January 2019
What a difference a month makes. A strong start to the year for virtually everything; global equities, commodities, US treasuries, gold and sterling. I concluded last month’s column by saying there were reasons to be optimistic but even I, as an inveterate optimist, did not expect such a strong January. Three main factors are probably responsible for the change in sentiment. First, the Federal Reserve has softened its stance on further tightening of US monetary policy. Nothing wrong with that, as John Maynard Keynes said, “if the facts change, I change my mind”. Inflation expectations in the US have fallen substantially in recent months. Second, the resumption of trade talks between the US and China, which is expected to conclude positively, and third, markets were starting from an 'oversold' position given the precipitous falls in the fourth quarter of last year.
US equities led the way, with the technology-heavy Nasdaq composite up +9.7 per cent and the S&P 500 +7.9 per cent. In continental Europe, the Dax was up +5.8 per cent, the CAC +5.5 per cent and the Italian MIB +7.7 per cent. Far East markets saw the Hang Seng gain +8.1 per cent, the FTSE China A All-Share +4.2 per cent and the Nikkei 225 +3.8 per cent. A mixed bag from the UK, with the FTSE 100 up just +3.6 per cent, perhaps held back by sterling strength, but mid-cap and smaller stocks did better, with the FTSE 250 up +6.9 per cent and the Aim All-Share +7.0 per cent. This was encapsulated in a FTSE All-Share (total return) index gain of +4.2 per cent.
Commodities were strong, with nickel up +16.9 per cent, zinc +12.1 per cent and copper +6.1 per cent, regaining much of the fourth-quarter’s falls. Oil was robust, with Brent Crude up +13.1 per cent to $62.04 per barrel. Sterling gained +3.0 per cent against the euro, (increasing confidence that parliament will agree a deal with the EU on Brexit or just poor economic news from across the Channel?) and +2.8 per cent against the US dollar. Gold was strong, up +3.2 per cent to $1,325 per ounce. But holders of Bitcoin, hoping for a better 2019 after last year’s -75 per cent fall, will have to wait. It fell a further -7.7 per cent in January.
Performance
A super start to 2019 for the JIC Portfolio. It was up +5.9 per cent, its third best month in the 85 since inception of the portfolio in January 2012. It was surpassed only by February 2012’s +6.1 per cent and July 2013’s +7.2 per cent. Some big gains with more than +10.0 per cent movers including Taptica (TAP) +25.6 per cent, after a very volatile month. Taylor Wimpey (TW.), bought in December, was up +21.2 per cent. Two stocks added in January, Altitude (ALT) and Rockrose Energy (RRE), were up +21.1 per cent and +17.9 per cent, respectively, although in Rockrose’s case I only captured +5.3 per cent of the gain. Serica Energy (SQZ) continued 2018’s success, gaining +13.1 per cent, Miton (MGR) was up +12.4 per cent, Lloyds Banking (LLOY) +11.7 per cent, Biotech Growth Trust (BIOG) +10.6 per cent and Superdry (SDRY) +10.3 per cent. The worst stock was newly acquired Duke Royalty (DUKE), down -7.6 per cent.
So my patience and commitment to staying fully invested in the fourth quarter of last year paid off. Attribution by Statpro Revolution, which takes account of the size of positions in the portfolio, shows that it was essentially a good, all-round performance from the portfolio. The top contributor was Taptica, adding +0.7 of the portfolio’s +5.9 per cent gain. This was followed by Biotech Growth Trust +0.6, Serica Energy +0.5 and Lloyds Banking +0.5. The biggest negative was Duke Royalty, which detracted just -0.2 per cent.
Following a dreadful 2018, I was reluctant to talk about the JIC Top 10 Portfolio in last month’s review; “The least said about the more focused JIC Top 10 Portfolio the better.” However, this was where sitting on my hands and doing nothing has paid off. It was up +10.4 per cent in January and as of 6 February is now up +14.7 per cent this year. Still a bit more to do to regain all of 2018’s losses, but a much better feel to the portfolio this year.
Recent activity
Quite a busy month on the dealing front, with 13 trades in total. I introduced three new positions and sold two completely. The two that were left were Faroe Petroleum (FPM), where DNO succeeded in its acquisition, and Royal Dutch Shell (RDSB). Nothing wrong with Royal Dutch Shell and the dividend is certainly most attractive, but I felt that I could do better elsewhere. The sale of those two oil stocks left me with just Serica Energy and Diversified Gas and Oil (DGOC) in the sector. I have covered both in previous columns and think they have much further to go. I added Rockrose Energy, another North Sea producer. Like Serica, the market seems to be severely undervaluing the cash generation of the company and its ability to do further value-enhancing deals. I bought Rockrose on three occasions during the month at prices between 623p and 630p. Another new holding was Altitude. Altitude provides tailored services to companies in the promotional products industry; pens with company logos on and that sort of thing. A presentation by the chief executive, Nichole Stella, at the Mello Investor event in November, piqued my interest. Further work suggested that the risk/reward ratio looked interesting. Following its successful placing of new shares at 68p mid-month, to fund the purchase of AI Mastermind, I took the plunge, paying 73.8p on 15 January. AI Mastermind is the largest promotional product distributor in the US and the logic for Altitude acquiring it looks compelling. Broker FinnCap increased its target price from 105p to 140p on the back of the deal, but believes that should management deliver to expectations, 300p is achievable on a 12-month view. With forecast earnings per share of 7.4p in 2019 and 15.5p next year, a PE ratio of 20 times looks reasonable to me for that kind of growth. We are waiting for 2018 results, with earnings per share forecast at a loss of 2.5p, so the stock is not without risk. I added further to the position on 22 January at 78.3p.
The final new addition was Games Workshop (GAW), the manufacturer and retailer of fantasy miniature figures. Games Workshop does what it does very well and has a very loyal customer base, which it nurtures through providing a community of like-minded people, whose hobby is collecting, painting and playing with miniatures and games.
According to a recent article in The Guardian, “Heroin for middle class nerds”, the popularity of Games Workshop owes its success to “people who were bored and angry under Margaret Thatcher and channelled that rage into worlds where everyone is the villain, and hope has been extinguished for millennia”. War gaming is not for me, but one only has to read the company’s website to see the passion within the business.
That passion that has produced tremendous results and a very high-quality company; operating margins are in the low 30s, return on capital in the 70s and return on equity in the 60s. It is highly cash generative and even after investing for future growth, pays a decent dividend. Sales for the current year ending 31 May 2019 are forecast at £235m, but its nearly completed production expansion at Nottingham will increase capacity to £350m. A drop in the share price from £40 at the end of September allowed me to buy an initial holding at 3,116p on 3 January. At that price it was valued at 17.1 times May 2018 earnings forecasts and a prospective yield of 4.2 per cent.
On 22 January I gritted my teeth and added to Taptica at 153.3p. It seemed that there was a lot of panic selling with people convinced that the falling share price was presaging disastrous news. At the time I felt that the company could do more to reassure shareholders, something that the chairman acknowledged earlier this week while explaining that he was restricted in what he could say given that it was in acquisition talks. To me, the valuation was too compelling for a company with net cash on the balance sheet and valued at only four times earnings and free cash flow. I only wish I had found the courage to buy more. As I write the share price is 198p. I also added to Standard Life Aberdeen (SLA), attracted by the 8.5 per cent dividend yield.
To fund some of these acquisitions I reduced Anglo Pacific (APF), selling the stock I added opportunistically 20 per cent lower, at the end of October and I reduced Bioventix (BVXP) to 6.0 per cent of the portfolio, (it’s still my largest position), at 3,071p on 22 January.
