A valuable lesson learnt from three let-downs

Technology stocks held up, with the Nasdaq up 0.9 per cent, slightly ahead of the S&P 500’s 0.5 per cent gain. The Nikkei 225 was up just 0.5 per cent and India 0.3 per cent. Most other major equity markets were down; the FTSE All-Share (Total Return) Index  fell -0.2 per cent; the DAX -2.4 per cent and the Hang Seng -5.0 per cent. Copper, often seen as the canary in the mine when it comes to economic growth, seems to be suggesting slower growth ahead. After a strong 2017, it is down 14 per cent this year after a 3.4 per cent drop in June. In the same vein, zinc is down 17 per cent this year. Nickel, on the other hand, is up 15 per cent in expectation of strong demand for electric vehicle batteries.

Gold continues to disappoint, falling 3.4 per cent in June to $1,258 per ounce. but at least it has fared a lot better than Bitcoin, which after June’s 17 per cent fall has more than halved this year.

Performance

The first half of 2018 has been a disappointing period for the JIC Portfolio; June’s 0.7 per cent fall leaves it down 5.4 per cent in 2018. Not disastrous, but clearly improvement is needed in the second half. For comparison, the FTSE All-Share (Total Return) Index fell 0.2 per cent in June, but was up 1.7 per cent in the first half. The longer-term picture remains good, with the JIC Portfolio up 164.2 per cent since January 2012 (+16.1 per cent annualised) versus +86.1 per cent for the FTSE All-Share (TR) Index (10.0 per cent annualised).

Last month the damage was inflicted by XLMedia (XLM). It was down 36 per cent and cost the portfolio 1.4 per cent of performance. On 11 June, it warned that 2018 revenue was expected to come in some 11 per cent below previous expectations, with profits down by a similar amount. Given that it raised new money through an equity placing in January at 198p, it would have left a lot of unhappy holders. They will be wondering why it took until 11 June to realise that regulatory changes – “namely the closure of the Australian market at the end of 2017” – would have such an impact on the business. 

Regular readers of this column will remember that, fortuitously, I reduced the holding on 14 May at 178p. I should have sold the lot; in the immediate aftermath of the profit warning the share price plunged nearly 60 per cent before staging what holders will hope is more than a dead-cat bounce. I reduced the holding to 2.0 per cent of my portfolio at 119p on 12 June, still realising a decent profit. Most of my shares were acquired between 60p and 80p back in 2016.

Apart from XLMedia, the other fallers of note were Medica (MGP) and Central Asia Metals (CAML), which both fell 11.9 per cent. Weak copper and zinc prices were behind Central Asia Metal’s fall. On the positive front, Diversified Gas & Oil (DGDC) was up 25.5 per cent, Taptica (TAP) 13.3 per cent and my largest holding, Bioventix (BVXP), up 9.7 per cent. Diversified Gas and Oil announced another “transformational” deal only months after the last. It is buying more oil assets in the Appalachian basin, which will increase production by 114 per cent and proven developed reserves by 142 per cent. It is accretive to earnings and cash flow per share as it was being funded roughly 40:60 equity:debt. So, for a 40 per cent increase in equity, a more than doubling in production. Rusty Hutson, the chief executive, clearly has his fans and was able to place 195m new shares at 97p, a small premium to the prevailing price. 

Given that its strategy is to pay out 40 per cent of free cash flow as dividends the payout should jump significantly next year. In fact, I saw an interview with Rusty suggesting that at 97p the 2019 yield was 10.0 per cent. No wonder the share price jumped 25 per cent on the first day back from suspension. Even in the mid 120s the dividend yield would be 8.0 per cent on Rusty’s figures, or 6.8 per cent after US withholding tax of 15.0 per cent.

On 19 June, following XLMedia’s warning, my heart skipped a beat when I saw a “trading update from Taptica”. There was nothing to worry about. It was reassuring, saying that revenue was expected to be in line with expectations and earnings before interest, taxes, depreciation, and amortisation (Ebitda) moderately ahead. The share price jumped 25 per cent on the day. 

No news from Bioventix, but it just continued to edge up and as I write is breaking new all-time highs. I attended the Mello South investor event at Hever on 14 June at which Peter Harrison, chief executive of Bioventix, presented to a packed room of private investors. I think he will have impressed those who had not met him before. It was also good to catch up with another of my holdings, aircraft leasing company Avation (AVAP) and several other companies. One that I added to my watch list was eServGlobal (ESG). If its money transfer service, HomeSend, a joint venture with MasterCard, which owns 56 per cent, gains traction, it could be a very exciting story.

Mello events, the brainchild of successful private investor David Stredder, are well worth attending. There are presentations by many good companies and excellent speakers and it’s nice to network with fellow private investors.

Activity

Quite a busy month, with three new holdings added to the portfolio. First up was Dunedin Smaller Companies Investment Trust (DNDL) (4 June at 279.9p). The near-20 per cent discount to net asset value (NAV) was too tempting, especially as the performance of the portfolio over the past year was much improved. I was rewarded with the announcement on 21 June that the board was recommending its merger with larger rival Standard Life UK Smaller Companies (SLS). Shareholders in Dunedin Smaller Companies will receive shares in SLS. The shares moved up 11.0 per cent on the announcement, closing the discount to NAV to around 7.0 per cent. Even though the Dunedin Trust is footing the bill, the current discount to NAV of 9.5 per cent seems too high to me. I intend to hold on until the deal is consummated or the discount closes to under 5.0 per cent. 

Next Strix (KETL) (8 June at 156p), the world leader in kettle controls. Its controls are considered best in class and it has more than 150 patents which it rigorously protects. The main attractions are market growth of around 7.0 per cent, high operating margins and strong cash flow. 2018’s dividend forecast of 7.0p puts it on a prospective yield of 4.5 per cent at 156p. With10.0 per cent growth forecast in 2019, the yield rises to 4.9 per cent. I followed up the initial purchase on12 June at 160p, taking the holding to 3.0 per cent. 

The third new holding was Syncona (SYNC) (25 June 243.3p). The old BACIT investment trust metamorphosed into Syncona a couple of years ago and is in the process of gradually selling its portfolio of funds and reinvesting the proceeds in early-stage lifescience and healthcare companies. An exposure to Syncona is an investment in its expertise to choose and back the right people and technology; the right people to not only develop new technology but to see it through to commercial success. Thus far it has floated two of its holdings on Nasdaq; Nightstar Therapeutics (US:NITE) last September and just last month Autolus (US:AUTL.O). It has a 42 per cent stake in Nightstar and following the Autolus initial public offering (IPO) has a 32.7 per cent stake. Those two investments are described as maturing, while anther, Blue Earth Diagnostics, in which it has a 90 per cent stake, is described as “established”. The share price has done extremely well over the past year, and stands at a considerable premium to NAV, but I think this could still be early days in the company’s evolution. It has the firepower from existing resources to more than double the number of lifescience investments in its portfolio.

I added to four existing holdings Scottish Mortgage Trust (SMT), (4 June at 518.5p), Alpha FX (AFX) (4 June at 587p), Elegant Hotels (EHG), (11 June at 83.9p) and Miton (MGR) (11 June at 51.7p).

On the sales front, in addition to reducing XLMedia, I sold Statpro (SOG) completely (11 June at 172.7p) and halved my holding in Central Asia Metals (20 June at 261.3p), in both cases realising a nice profit. On 26 June, I sold Templeton Emerging Markets (TEM) at 691p, realising, including dividends, a small profit. With talk of trade wars and a stronger US dollar, it seemed prudent to reduce my emerging markets exposure.

Lessons learnt

Looking back at the first half, I have been let down by three holdings, (Conviviality, XLMedia and Card Factory). They have done me well in the past but were hit by profit warnings, knocking 8.5 per cent off my performance. It’s easy with hindsight, but in all three cases I think there were warning signs both in company announcements and from share price action. 

Possibly as a reaction to XLMedia, I read a couple of books in June: Trade Like a Stock Market Wizard by Mark Minervini and Stan Weinstein’s Secrets for profiting in Bull and Bear Markets. Both good reads and, hopefully, they will help me hone my timing on both selling and buying. Time will tell. 

I also enjoyed reading a review of the first half of 2018 by a private investor with the twitter handle @Glasshalfull1. He has done very well over the past several years and although he has a different approach, with a far more concentrated portfolio, I think there are valuable lessons to learn. One sentence jumped out at me and is now attached to my pin board: “Take decisive action when factors change or there is a realisation that you simply got it wrong”.

John Rosier's portfolio (at 9 July)