October 2018 Portfolio Update

Well I don't mind saying that this has been a shocker of a month. I can't remember such a destructive period for a number of years but such is the risk of being fully invested and not using hard stop-losses. It's not that I'm unaware of the use of stop-losses, and I do use alerts to pick up on sharp falls, but I've come to realise that they don't really work with either my strategy or my psychology. Instead I'm looking for companies which should grow and prosper over the next 5-10 years and I'm willing to endure capital volatility along the way (since I don't intend to draw-down on this capital for 10+ years). If a profit warning comes along then I'll close a position without hesitation but beyond that I'm looking to remain invested in my holdings. Obviously this tactic looks a bit silly right now, especially when a good number of folk are tweeting about how they presciently sold everything and went to cash in the summer but you can't win them all.


Burford Capital Bought 1859p and 1612p - October 18

Well the board at Burford employed outstanding timing at the start of the month by raising $250m from institutional investors at 1850p. When the price fell to this level the day after I figured that with the price at £20 just a few days before this was a good chance for me to top-up at more or less the equity raise level. In hindsight this was remarkably poor timing in the short-term; in the long-term I am absolutely sure that Burford will continue to deliver outstanding results and that the forecast P/E of ~17 will prove to be materially wrong. My reasoning here is that Burford has been employing ever increasing amounts of capital and that the profits this year are down to investments made several years ago (which is how it works every year). So their market is growing and Burford have an ever larger portfolio of cases in progress. Hence I made a second top-up recently to benefit in some way from recent volatility.

XP Power Bought 3048p and 2594p - October 18

As mentioned in my comments on the Q3 update below I think that XP Power is trading very well and is not at all expensive when you look at the forecast growth. Thus I added to my holding after the result announcement and then added again shortly afterwards when the market took a wrong turn. With analysts indicating 30% profit growth this year, against a P/E of ~14 and a yield >3%, I think that we're being offered an outstanding opportunity here to buy into a company which is expanding its product range and embedding itself in client products. If anyone has any thoughts on why the future may not be bright for XP Power I'd be happy to hear them in the comments below.

B.P. Marsh Bought 274p - October 18

Now this is a rather interesting private-equity investment where I see the downside as being very well protected while retaining a lot of upside potential. The reason for the former is that the board have explicitly stated that they will buy-back shares above a specific discount to NAV and have started doing exactly this. As a result a reasonable amount of selling volume is being mopped up by the company and the discount shouldn't widen much beyond this point. On the upside recent interim results show a continuation of asset growth (which has been the case since 1990) as well as a chance for their largest holding to go public in some way. So I see this as a fairly asymmetric position in terms of performance while providing exposure to a PE investment space which would normally be unavailable to the private investor.

Somero Enterprises Bought 364p - October 18

I've held a position in Somero for a good number of years now, ever since seeing the CEO present in London, and the company has done a fabulous job of growing steadily with high margins and excellent cash generation. If this wasn't a US company listed here then I'm sure that it wouldn't be on a P/E of ~10 with a yield of ~5%. To me I believe that this is a ridiculous valuation which over emphasises the risks of investing in Somero. Nevertheless it is in a cyclical sector (construction) and much of its growth has come from the US economy expanding and remaining healthy. Hence I wouldn't want to put all of my portfolio into this share, no matter how good its cement-levelling machines are and no matter how competent the management, but I had no difficulty topping up my holding and may do so again if the price weakens enough to put Somero on a single-digit P/E ratio.

IG Design Group Bought 498p - October 18

My eye has been on IG Design ever since seeing them present earlier in the year but a sharp rise in share price to £5 and then £6 put me off somewhat. However when the price fell back below the 500p level earlier in this turbulent month I figured that this was, potentially, an excellent opportunity to climb on board. By sheer fluke a very positive trading update emerged the next day, as mentioned further down, and it seems as though all of their initiatives are bearing fruit. I can't deny that it's nice to see at least one of my trading decisions this month bearing fruit!


Taptica International Sold at 345p - October 18 - 4.4% gain

Now Taptica is an excellent example of where a stop-loss of say 20% would have been beneficial. The price topped out at 507p back in January and a hard stop-loss would have seen me exit at ~400p in February (or March at the latest). However to me it seemed that trading was still pretty good with an "ahead of expectations" announcement coming out in June and strong interim results, in September, again pointing to FY EBITDA being ahead of expectations. As a result Taptica sits on a forward P/E of ~8 despite the potential for 95% earnings growth this year. Nevertheless the price has continued falling and when I decided to add more to my XP Power investment I'm afraid that Taptica was first in the firing line.

Next Sold at 5386p - October 18 - 19.4% loss

Oh what a frustrating investment Next was for me and my portfolio. I absolutely love the clarity of reporting from Next and the board's deep understanding of their company and the dynamics at play within the retail sector. They are playing their cards just as well as they can, as the transition from high-street to on-line retailing continues, and I firmly believe that Next will be a long-term winner. Nevertheless it has been a terrible investment during the period within which I held the shares and it's not immediately clear that it'll ever trade at a much higher earnings multiple (given relatively anaemic growth). Hence it got the chop when I needed to free up cash for more compelling investment opportunities. Such is life.

Boohoo Group Sold at 223p - October 18 - 8.5% gain

Another great retail name, which I also have high hopes for long-term, is Boohoo and its trio of in-demand brands. Even so it has struggled to deserve a P/E ratio of >50 over the last couple of years as the main Boohoo brand has decelerated in growth while PrettyLittleThing and Nasty Gal have taken the honours. Strong interims last month propelled the share price up by over 40%, suggesting that the share had been over-sold, but I do have some reservations about how equally the benefits of future growth will be shared around - since Boohoo only own 2/3 of PLT and this is the brand which they're pushing hard. Anyway as with Next I needed to release some funds and so this pretty little online retailer had to go.

Bank of Ireland 13.375% PIBS Sold at 198p - October 18 - 50.1% gain

Up until this month I'd held this preference share for over 5 years and done well out of both the dividends and capital growth (as we emerged from the financial crisis). I didn't manage to buy at a bargain basement price of course (a crazy 25p in 2011) but still this was a great investment and something close to quasi-cash. What I didn't quite notice is the price peaking at 235p in January (eerily close to the previous ATH of 238p in 2006) with a slow decline setting in from that date onwards. I suspect that interest rate hikes are playing their part here and that the capital improvement story has been played out for this preference share and plenty of others. Anyway with funds needed elsewhere I decided to liquidate my holding - a surprisingly difficult operation requiring a number of broker phone calls - and I doubt (hope!) that I'll never return to this BoI PIB.

Computacenter Sold at 1029p - October 18 - 0.8% gain

To finish off this miserable month the latest trading update from Computacenter went down like a lead balloon as sales in all markets slowed. I think that the company will do fine in the long run but my inclination at the moment is to take money off of the table when faced by uncertainty; hence I'm not too bothered about being little more than break-even here. I could have done better with a hard stop-loss but there's no point looking back!


Treatt: Shares in Treatt have gone nowhere over the last year as the company has invested for future growth while current sales have flat-lined. With this update management confirm that H2 has performed well, despite FX headwinds, and profits should be in line with the Board's earlier expectations. Now that's an interesting statement because the consensus has drifted down from 19.8p last October to 17.95p now and I wonder if the board are alluding to the earlier, higher figure? On the capex front design options are being studied for the new UK facility while building work is at an advanced stage in the US with extra capacity coming on-line in H1 2019. With the key products of citrus, tea and sugar reduction continuing to deliver I think that the market is underestimating how well Treatt is performing. (Update)

Ramsdens Holdings: After some very chunky sales by a number of directors, at the end of June, sentiment in this share has been very weak. Quite a few investors thought that the scorching summer would dampen trading in foreign currency and they were spot on; revenue here has been adversely affected. However other areas of the business, such as jewellery and pawnbroking, have offset this decline to the extent that profits are anticipated to be in-line with expectations. These aren't too challenging, with profits up by 3.6%, but then again Ramsdens is only on a P/E of 9.6 and it's yielding over 4%. With the 4 stores opened last year, and the 5 stores opened this year, trading ahead of expectations overall I think that there's scope for cautious optimism here. (Update)

Volvere: Unexpectedly the Lander brothers have disposed of their largest and most profitable investment, Impetus Automotive, for a total consideration of £31m. With their economic interest coming in at 83% this will lead to Volvere retaining around £23.1m after costs and bonuses. Given that they only paid around £1.25m back in 2015 this is a very decent return on investment and a reasonable sale price given that PBT last year was £3.3m. The big question is what they will do with all of this cash (they had £20.4m prior to the disposal) and whether they have any acquisitions in mind. Either way this share clearly has a lot of downside protection at the moment! (Update)

Bioventix: Every time results come out for Bioventix I'm always surprise by its astonishing profit margins (>75%) and prodigious cash generation. It's just a shame that growth is constrained by the nature of its market niche and reliance on customers to generate sales. On the flip-side Bioventix is a lot like Burford Capital in that the investments that it makes now, in research, will only generate revenue in the future (2022-2030). As such research done over the last decade is paying off now and should continue to pay off for many years as customers stick with tests that have been given regulatory approval. Looking forwards the big money earner should be the new Siemens troponin test and while this test has been slow to get moving it is now approved and ready for use. That said analyst forecasts point to flat profits over the next couple of years and I'm sure that this is down to the board being unable to give much forward guidance. I believe that they'll continue to deliver but you do need a bit of patience with this company. (Results)

Impax Asset Management: After a bit of a wobble, in share price, last month it seems that Impax is continuing to trade well with AUM up by 6% in Q4 (to £12.5bn) and up by 72% over the year. Already another £400m in new mandates will come on board in the next quarter so it seems that the sustainable investment space is hot at the moment. Unfortunately there have been some outflows from the acquired Pax World business but these don't seem huge and have been more than offset by positive performance. Looks in pretty good shape overall then. (Update)

XP Power: For no obvious reason XP Power has been on a bit of a downer recently and so these Q3 numbers provide a useful fillip. Trading is strong with Q3 sales up by 18% as reported or by 11% if you adjust for acquisitions and currency effects. Looking forwards their components are increasingly designed-in to new equipment and they're now active in the RF power and high-voltage markets due to the Comdel and Glassman purchases. It seems to me that these additional areas of expertise will provide real benefits in the future and meanwhile trading is in-line with expectations (which indicate profit growth of 30% for 2018). I don't think that the company is expensive, on a P/E of ~17, and operationally they're doing a great job. No wonder I topped up here today! (Update)

Robert Walters: It's nice to see any company reporting on a 'record quarter' and this follows quite a few quarters of decent trading. Growth across the group was 12% with this coming from permanent, contract and interim recruiting. The two strongest regions remain Asia Pacific and Europe, growing 15% and 21% respectively, while the UK lags at just 4% growth. Still recruitment levels remain high across the UK with sectors such as legal particularly active. With net cash up to £41.3m and continuing investment it seems that Robert Walters is really on a roll with a reasonable chance of updated forecasts in Q4. (Update)

Hollywood Bowl: A reassuring update with earnings to be in line with expectations. Usefully they indicate that these are for a 10% growth in PBT, which is more than the consensus that I can see and decent for a not overly expensive business (P/E ~15). Usefully cash generation is so good the board are considering returning additional capital to shareholders! With the steep fall in net debt over the last few years it's clear that free-cash flow is good here but this is even more impressive. (Update)

Patisserie Valerie: Well from one good update to a total car-crash. In just a few days this (apparently) quality business has gone from being highly-rated to sitting on the brink of liquidation. I have no idea how this is possible in such a simple, high-profile business but there you go. To go from suspending the shares, because of an issue in the accounts, to being the subject of a winding-up order just beggars belief. Still this is a good reminder of why I own 40-odd shares and don't do leverage; you really have no idea what might go wrong with any public company and I like to sleep at night. Personally I've marked this holding down to zero in my portfolio on the basis that this seems the most likely outcome. If I do manage to salvage some capital here then I'll be pretty happy with that. (Update)

Patisserie Valerie: OK it looks like the company isn't going bust just yet. They've managed to raise £15.7m in an emergency fund raising and this will allow them to cover their present liabilities and remain solvent. Obviously the fact that these new shares were issued at 50p, compared to a pre-suspension price of 429.5p, reflects the level of apparent risk and uncertainty in the firm's true financial position. From a shareholder perspective there's an impressive amount of dilution here with a quarter of the company being sold for £15.7m - which implies that the whole is worth £60-70m. A long way down from £446m! Anyway I think that it's right and proper that the shares should remain suspended to avoid a false market; we need to know the actual financial state of the company in order to value it. Still when the shares trade again I'll be surprised if they trade above 176p (which takes a 50% haircut on the previous share price and adjusts for dilution) and they could easily fall well below 150p as a wave of sales hits the stock. (Update)

B.P. Marsh: Good interim results from this specialist investor with NAV up to 333p (was 321p in July) as the majority of their 18 investments have delivered strong returns. What's interesting is that the company have a mandate to buy back shares when they hit a 15% discount to the NAV; this level is now 283p and with the share price also being 283p it's clear that this is something of a floor (which protects the downside). That said I think that the company is poised to continue to do well: 32 opportunities were reviewed during the period, 3 are in ongoing discussions and 1 investment (in ATC Insurance) was completed. In addition their very largest position (£36.8m or roughly a quarter of the portfolio), in LEBC Holdings, is contemplating a liquidity event; if this happens then the NAV should receive a significant boost. With £12.7m of uncommitted cash I'd say that B.P. Marsh is in the right place to maintain their track record (from 1990) of growing the NAV at an annual compound rate of 11.9% and I'm looking forward to see what they do next. (Results)

IG Design Group: Having only bought a position here yesterday I was quite surprised to see a trading update this morning! Fortunately it's all positive with sales and margins up significantly from last year and growth being seen in all regions. It's been a busy period with the acquisition of Impact Innovations, installation of a new IT system in the US and final commissioning of a state-of-the-art printing press in Holland. All of these changes appear to be either delivering growth or reducing costs so it's a bit of a surprise to hear that they expect to deliver profits in-line with management expectations. However it's possible that these are different to analyst expectations where these are pointing to an excellent 29% growth in earnings. Either way IG Design doesn't look expensive on an P/E of ~19 when trading is so strong. (Update)

dotDigital Group: A key worry for dotDigital this year has been the implementation of GDPR since this caused a slow down in the European sales process. However, it turns out, the group has traded acceptably through this with EMEA revenue up by 11% to £30.4m. This is a lower growth rate than the ones seen in the USA and APAC regions but these are coming from a much smaller level of sales. The acquisition of Comapi also looks to have been a smart move with this adding an omni-channel element to the group. Just as important though are the strategic partnerships with big names such as Magento and Microsoft Dynamics. These deliver significant revenue with ARPU increasing by 7% to £1512pm and by 42% to £1405pm for each of these partners respectively. Another aspect which I like is that dotDigital actively seeks to enhance existing functionality and monetise advanced features; this helps drive growth and ensure that they're meeting customer needs. With the new year starting strongly I think that the market will recognise the strengths of dotDigital as more news emerges. (Results)

Softcat: Impressive results today with 30% sales growth translating into a 36% jump in profits (which indicates improving margins; a great sign). With conversion of profits into cash an excellent 98% the company has more funds than it needs and is returning some via a 15.1p special dividend (up from 13.5p last year). Still despite this positive performance the share price fell a hefty 11.5% on results day as investors worried about how Softcat would follow such an outstanding year as economic conditions remain choppy. It's a reasonable concern although Softcat has managed 52 consecutive quarters of year-on-year growth so either they know what they're doing or they're cooking the books. Personally I think that they're just taking advantage of the current demand for hardware/software which is why all regional offices delivered double-digit growth in gross profit, as did each of their customer segments. The first few months of the year have been encouraging, in terms of further growth, but we need to wait another month until the Q1 update to really see how things are going. (Results)

Games Workshop: Weirdly phrased trading update from everyone's favourite miniature figure company. Sales are ahead of the same period last year while profits are at a similar level. In one respect this is good news as forecasts pencilled in a drop in profits with this being a less exciting year for releases. On the other hand margins must be under some pressure for profits to remain flat which indicates, I think, that costs have risen from a low base (thinking about the single-handed shops). Also the board are aware of unspecified uncertainties for the remainder of the year - which leaves us all in the dark. No wonder the shares have fallen away following this update even if the business is doing fine! (Update)

Bloomsbury Publishing: With these interim results it's worth noting that Bloomsbury makes the vast bulk of its profits in H2 (due to Christmas). With that in mind it's good to see adjusted EPS up by 12% from a 4% sales increase (which implies a margin improvement). The adjustments relate to acquired intangibles and IBT acquisition costs which seems reasonable. What I particularly like is the high cash conversion ratio of 172% with capex requirements being low and the cash balance remaining a solid £16.9m (after spending £3.9m on IBT). With trading being in-line with expectations, which are for ~15% growth in earnings, I think that the business is reasonably priced on a P/E of ~14. Looking forwards I expect the Bigger Bloomsbury initiative (announced May 2018) to drive growth and reduce costs over the next 5 years with a particular focus on the group's digital assets; they do seem to have a lot of poorly monetised content and recent partnerships with ICAEW, Net-A-Porter and others suggest that there's a lot of potential here. (Results)

Watkin Jones: First things first - results will be slightly ahead of its previous expectations. Given the high visibility of earnings from student accommodation and build to rent (as developments are forward sold) I wonder if the additional profits have come from residential sales? With this division having a good year, selling 175 properties vs 94 in 2017, this must be the most uncertain part of the business. In addition ~£4m was received as a one-off profit in relation to the Curlew Student Trust, which Fresh Property Group managed before the Trust's sale, but I don't think that this is included in the forecast since this alone would boost profits by 10% (which isn't a "slight" increase in my book). I'm encouraged by the level of forward-selling announced here, which underpins earnings for the next couple of years, and the board seem pretty confident too. Not bad value on a P/E of ~13. (Update)

Computacenter: Well this is a downbeat update with sales declining by 3% in Q3 and sales for Q4 looking to be reasonable but nowhere near as good as H1. In addition the Managed Services market is somewhat challenging and the company is perhaps looking towards Professional Services to be the growth driver. Still expectations remain unchanged and so I'd have expected to see the share price weaken by maybe 5% - rather than the almost 20% drop seen in early trading! What a harsh market. That said the key geographies of the UK, Germany and France all appear to be under pressure and it's possible that we are seeing a change in fortune for Computacenter? Hard to say really which is why I decided to liquidate my holding this morning - no point hanging on in hope when the market is in a punishing mood. (Update)

PPHE Hotel: For quite a while PPH have been renovating and refurbishing hotels across the group; great for the future but a bit of a dampener on current earnings. Still this activity seems to be bearing fruit with RevPAR increasing across all regions and overall growing by 5.8%. Looking further both average room rate and occupancy increased in Q3 and over the entire 9 months. Definitely a solid result and I wonder if they'll beat expectations for the full year (for now they're being kept as in-line)? Sadly no update to the EPRA NAV value from June is provided but given that this was £24.21 (compared to the share price of £15.50) there's clear scope for revaluation upwards if the City decides to value the group on an asset basis. A good update with which to finish the month. (Update)

End of month summary

Well that was an extra-ordinary month, for all of the wrong reasons, and I'm glad that it's over. The extreme correction has been covered elsewhere, so I won't go into the reasons why fear seems to have gripped the market, but it's quite something to realise that almost all of my positions shrunk this month. The stand out loser was obviously Patisserie Valerie but I really don't think that you can prepare for an outright fraud other than by employing sensible position sizing. In this case I've lost ~2% of my portfolio value to this collapse alone but that's hardly a fatal blow. More insidious are the sharp falls registered by companies like Accesso, Keywords Studios, Simplybiz, Games Workshop, Softcat, Portmeirion and dotDigital; with all falling by 15% at the very least!

Still at least Volvere did alright this month. Shame it's only a small position.

Winning positions for the month: VLE 17%, WJG 7%, PCA 3%

Losing positions for the month: RFX -1%, NRR -2%, PPH -3%, RM -4%, BPM -4%, IPX -6%, SOM -6%, GAMA -7%, III -7%, BOOT -8%, DTG -9%, BOWL -10%, BVXP -10%, HAT -11%, ZOO -11%, FDM -11%, BOY -12%, BUR -12%, XPP -13%, TET -13%, TUNE -13%, ADT -13%, BKS -13%, BMY -14%, RWA -14%, K3C -15%, DOTD -16%, PMP -17%, SCT -19%, GAW -19%, SBIZ -21%, KWS -30%, ACSO -31%, CAKE -100%

Overall this horrific month dragged my portfolio down by -12.7% with this being enough to make the YTD performance an unhealthy -1.7%. Still it's not the end of the world and in ten years time I won't even remember what happened this month; it'll just be a blip on the chart. More usefully the fact that I'm still full-time employed affords me a little distance from my investing performance and I feel very lucky on that front; in fact work proved to be an excellent distraction when I was trying to avoid thinking about the stock market at all!

Disclaimer: the author holds, or used to hold, all of the shares discussed here

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