit falls at Ramsdens, Henry Boot and Hollywood Bowl feel like a sideshow - and I have no real idea why any of these shares have dropped back so much. Ho hum.
Winning positions for the month: IPX 34%, DOTD 24%, DTG 18%, PLUS 15%, BUR 13%, BVXP 12%, CCC 8%, ACSO 7%, TET 7%, RWA 7%, III 5%, BOO 3%, PPH 3%, KWS 2%, GAMA 2%, NRR 1%
Losing positions for the month: TUNE -1%, NXT -2%, PLP -2%, FDM -3%, LLPD -3%, WJG -4%, TAP -5%, CAKE -8%, BOWL -10%, BOOT -11%, RFX -11%, CLG -19%
The overall result, despite some nasty surprises, was a handy 3.2% for the month with the YTD return pushing up to 11.8%. I'm very happy with that and hope that nothing daft happens in the quiet month of August!
Disclaimer: the author holds, or used to hold, all of the shares discussed here