For those of you in a rush, portfolio returns year to date have been 3.19% against my benchmark (FTSE All-Share TR) having returned 1.69%. So the good news is, in this second quarter I’ve swung from a 10% negative return to a 3% positive return. Since inception in August 2015 the portfolio has returned 70.55% against 22.30% for the All-Share. Therefore the compound annual return for my portfolio is 20.09% going into my fourth year of investing. You can view the portfolio here.
Boy, it’s harder to write when portfolio returns are so anaemic. Last year was so much easier! I’m really struggling this year to marry the passive element of portfolio investment with actively writing on a weekly basis. The old brain isn’t coming up with ideas as often as it did last year, and no doubt there is a link between this and the returns most of us have been getting. But to say this would be disingenuous. I simply haven’t been trying as hard to come up with ideas. If you read my Q1 post you’ll know I suffered a period of illness earlier in the year which I am well on the way to recovering from, however unfortunately this has knocked me off-track on the blog front. So please be patient. I’ll be back.
But enough of that. What’s been happening in the second quarter of this year? Well, firstly you’ll not be surprised to hear I have made no trades at all. And I’m pleased about that. Most of my holdings have posted reasonable recoveries in the 3 months since the end of March, which hopefully will continue.
A few milestones were hit that really make little difference, but I enjoyed none the less. I am back to break-even on both Next and Howden Joinery, both inception purchases in August 2015. I know, I know, anchoring to your buy price is a fools’ errand. Nevertheless, it cheered me up a bit. But what about opportunity cost? I hear you ask. Absolutely right. I could have sold at any point and redeployed those funds elsewhere. But you see, for me the fundamentals of both businesses haven’t changed. Both command a strong presence in their respective industries, both are cash generative and both have strong fundamentals. Next in particular seem to be weathering the retail storm far better than other businesses in recent weeks (see here and here).
So, time for a short update on my holdings:
AB Dynamics PLC
Percentage gain/loss: 178.88%
Forward P/E: 29.65
AB Dynamics is motoring ahead (see what I did there?) in the second quarter of 2018, up nearly 35%. A strong half-year report showed business ticking along nicely now that they’ve opened their new factory and offices. In June they announced their first sale of the new advanced vehicle driving simulator. Let’s hope this is the first of many.
Advanced Medical Solutions PLC
Percentage gain/loss: 68.55%
Forward P/E: 32.38
Testament to the quality and reliability of this company that they’ve added 20% upside to their share price whilst simultaneously lowering their forward P/E by over six times earnings. No new updates since Q1. I did consider selling AMS purely because its valuation is somewhat higher than the average of my portfolio. But you know what? I’m not doing it. It’s a quality business, and sometimes quality businesses get expensive.
Percentage gain/loss: 63.42%
Forward P/E: 16.29
Apple charges ahead in the race to become the first publicly-listed trillion dollar company. It got close in June, a mere fifty billion dollars away. It’s since dropped back a bit but it’ll get there. I won’t proclaim to have any unique insight on Apple. It’s quality is plain to see.
Avon Rubber PLC
Percentage gain/loss: 36.40%
Forward P/E: 18.96
In their positive half-year report, Avon Rubber announced a strong forward order book, underpinned by further sales to the military and growing market share in law-enforcement. They also announced the sale of their investment in the manufacturing of hovercraft skirts. Whilst a good operational decision, it made me a little sad given I live in the only part of Western Europe with an operational hovercraft service.
Berkeley Group PLC
Percentage gain/loss: 19.59%
Forward P/E: 11.69
Final results were released very recently, which were perfectly satisfactory. However, there was also the admission that “(sites acquired in 2010-13) represent a peak for Berkeley with profitability returning to more normal levels from 2018/19, when profits are anticipated to be around 30% lower”. The profitability and success enjoyed by BKG in recent years has been as a result of well-considered investments following the financial crisis. I need to have a think about this holding. Two housebuilders in my portfolio feels unduly risky at the moment.
Percentage gain/loss: 246.95%
Forward P/E: 8.78
Creightons remains a volatile holding, however in Q2 it returned over 50% to bring my overall gains back to a more reasonable level. Their preliminary results were very encouraging, and mentioned “unexpectedly high growth in demand”. Management continue to impress. Have a watch of their presentation over at piworld.co.uk to see what I mean.
Dialog Semiconductor PLC
Percentage gain/loss: -58.61%
Forward P/E: 7.20
As anticipated, Dialog’s dependence on Apple as their main customer has come back to bite them this year. The share price has seen a precipitous fall following an announcement from Apple that they would be cutting orders for DLG’s chips. So why haven’t I sold? Three reasons. 1. The company is trading very cheap now, at seven times current earnings. 2. It has a very strong balance sheet with net cash, and remains free cash flow generative. 3. It announced in June its intention to diversify away from reliance on Apple with a proposed offer for Synaptics; a semiconductor company larger than themselves who make a more diversified range of products for a wider range of customers. Read more about it here.
Percentage gain/loss: 81.18%
Forward P/E: 22.18
Another half year report in May highlighted the continued high single/low double digit growth at Diploma. No bells and whistles at this company. One to tuck away and leave to do its thing in my view.
Gilead Sciences Inc
Percentage gain/loss: -14.39%
Forward P/E: 10.92
Much like Dialog Semiconductor, Gilead appear to be in a bit of a consolidation phase right now. The acquisition of Kite Pharma last year has yet to bear fruit but signs remain as promising as ever that their cancer immunotherapy treatment holds high promise. In the mean time, Gilead is trading cheap and throwing off cash, much like Dialog.
Howden Joinery PLC
Percentage gain/loss: 10.41%
Forward P/E: 15.70
Sales growth has been good at Howdens, according to their latest trading update. Revenues are up by 14.8% and planned depot openings look to be continuing (although they might want to hurry up a bit). They have also been buying back shares for quite some time now which has increased per share book value by over 42% since 2015.
Michael Kors Holdings Ltd
Percentage gain/loss: 78.21%
Forward P/E: 12.07
Michael Kors have routinely beat analyst estimates in the US, and their fourth quarter 2018 report continued this theme. The integration of British shoemaker Jimmy Choo seems to have gone very smoothly with the company looking to open further stores of both brands throughout the year. This is another company generating high levels of free cash (seeing a pattern here?) that is also trading cheaply.
Percentage gain/loss: -0.78%
Forward P/E: 13.87
As expected, the retail environment remains challenging. Retail sales were down 4.8% in Next’s May trading statement, however online sales were up 18.1% leading to an overall increase of 6% across the brand. With a dividend yield of 2.61% and regular share buybacks, I’m happy to continue to hold for the foreseeable future.
Percentage gain/loss: 21.53%
Forward P/E: 10.70
In their April trading update Persimmon announced forward sales revenue increases of 8% on last year. As mentioned earlier, I’m currently thinking I will sell Berkeley and keep Persimmon.
Percentage gain/loss: -30.94%
Forward P/E: 12.11
Playtech threw a curveball this morning with a profit warning in their trading update. This has been a highly disappointing holding since 2015 and I will be giving serious thought this week to selling.
Somero Enterprises PLC
Percentage gain/loss: 38.46%
Forward P/E: 13.91
Somero issued a very positive trading statement in June, highlighting positive growth and further growth opportunities across almost all geographical trading areas. Exciting possibilities ahead.
Percentage gain/loss: -19.66%
Forward P/E: 9.61
June’s trading update announced EBITDA ahead of market expectations. It was a short update, but it did the job. The integration of Tremor Video DSP appears to be going well. Taptica got caught in the shockwave of the XLMedia profit warning, which at the time felt unfair as they are rather dissimilar to one another. Thankfully they seem to have shaken this off with the share price in recovery.
Wizz Air Holdings PLC
Percentage gain/loss: 115.97%
Forward P/E: 15.09
May’s final results showed double digit growth in passengers carried, revenues and net income. I am so impressed by this company and its ability to successfully manage growth in what is a highly competitive industry. Wizz Air continue to have one of the youngest and most cost-efficient fleets in the business, with further fleet additions throughout the year. WIZZ also made investment in their UK operations by basing themselves at Luton airport.
My current portfolio has an overall forward P/E of just over 16 times earnings, which in this climate seems pretty reasonable (and is probably close to the market average). With that in mind, I’m satisfied to be exceeding my benchmark and continue contributing to strong compound annual returns. It’s no 2017 by any means, but then there’s nothing to say it should be.
There’s a mix of cheap, cash generative companies who are struggling a bit, and more highly valued growth companies managing to continue their strong performance. So two to consider selling, Berkeley and Playtech. That’s my homework for the week.
Managed to read a few new books recently (although apologies, they aren’t about investing). If you’re interested, take a look at my recently read page. The Culture Code was excellent, and I’m thoroughly enjoying Modern Monopolies. As planned, I will be re-reading The Intelligent Investor next as well. Every time I feel overwhelmed by EBITDA margins, operating cash flow conversion and discounted cash floe valuations, I go back to Ben Graham’s classic. It clears my mind.
I wish you all the best for the remainder of 2018. Remember, there’ll always be someone with higher returns than you. Don’t fret it. So long as you’re satisfied you’re making an adequate return for the amount of risk you’re taking, that’s all that matters. Don’t let returns drive your investments. Let your investments drive your returns.
“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” – Benjamin Graham, The Intelligent Investor.
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