Tristel had been on my watch list for some time and I eventually bought in at 69p in late March 2015. They met many of my usual buy criteria including decent cash flow, decent ROCE, increasing sales, increasing profits, cps greater than eps, no debt and decent news.
The share has been an outstanding performer and I must say I have commented a couple of time that I felt the stock was possibly becoming a tad overheated. During my December/January risk mitigation when I converted a lot of positions into cash, I did consider selling my position in Tristel but decided it could just about hold it’s place in the portfolio as the noises from the company had remained quite positive.
As on every day before I head off to the pool for a quick mile, well, to be honest, the miles stays the same but the time marginally increases as the years pass, I went through the various RNS of the day just after 7am. Tristel put out an encouraging headline but a quick flash through the numbers left me feeling that I needed to have a much more detailed look after getting back home. On item that initially caught the eye was the £1m share-based payments item. Not ideal, but I was not unduly spooked as the company had made profits from which the payments were taken. Alright, not an ideal item to be seeing but if growth continues then we can live with that in my opinion. However, what did start to concern me was the apparent slow down of sales in the UK, it’s current largest market and the overall 8% increase sales which for a company closing the previous night on a PE of 23.5 did not make me feel totally comfortable. Note, I am not saying a disaster by any measure but it just added to my view that maybe the valuation had become overstretched and that at current valuation the risk is a touch higher than I am happy carrying. The market seemed a little spooked and after a touch more thought decided to sell as the shares had fallen some 14% on the day. Selling with any small company can often be a pain due to NMS but that’s part of the territory with small cap shares. I sold all of my holding for an average price of 124p which gave me something on the order of a total return of 88%; happy days!
So the cash pile grows ever larger as the uncertain market progresses and I must admit that currently I am happy to wait for conditions to become a little more certain before making further investment; I am still of the opinion that there will be many attractive bargains in the coming months.
In my blog My Way of Dealing With The Bear, I mentioned that provided the time horizon when you want to use your capital is not terribly near, then provided you hold quality stocks and jettison the dross, you can take a fairly laid-back approach to a bear market.
Just to explain, let’s go back in time to 12/12/2007 a date when the FTSE100 reached one of its three peaks of 2007. You could take another date or indeed another index but for the demonstration of concept, I will use 12/12/2007: after this date the FTSE100 slid steadily downhill at an increasing pace. The index reached a final low some 15 months later on 9/3/2009 having fallen some 46%: a nasty bear market. What I am doing is looking at what the outcome may have been for two groups of stocks if I were to do nothing from just before the start of the banking crisis and held on to them for the following eight years.
Now let’s say we cleaned our portfolio and only had stocks that were of good quality. Now to measure quality we could have used all sorts of ratios but for simplicity I have taken a look at a basket of quality stocks as having the following criteria in 2007: a Piotroski F-score of at least 6, an Altman-Z score of at least 1.8 and a free cash flow margin of at least 5%. The data I have used is from the excellent SharePad. I then back-tested to see how those shares have performed after holding them for eight years to 12/12/2015.
I then run the same filter over the same period but for shares of lower quality and certainly ones I would not wish to hold during a bear market: Criteria Piotroski F-score of 5 or less, an Altman-Z of less than 1.8 and a free cash flow margin of less than less than 2%. Once again, I back-tested the performance of this group of shares to see how they have performed after continuously holding from for the following eight years.
1. FTSE All Share
FTSE All Share Index over this period: zero % change i.e. been through the falls and over 8 years has crept back. Note this as indeed the examples I quote excluded dividends either taken or reinvested.
FTSE All Share quality stocks as given by the above criteria: 49 stocks met the quality criteria and gave a “basket” appreciation of 165%.
FTSE All Share low-quality stocks as given by the above criteria: 17 stocks met the low-quality criteria and gave a “basket” depreciation of -26% change i.e. been through the falls and over 8 years and has failed to reach the heights of the pre-banking crisis level.
2. AIM All Share
Aim All Share Index over this period: -30 % change i.e. been through the falls and over 8 years and has failed to reach the heights of the pre-banking crisis level.
AIM All Share: quality stocks as given by the above criteria: 24 stocks met the quality criteria and gave a “basket” appreciation of 115%. This included 6 of the 24 stocks appreciating by over 300%.
AIM All Share: low-quality stocks as given by the above criteria: 82 stocks met the low-quality criteria and gave a “basket” depreciation of -73%. Of this group of 82 poor quality stocks only 4 gave an appreciation over the eight-year period: something to think about in my view!
What can this data infer? Note as I scientist I don’t like the term prove because it’s just a sample of data over one bear market. However, it does suggest that if you hold a portfolio of good quality stocks and you are not in a rush, then you may well find that within a few years time, in this case, eight years, you may well have done rather well simply sitting on your hands. Note the above figures don’t include reinvested dividends and I am very keen on reinvested dividends.
This simple back-test also suggests that much more danger lurks for the unwary investor on the junior AIM market but this is surely not news to anybody apart from the idiots and fools that populate bulletin boards.
When it looks like a bear market is arriving: rule number one: don’t bury your head in the sand
Make a plan which may include some form of mitigation, selling highly rated stocks and action that plan.
My way of dealing with the bear: well firstly we have a very good 2-minute blog from WheelieDealer discussing bear markets: that’s well worth a read. I will not really add to that other than to offer my experiences following very significant bears I have invested through over the last 20 years.
What I have learnt is that for my mindset the preferred action is to take some degree of risk mitigation as it becomes more and more obvious that the bear is taking a grip on the market. Remember in the early stages of what develops into a bear market, you just don’t know the bear is really there for sure. It usually starts with an overall index decline that may occur in steps downwards with little climbs back upwards but the overall trend as displayed by the likes of the decreasing 200day MA will suggest that the bear is about to go walk about. For the FTSE all share (ASX) the 200day MA started to suggest a downward trend was starting from around mid-September 2015 but like all indicators, it’s very easy looking backwards.
Differing definitions of when a bear market starts and how long it runs for exist but for ease of understanding I tend to measure duration form the nearest obvious sustained high of an index. If we look at the FSTE all share (ASX) you could argue that we have been in decline since July/August 2015. Whatever the starting point, what is obvious is that we are now living with the bear and he is having a good old stomp around. So, a few rambling thoughts on the bears that I have lived with:
Back in 1998 after a three-year climb of 100% in the FTSE100 everything happened so fast there was hardly time to react. The bear must have been on a bonus as he got his job done in 50 trading days taking the index down some 25%: yet in truth, little harm was done as the markets recovered rather quickly. Good companies remained good companies and at the same time many “no-hopers” were born. Within nine months of the start of the 1998 bear market, the FTSE 100 was at a higher value than when Mr Bear first started his stomp.
1998: What did I do? Well nothing really, a lot of my stocks were very Jim Slater inspired and I continued to seek opportunities from those massive Company REFS manuals. Surprisingly I sailed through but did sit down some months afterwards and ask the question would I be so lucky next time.
However, 2001 was a different matter. The markets had become over optimistic and everything carrying a .com becoming grossly overvalued. We then went into a long period of decline lasting two years until we benefited from the Baghdad bounce in 2003.
2001: What did I do? Well, fortunately, I had a plan in place and when it became clear that the 200day MA was in a sustained decline, I sold down lots of stocks and although on reduced profits, stayed in pretty good shape to fight another day. In my view, the important thing I did was to realise after a fairly significant fall that things could get a whole lot worse. I should say that leading up to 2001 I had made some very decent profits yet never really got involved with the .com stuff as I just could not readily see where the profits would come from for those masses of companies.
Just as before after the 1998 bear, we had a very sustained period of a bull market; it was a really good time to be investing. As usual, I never got in at the bottom or out at the top of anything but a compromise is just fine with me.
Things were going along nicely and my portfolio was stuffed full of apparently quality companies that paid very good dividends. PYAD had suddenly become the flavour of the time with banks and life insurance offering excellent dividends. We then started to see things going adrift somewhat with the new phrase “toxic debt” being talked about all over the news. I swear that the news agencies or banks just did not have an utter clue what toxic debt really was!
2007/8: What did I do? Well as previously the 200day MA was suggesting that all was not well. I started to get more cautious and sold down some stocks yet I just could not believe the like of Northern Rock & Lloyds could be in trouble and I actually did some topping up in September 2007 but very rapidly sold within a few days realising my mistake. As the decline set in I moved very heavily into cash, around the 80% mark. I had done a couple of sillies yet thankfully admitted when I was wrong and escaped with a fair percentage of accumulated profits; reduced profits but I felt happy to only have a 20% exposure to the ongoing carnage.
When the bear finally ran out of whatever it is bears feast on, the markets turned up but I had temporarily become a hesitant and possibly over-cautious investor. I was getting back into quality stocks, good returns on capital and good FCF but I still held probably too high a percentage of my folio in cash until I was absolutely sure that pesky bear had gone away.
So after all of this, what are our options in a bear market?
Well, firstly I would say don’t bury you head in the sand and just pretend nothing is happening.
The options as I see them are:
2015/15: What have I done? Well I have applied the lessons learned over the previous bear markets and heavily deployed my preferred strategy of risk mitigation. I started selling down some stocks in December with 200day MA of the fTSE100 looking to be in a continuous down-trend and the worries over, oil, China etc. That sell off gathered pace in the first half of January and I now am now around 70% cash. It may well prove to be the wrong decision but it’s one I feel comfortable with. When the markets do recover and some degree of confidence returns, it may well be we are granted the freedom of the chocolate factory all over again!
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