Q1 2017: 1 New Buy And 1 Sell

31 March 2017
By Maynard Paton

Happy Friday! I hope you continue to find my Blog useful… and that your portfolio has started 2017 in good shape!

After experiencing a somewhat mixed performance during 2016, I am pleased my investments have generally performed well during the last few months.

Certainly the two new holdings I acquired last year — BrainJuicer and Bioventix — have helped powered my portfolio higher of late. And up until the other day at least, this full-time investing lark was becoming quite comfortable…

But then came another reality check.

Sadly I’ve been humbled yet again by a profit warning — on this occasion from Tasty.

Still, I have survived various ups and downs before…  and I need no reminding that it was only nine months ago that my entire portfolio was looking rather sorry.

Anyway, I’m up 7.4% so far for 2017, and my portfolio has not witnessed too much trading during the last three months. I bought one brand-new holding and sold another holding entirely.

Let me outline what has happened.

This is how my portfolio has changed since the start of the year

I publish quarterly updates to round up what’s been happening within my portfolio, and this Blog post is a recap of my January/February/March activity. You can read all of my previous round-ups here.

The table below shows how my portfolio has changed during the first quarter.

The left-hand column is how I reported my portfolio at the end of 2016, while the right-hand column is how my portfolio stood at today’s close:

Holding	Weighting 31 Dec 2016 (%)	Weighting 31 Mar 2017 (%)
Andrews Sykes	3.4	3.3
Bioventix	5.3	6.6
BrainJuicer	2.6	3.5
Castings	6.7	7.1
City of London Inv	6.5	6.7
Daejan	7.1	7.0
Electronic Data Proc	2.8	-
Getech	3.8	3.4
Mincon	3.3	3.8
Mountview Estates	8.9	8.3
Record	5.7	6.9
S & U	-	4.3
Tasty	7.6	3.7
FW Thorpe	9.1	8.8
Tristel	8.0	9.9
M Winkworth	5.6	5.4
World Careers Network	4.4	4.1
Cash	9.2	7.2
TOTAL	100.0	100.0

They have £103m riding on the share price 

Look through the table above, and you will see just the one new entry — S & U.

I paid 2,070p for these shares (including all costs) during January and, as I mentioned in my Buy report, the company may not be everyone’s idea of a great business. The group was for years best known as a doorstep moneylender, but these days it solely provides hire-purchase finance to buyers of used cars.

S & U’s conservative under-writing has delivered to shareholders an illustrious record of expansion, while recent trading appears upbeat, too. What’s more, S & U boasts a family executive team that extols the virtues of “steady, sustainable growth” and has at least £103m riding on the share price.

I’m trusting all of that ensures this business stays out of trouble and continues instead to prosper and grow. Recent results suggest that remains the case.

I had hoped there would be a queue of ready bidders

The only other change to my portfolio during the quarter was the entire disposal of Electronic Data Processing (EDP).

I am quite glad to have exited this position.

To recap, this tiny software house had put itself up for sale during 2016 following years of miserable results. I had hoped there would be a queue of ready bidders…

…but sadly an update earlier this month admitted most of the interested parties had walked away.

Oh, and the update also disclosed an adverse funding calculation within the firm’s pension scheme.

Similar to French Connection (sold here), EDP evolved into an unsatisfactory ‘deep value’ investment.

The shares appeared cheap at the time of purchase, but a poor underlying business alongside inadequate management meant it became a somewhat frustrating holding.

At least I earned a 60% total return over four-and-a-bit years after selling at 67p per share.

Elsewhere in my portfolio, I did not buy or sell a single share during the quarter.

My theory about enjoying better-than-average returns

As usual I have kept tabs on all of my existing holdings — trying to seek out bargain buys just in case.

Here is a summary of the Q1 news:

* Impressive figures from FW Thorpe, Tristel, BrainJuicer and Bioventix; 

* Acceptable progress at City of London Investment, Mincon, S & U  and M Winkworth;

* Disappointing news from Tasty, and; 

* Nothing from Andrews Sykes, Castings, Daejan, Getech, Mountview Estates, Record and World Careers Network.

Looking through that earlier table, I’m pleased my portfolio has become a little more concentrated on better-quality businesses.

Now that I have ditched two ‘deep value’ dreadfuls — EDP, and French Connection last year — my holdings almost all exhibit a rich mix of high insider ownership, appealing track records, attractive financials and respectable prospects.

True, a few of my investments may come up short in some areas.

Getech for example is a debatable holding that lacks proven management and a resilient operating history. But the firm does own an array of specialist data, and at some point could return to its high-margin heyday as and when the group’s oil customers restart spending.

Then there is City of London Investment and Record, two City businesses that manage institutional assets and which seem more interested in rewarding their staff than garnering greater client money to lift earnings.

Mind you, the margins and cash flow these two companies enjoy are among the best in my portfolio.

And of course, the jury may now be out on the executive talent running Tasty…

Generally speaking, I feel my portfolio is filled with better-than-average executives and better-than-average companies, the shares of which I hope were all bought at better-than average valuations.

As such, I expect to enjoy better-than-average returns.

Well, at least that is the theory.

Watch list activity

You may have noticed I became a lot more active with my watch list during the quarter.

I felt some of my watch-list write-ups from 2015 had become rather stale, and I used a quiet time for company results to bring the reviews up to date.

I revisited Ashmore, Goodwin and Shoe Zone, and discovered all three businesses had not performed well during the intervening two years.

I noted Ashmore, a fund manager, had been losing its clients money and it seemed to me the group’s highly paid employees were dependent entirely on favourable markets to do well.

Meanwhile, Goodwin, a specialist engineer, has seen its earnings plummet after its oil customers stopped spending… and yet the business has since taken on a lot more debt to help fund new projects.

Finally, shoe chain Shoe Zone looked to me to be a possible value trap. Despite the retailer upgrading its branches, revenue per outlet continues to fall and the underlying business appears to be shrinking.

I removed Ashmore and Shoe Zone from my watch list, but kept Goodwin purely on the grounds of its veteran family management and the likelihood of the group’s problems being more sector related than company specific.

The first quarter also saw me investigate Cambria Automobiles and Softcat.

I could not give Cambria a place on my watch list because I felt quite nervous about the car dealer’s acquisition history, dependence on supplier financing and ambitious capex plans.

In contrast, Softcat jumped onto my watch list because of its impressive — and acquisition-free — track record, reassuring cash hoard and likeable management/employee culture.

(I must admit, when I re-read my Softcat review after publication, I did wonder if I should have just bought the shares and not quibble about the valuation too much.)

Let me finish by saying that I am keen to maintain my watch-list efforts during the second quarter and the rest of the year.

I do have a bit of cash to invest right now… and I am convinced good quality companies selling at reasonable valuations do still exist in today’s buoyant market.

Mind you, I have to confess the search is becoming quite the needle-in-a-haystack job!

Until next time, I wish you happy and profitable investing!

Maynard Paton

Disclosure: Maynard owns shares in Andrews Sykes, BrainJuicer, Bioventix, Castings, City of London Investment, Daejan, Getech, Mincon, Mountview Estates, Record, S&U, Tasty, FW Thorpe, Tristel, M Winkworth and World Careers Network.