Note: previous blog articles of this journey can be located via the right hand side bar. A we reached the end of 1999, the paper profits were just becoming unreal and investors were buying into the idea that this one way trip would go on and on: you even had people in well-paid jobs that had become totally seduced by the technology/.COM story and had given up employment to become full-time investors; fortunately I never really got that feeling. The Sunday Times carried a regular feature entitled The Diary of a Day Trader featuring a chap who had quit his secure job during the .COM boom to become a full-time trader working from home. The Diary of a Day Trader was a must-read feature, chronicling the ups and downs of the journey of John Urbanek. Even people who had not bought a share in their entire lives were talking about the column on a Monday morning at work. The column was beautifully honest, “warts and all” and as time went by it was obvious that the new trading life was becoming very tough. Interestingly in his final column, he wrote "I am not throwing in the towel and will continue as a day trader, although somewhat older and wiser than when I started almost two years ago. I would not necessarily recommend that readers follow my lead. It is not an easy life – nor is it an easy way to make money"; Wise words that may he headed by any investor and as I recall there were many less fortunate folk who found the glorious new .COM road would not be paved with gold forever. For my part, I was becoming increasingly nervous at the altitude that my technology stocks were reaching but felt almost powerless to climb off the roundabout, it was surreal; the intoxication just overwhelming. As the clock struck midnight on new-year’s eve 1999, I was at work completing the tape backup for our valuable laboratory information system, wondering what I was doing there on a new years eve playing service to what I perceived as the Y2K scam. I was also wondering just for long this gold rush could continue. Thankfully the drive home in the early hours of the first of 1st January 2000 proved uneventful; the traffic lights were all still working and as yet no aeroplanes had fallen from the sky: the millennium bug had been beaten; civilisation and the planet saved! As for the question of how long this technology gold rush could continue, the answer came along in early 2000 with to my mind a watershed of the .COM bubble in the flotation of Last Minute.com. Lastminute.com floated at a SP of 380p and rose to over 500p in the first hour of trading; the demand was massive and the average punter was allocated 35 shares; what a crazy world. The company had a phenomenal valuation: the magic roundabout built on the edge of the cliff had to grind to a halt and that’s exactly what happened in March 2000. A friend, Bob and I were talking about the madness of the dot.com thirst and the departure from reality with the lastminute.com floatation; little did we know at the time that this was the signal for the end of the technology boom. What followed is now well-documented history as the decline in share price of these briefly loved stocks was about as fast as their rapid rise. Fortunately in the most part, I got out part way through the tumble down the cliff and whilst I had in today’s terms made very healthy gains, they were nowhere near as high as they appeared to be when we were at the top of the cliff. I sold, sold and sold until again my portfolio just had a couple of stocks remaining including a few Redstone’s; how could a company that sponsored the Wales Rugby team be anything but worthy? Yes, that Redstone reasoning of myself seeing the reassurance of a company sponsoring a national side was totally misplaced. The main part of the decline or fall off the cliff took part over something like an eight week period commencing March 2000, with many IT stocks losing around 80% of their value. In fact, Lastminute.com continued falling for some months to come until it had lost 96% of the valuation it had reached on its first day of trading. For sure, anybody who invested during the late 90’s and early 2000’s will never forget those turbulent days. Early 2001 became a time to reflect. What would I do now? I had made good profits so far on my journey and learnt a lot. Sadly not everybody was learning as they might; I had investment friends who continued to stay loyal to their technology stocks and refused to sell, living in a world of self-denial. My good friend Bob said to me “Fibernet touched £30 not so long ago and mark my words, it will get back there soon, this fall is only a temporary setback”: to his credit Bob was a very loyal chap he went all the way to the top with his stocks and for the most part stayed loyal all the way to the bottom! It was definitely time to sit on my hands, protect a reasonable cash pile and take some time to think; what was this diversification stuff I once thought worthwhile. After my experiences to date, I felt comfortable in that I was learning all the time and probably after the .COM bubble burst I was becoming a touch more cautious but where would I go from here I wondered. What stocks may be a touch more predictable and safe? Hang on, those ex-building societies look interesting and pay a safe dividend and then, of course, there is always the banks; you can’t get much safer than that! The journey continues.
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The investment landscape started to change rapidly in the late 90’s and whilst I had had a very good run in Blacks Leisure, JJB, MSB International, and Severfield Reeve as the prices started to fall back I took my profits and also booked slight loss on Harvey Nichols: all stocks that had been identified via Jim Slater’s methods. In those relatively early days, I would only be running around 6 to 8 stocks in my portfolio. It’s a crazy feeling because at the time I was beating myself up for having made only a 60% profit on this basket of shares. I thought to myself “if I had been smarter and sold at the top my gains would have been way over 100% for no more than 18 months of investment. Thankfully, I don’t think that way anymore and can live very comfortably with myself in the knowledge that I will probably never be able to purchase at the bottom and sell at the top. However, I did take quite some more years investing before I could leave my remorse of not selling closer to the top behind me. I now had a fair amount of cash sitting in my PEP/ISA and only a couple of stocks including DCS which I kept holding as Jim Slater kept writing so enthusiastically about it. I then started thinking of those Fibernet shares that Gordon our electrical contractor, had been mentioning and decided that it was time to try something else and take a much closer look at IT shares. I had some good knowledge of IT companies as my own company had outsourced the provision of all IT services to a third party, our IT partner, on an amazingly expensive contract; I really could not believe the costs we were paying and all because our own in-house IT expertise was allegedly not up to the job. At this time, I was also attending meeting after meeting with our IT outsource company as they preached their version of the Y2K commercial opportunity, apologies, I mean the millennium bug. We were all doomed to perish when the clock struck midnight on 31st December 1999 unless our consultant IT partners determined each piece of IT kit was safe. I started to get the feeling that IT service companies were very lucrative investment opportunities. Yes, the technology world was rapidly impacting on the stock markets: respectability and excitement could easily be demonstrated by a company if it had the magical .com after it’s name or business plan. Within no time at all Technology and internet stocks had become the new Klondike Gold Rush Once it became clear to investors and speculators that the internet had created a wholly new and untapped international market, IPOs of internet companies started to follow each other in rapid succession. It seemed to me that the business plan of some of these companies was based on little more than just an idea on the back of a fag packet with a flashy vision and obligatory mission statement. The excitement over the commercial possibilities of the internet was so big that every idea which sounded viable could fairly easily receive millions of pounds worth of funding. The basic principles of investment theory with regard to understanding when a business would turn a profit if ever, were ignored in many cases, as investors were afraid to miss out on the next big hit. They were willing to invest large sums in these companies many of which had more of an idea rather than a feasible plan. The survival of most of these companies depended on the rapid expansion of its customer base, which in most cases meant huge initial losses. Try as I did at the time, I just could not get a “must have” feeling about pure internet play stocks and never invested in one as such. However, I became very much in tune with any form of technology business that seemed, at least to me, to have a tangible product to offer: IT consultancy, outsourcing of IT services, procurement, software developers etc. I became totally hooked; you could say I was an IT junkie. During the late 90’s conventional wisdom went out of the window; who wants to invest in a company that actually makes something; paying dividends is boring. Good old reliable Mickey Clark on the BBC’s Wake Up to Money used bemoan the markets “who wants to but smoke-stack companies, you know the ones who make something and pay a dividend”? “Let’s not miss” Paul Kavanagh’s very readable column in the Sunday Times started to heavily feature plausible technology stocks: Sunday mornings had become very interesting. Many such investment articles in almost all publications caught the IT mood of the time as the technology bubble formed. As I said, I was far from immune to this technology fever and my portfolio had just about abandoned the previous Zulu style principles and climbed aboard for the tech ride. My portfolio now became fully invested in a whole range of technology stocks: Anite, Comino, Dataflex, Diagonal, Financial Objectives, Kewill, Logica, London Bridge Software, MMT Computing, Merant, NSB Retail Systems, Plasmon, Royal Blue, Redstone, Staffware & Triad. What was that dinosaur term of diversification all about? I had become a complete technology junkie, not a very relaxed junkie but nevertheless a junkie. The world had become just unreal; a couple of months could go by and a stock could be up 50% or 100% and in some cases rise almost in a logarithmic fashion. The rate of price rise of these technology stocks was phenomenal: I bought Kewill for just over £3 in June 1999 and eight months later it had risen to over £28 “wow, my stocks were going through the roof”.
Footnote: there is just so much to say about this .COM/IT boom that the blog has been divided into parts a) & b) to offer a comfortable length of text: Part 3b to follow. It was my intention to write up my usual open and honest blog covering the purchase of Telit Communications and indeed I was in the process of doing that yesterday evening albeit belatedly for a purchase made only 9 trading days ago. The declared figures for Telit, results and those top level numbers available on various financial sites, did attract me along with a couple of encouraging RNSs on 23/5/16. The income for the business has been rising very nicely over recent years as have the apparent profits even taken into account the occupational hazard of a minor profits warning back in October 2015. The stock did not pass my routine screens which are weighted to free cash-flow but nevertheless, I was swayed by the increasing profits year on year and decided to make an initial purchase.
Last night, 2nd June, I started to dig around a little further and did not like what I saw on the cash flow statement which suggests that costs that should possibly have been taken into account against income when calculating profits were actually capitalised. Looking further at the figures over recent years and I see that the capital expenditure is starting to open a big gap over the quoted depreciation & amortisation; starting to not feel comfortable now! Of course, it’s not illegal to do that but it does greatly detract from my original reasoning to make the purchase just a few days earlier. It may well be that things will turn out well and the apparent need to follow this practice will diminish. As I see it the profits year on year are shown far more favourably than they may have been and I am left with the feeling that real profits as I would see them, are actually considerably less than the top line figures suggest. We already have a business on a current PE within the 20’s and whilst this falls to something like a PE of 11 in the future, these PE figures are generated on profits calculated following capitalisation of a lot of costs; had this not been the case then just how high would the PE be? Ok, I am not the greatest fan of the PE and much prefer free cash-flow measures but taking the quoted figures we have a P/FCF of over 75. Please Note: I am not saying that Telit are cheating in any way, I am not saying that they are a bad business; what I am saying is that based on the criteria I apply that Telit carries a far greater risk than I allow my portfolio to live with: I simply don’t like large amount of costs being capitalised in this way. Accordingly I sold the shares today and booked a fortuitous 11% profit; this was purely down to Lady Luck and not skill as the price ticked up over the last few days. On the same theme, I would not wish to slate Telit and say they are an unworthy business; they simply don’t on reflection tick all of the boxes for me. As ever with this blog, the above is just a walk through my thought process and should not be seen in any way as investment advice or condemnation of Telit; it’s simply what fits or does not fit with me comfort. Well, the first steps in my investment journey had really gone well with the easy stuff of buying shares in the utility company I worked for. I had also branched out just a tad, and bought into some investment trusts run by Edinburgh fund managers and that gave me a buzz in terms of doing something a little more myself rather than just taking the safe pickings from utility flotations. The next logical step of the journey was, of course, to really become a big boy and buy some shares in individual companies but how would I select them. Possibly via tips in newspapers or via tip sheets. In the end, it was a combination of tip sheet and the papers with the first purchase being a house-builder that was rapidly acquired by a larger player for a premium; nice, I thought! I started to read a penny share tip sheet that suggested two really hot companies to get into were Azur; a ladies fashion company and also the British Taxpayers Association; both traded on the OFEX market. The write up for each seemed to be very convincing and the fact that you needed to subscribe to the penny share publication to obtain these privileged hot tips, gave me the confidence to buy both. I was naive of course and the collective investment soon proved to be a bit of a disaster; I learnt that such very junior markets were not for me: lots of promise of jam tomorrow but as my old granny used to tell me, “tomorrow may never come”. Bound just to be a temporary setback I convinced myself and boldly strode onwards. With just basic research of the Helphire prospectus and the confidence of reading in the press the high regard of the management of the business, one the first day of trading in late 1997 I purchased some Helphire shares. Within a few weeks, I was handsomely in profit; this share price just kept going up and up; obviously one for me to hold onto; no intention of selling these boys quickly! Some of my colleagues at Anglian Water, flushed with the success of AW share ownership, were also becoming impatient to dip their toe into the stock market pool and decided it would be a good idea to form an investment club. Our meetings were held in a pub in Cambridge: it was rather nice and very social. The format was for at least one potential purchase to be nominated, followed by a discussion of merits and voting. For our first purchase, I nominated Helphire, telling the group of my very wise decision to buy and boasting that I was already 20% up on the deal. My powers of persuasion came to little as the vote, went in favour of the nomination of a wiser sage within the club who had been investing for many years. Our sage wanted us to stay local within Cambridge and buy shares in Ionica a telecommunications company in Cambridge. The club was good fun but after Ionica, despite our unrelenting loyalty and refusing to sell, went bust, the investment club became less active. The investment club continued for a couple of years but the realisation to some members that they may actually lose money severely dampened their enthusiasm for the venture. Undaunted and possibly bolstered by my already growing experience of share success and failure, I confidently continued on my investment journey. I say confidently, although I was honest enough with myself to realise that the dramatic Helphire success, which by this time had trebled in value, owed much more to luck than my prowess as a stock picker: of course, when I did regale the story of my success, it was all down to my smart decision making. I decided I really needed to build my knowledge on what may make a good investable company over a poor company. I continued with various tip sheet publications: The Analyst, Technivest, Quantum Leap and others came within my radar but I never really felt comfortable with either their reasoning or that fact that the share price was usually up by about 15% directly on the Monday morning following publication. I continued to plough through newspapers and then stumbled upon a couple of columnists that struck the right note with me: Jim Slater writing in the Mail on Sunday and Paul Kavanagh in the Sunday Times. I did not realise it at the time but these two guys would have a considerable impact on my investment journey as we headed towards the turn of the century. I was becoming very impressed with the work of Jim Slater and bought his incredibly well-written book “The Zulu Principle”. The reasoning within the book was to my mind so very sound, understandable and convincing. Within my salaried employment I was managing a budget of £10 million pounds and dealing with accountants on a very frequent basis and maybe my confidence with financial budgets made the book all the more appealing. Jim mentioned such sensible things as a reasonable valuation for the expectation of future growth in earnings, the relative strength of the share price, the non fudging of profits and returns on capital: all aspects that would become hard coded within my thinking. Following Jim’s well-reasoned guidance and understanding a little more of the financial criteria, I bought another two stocks: Blacks Leisure and DCS. Both of these stocks rapidly began to motor and I was a very happy investor. Wow, this was really good stuff and as I was feeling absolutely fabulous, I bought another growth stock; Harvey Nichols. Unfortunately, Harvey Nichols failed to move in my favour but the good point was that I was rapidly developing the realisation that even with reasoned share selection, it’s the performance of the collective basket of shares in your portfolio that determines joy or sorrow. "No worries dear, just this months Company REFS arriving" My thirst for knowledge started to take up more and more of my time as I read various investment books including What works on Wall Street, Beating the Dow but I was so impressed with Jim Slater’s works that I followed up his association with Company REFS and took out a subscription. At the time the publication consisted of the equivalent of a couple or more telephone directory size catalogues; they were heavy beasts as they mounted up and pre-computing took a massive amount of time to sort. The good thing was, however, that absolutely superb financial data had become available to joe public but at a cost. So for me, the post service became a source of not only data but the contract notes for my share trading. The trading commissions themselves could easily eat a hole in your portfolio value as at least one broker I was using at the time had a charge of £45 per transaction; nothing like the £5 for any amount that we are spoilt with today. I started to attend various meetings & lectures in London, particularly ones involving lucky Jim; they were really so informative. I also remember attending one hosted by the owner of the Analyst tip sheet where it was explained to the audience that JJB sports was a share that you should plan to hold for life; although I held JJB at the time, I found the “hold for life part” a touch difficult to follow. The internet was now coming of age but to get on-line at work back in 1997 was something of a challenge: whatever did the directors think we were going to do with such access. It became clear that I needed to buy my own PC for home use and I invested £2000 in a start of the art 4GB hard drive, 64mb RAM monster with a 15-inch screen; now we are flying with my dial-up internet connection! This was my first PC since a Sinclair ZX Spectrum, heavens I hated that thing! Now getting online; wow was I lucky, all of this information on free bulletin boards written by people who were obviously in the know yet willing to share their wealth of knowledge to all: welcome to the world of ramping. Overall I was a happy chap, I was learning all the time about share selection and making money. I used to have many coffee break discussions with Gordon who had the contract to maintain the power facilities in the labs. Gordon was a very keen investor but each coffee conversation started with his cursing of Adil Nadir and Polly Peck; Gordon had suffered a particularly bad experience in that area. Anyway, on this particular morning, Gordon said “my broker has been trying to push me in the direction of Fibrenet, reckons technology is the next hot thing”, “what do you think Bill”? Hmm now there is a thought; the journey continues!
Patisserie Holdings is a share I have been keeping a watch on for a few months. Strangely I first visited one of their outlets when I was attending a football match following the hatters. The local police would not let any football supporters into any pub within town; even a pleasant mature chap like myself: Well no beer, so I sought out the next best thing; coffee and cake. The outlet I attended was indeed impressive and I made a mental note. Oh, the match was a fairly dull goal less draw in atrocious wet conditions that saw us defend the shallow end in the first half. Today, 18th May 2016, Patisserie Holdings issued their half-year results for the period to 31st March 2016 and to my mind, they were a really sound set of results.
From the RNS: Current Trading and Outlook These results represent another strong performance from the Group. We continue to control costs tightly, make efficiencies in our supply chain and with the quality of the new site openings in the first half of the year, the developed pipeline and continued solid trading from our premium offerings I am confident of achieving the Board's expectations for the full year. My comment: The company are increasing the size of their estate and as they put it, very pleasingly funding the roll out from its own funds. Back to today’s RNS: Cash flow & Balance Sheet The Group remains solely funded from reserves and operating cash flows and at the end of the period had net cash of £8.9m (2015: £3.0m). Operating cash generated in the period was £10.2m (2015: £9.2m) and after interest and tax payments, free cash flows available for investment were £8.9m (2015: £8.0m). We invested £4.4m on property plant and equipment, which includes investment in new stores and a refresh of the existing estate. My comment Even after that, they manage to allow funds for the payment of a small but possibly growing dividend. In summary, the company has the following attributes that I like: Increasing turnover Increasing profits No debt Very good operating margin Very decent ROCE Good cash flow A concept that is being rolled out under what appears to be a well managed system. The dash board from the excellent SharePad shows: The recent share price graph from ShareScope shows that the price has come off about 30% since the high the high in early 2016 but has been creeping up a little in the last few days and also got a nice 4% lift today (not shown on the SP graph below) with the interims: My View on Patisserie Holdings
I like the company and the financial numbers but was a touch concerned at the end of 2015 that the valuation had become a bit excessive. To some extent this has improved as the share price has fallen back as much as 30% but then even to some, the share will appear overvalued. With today’s interims looking so strong and with the rate of growth and no debt, I am happy to take today as a buying opportunity and take my first nibble of CAKE: will it prove too rich for my palate? Only time will tell! As ever, these notes are not investment advice. They are just a rambling on my thought process that resulted in my purchase of a position. -All private investors that at some time consciously took an investment on the stock markets did so as the start of an investment journey. For many that journey would have ended fairly quickly having suffered a series of poor investment decisions and for others, a little success probably kindled a spark of enthusiasm to go a little further on that investment journey. This three-part series is a story of my own journey starting back in 1989 to the present time, 2016. Part 1: Early Steps on My Investment Journey During the 1980’s a relatively new phenomena were being brought to the eyes of the great British public: the privatisation of various services that were state-owned assets via a listing on the stock market: industries such as gas, electricity, water, transportation & telephony went through the process of privatisation. Of course, there were massive arguments for and against the process but it was a snowball that was gathering pace and momentum during the 1980’s and 1990’s. For many ordinary members of the public, it was really the first time they had been actively encouraged to own shares in a company. The "tell Sid" advertising campaign prompted many thousands of people to buy shares in British Gas. The “have you told Sid” promotion to raise public awareness of the privatisation of gas in the UK was absolutely inescapable and for many people the first real time they had directly owned part of a business; being a shareowner.
Like so many, privatisation was my first exposure to the world of share ownership and indeed the great publicity campaign that the accompanied the ongoing process. I had joined Anglian Water at the time of the formation of the water companies in 1974; that in itself was a grand place for a relatively young chap to be. The company was incredibly supportive I worked through part-time study to complete my professional qualifications in science and become a Graduate of The Royal Society of Chemistry. What I did not realise at the time was that this lad who joined the very large analytical laboratory service of this new business at the very first run of the career ladder would be fortunate enough to eventually spend twenty years managing one of the largest analytical services in East Anglia: you just never know how things will turn out! It was Anglian Water that introduced me to the racy world of the stock market as the company went through the privatisation process. Lots of publicity work took place within each of the companies heading down the road to the stock market and my own company was no exception with political figures involved in high profile publicity events. Just to name drop a touch, well why not, I gave tours of our scientific process to the very charming Lord Hesketh of motor racing fame and also Michael Howard a man destined to become a leader of the Conservative party; I have to say I took to one of these individuals much more easily than the other. As was common with all businesses about to be privatised, employees were offered preferential terms to take part in the privatisation issue and quite honestly it was a no brainier. The company was duly floated, nice phrase for a water company, on the stock market and the flotation price of £2-40 closing its first day’s trading, in 1989, some 15% up: I had become a shareholder, I was excited and my investment journey had begun. In those early days, I had not the slightest idea that the stock market would play such a large role in my future. Following the listing of the various energy, water company’s etc people who worked within the newly floated businesses were regularly offered share-save schemes. These basically allowed staff to buy shares in the business at a previously discounted rate and via monthly contributions from their salary over periods of 3, 5 and 7 years. To me, it sounded just too good to be true and I filled my boots as they say over the years building us a considerable holding in the business: I had become a fully fledged investor. There was no stopping me now from investing within my comfort zone and I took part in lots of other privatisations going on the time and became what is now known as a stag, buying shares in these newly privatised industries and with the exception of my own business, selling them relatively quickly and making some easy money. I decided I really liked this privatisation stuff, well at least in term of making me a wealthier chap. What I did not know at the time was that although it was fine making a very nice fast buck in staging, the real money and wealth would come to those with patience who took the very generous dividends and reinvested them the purchase of additional stock. My investment journey had begun and I felt quite pleased with myself: my lovely shares were rapidly increasing in value and paying very handsome dividends. Yes, I really liked this investment lark; what could possibly go wrong? Woops, I had meant to update at the end of April following the finals released by GVC on 25th April. Anyway, better late than never I suppose and a few brief notes for completeness are included here.
I originally purchased GVC in mid-January this year as the company having many of the attributes that I see in a prospective purchase:
The shares had already risen 25% in December following a good trading update together with more news of the acquisition of bwin.party. The company also announced it’s intention to move from AIM to the main market. Although it’s nice to be backing winners there is always the tendency to think “have I missed the boat”, am I now overpaying, simply it’s just the way we are wired that makes us think in that way. Anyway, the purchase went ahead at 472p and as we ploughed through the horrible January market decline, they fell to 420p before recovering along with the general market. GVC release their year-end results on 25th April 2016 and the figures were both pleasing and accepted well by the market. Kenneth Alexander, Chief Executive of GVC, comments in most recent RNS 24/04/2016: "GVC has had a momentous year. Not only has the Company seen a fifth consecutive year of revenue and clean EBITDA growth but the completion of the bwin.party acquisition in early 2016 affords us an opportunity to take the Group to the next level". "GVC has never been in a stronger position going forward. The enlarged Group is already enjoying encouraging trading, resulting from our unique mix of diversified products and strong brands. There is much work to be done, nevertheless, with GVC brands and bwin.party brands (including PartyPoker), growing, together with synergy benefits, we look forward with confidence to another successful year." My Other Thoughts: It’s an average sized holding in my folio, rather than a large position as I am always concerned about regulatory risk within this sector. Since my purchase, GVC has moved to the main market and has a fairly substantial market cap of £1.62 billion. The company is taking a dividend holiday for 2016 as part of the conditions of its financing of the bwin.party acquisition and this seems sensible to me. As I have said in other company notes, I don’t live or die by stock ranks but it’s nevertheless reassuring to see that Stockopedia give a stock rank of 91, however, Sharelockholmes are way less confident giving a market rank of 39 roughly equivalent to 61 in Stockopedia terms. The shares currently trade at 558p, up 18% on my initial purchase price: happy holder. I rather like the acquisition of Lighthouse Holdings by Portmeirion announced today, Lighthouse own Wax Lyrical Ltd the UK's largest manufacturer of home fragrances. They produce such items as reed diffusers and scented candles and there seems to be good demand from the public for such items with every supermarket stocking various varieties of each. Amusingly I first came across reed diffusers a few years back whilst staying in a rather nice Hong Kong hotel. I was washing my hands in the plush bathroom and thought I would try this “rather nice oriental handwash in a bottle containing sticks for application to ones hands”; enough said!
The £18m acquisition won’t in my view have any real impact in terms of carrying debt as the £18m consideration has been funded from cash reserves and debt draw down on new banking facilities comprising a £10 million loan facility, a £10 million revolving credit facility and a £2 million overdraft facility from Lloyds. Previous to this acquisition Portmeirion had no debt; a market cap of £127.6m and an enterprise value of £116.5m so no worries at all there. Lighthouse looks a solid business these days and the accounts for the year ended 31 December 2015 recorded revenue of £13.8 million, a pre-tax profit of £2.1 million and net assets as at 31 December 2015 of £7.6 million. That’s a very decent operating margin of 15% which bolts nicely onto the latest declared operating margin for Portmeirion on 12.5%. Incidentally Portmeirion have grown this margin year on year over the last six years. I particularly like the comments in the RNS: Strategic Highlights The Acquisition brings the following strategic benefits for Portmeirion:
It’s also good to read that Joanne Barber, the current Managing Director of Wax Lyrical, will continue to run the business: always good to see continuity. I did blog a note on the 17th April regarding my top up of my Portmeirion holding and all in all I am a happy holder. It appears that Mr Market is fairly happy today with the news as the share price has nudged up a modest but pleasing 3%. It’s time for the first quarterly update on the Passive v Reactive Whittler portfolios; I have again restated the basic rules for the management of the portfolios; see about 5 paragraphs down. All ten stocks common to the three portfolios were identified via my routine free cash flow+ returns on capital screen. At the time of this update I hold positions in three of the ten companies: SOM, CCT & NFC.
Update & Trading in Quarter (Feb, March, April): Of course following the rules of the exercise no trading took place in the 3YL (three year life portfolio) or the ASH (annual sit on hands) portfolios. Trading did take place in the Tinker portfolio and these are listed below: 1/2/2016: sale of 60% of position in Bodycote following a broker downgrade and the funds used to purchase further shares in Dignity. 1/3/2016: sale of 50% of position in Amino Technologies & the reinvesting of the proceeds in Somero following excellent preliminary results. On reflection the sale of 60% of the Bodycote shares was a slightly poor move that came about due to my listening to the market noise: yes I do whilttle on about not listening to market noise but somehow I did. How are the three Portfolios doing? Well as 3YL & ASH are identical composition and allocation in the first year, they are identical with the original £100k now reaching £109.9K, a 9.9% increase in the first 3 months of the exercise. Strangely the Tinker with its two trades also sits at £109.9k an increase of 9.9%. The comparator the FTSE ASTR (ASX.TR) rose by 7.3% in a generally happy February to April for the indices. The three best performing stocks were the smaller market capitalisation: NFC, ADT & SOM. The best performing large cap stock was BOY; the one where I listened to the noise and sold 60% on the holding in the actively traded Tinker portfolio. Reminder Of The exercise Rules. The three portfolios will be firstly a buy and hold for three years, ploughing on regardless through economic conditions, profit warning and any other news either good or bad. I will call this the three year life portfolio (3YL). The only time a change to the portfolio will be permitted is if a business is de-listed for any reason: the funds liberated would then be discretionally invested between the remaining stocks in the portfolio. The second portfolio will start out with exactly the same holdings as the 3YL but each January the same cash flow screens/returns on assets screen will be run and a revised set of ten stocks nominated. This revised set of stocks will have the proceeds of the sale of the previous years stocks equally divided between them i.e after one year we have £110k of funds then a purchase of £11k will be made for each of the ten stocks. I will call this the annual sit on your hands portfolio (ASH). The third portfolio will again start the same as the 3YL & ASH portfolios but I will alter the percentage invested in each position within the portfolio in reaction to RNS announcements from the companies, economic conditions or any other reason that seem valid for altering, reducing or increasing a position. I will call this portfolio the managed annual tinker portfolio or simply the TINKER. All 10 stocks will remain within the portfolio throughout the year although the investment in each stock may vary. For example one stock, let’s say Hattersville Dream Co. may issue a particularly bullish RNS “results will be appreciably ahead of market expectations”. The Tinker may sell down one or more of the other holdings to invest more in Hattersville but still retain a position, although not equal positions, in the same 10 stocks that we started within January each year. In January 2017, 2018 & 2019 this portfolio would be treated in the exact same way as the ASH and funds equally balanced across the each of the ten stocks starting that year. The common rules for all three portfolios:
As a private investor, we aren't unlike the crew of the Starship Enterprise. We are permitted to roam within the investment universe as we seek new gems that we may add to our investment portfolio. Unfortunately, that universe is a vastly big place and we are not naturally gifted at birth with the emotionless logic of Mr Spock that may enable him to find those investment gems more readily than a mere earthling. All too frequently investors latch onto some of the space-junk that drifts in the vacuum of space. Many private investors that journey in the investment universe take a random journey as they bounce from one idea to another, from hot tip to hot tip, from chaotic bulletin board "in the know tart" to the next hot thing suggested by part-time journalists.
Now that universe is a difficult place to travel, so how can we make that journey a little less random and improve our chances of beating the FTSE index? I suspect that the majority of private investors, especially inexperienced investors, invest to some degree with a random approach, selecting stocks that sound the real thing! Sometimes this random approach works, sometimes it fails as I found out many years ago in my early days as a PI. The approach I adopted some years ago is to shrink that universe greatly; in fact creating my own universe of stocks; hopefully, a universe that I may continue to feel comfortable with and understand. A good number of investors take this universe approach by becoming specialised in such sectors as utilities, oil stocks etc and carry out the bulk of their trading within their chosen specialist area. Others may develop an understanding of value stocks, growth stocks or hitch a ride on momentum etc. The common thread is that they understood their universe and severely limited their diversions to random space walks that invariably lost them money. My Approach: The Whittler Universe: Well, firstly absolutely no jam tomorrow stocks, bulletin board stocks or following of tipsters in any way: been there, done that many years ago and learnt the lessons. My investment universe is very heavily biased to stocks that are already displaying the characteristics of winners. I screen entire listing of LSE stocks for shares that includes AIM, to come up with a relatively small number of stocks that meet the rather demanding criteria that I apply for universe membership. The criteria I apply are all linked to returns on capital (ROCE & CROCI) & cash-flow, particularly free cash-flow; I also treat debt with real caution. I don’t like to overpay for stocks but have more faith in cash-flow valuations, cash profits valuations than I have on the PE ratio although I do tend to set an upper limit on the PE when screening. After each screening, I tend to end up with about 20-25 stocks and it’s surprising that over a given period the numbers of stocks that reappear month after month. In fact looking back over the past five years, only a total of ninety five stocks have entered my universe via my screening. Do I invest in all of these stocks? No, firstly I keep a very close eye on the recent and current company RNS particularly outlook statements. I look to see if there is anything obvious lurking in the numbers that may suggest that the story I originally perceive is not the true one. I then take a view on the strength/current favourability of the sector; then I apply some very simple TA; where does the price sit to the 200 day MA, recent trends etc. Finally, if I am still comfortable and I see the stock as being available at a fair value, I buy. My approach will never identify the Gulf Keystones of this world, thankfully, it will also miss many, many high flyers but it is a universe approach that I feel comfortable with and certainly gives me the edge over beating the FTSE All Share index. Do all of these stocks go on to increase in value? Well, no, of course, they don’t otherwise an infinite way of legally printing money could be claimed. The majority do go on to increase in share price but some are inevitably the victims of changes in market sentiment, sector downturn or falling behind market expectations. My particular application of screening tends to create a universe of fairly boring stocks. Over the past 5 years the unexciting large caps such as GVC, SMWH, NXT, ITV along with smaller caps stocks such as XPP, NFC, ZYT, CCT & DTG. I have mentioned that over the last five years that ninety-five shares have entered the universe for further appraisal and roughly one-third of that number have then been bought/sold or continue to hold. There are another couple of parts to my universe but these are a touch smaller and close to Jim Slater’s Zulu principle followed by a splattering on stocks that I see as undervalued. The real point I am trying to get over in this article is that to improve one’s chances of success, in my experience, it helps greatly if you have a fairly large portion of your investment portfolio made up from a universe of shares that meet your criteria. A universe of shares whose fundamentals you both understand and whose degree of risk you feel comfortable with. The sources of data I use for screening for my universe are: SharePad Sharescope Sharelockholmes I then seek data for confirmation from Stockopedia and RNS data from Investegate or the company's web site. Happy Investing! |
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice. Archives
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