Private Investor's Diary: Unilever is too cheap to ignore

In the US, short-dated Treasury yields rose (the two-year yield up to 4.13 per cent) while longer-dated yields fell (the 10-Year Treasury yield dropped to 3.8 per cent.) The higher yield on the short-dated paper suggests the market thinks that the Fed risks overdoing its tightening and that the risk of recession has increased further out.

Equity markets responded to the improving news on inflation. The Italian MIB led the way, gaining 8.2 per cent, with other major Continental European markets also making positive gains – the CAC 40 was up 4.2 per cent and the DAX 3.1 per cent. The Nikkei 225 hit a near-35-year high, gaining 7.4 per cent. As I write, it is only 20 per cent off its all-time high recorded in December 1989. In the US, the largest stocks continued to dominate.

After gaining 9.4 per cent in June, Apple became the first company valued at over $3tn (2.2trn) – up 50 per cent this year. Along with Tesla's (US:TSLA) 28.4 per cent rise in June, Nvidia's (US:NVDA) 11.8 per cent and Amazon's (US:AMZN) 8.1 per cent, it helped the Nasdaq composite to a 6.6 per cent increase (up 32 per cent this year). The S&P 500 gained 6.5 per cent, but in a sign that the market may be broadening out, the Russell 2000 was up 7.8 per cent.

In the UK, there was not much to cheer the optimists. The FTSE All-Share gained just 1 per cent. It was all down to the FTSE 100 (total return 1.4 per cent), with mid and smaller companies, which are more exposed to the UK economy, suffering. The FTSE 250 fell 1.6 per cent (down 2.3 per cent this year), FTSE Small Cap -0.2 per cent (-1.1 per cent this year) and FTSE Aim All-Share -3.7 per cent (-9.4 per cent this year). It has been a tough time for those focused on UK stockpicking.

In commodity markets, Brent crude managed a 4.3 per cent increase to $75.3 a barrel – five times this year, $72 per barrel seems to have been a floor from which it has bounced. The returns from metals were mixed, with copper, nickel and zinc, making single-digit gains, while platinum and aluminium were down 9 per cent and 5 per cent, respectively. Gold fell 2.7 per cent to $1,912 per ounce and is off 6.5 per cent from its 2023 high of $2,050 in April. As a good friend and bitcoin fan keeps pointing out to me, its 84 per cent gain this year is far ahead of other asset classes.

Portfolio performance

A much better month for the JIC Portfolio. A positive return for the first time since January and better than the FTSE All-Share for the first time since December 2022. Hopefully the start of a trend. The JIC Portfolio was up 3.4 per cent, which means that, year-to-date, it is down 8.9 per cent. The FTSE All-Share is up 2.9 per cent this year. Since its inception in January 2012, the JIC Portfolio has gained 291.8 per cent, equivalent to annualised growth of 12.7 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 116.9 per cent, with an annualised gain of 7.0 per cent. Over one year, the JIC Portfolio is down 2.6 per cent versus a gain of 7.9 per cent for the index, and over five years JIC is up 49.8 per cent versus 16.5 per cent for the index.

The Funds' Portfolio struggled, with its lack of exposure to the US holding it back, especially relative to the FTSE All-World Index. It was down 0.7 per cent in June, leaving it down 4.1 per cent this year. Over the respective periods, the FTSE All-World (GBP, TR) Index was up 3.1 per cent and 7.9 per cent. Since this portfolio's inception in June 2020, it is up 23 per cent compared with 34.6 per cent for the All-World.

Seeing 14 of my holdings outperform the All-Share and only eight behind was good. There were some excellent gains among the outperformers, with Me Group (MEGP) up 18.9 per cent, Brooks Macdonald (BRK) 15.5 per cent, SDI Group (SDI) 13.8 per cent and Shoe Zone (SHOE) 9.2 per cent.

Me Group responded positively to robust interim results. Consequently, earnings were upgraded by around 10 per cent for the current year, ending 31 October. Its Photobooth division saw revenue up 25 per cent, and the smaller laundry division 37 per cent. As a result of the forecast increases, it could, this year, reach previous forecasts for the year ending October 2024. On current forecasts, the market values it at 13.2 times October earnings and a yield of 3.9 per cent. I added it to the Portfolio in January as a "quality compounder" – it's doing its job and still looks good value.

Brooks Macdonald was bought in April because it looked as though it was attracting net inflows again after struggling for a few years. Earnings forecasts were starting to tick up, but the share price was yet to respond. Even after June's uplift and an 18 per cent gain since adding the stock, the market is valuing it at only 14.6 times June 2023 earnings per share and a yield of 3.6 per cent. Hopefully, a year-end update will confirm it has continued to attract new inflows.

There was no news for SDI Group, but the drop in the share price following its May update was enough to attract buyers.

Shoe Zone responded to a trading update that said pre-tax profits for the year ending 30 September would be not less than £10.5mn. That compared with expectations before the update of £8.5mn – a most welcome 24 per cent upgrade. There was a hint that things were going well on 31 May when the company announced a further share buyback of £2.5mn. As I write, it has produced another update leading to a further 30 per cent uplift to profits. At 252p, it is valued at 11.5 times new forecasts for earnings to 2 October 2023, with a yield of around 3 per cent. I expect momentum will continue in the business as it benefits from trading down, lower container costs and rejigging its property portfolio to pay lower rents.

The largest faller was NIOX Group (NIOX) with a fall of 7.7 per cent, which succumbed to profit-taking following the substantial gains in May. The fall was despite it announcing a maiden dividend of 2.5p. It goes ex the dividend on 17 August and, at the current price, amounts to a yield of 4.4 per cent.

NextEnergy Solar Fund (NESF) was down 7.5 per cent. The main reason is the rise in gilt yields, which raises its cost of capital and makes its dividend yield relatively less attractive than when interest rates were near zero. Management has declared an 11 per cent increase in the dividend to 8.35p for the current year ending 31 March 2024. Paid quarterly, it amounts to an 8.8 per cent yield. Management has committed to a "capital recycling programme" in which they are aiming to sell around 25 per cent of its solar-generating capacity (assets that are not subsidised).

Management expects the sale price to demonstrate that the assets are undervalued on the balance sheet. It intends to use the proceeds to reduce debt and invest in battery storage, where returns in the mid-teens are nearly double that of new solar investments. It may also buy back shares to reduce the discount to net asset value (NAV), which currently stands at 16.9 per cent. Despite the share price being some 11 per cent below my average purchase price, my total return is flat due to the dividends received. There should be an update on asset sales before the autumn, which will hopefully aid the share price. If, in a year, it gets back to my purchase price of 107p and I have picked up a further four quarterly dividends, I will have made a return of 20 per cent. At 107p, it would still yield 7.8 per cent.

The Funds' Portfolio

As mentioned earlier, lack of exposure to the US market, particularly the most significant Nasdaq positions, did not help. The fall in Next Energy Solar Fund hurt performance, but the largest faller was BH Macro (BHMG), down 9.9 per cent. It moved from a 4 per cent premium to a 6 per cent discount to NAV. The weakness was due to concerns that the merger of Investec Wealth and Rathbones, which held over a third of BH Macro between them, would lead to the selling of the shares. It wasn't all bad news, though – Global X Copper Miners ETF (COPX) was up 7.6 per cent.

Activity

After cutting several positions in May, I had a quieter month. I started the month with one more turn of the knife. Out went Lucara Diamond Corp (CA:LUC) for a nasty loss – I sold on 1 June at the UK price of 23.6p. I introduced two new positions – Hargreaves Lansdown (HL.) and Unilever (ULVR).

I bought Hargreaves on 7 June at 825.6p. It has undergone a considerable derating in recent years – the share price is down 67 per cent from its peak in May 2019. That has left the valuation looking very attractive. Given the drop in margins, I can understand the derating, but the current valuation ignores the underlying quality of the business and evidence that results are improving. Revenue in its Q3 ending 31 March, at £188.1mn, was 28 per cent up on the same quarter a year ago. In July 2022, forecasts were for earnings of 46p for the year just ended on 30 June – forecasts are now 43 per cent higher at 66p, but the share price hasn't moved. It is valued at 12 times June 2023 forecast earnings and has a juicy forecast yield of 5.1 per cent. I will have to wait until 19 Julyafter this article has gone to press, for a year-end update to see if my optimism is misplaced.

I bought Unilever on 2 June at 4,043p. At 4,043p, down 10 per cent in just over a month, it looked like an excellent opportunity to gain exposure to a quality company at an attractive valuation. The prospective price/earnings (PE) ratio of 17.7 was mid-range in recent years and was on an attractive yield of 3.7 per cent. I'm still determining if it will be a long-term position, but it looked very oversold and, I think, ripe for a bounce in the coming weeks. The next news should be Q2 results at the end of the month.

In the Funds Portfolio, I sold Chelverton UK Equity Growth (GB00BP855B75) and Ecofin Global Utilities and Infrastructure Trust (EGL) to make way for new positions in Strategic Equity Capital (SEC) and Fidelity Asian Values (FAS). I also added to Schroder UK Mid Cap (SCP) and Smithson (SSON).

Other news

IG Design (IGR) published its results for the year ended 31 March 2023. We knew the bones of the results from its April trading update. The good news was the margin improvement and cash flow. Management has got to grips with the business and is doing everything right to restore margins to previous levels. It still expects "continued progress with its aspiration to return to pre-pandemic operating profit margins by the end of the year ending March 2025". However, management was keen to keep expectations in check and so dampened them for the current year, signalling that it will only restore dividend payments next year.

Nevertheless, the shares are now valued at 20 times current-year earnings forecasts to March 2024, dropping to just 6 times March 2025. If the March 2025 numbers are correct, I expect to double my money over the next 18 months. Hopefully, expectations are now so low that news from now on will lead to a re-rating of the shares.

Polar Capital Holdings (POLR) published the results for the year ended 31 March and, as I hoped, maintained the final dividend at 32p. Added to the interim of 14p makes 46p for the year – a yield of 8.8 per cent. Investment performance was generally good, and although results for the year ending March 2024 will depend to a large degree on markets, Polar Capital is in a relatively good position with a strong balance sheet and an attractive suite of funds. On current forecasts, the market values it at 13.9 times March 2024 earnings with a yield on a maintained dividend of 8.9 per cent.

Dividend update

On 30 June, I received dividend income of £13,857 this year. Another £9,379 has been declared and will be received before the end of September, totalling £23,237. With undeclared dividends to come, I remain confident that 2023's income will exceed 2022's total of £31,104. That's a dividend income of more than 5 per cent of the portfolio value. It stays in the portfolio, is reinvested, and contributes to the long-term compounding of returns. In many ways, it is good that the market is lowly valued – it allows me to reinvest the dividends at eye-catching valuations.

Outlook

The UK badly needs some encouraging news on the inflation front. The good news is it shouldn't need much to get things moving. With negative sentiment towards the UK, valuations are very attractive relative to other markets and history. Back to Apple's (US:AAPL) $3tn valuation – more than the FTSE 100 and FTSE 250 combined (total market capitalisation of $2.8bn). In other words, the markets value Apple more highly than the UK's largest 350 listed companies. On a five-year view, which would you rather own? I know what I would.