May Week 2 - Boo inflation, Yay inflation, Boo Growth, Yay Growth

Boo inflation, Yay inflation, Boo Growth, Yay Growth 

Portfolio Review

A volatile week with the portfolio down on the week, and under performed the ASX.

BOTB impacted the portfolio, being the largest holding. An in line update was not received well by the market.

A fairly quiet week for results and none of the risers of fallers (other than BOTB actually reported in the week).

Perhaps wishful thinking but I the feeling was that some of the more volatile shares, seemed bit of market maker shakedowns.

More transactions than I would like in a week & as I think about it, at least one was unnecessary!

Cursory Market/Macro Observations

A very volatile week where the market worried about & then didn't worry about inflation and/or growth.

I commented last week that the miners and such like looked unsustainable and they do seem to have had a pull back during the week. That said, tech/growth continues to underperform - from what I can tell other than stock specific, the rallies tended to be in the more defensive spaces (healthcare/staples/utilities) and also a little in the financials space.

Travel & leisure, commodities & high growth (no earnings) very high valuation quality growth seem to be taking a hit too.

That said, in the FTSE 100, there were some 75 fallers and the fallers were certainly larger in magnitude than the risers.

The week ended positively with a strong rebound from the midweek falls and technicals suggest it should continue in the immediate term.

Absolutely no idea, what is going to happen - CoVid India will impact travel somewhat (and potentially re-opening) but I think businesses have come to manage. Portfolio is not exposed to lockdown impacted stocks - or more accurately lockdown disrupted stocks.

Will be more macro noise - prices are rising but production is not - could be indicative of stagflation, but data quality is pretty poor at moment and doubt anybody has a reasonable expectation of next 3-6 months.

Worse case would be tech rolls over & the cyclical recovery plays start rolling over. Meanwhile, the biggest structural threat (to price) remains end of TINA if yields rise.

Think fully invested bear is the right approach - maybe look into some sort of tail risk hedging, but unfortunately I probably don't know where to begin.

That said, from an inflation perspective, I am not entirely sure why companies that have already made huge investments, sell software, have high margins & immense pricing power would be the ones to be hit hard by a bout of inflation versus an airline or cruise ship at least as far as the five year operational performance is concerned.

Lesson:

Having given it more thought, I would say with some confidence that the reason you bought SBUX is because you sold Greggs (because of volatility / fear) even though you were in at an attractive price and thought you would make up for it.

And found a company that would be the same.

Transactions

Sell VEUR 

After purchase of JDEP (not reported), this was pretty much offsetting sale - part of strategy to remove passive investments from my portfolio.

Increasingly concerned about whether passive can continue to outperform.

Any passive investments to be held in wife's portfolio - speaking of which that really needs to be dealt with at least a little bit!!

Add HAT

Was not full sized so was planned add with cash held to increase position size. Of current holdings, this has the best value metrics. Further, portfolio benefits from recovery themes to which it is under exposed - namely cyclical / spending recovery / travel recovery and provides gold exposure.

Ex-gold, this is also counter to my longer term structural view & serves as a hedge if I am wrong and the loan book should rebuild as people spend and maybe pawn some of the stuff they have bought.

NEW SBUX

Was very impressed by their results end of April. On the back of Greggs' results, so felt SBUX would also start to benefit from a stronger recovery in international.

Doing the comparison between Greggs & Starbucks, based on financial metrics & relative to the size/dispersion of the business, international prospects & brand recognition, SBUX was likely a better long term bet.

That said, you didn't like Greggs on valuation (and the fact that you are an embittered ex-holder!!!) and SBUX did not satisfy the primary reason you ruled out Greggs.

Further, with the CoVid outlook worse in Asia & what not, maybe international could prove to be a negative factor in the short term.

ADD LSEG

Adding to holding to bring to appropriate size - room for one more add. As per investment thesis, this is a high quality operator that has reduced volatility in earnings and not overpaid.

In my view, it is good to attack big integrations head on (as opposed to spend years working through disparate infrastructure/organisational practices).

Valuation is substantially below peers and indeed below the valuation at which Borsa Italiana was sold

New - added ELCO

Have monitored on the back of announcements on 29th March and 30th April - took starter position. Provides software to the construction & building management sector, a sector that is booming. The company has a good track record of growing the business without dilution & excellent quality metrics, in particular very high gross margins (above 80%) and has grown without increasing its cost base suggesting positive operational leverage.

2020 growth was negative/pedestrian but hopefully get back on improving trajectory. Half on half & quarter on quarter growth signs are positive, with some upside to forecasts

The sector to which it provides software is performing strongly. New management team have reorganised sales/marketing function (reducing costs) - growth ambitions to expand in sector & geography, cross sell existing suite of products across customer base and look at other industry verticals. Relative to the valuation of direct peers (internationally) & sector such as Nemetschek & Autodesk, it is cheap / fair. 

Portfolio Risers

IHC up 19.5%

• Absolutely no idea what drove that increase, especially this week given that results were announced last week (and I think Simon Thompson covered it then too)
• Maybe Octopus are adding to their holding and Premier Miton have stopped top-slicing (or maybe it got tipped)

TPFG up 8.9%

• Post results, think market is starting to see what I saw - very strong sales pipeline and quality compounder.
• Purchase was on pretty high volume and post results - very positive signs (but already full sized so might need to reduce a little), but was a 6% faller last week so who knows!!
• Got a mention on PI World (in context of Belvoir) but think volume was a little high for that.

Portfolio Fallers

BOTB down -11.3%

• In line trading update (previous upgrade in March). Think a lot of people had very high hopes for this update and some of that air seems to have been let out.
• If it can continue to grow then valuation is very reasonable.
• Very tempted to add but this is already giving you a little trepidation with position size and when you last purchased, your note said "ENOUGH NOW"

GETB down 9%

• More disconcerting fall given it was on back of annual report and AGM and this seems to have been sustained a few days and on reasonable volume.
• That said very illiquid and subject to noise - but does feel like someone wants to get out reduce.
• Had a call with CFO - am still comfortable with the performance so far - very clear markers to watch over the next 12 - 24 months. 
• Given existing operations, current valuation should be supported with speculative upside with GetBusy & scaling SmartVault
• Hideously competitive space but seem to have carved a niche & have an interesting approach to innovation.
• Do not like the share option dilution.

SPSY down 9%

• This is now getting somewhat sustained & higher than average volume, but now the valuation is starting to look very compelling.
• Not sure I like the twitter noise around this, but then again that noise is factually accurate and if management / annual reports are to be believed, there is a substantial chunk of revenue not included (and that will come by 2023 even if not 2022)
• Further the fall in the context of buybacks is disconcerting. 

IXI down 9%

• Illiquid micro cap, no volume - had a rally last week / fortnight, pulling back

IGP down 6.3%

• Illiquid micro cap, no volume - had a rally last week / fortnight, pulling back

Updates & Results

Primary Health Properties 12 May 2021 - neutral to +ve

• Rent collection at 99%, 90% is government backed and paid quarterly in advance
• Cost savings from having the manager moved in house but slower conversions / decisions / vendor withdrawal on pipeline (very in demand again)
• Dividend is 6.2p (4% yield) ultra defensive and inflationary increases will result in 1.7% uplift to rental income
• As with BBOX, with hindsight the decision to move up the risk / speculative development seems a smart one with the yield compression on market transactionsSmartVault growth at 44% increase in new business, driving growth in recurring revenue (higher value/customer) - should improve GM
• One significant new customer in the solvency space for Virtual Cabinet (older business), should add to recurring revenue for FY.
• Growth slowing down, however, Smart Vault seems to have accelerated somewhat & Getbusy is just starting to gain traction.

React 12 May 2021 - Neutral to +ve 

• Deferred consideration on the Fidelis acquistion will be payable (performed well and some very good growth rates there).
• Deferred consideration payments can be funded from existing cash / cash generated from Fidelis.
• Think there is a lot to like but am already breaking rules on min M/Cap requirement and given that don't want it to become a large position. 
• Indeed rally in short time & director sale (but small in grand scheme) is making me a little comfortable, although if it keeps going, it will start meeting minimum M/Cap requirements!

Best of the Best 13 May 2021 - neutral

• Market did not like this update (in line with expectations), but think people had very high hopes going into this.
• Want to see the sequential Half on Half growth in the results (they need bigger beats to guide ahead now) and how that is progressing.
• Expect margins might be hurt by investment / staff costs in current year as well, potentially meaning that revenue does beat but depresses earnings.
• I think this is still looking reasonably attractive on valuation assuming 2021 is not a one off.