Focusing on robotics

The US led the way, benefiting from a strong second-quarter results season. The Dow Jones and S&P 500 were up 4.7 per cent and 3.6 per cent, respectively. The Nasdaq did less well, gaining 2.2 per cent. It was held back by a few of its largest companies; Facebook (US:FB) was off -11.2 per cent, Netflix (US:NFLX) -13.8 per cent and Tesla (US:TSLA) -13.1 per cent. President Trump’s fruitful trade talks with EU president Jean-Claude Juncker may have helped continental European markets; the German Dax was up 4.1 per cent, the French CAC 3.5 per cent and the Italian MIB 2.7 per cent.

Elsewhere, the Indian Sensex hit new highs, gaining 6.2 per cent on the month, and the Nikkei 225 was up 1.1 per cent. China did not join in the fun, with Trump’s trade tariffs hitting sentiment. Although flat on the month, the China A All-Share Index is down 26 per cent since the end of January.

Commodities had a tricky month, with base metals continuing to give ground. Copper was off -4.6 per cent, nickel -5.8 per cent and zinc -8.0 per cent. Oil also suffered, with Brent crude down -6.4 per cent to $74.19 a barrel. Gold continues to disappoint, off -1.7 per cent in July and -5.8 per cent this year, to $1,232 an ounce.

Performance

The JIC Portfolio was up 1.8 per cent, half a percentage point ahead of the All-Share’s 1.3 per cent gain. Since 1 January, the portfolio is lagging the Index, -3.7 per cent compared with +3.0 per cent. Still much to do over the remainder of the year. The longer-term picture remains rosy, with the JIC Portfolio up 169.0 per cent (+16.2 per cent annualised) since January 2012 versus +88.5 per cent (+10.1 per cent annualised) for the All-Share.

My patience was rewarded with long-term winner AdEPT Telecom (ADT) up 17.7 per cent, smashing through its previous high achieved in April last year. Full-year results on 10 July in which it increased the dividend by 12.9 per cent were well received. Investment manager Downing, which owns 12.9 per cent of AdEPT Telecom, pointed out in its recent investor letter for its Strategic Microcap Investment Trust that its record of nine consecutive years of earnings growth is only bettered by three in more than 700 Aim-traded companies. 

It explains that: “AdEPT initially found its way into the portfolio on an expected free cash-flow yield of 9 per cent after the Atomwide contribution, which we deem transformational. We feel that the valuation was particularly unchallenging at the time we made the investment and the capital-light model should support growth without much incremental investment. By our calculations, AdEPT should be able to grow at 15 per cent aper annum and also return 50 per cent of earnings to shareholders.” It is nearly five years since I added AdEPT to the JIC Portfolio. Given the quality of the company and management I expect it will feature in the portfolio for some time.

Serica Energy (SQZ) was also up 17.7 per cent, recovering most of May and June’s losses. It was a nice move ahead of the 3 August announcement of its purchase of Total’s 42.25 per cent stake in the Bruce field and 25 per cent stake in the Keith field in the North Sea. It's a cleverly structured deal, which sees Serica's interest in Bruce increase to 78.3 per cent and in Keith to 59.8 per cent; the share price leapt 23 per cent. It expects this and its previously announced BKR deal with BP to complete before the end of September. On completion, Serica’s daily production will increase to around 25,000 barrels of oil equivalent per day (boepd). A year ago, it was producing just 2,800 boepd. It has increased production nearly 10-fold without diluting shareholders through issuing shares and has avoided taking on debt by financing the two deals through existing and future cash flow. There is the small matter of its partner in the Rhum field being the Iranian National Oil Corporation. It is seeking regulatory consents for Rhum including a licence from the US Office of Foreign Assets Control. If that is forthcoming I think the share price has a lot further to go.

Other strong performers were Miton (MGR), up 15.9 per cent over the month following its 10 July trading update, which showed robust growth in assets under management. This has been one of my better recent purchases, up 42 per cent on my average buy-in price. Bioventix (BVXP), the largest position in the portfolio, continued its strong performance of recent months on the welcome news that Siemens had gained approval to sell its high-sensitivity Troponin test for heart attacks in the US. Siemens uses Bioventix antibodies in this test. Medica (MGP), which is the leading independent UK provider of radiology, updated on first-half trading on 25 July. It expected revenue growth of 18 per cent and had increased the number of radiologists by just over 10 per cent to 339. The share price was up 20 per cent on the day.

Bloomsbury (BMY) was the worst performer, down -10.2 per cent. Going ex-dividend on 26 July accounted for nearly 3 per cent of the fall. I attended the annual meeting earlier in the month, learning more about its strategy to accelerate growth in digital revenues. It says it is on target to achieve digital revenues of £15m by 2021-22, with profits of £5m. With strong cash flow and on a prospective PE ratio of 15.9 times February 2019 earnings forecasts (for 18.5 per cent growth) and a forecast dividend yield of 3.5 per cent, I am more than happy to hold on.

Activity

This month I’m focusing on just one of my July trades; having first added it to the portfolio in March, I increased my position in ROBO Global Robotics and Automation ETF (ROBG). You can’t escape articles or discussion on artificial intelligence, robotics and automation in the media. Recently, this publication ran a feature by Alex Newman, 'Generation Games, IC, 3 August 2018'. In it he postulated that ageing populations would lead to innovations in robotics and technology, driven by there not being enough young people to fill jobs or look after the old. Ageing populations is just one of the drivers. Other powerful factors are the profit motive (machines replacing people) and making life easier (robots to clean the home or drive the car). One of the ways he suggested gaining exposure was through ROBG.

I started my exposure to this theme early this year, first through Scottish Mortgage Trust (SMT), then ROBG and more recently Syncona (SYNC). Regular readers of my diary will remember that at the time of buying Scottish Mortgage Trust, I described an excellent talk I attended by Jim Al-Khalili, Professor of Theoretical Physics at Surrey University, and presenter of The Life Scientific on BBC R4. “He made a convincing case that in all areas of technology (artificial intelligence, energy, medical, quantum computing, blockchain) change would be far more dramatic over the next 10 years than the last.” He believed the pace of change would grow exponentially. This was the 'light bulb' moment that prompted me to increase my exposure to technology, hence Scottish Mortgage.

On further reading, I became increasingly convinced that I was on to something. I’m persuaded that artificial intelligence, automation and robotics is the next big phase in technological change – phase one being the internet in the 1990s and noughties, and phase two smartphones during the past decade. Ten years ago, how many of us foresaw quite how ubiquitous the smartphone would become; it’s used for everything from paying for goods, banking and booking flights to keeping in touch and monitoring one’s health.

My summer holiday reading included bestseller Homo Deus by Yuval Noah Harari, in which he gives a “brief history of tomorrow”. It's either terrifying or exciting depending on your disposition. He has written a follow-up, 21 lessons for the 21st Century, published later this month. In it he continues the theme that the pace of technological innovation is undergoing a step-change and that artificial intelligence will have a massive impact on our lives. In it he admits it’s difficult to know exactly what the impact will be, but we must be prepared.  

I was attracted to ROBG because it gives me a very broad exposure through its 84 holdings spread across two equal categories: technology and applications. Technology encompasses computing, processing and artificial intelligence, sensing, actuation and integration. Applications covers industries such as energy, logistics, healthcare, food and agriculture, 3D printing and manufacturing. Its holdings cover around 10 countries, with the US at 44 per cent and Japan at 25 per cent, the largest. Top 10 holdings include IROBOT (US:IRBT) (2.2 per cent), the manufacturer of the Roomba vacuuming robots, Intuitive Surgical (US:ISRG) (1.9 per cent) a leader in robotic-assisted minimally invasive surgery, and Fanuc (JN6954) (1.7 per cent), the Japanese manufacturer of industrial robots. 

I added to my holding following a 4.0 per cent pullback in the ROBG Index during the second quarter. Following strong earnings growth (29 per cent year on year in Q1) the valuation had fallen to its long-term average, 21.3 times forward earnings compared with 27 times a year ago. My analysis of its components showed that many were trading on PE ratios from the mid-teens to high-20s, but with price/earnings growth (PEG) ratios of less than 1.0. The timing seems ripe for the next leg up.

Details of my other trades, including the complete sale of XLMedia (XLM) and purchase of Superdry (SDRY), can be found on my website, www.JohnsInvestmentChronicle.com.

Outlook

Equity markets continue to recover from Q1’s setback. The Nasdaq 100 keeps hitting new highs and is up 13 per cent since 1 January. The S&P 500 is up over 5 per cent, just ahead of the FTSE All-Share’s 3.0 per cent. The Dax and Nikkei 225 are still, just, in negative territory for the year. Markets feel good. but I guess they often do before a setback. The problem is getting the timing right. Many thought that the first-quarter’s fall was the start of something more sinister, and the voices of doom are predicting a summer setback. It may happen, but for now I’m sticking to my recurring message that its best to focus on stockpicking and leave the markets to look after themselves.