Private investor's diary: predicting a correction

Since inception in January 2012 my portfolio has gained 130.0 per cent, giving an annualised return of +17.5 per cent, comparing favourably with +66.3 per cent for the All-Share (+10.3 per cent annualised).

Background

The Donald Trump inspired surge in equity markets continued. Markets are anticipating an acceleration in economic growth on the back of increased infrastructure spending, tax cuts and higher private sector capital investment. So far, despite noises from the Federal Reserve pointing to higher interest rates, equity markets are taking this in their stride.

The S&P 500, Dow Jones and Nasdaq continued to hit new all-time highs throughout the month and, as at 28 February, the S&P 500 had gone 95 trading days without a 1.0 per cent down day. It also recorded 50 days without a 1.0 per cent intra-day move; the longest in its history. Calm markets indeed. The S&P 500 gained 3.7 per cent in February. Many have been surprised by the post-US election surge in equity markets, most notably George Soros, who placed a big negative bet. It will be interesting to see whether he eventually makes money on this position but I guess in his case the saying that “markets can stay irrational longer than you can stay solvent” might not apply.

In the UK, economic statistics continued to confound the gloomy post-referendum forecasts, with the consumer continuing to spend and exports starting to benefit from sterling’s slump and improving growth on the continent.

In other markets, the German Dax gained 2.6 per cent and the Nikkei 225, +0.4 per cent. Gold strengthened 2.8 per cent to $1,246 (£1,027.32) per ounce, and the oil price was up, with Brent oil gaining 1.7 per cent to $56.45 per barrel. Sterling lost 1.7 per cent against a US dollar buoyed by expectations of higher interest rates.

The JIC portfolio

The Singapore-based aircraft leasing company, Avation (AVAP) was the biggest mover in the portfolio, gaining 13.4 per cent over the month. The market still awaits news on the potential sale of its fleet of 23 turboprops. Management assures the market that it will only go ahead if it is value enhancing for shareholders, which I take to mean a premium to asset value at the very least. The exercise has served to highlight the current 15 per cent discount to net asset value (NAV), which I hope will continue to narrow over the coming months.

Another stock to benefit from strong results was Conviviality (CVR), which was the second largest positive mover in the portfolio, gaining 11.4 per cent. It is clearly profiting from the integration of the transformational acquisitions of Matthew Clark and Bibendum, made over the past 18 months or so. Based on consensus forecasts, the shares are valued at 13.0 times and a prospective 4.7 per cent yield for the current year ending 31 May. I think that leaves scope for a further rerating and am hanging on to my position.

Bioventix (BVXP), the developer of sheep monoclonal anti-bodies for use in blood tests, gained 10.3 per cent on no published news. Results should be due later this month. Renew Holdings (RNWH), reacted positively to its end of January trading update, gaining 9.3 per cent.

Now to the losers in the portfolio. Crawshaw (CRAW) qualifies again, I’m afraid. There were no announcements from the Northern England-based butchers and ‘food-to-go’ chain during the month but that did not stop it falling a further 19.7 per cent. It has a feel of shareholders throwing in the towel. I am hanging in there because I think that an enterprise value, (market capitalisation plus debt), of around £12m for sales of £40m+ is undervaluing the company, especially if management steady the ship and return it to profitable growth. I accept I am a bit of a stuck record on this one but think my patience will be rewarded.

Serco's (SRP) 2016 results sparked an 18 per cent drop in the share price. The results were pretty much in line with expectations and I can only put the share price drop down to investors hoping for a rosier outlook statement. The CEO, Rupert Soames, described the recovery: “The road back to prosperity was always going to be long and winding, with many potholes and boulders, but we are making good progress.” This is not a change in language from him, so I am surprised at the shares being hit quite so hard.

Luckily the two big fallers are at the smaller end of my holding size, while the biggest gainers were further up the list. Statpro’s software Revolution includes holding size when calculating the largest contributors to performance. It shows that Conviviality topped the list, contributing +0.7 per cent, followed by AdEPT Telecom (ADT) +0.6 per cent and then +0.5 per cent each from Ithaca Energy (IAE), Avation and Bioventix. Serco, -0.4 per cent, and Crawshaw, -0.3 per cent, were the largest negative contributors within the 3.4 per cent overall gain of the portfolio.

Activity

Following the agreed 120p cash offer for Ithaca Energy I decided to take the money and run. Having bought the stock only last October at 76p, I realised a nice profit. I sold half the holding on 6 February at 120.1p and the remainder on 21 February at 116.4p. I added three new holdings during the month. On 3 February, I added Satellite Solutions Worldwide (SAT), at 89.1p a share. Operating in 32 countries, it provides broadband services to households and small businesses in remote areas not served by fibre or sufficiently good copper networks. I am attracted by the operational gearing as it adds customers to its network, both organically and through acquisition and by the fact that it is close to moving into profit.

With some of the proceeds of the Ithaca sale I bought Faroe Petroleum (FPM) on 6 February at 111.8p. I think it has the management to take Faroe up to the next division of oil companies. It has the potential to show substantial growth, both through exploration and deal making. I also note that Delek, who is acquiring Ithaca, has a 13 per cent stake in Faroe. I would have thought at some stage it will make sense for Delek to consolidate its North Sea assets.

The final new holding bought on 27 February was Card Factory (CARD) at 263.9p. Its strong cash flow and dividend yield were the main attractions. In addition, I added to the existing holding in Royal Dutch Shell (RDSB) on 21 February at 2197p, still attracted by the 6.7 per cent prospective dividend yield. I bought more India Capital Growth Fund (IGC) on 7 February at 80.5p, noting the 20 per cent discount to NAV. I trimmed the position in Fidelity Asian Values (FASS) on 6 February at 358p and on the 16, reduced Renew by a third at 459p.

John Rosier’s portfolio (end-Feb 2017)

Patience

Some might say that if you get your timing right you don’t need patience, but it is not always that easy. Many of my best performers this year, at best, contributed nothing last year. I first bought Avation in November 2014 and although I added at various times throughout 2015 it was not until October last year that it eventually closed above my original buy-in price. I’m now up some 50 per cent on my average price of 149p.

AdEPT Telecom is another case in point. I first bought shares in it in September 2013 at 126p, added a few times after that but had to wait over a year for it to move upwards through the 130p level. Similarly, the share price had another holiday last year, starting 2016 at 282p and finishing at 275p, before starting the next leg up to its current 355p in January.

The final example is Conviviality, where I first bought shares in November 2015 at 190p before adding during 2016. Again, I had to wait a year, until December 2016 for it to move up decisively through my average buy-in price of 198p. It is currently up 40 per cent, including dividends, on my purchase price. In all three cases I stuck with them because I felt valuation was firmly on my side, management was delivering to plan and therefore it was reasonable to expect the market, at some stage, to take notice.

Looking forward

Equity markets continue to hit all-time highs, which I guess is why we invest in them. Recent strong markets have been accompanied by a prolonged period of very low volatility which is making many commentators nervous. After the ‘Trump pump,’ the ‘Trump dump’ is widely anticipated. Last month I said I admitted to being a “little nervous”, thinking “some caution was merited in the short term”. I haven’t changed my stance and have increased my cash a little further to 9.5 per cent at the end of the month. I envisage further increasing my cash exposure in the coming weeks. It’s not that I am predicting a crash, but I think a correction of 5-10 per cent is long overdue and when it happens I would like to have some ammunition.

My criteria

Holdings must have:

■ PE ratios in the low to mid-teens.

■ PEG ratios of less than one.

■ A growing dividend, well covered by earnings and cash flow.

■ Low to moderate debt levels.

For more on John’s portfolio visit: johnsinvestmentchronicle.com

As this is a live portfolio the author has interests in all of the shares mentioned.