In the Q2 2017 update, performance has again been more than satisfactory. The portfolio has returned 21.12% year-to-date against 5.50% for my designated benchmark, the FTSE All-Share Total Return Index. Total return since inception in August 2015 therefore is now 39.96%. You can view the current portfolio here. For the (almost) two years this portfolio has been running there has been an annualised return of 20.52%.
It’s been a slower quarter compared to Q1, which returned just under 17.5% for the first three months of the year. Most of the performance change has been down to large movements in a few positions, namely Wizz Air and Creightons to the upside, and Dialog Semiconductor to the downside.
As usual another fairly quiet quarter in terms of trades. I don’t buy and sell often. I prefer to do my research up-front with a view to holding for years, rather than weeks or months. That being said, there was some movement. The 32Red takeover was completed, freeing up some cash for reinvestment. I finally sold Gattaca after a profit warning came out for a 53% loss. In terms of buys, I topped up on Somero Enterprises and Creightons, as well as making a purchase in Avon Rubber following a write-up last month.
Star performers as mentioned were Creightons (100% YTD return), who delivered a lovely trading update in the final week of June and who I believe are still cheap on a valuation basis. Wizz Air have lived up to their name, returning 47.53% in just the past three months alone.
Dialog Semiconductor gave up most of their stellar returns this past quarter, losing 20.4%. The retailers in my portfolio, Dunelm, Next and Michael Kors continue to be a drag on the portfolio, each losing around 20% year-to-date.
AB Dynamics PLC
Percentage gain/loss: 26.94%
Forward P/E: 26.12
Performance continues to be good at ABDP. Interim results in April suggested continued improvements in both revenue & net income. The company are bringing a new factory on line later this year as well, which will be “freeing up valuable manufacturing space and creating necessary product development areas required to create the new laboratory test equipment that will drive the Company’s growth.”
Advanced Medical Solutions PLC
Percentage gain/loss: 49.25%
Forward P/E: 34.77
Perhaps the most ‘expensive’ purchase of the portfolio, AMS are proving that it is possible to buy growth at a reasonable price. There is the possibility that the price has gotten a little ahead of itself this year, however growth continues to be healthy and so I am happy to remain holding at the moment.
Percentage gain/loss: 30.81%
Forward P/E: 17.09
No doubt one of the most debated companies in the financial world, the future success of the company depends on your interpretation of it. I prefer to view Apple not as a tech company, but as a luxury goods brand. Most of their revenues are derived from the iPhone, with consumers tied into the Apple eco-system. A recently redeveloped UI has been well received, and with the iPhone 8 due later this year marking the tenth anniversary of the iPhone, it is anticipated Apple are pulling out all the stops.
Avon Rubber PLC
Percentage gain/loss: -2.22%
Forward P/E: 17.25
My newest purchase. Not a lot to be said that hasn’t been covered by my recent write-up. A nice, boring company on a decent valuation. My only worry would be the impending end of their lucrative decade-long DoD contract.
Berkeley Group PLC
Percentage gain/loss: 1.96%
Forward P/E: 7.38
The fate of housebuilders is something of a contentious issue at the moment. Recent results from Berkeley suggest a strong position with a healthy forward order book. In the mean time, a juicy dividend is most welcome. Just a shame they decided to begin buying back shares instead of paying out even more.
Percentage gain/loss: 285.54%
Forward P/E: 7.96
By far my strongest performer. What astounds me is the valuation. A forward p/e of less than 8, that can be bought for less than one times sales. Is the market beginning to wake up to this gem of a company? Results last week further showed just how well run the business is. The market cap remains under £20m, and I find it hard to believe they won’t get snapped up at some point. Hopefully later rather than sooner.
Dialog Semiconductor PLC
Percentage gain/loss: 18.56%
Forward P/E: 20.60
A star during the first three months of the year, DLG fell heavily on the speculation that Apple (by far their largest customer) may cease their contract. I like the business, it’s a well run company generating ample free cash. However any business deriving such a high proportion of their revenue from one company is surely extremely vulnerable. It is likely this won’t remain a holding for much longer.
Percentage gain/loss: 53.06%
Forward P/E: 23.59
Diploma have quietly gone about their business this past year. Similar to AMS with decent growth at a reasonable price, DPLM are proving to be experts at making bolt-on acquisitions that enhance revenue. Their P/E approximates their growth in revenue as highlighted in their May interims. As long as this continues, I’m happy to hold.
Dunelm Group PLC
Percentage gain/loss: -34.51%
Forward P/E: 13.87
The Dunelm slide continues. Retail is getting hit hard at the moment, and Dunelm have suffered total like-for-like growth of -2.2%. However, Home Delivery posted strong gains and the incorporation of their Worldstores acquisition appears to be continuing successfully. As a result, revenues grew 11.4% for the quarter. I continue to hold, but will be watching each update closely. If they can offset store sale declines with home delivery gains, I will likely maintain my position.
Gilead Sciences Inc
Percentage gain/loss: -13.05%
Forward P/E: 8.78
Gilead’s latest 10Q posted a decline in revenues & net income, as is commensurate with a company reliant on its patent portfolio and pharmaceutical product range. Gilead remains quantitatively cheap however, particularly in comparison to its competitors, and continues to generate healthy free cash. With a number of products currently at the phase three trial stage, I am happy to hold for the foreseeable future.
Howden Joinery PLC
Percentage gain/loss: -15.22%
Forward P/E: 15.64
Howdens have a half yearly report due this month, however their most recent trading update suggested slow but positive growth, with a continuation of their aim to open 30 new depots this year. The company continue to post healthy margins, remain cash generative and are operationally very well run.
Michael Kors Holdings Ltd
Percentage gain/loss: -1.39%
Forward P/E: 8.71
KORS have proven the retail environment to be suffering not only in the UK, but virtually globally, with recent revenue decreases of 4.6%. This has partly been offset by substaintial growth in Asia, with retail revenues more than doubling. This is a macro play for me, and I could be completely wrong, but I believe KORS to be well placed to benefit from a growing and more prosperous middle class in Asia over the coming decade.
Percentage gain/loss: -51.81%
Forward P/E: 10.76
This is becoming somewhat painful now. Every time the share price begins to improve, it gets hammered back down. Retail is suffering, particularly store-based fashion. The likes of ASOS and BooHoo are the current darlings of the fashion world (and are priced accordingly). Next have definitely been caught with their pants down with regard to their online offering. Thankfully they have admitted this and are taking steps to rectify it. Alongside Dunelm I will be keeping a keen eye on Next. For the first time recently, Directory (catalogue and online) sales eclipsed in-store retail sales. If this trend continues, there may be hope yet.
Percentage gain/loss: 8.77%
Forward P/E: 11.39
The most recent trading update from PSN reads much like Berkeley Group. Increased revenues, increased sales and average selling prices. This trading update also included their decision to increase their Capital Return plan by 49%. I am happy to hold and benefit from this plan for the foreseeable future.
Percentage gain/loss: 18.34%
Forward P/E: 14.06
Whilst the recent trading update was devoid of figures, management suggests business to be in line with expectations, with a potential future pipeline of possible acquisition targets. Final results in February stated revenue increases of 20% at constant currency, so there’s every reason to believe trading growth remains positive.
Percentage gain/loss: -26.95%
Forward P/E: 9.04
Plus500 suffered a massive and sudden decline in share price due to a statement from the Financial Conduct Authority proposing stricter terms on CFD (contract for difference) firms, including PLUS. The company subsequently issued a statement to suggest that the terms, if implemented, would impact revenues to the tune of approximately 20%. The share price has, however, recovered by around 30% in the past quarter. Whether these terms end up being implemented, and whether said terms impact the business as suggested, remains to be seen. One to keep an eye on.
Somero Enterprises PLC
Percentage gain/loss: 9.83%
Forward P/E: 14.21
Back in March I wrote my justification for a purchase in SOM, and have subsequently topped up further. Trading in Europe has been positive, however the US market has not fared as well, with trading flat in their latest update. For me, the biggest opportunity resides in China. To put things in perspective, China used more concrete between 2011-2013 than the US in the entire 20th Century. With their much-lauded ‘one belt-one road’ trade initiative, one of the most ambitious infrastructure projects ever, Somero could stand to benefit if they continue their efforts to make their presence known.
SPDR MSCI EM Europe ETF
Percentage gain/loss: 13.07%
Forward P/E: 8.07
This ETF is a play on thoughts regarding low CAPE (cyclically adjusted price-earnings) ratio countries. This particular ETF tracks emerging market Europe, particularly Russia, Poland and Turkey. Incredibly, the ETF contains an approximate 50% weighting towards Russian equities, and yet has returned -1.55% YTD against a decline of -15.82% for the Russian MICEX index year-to-date. Russia remains one of the cheapest markets by CAPE. I therefore continue to hold.
Wizz Air Holdings PLC
Percentage gain/loss: 46.67%
Forward P/E: 12.53
The good times continue to roll with Wizz Air. Last week they announced their intention to open their first UK base at Luton, and are looking to double their fleet size by 2024. They already have one of the youngest fleets in Europe. The major downside to the business is the number of convertible shares held by Indigo Hungary LP and Indigo Maple Hill L.P. They have begun converting these into ordinary shares, which will see share dilution knock some shine off the incredible year-to-date performance. Were they to convert all convertible shares into ordinary shares, it would all but destroy the 3-month return of 47.53%.
I am strongly considering increasing my cash position from the rather anaemic 6% in the near future. I wrote recently in an attempt to clarify my thoughts on whether equity markets in the UK were fairly valued. One thing I think is clear is that markets aren’t quantitatively ‘cheap’, and that some element of current performance is down to asset inflation rather than improving company fundamentals. That being said, I am happy with my various holdings at current valuations.
I seem to be able to maintain the discipline to regularly check my portfolio and yet not make changes very often at all. I wonder how much of this is down to doing somewhat thorough research before actually making a purchase. I’ll only invest in businesses I’d be happy to hold for two years or more (the longer the better). In the mean time, I’m diving into as many books as I can. Currently it’s ‘Dear Chairman‘ by Jeff Gramm. Chapter One is about Benjamin Graham and his battle with Northern Pipeline. Whenever I feel pressure to do something, I think about Graham and leaf through ‘The Intelligent Investor‘. It’s timeless.
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