Private investor’s diary: a month to forget

The UK equity market made further progress with the FTSE All-Share (total return) index up 1.7 per cent. The FTSE 100 led the way again with mining companies to the fore. The top five movers during September were Anglo American (AAL), +24.1 per cent, Glencore (GLEN), +21.9 per cent, BHP Billiton (BLT), +17.4 per cent, Fresnillo (FRES), +13.0 per cent and Rio Tinto (RIO), +11.9 per cent. Sterling’s weakness, down a further 1.2 per cent against the US dollar in September, boosted the attraction of miners and other overseas earners. Gold was flat on the month, gaining just 0.5 per cent to $1,318 per ounce (oz). Since this year’s high point of $1,378 per oz, in the immediate aftermath of the Brexit vote, the price has dropped nearly 9.0 per cent as of 10 October 2016. It will be interesting to see whether it gains support around these levels.

JIC performance

Following a couple of better months, my portfolio was down 3.4 per cent during September, leaving the shortfall at 5.9 per cent since the start of the year. That compares with the 1.7 per cent and 12.4 per cent rise in the FTSE All-Share (total return) index over the respective time periods. This leaves me clinging to my longer-term performance for comfort; since inception of the portfolio in January 2012, it has gained 108.6 per cent (+16.7 per cent annualised), compared with +55.8 per cent (+9.8 per cent annualised) for the index.

While I have made things difficult for myself by not having enough exposure to miners and other large-cap overseas earners, the main reason for my lacklustre performance has been some unfortunate stock picks. I have compounded the situation by being too slow to cut those positions. The market has also shown a willingness to pay for growth, especially for those stocks that have delivered upgrades to forecasts; Fevertree (FEVR), Boohoo.com (BOO) and Keywords Studios (KWS) spring to mind.

To my detriment I have not had enough exposure to these types of stocks. In fact, last October, on meeting Keywords Studios, I concluded in my blog that although I could see that earnings upgrades were likely and that the market seemed willing to pay up for growth, I felt that the valuation was up with events. I added it to my watch list and since then it has doubled and currently stands on a forecast 2016 PE ratio of 30.0 times.

Two stocks inflicted most of the damage. Crawshaw (CRAW), the northern-based butchers and food-to-go chain that has ambitious plans to expand its number of outlets from the current 49 to over 200, shocked shareholders with a poor trading statement. Like-for-like sales growth had slowed during June, worsened during July, and in August/September were running 15.8 per cent below the year before. The shares, priced for flawless execution of the strategy, were pummelled, falling 59.7 per cent over the month. Statpro shows that Crawshaw alone accounted for 3.2 per cent of the 3.4 per cent drop in the portfolio. I had too high an exposure to the stock, partly because I was trying to run a winner, but mainly because I was overly confident in the new management team’s ability to keep sales growth ticking along.

To be fair, I have booked some hefty profit along the way, having first bought the holding in November 2013 when the share price was in the mid-teens. If I sold out today, I would still book a total profit equivalent to 3.0 per cent of the portfolio’s current value. I do not plan to sell, however, as I think the share price has reacted too far the other way. Very few people believe the story now. Noel Collett, the CEO who joined Crawshaw from Lidl last year is the first to put his hands up and admit to some mistakes in executing the rollout strategy but I don’t think they are things that cannot be corrected. Time will tell but the first priority is to get the like-for-likes moving in the right direction. As such, the coming winter/festive season now takes on greater significance.

The other stock to cause damage was Fairpoint (FRP), which has nearly completed the transition from a debt servicing company to a legal services group. It fell 22.6 per cent during September, with most of the fall coming after the half-year results on the 15th. Those results led to earnings estimates for the full year being reduced by around 12 per cent. It said it expected the second half profitability to be in line with the first half’s and as well as maintaining the dividend it reassured on its commitment to paying a rising dividend in the future. On current consensus forecasts the shares are valued at 5.0 times 2016 earnings, falling to 4.7 times 2017 with a prospective 2016 dividend yield of 9.9 per cent.

Clearly the market does not believe these figures. There is a risk that 2016 earnings estimates will be reduced again if a recovery in its conveyancing business, which is dependent on UK housing turnover, fails to materialise. At current levels I think the share price reflects the disappointment from earnings downgrades this year rather than the company’s potential. Although it is difficult to see a catalyst in the short term, it will not need much good news to get the share price moving.

Avation (AVAP), the aircraft leasing business that I first bought nearly two years ago, gained 10.1 per cent after posting results for its year ended June 2016. It delivered strong growth as well as improving the quality of the business. As it has grown it has diversified its aircraft type, its geographic exposure and its customer base. With continued strong growth forecast for the current year and next, the shares attracted some support at last, gaining 10.1 per cent to a 22 month high.

Baillie Gifford Shin Nippon (BGS), the investment trust exposed to smaller Japanese companies, gained 8.0 per cent, and BlackRock World Mining (BRWM) put on a further 7.6 per cent. Whereas Baillie Gifford Shin Nippon is currently at around net asset value (NAV), BlackRock World Mining stands at a discount of around 13 per cent and remains my principal exposure to mining and commodity companies.

John Rosier's portfolio (end-September 2016)

Looking Forward

Readers may have detected a note of frustration with my recent performance. The worst thing would be to thrash about and try and regain all the performance lost this year in the next few months. It could just make things worse. During my 32 years of investing I have been through periods like this a number of times before and come out of it by not panicking, keeping my discipline and staying optimistic. Equities continue to offer good value against other asset classes which are generally yielding next to nothing. In addition, economic growth continues to tick along and while interest rates, led by the US, are likely to move gently upwards, these hardly smack of end-of-cycle actions, slamming the brakes on an overheating economy.

In the UK, continued uncertainty over Brexit, accompanied by falling sterling, might lead to further polarisation in valuations between domestic and overseas earners. I calculate that over half my portfolio is exposed directly to overseas currencies; there may be a case for increasing this a little further.

Activity

I cut Interquest (ITQ), a stock that has troubled the portfolio this year, following its half-year results. It revealed an increase in debt and cut the dividend. My new holding was Statpro (SOG). Regular readers will remember that I use Statpro Revolution to measure the volatility and performance of my portfolio. Over the past eight years it has invested in moving its risk measurement service to the ‘cloud’ and has just this last month launched its new cloud-based performance measurement service, the appropriately named Statpro Revolution Performance.

I believe that we are at the inflection point where it will begin to reap the rewards from its investment. Indeed, there have been encouraging signs, with a number of upgrades to forecasts over the past year, based on new business wins. I think that there is scope for considerable growth in revenue, profit and cash flow, which I think is not being fully appreciated by the market. As a small company there is inevitably quite a wide bid/offer spread and liquidity in the stock is quite tight. I have dipped a toe in, with the intention of adding further as I become more comfortable with the story. If I’m correct, this should be a multi-year growth story with the attraction of high levels of recurring revenue.

I increased my holding in two investment trusts, Baillie Gifford Shin Nippon and TR European Growth Trust (TRG), which continues to trade at a mid-teens discount to NAV. I built up my positions in Patisserie (CAKE), the owners of Patisserie Valerie and in Serco (SRP), which continues to recover. I added to Dixons Carphone (DC.) which posted a strong first-quarter update but is still some way off its pre-referendum highs, and I couldn’t resist adding to my Crawshaw position at the lower levels.

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.