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Private Investor's Diary: Marching up

Private Investor's Diary: Marching up

In March, my portfolio gained 2.6 per cent, nicely ahead of the FTSE All-Share (TR) Index return of +1.2 per cent. For the first quarter of 2017 the portfolio was up a healthy 11.0 per cent compared with +4.0 per cent for the All-Share and since inception in January 2012 is up 135.9 per cent, (17.8 per cent annualised), ahead of the +68.3 per cent (10.4 per cent annualised) for the All-Share.

Background

The US equity market hit a small air pocket during March, with the S&P 500 Index ending the month where it started and 1.6 per cent off its intra-month all-time high. President Trump suffered some setbacks, with his plans to overturn President Obama’s healthcare bill lacking support in congress and his second attempt to introduce a travel ban being suspended by the US District Judge in Hawaii. The Federal Reserve also increased interest rates and indicated that further hikes were likely later this year. It will be interesting to see if this was merely a pause for breath or whether the market is topping out.

Of the major equity markets, Germany led the way, with the DAX up 4.0 per cent, buoyed by firmer economic growth. Continental Europe is seeing its fastest growth in over five years. India continued to recover from the shock of Prime Minister Modi’s surprise withdrawal of 500 and 1,000 rupee notes last November. The market, and the electorate, seem to support his reformist agenda, with the Sensex Index gaining 3.1 per cent. It is now hovering around its all-time high, recorded in January 2015 (I am playing India through the India Capital Growth Fund but more on that later). The Japanese Nikkei 225 gave up 0.7 per cent during March leaving it down a similar amount since the turn of the year.

In the UK, the major event of the month was surely the triggering of Article 50. It, however, certainly wasn’t a surprise and markets took it in their stride. Sterling gained 1.3 per cent against the dollar to 1.255 and 0.4 per cent against the euro to 1.1762. The FTSE All-Share was up 1.2 per cent. Gold gained 0.4 per cent to $1,251 an ounce (oz) and Brent Crude, despite a couple of strong days at the end of the month, finished down 4.9 per cent at $53.70 a barrel.

 

The JIC portfolio

In last month’s column, I mentioned that I was hanging on to Crawshaw (CRAW) following further weakness in the share price. In the short term, that has proved the correct decision, with the shares up 38 per cent during March. I have no idea why the sudden recovery has happened, although with results later this month perhaps some are expecting further improvement in like-for-like sales. Last summer’s sudden drop in sales does mean that later this year the comparatives will become much easier.

Bioventix (BVXP) continued its upward path, gaining 12.5 per cent. Another strong set of results on 27 March was accompanied by a 20 per cent increase in the dividend and a reassuring outlook statement. Indian Capital Growth fund, which focuses on mid and small-cap stocks, participated in the underlying strength of the Indian stock market, gaining 10.8 per cent. Revolution Bars (RBG) was up 10.7 per cent following its results on 29 February.

Now on to the fallers. Geiger Counter was down 15.8 per cent, although it is still up 25.8 per cent since 1 January. Hopefully just some short-term profit-taking, as I believe the fundamental reasons for my original purchase remain in place. Renew Holdings (RNWH) was off 9.6 per cent, Inland Homes (INL) 5.6 per cent and Patisserie Holdings (CAKE) 5.4 per cent

StatPro’s Revolution system shows that as well as Bioventix and Crawshaw, the biggest contributors to my 2.6 per cent portfolio gain were two of my investment trust holdings. Fidelity Asian Values (FAS) and TR European Growth (TRG), although up only 8.8 per cent and 8.4 per cent respectively, each contributed 0.5 per cent due to them being the largest two positions in the portfolio. The biggest detractors were Renew Holdings and Geiger Counter (GCL), but they only cost 0.2 per cent each as they are relatively small positions.

Other notable company news included solid results from Card Factory (CARD) in which it foreshadowed the payment of another special dividend later this year. XLMedia (XLM) posted results in which it increased its dividend by 52 per cent, way ahead of forecasts. And, later in the month, one of its original backers placed its 32 per cent stake with institutional investors at 110p. I am hoping current weakness in the share price will prove temporary, given the 5.9 per cent forecast dividend yield.

 

Activity

I introduced one new holding in March. I bought a 1.0 per cent holding in Diversified Gas & Oil (DGOC),

which joined the Alternative Investment Market (Aim) in early February. It buys conventional oil and gas wells in the US from larger oil companies. Typically, the vendors, focused on building their shale operations, are disposing of smaller assets deemed peripheral to their strategy. DGOC is strict about the price it pays and the payback on investment is typically quite quick. Later in February, it announced the acquisition of a package of producing gas and oil wells in Ohio and Pennsylvania for £1.75m. This is a typical deal for DCOG, increasing its gas production by 14 per cent and oil by 23 per cent. At current prices, it is expected to generate operating cash flow of approximately $1.0m a year; not bad compared to the $1.75m purchase price.

The Board intends to return 40 per cent of operating cash flow to shareholders in the form of dividends. The remaining cash flow will be used, along with cash raised in the flotation, to invest in the business and new assets. At my 67p purchase price, given its commitment to pay out 40 per cent of cash flow as dividends, the prospective 2018 dividend is forecast at 6.0¢ (4.8p per share) giving a prospective dividend yield of 7.2 per cent. With further deals this should grow. Growth is reliant on it continuing to make cheap acquisitions and there is the slight concern about why, as a US company, did it list in the UK? I have reflected those risks by buying just a 1.0 per cent position to start with.

I added to several existing holdings. I increased Biotech Growth Trust (BIOG) to 5.0 per cent of the portfolio (1 March at 773p). On 15 March I bought more StatPro (SOG) at 89p, attracted by the 3.3 per cent dividend yield and the potential growth from its cloud-based performance management system, Revolution. I added to Serco (SRP, 16 March at 118p) and Satellite Solutions Worldwide (SAT, 23 March at 8.2p). Satellite Solutions created confusion with the late publication of its results, causing some weakness in the share price. I think this presented a good opportunity to add to this rapidly growing provider of fast broadband to customers in remote areas not served by fibre or sufficiently good copper networks.

I halved my position in Hurricane Energy (HUR) on 27 March at 61p, booking a nice profit. I am a little concerned that it has done the ‘easier’ bit in finding these new oil structures west of Shetland. The next stage of signing up partners to fund the development of the fields may prove a little more difficult. With some of the proceeds, I added to Faroe Petroleum (FPM, 28 March at 92.8p) 28 March at 92.8p) where production is being ramped up over the next two years. I also think its drilling program over the next 18 months or so may provide some excitement.

I realised some nice gains by reducing Renew Holdings to 2.0 per cent on 9 March at 469.9p and AdEPT Telecom (ADT) to 6.4 per cent, on the same day at 350p. I thought Renew’s valuation was looking a little stretched after a near-60 per cent advance in the share price since last June left the prospective dividend yield at under 2.0 per cent. AdEPT Telecom was just too big a holding for comfort after a strong run over the preceding few months. Despite selling 20 per cent of the holding, it is still my third-largest position and I look forward to full-year results in May. Both these moves were planned, in that I set a price at which I was happy to reduce and left an online limit order with the broker.

Finally, on 29 March I met Gaurav Narain, manager of India Capital Growth Fund, who was over in London for the 2016 results. I have written up the meeting in detail on my website. I liked his strong bottom-up approach to stockpicking and his focus on management. He manages a concentrated portfolio of around 35 stocks and turnover is low. In 2016, he sold two holdings and bought five new stocks. This year he has added just one stock and sold two. When initiating an investment, he aims to double his money every three years. He likes to focus on “what is predictable”. I’m not sure he would like my exposure to oil and mining stocks.

The fund is currently trading at a discount to net asset value (NAV) of around 18 per cent, which I think should narrow in the coming year. Given the longer-term Indian growth story (his broad view is that there is “no shortage of growth in India”), my confidence in Gaurav’s stockpicking and the potential for the discount to NAV to narrow, I increased the position to 3.0 per cent of the portfolio on 30 March at 89p.

Looking forward

Apart from a brief setback around the Brexit referendum last June, equity markets have had a super run over the past 15 months or so. March saw a small pick-up in volatility, with the S&P 500 recording its first 1.0 per cent down day since November, but the buyers returned and markets resumed their upward path. I continue to believe a ‘correction’ is likely given the length of time since the last 10 per cent pullback. In any case, historically, stock markets have tended to generate most of their returns between November and April.

As we head towards the summer I feel comfortable running with 10 per cent cash and may well increase that further during April and May. I know calling markets successfully is next to impossible, but I am happy to lock in some of my recent gains and give myself the flexibility to buy in the event of a setback.

NameEPICMarket cap (£m)% of portfolio
Cash depositCD10.0
Fidelity Asian Values PLCFAS266.16.5
TR European Growth Trust PLCTRG463.86.4
AdEPT Telecom PLCADT77.65.8
Conviviality Retail PLCCVR470.35.5
BlackRock World Mining Trust PLCBRWM6115.4
Bioventix PLCBVXP91.85.2
Baillie Gifford Shin Nippon PLCBGS268.55.0
Biotech Growth Trust (The) PLCBIOG417.74.9
Avation PLCAVAP131.34.3
Imperial Brands PLCIMB37,073.44.0
Royal Dutch Shell PLCRDSB175,651.74.0
XLMedia PLCXLM211.43.0
India Capital Growth Fund LtdIGC1013.0
Inland Homes PLCINL118.72.5
Faroe Petroleum PLCFPM364.52.2
Accrol Group Holdings PLCACRL131.62.1
Card Factory PLCCARD971.42.1
Serco Group PLCSRP1,268.81.9
Renew Holdings PLCRNWH272.31.9
Revolution Bars Group PLCRBG1101.8
Crawshaw Group PLCCRAW16.61.8
Elegant Hotels Group PLCEHG77.31.5
Gattaca PLCGATC91.31.4
Hurricane Energy PLCHUR682.71.4
Patisserie Holdings LtdCAKE312.31.3
RedstoneConnect PLCREDS23.91.2
Satellite Solutions Worldwide Group PLCSAT45.61.2
Geiger Counter LtdGCL1.1
Diversified Gas & Oil PLCDGOC1.0
StatPro Group PLCSOG57.30.5
Fidelity Asian Values PLCFASS0.1

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By John Rosier,
12 April 2017

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