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Setting myself a tougher target

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May 16, 2019

Another good month for equity markets. Highlights included the German Dax, up 7.1 per cent, the Nasdaq composite, up 4.7 per cent, the CAC 4.4 per cent, the S&P 500 3.9 per cent and the Nikkei 225, 5.0 per cent. The robust performance in the US means that the indices have regained all the losses attained during the fourth quarter of 2018. Quite a turnaround since the New Year in what has been, in the US, the best start to a year since 1987.

In the UK, the ongoing Brexit farce doesn’t seem to be having too much of an effect, although I guess we will never know how markets would have reacted to an orderly Brexit, or indeed a no-deal one. Perhaps optimism that Brexit might never happen, or that the UK would agree to a customs union of sorts, helped the more domestically oriented UK indices do better. While the FTSE 100 was up only 1.9 per cent, the Mid 250 gained 3.7 per cent, the Small Cap 3.8 per cent and the Aim All-Share 5.7 per cent. The FTSE All Share (Total Return) Index was up 2.7 per cent.

Elsewhere, oil had a good month after President Trump said that waivers allowing several countries to buy Iranian crude would be removed. Brent crude was up 6.0 per cent to $71.64 a barrel. Other commodities did not fare as well, with nickel down 6.8 per cent, zinc down 2.4 per cent and copper up just 1.2 per cent. Gold was down 0.9 per cent to $1,284 an oz, leaving it flat since 1 January, but Bitcoin isn’t dead yet. It was up 28.8 per cent in April, taking it up 54 per cent this year. Although, at $5,686, it still has a long way to go to reach December 2017’s high of $20,000. 

 

Performance

It was another positive month for the JIC Portfolio. Its gain of 3.9 per cent was nicely ahead of the FTSE All-Share (Total Return) Index’s 2.7 per cent. In the year to date it is up 15.8 per cent versus 12.3 per cent for the All-Share, and since inception in January 2012 is up 185.2 per cent (15.4 per cent annualised), comparing favourably with the All-Share’s total return of 86.1 per cent (8.8 per cent annualised). Should I, however, be comparing my performance with the FTSE All-Share? Is it too easy? More on that later.

The performance was driven by five positions that were all up more than 10.0 per cent, with only one of my holdings down more than 10.0 per cent. The winners first: Games Workshop (GAW), added to the JIC Portfolio back in January, was up 32.1 per cent. In a trading update on 12 April, it said that it expected profit before tax for the year ending 2 June to be around £80m. Subsequently, earnings forecasts were upgraded by 15 per cent or so. It also indicated that it would pay a quarterly dividend of 35p. Forecasts for the total dividend for 2018-19 rose from 120p to 135p. The cash generation at Games Workshop is solid, and the board has a policy of distributing all “truly surplus cash” as dividends.

Anglo Pacific (APF) was up 26.8 per cent, following results at the end of March, where the story was re-enforced by a strong first-quarter (Q1) trading update on 25 April. Scientific Digital Imaging (SDI), another stock added to the portfolio earlier this year, was up 16.0 per cent. Another acquisition early in April focused investors’ minds on the accretive nature of its 'buy and build' strategy and its attractive valuation. Serica Energy (SQZ) was up 13.2 per cent following 2018 full-year results. An update for the first quarter of 2019 demonstrated the tremendous cash generation from its newly acquired North Sea fields. The stock continues to look very attractive on a price-to-cash-flow basis. Lastly, Melrose Industries (MRO) was up 10.4 per cent. I bought back into Melrose during the Q4 market setback, buying at 150p. It’s nice to see it back up towards 200p. 

Now the negative. Taptica International (TAP) continues the rollercoaster ride I described in previous months. Down 24 per cent in February, up 36 per cent in March and down 29.9 per cent in April. The share price was not doing particularly well before the placing of the stake belonging to former chief executive Hagai Tal and one of his backers, Ehud Levy, on 25 April did the real damage. There was not much enthusiasm for the 10.6 per cent stake. The shares were placed at 140p, and Taptica used up £8.0m of its share buyback programme acquiring 5.7m shares. It leaves the company with £1.9m of its existing buyback remaining. The positives are that the placing removes an overhang and, in essence, gives the new management a clean break from the past. 

Additionally, the buyback is at a 22.0 per cent discount to the average price at which the company had been buying back shares earlier in the month, so is highly accretive. There is little enthusiasm for the company given its recent history, but rightly or wrongly I have decided to stick with it given its extremely cheap valuation and the fact that I think the balance sheet risk is minimal given no debt and good cash flow. I reserve the right to change my mind if the new chief executive cannot deliver improved trading news. After Taptica, the next worst performing holding was Biotech Growth Trust (BIOG), off just 5.7 per cent.

 

Recent activity

An even quieter month on the trading front with just three trades after March’s six. I opportunistically snuck in and added to my Serica Energy position at 105p on 4 April. It reacted badly to the news that the Rowallan exploration well in which it had a 15 per cent carry had been unsuccessful. It would have been nice if it had hit oil, but in the grand scheme of things, it was a minor hiccup in what already looked an undervalued stock. Within days the share price was 20 per cent higher. On 15 April, the weekend after Games Workshop’s upbeat trading update, I added to my position at 3,709p. Lastly, on 23 April I added to Scientific Digital Imaging at 52.4p. I felt that, with its year-end coming up on 30 April, attention would start to turn to the year ending April 2020. At 53p, the shares were valued at just 15.8 times April 2020 forecasts for 32 per cent growth, which to me looked good value. Hopefully, with a few judicious acquisitions, earnings growth will exceed current projections. 

 

Outlook

We have had a super start to 2019 – the best in the US since 1987 – and we all know what happened then: Black Monday and the October crash. For those who think it’s best to sell in May and return on St Ledger's day, in the US at least the stats do not bear this out as a good strategy. Charlie Bilello points out that using the S&P 500 Index from 1928-1918??, 72.5 per cent of November to April periods have seen a positive return, only marginally ahead of the 71.4 per cent for May to October periods. The average return between November and April was 6.7 per cent and from May to October 3.9 per cent. Crucially, if one sold each May and reinvested in October, $10,000 in 1928 would have grown to $2m, but if left in the market the whole time would have grown to $31m. On that note, I am happy to remain fully invested for the time being.

 

John Rosier's portfolio (at 30 April 2019)

NameEPICMkt.Cap (£m)% of PortfolioYield (Forecast)
Baillie Gifford Shin Nippon PLCBGS5115.9 
Scottish Mortgage Investment Trust PLCSMT77785.00.6
Bioventix PLCBVXP2064.91.8
Bloomsbury Publishing PLCBMY1794.83.4
Serica Energy PLCSQZ3454.7 
Biotech Growth Trust (The) PLCBIOG3464.7 
Strix Group PLCKETL3234.64.6
Lloyds Banking Group PLCLLOY443384.45.4
Anglo Pacific Group PLCAPF3874.23.9
Duke Royalty LtdDUKE924.27.4
Rockrose Energy PLCRRE1034.1 
Games Workshop Group PLCGAW13513.93.6
Scientific Digital Imaging PLCSDI533.7 
Diversified Gas & Oil PLCDGOC8613.79.3
Iomart Group PLCIOM3783.62.2
Melrose Industries PLCMRO98233.52.5
Central Asia Metals PLCCAML4033.46.1
Robo-Stox Global Robotics and Automation GO UCITS ETFROBG 3.1 
Syncona LtdSYNC16893.1 
India Capital Growth Fund LtdIGC1033.0 
U and I Group PLCUAI2243.07.5
Altitude Group PLCALT663.0 
AdEPT Technology Group PLCADT822.82.8
Miton Group PLCMGR982.53.8
Taptica LtdTAP1882.43.4
Cash depositCD 2.2 
Vietnam Enterprise Investments LtdVEIL9771.6