October Week 2 - Risk On

Data good, Results good, Market good;

Transactions - Risk on (and off); #BMY #SUP, #CLX, #UPGS, #GAW, #CCC, #AVON, #FCAP, #BOO, #GETB

Updates from: #IGP, #SPSY, #CLX, #QTX, #G4M, #AAZ, #AVON, #CLIG

So it was a busy week of purchases - I thought I was rash/too aggressive, but it turns out not. 

Having read my earlier posts - I did say that it was time to do more than window shopping - clearly having the journal is useful - perhaps I should read before I act in stead of after the event.

Its true - cash might be great/useful in the short term but given the investment horizon, I know for a fact that it will be one of the worst places to be over my investment horizon.

Two new holdings have appeared in the portfolio & two have disappeared. 

5 companies were added to. I mentioned in my macro catch up that I thought there were conditions for risk on - with my own activity I thought there was some opportunity in the supply chain hoo haa.

I have 33 holdings* & I think that is about right - I do want to reduce the number of holdings but have some sleep easy issues (because as far as I am concerned any individual holding can go to zero)

There are 36 holdings in total - 3 of which earlier sales/reductions are less than 0.5%, Arcontech (not selling rest as not worth it - will follow and may well add), QTX (not selling rest as not worth it) & AAZ - a no action sale!

Approximately 13% of the holding value & 9% of the portfolio value was put to work net.

My bold call is we are at peak shipping & to a lesser extent chip dramas (less certain on inflation) although if things do start to normalise, there will be some interesting base effect movements next year when Adjusted Inflation will be showing -ve prints - ARGH Deflation (the natural state because human beings are amazing IMV)

I reiterate - Tesco sales are up 9% on 2019, BooHoo inventory is up some 30% - these don't feel like production challenges - they feel like demand in excess of what was anticipated - and it is not surprising that ports are clogged where things come in (more so than they leave).

I see that Computacentre in their results referenced that the larger customers (Read Monster Tech) are ordering early to ensure their supplies are secured.

I would be more concerned about retailer de-stocking (UPGS) & the world being full of chips (unless we are in a Weimar Republic world).

Given the amount of cash invested over the week maybe this is my bear capitulation but I am still bearish the market - I did not buy anything "whole of market", so let's see where things end - hopefully the last couple of months can repair some of the damage.

Cash levels are now at 20%, which is where I want them to be given general valuations & hopefully some dividends can build up too.

If I had done the whole sell in May & go away, I would be around 16% YTD (versus as low as 3.5% in peak dramas). If I adjust for BOTB, I expect I would still be down!

Let's see how it goes on the don't sell in October.

To remain bearish (bears sound smart after all) - there is a US debt ceiling - that limit got suspended until mid to late December I think.

What if in December, just before Christmas, when everyone is away and there is no liquidity & even the Fed officials are on holiday (I will be) and the US defaults.

Markets don't fall because of things people expect - I am pretty sure nobody expects a US default.

In the meantime, the contrarian in me really wants to buy long dated government bonds or maybe just buy the VIX. Warning to self - VIX is complicated, hideously volatile & expensive to fund - I will not be getting involved.

Public service & Macro/market covered in the previous week + my general thoughts around the portfolio so straight to it.

To sum up the markets in very few words - Data Good, Results Good, Market Good.

Portfolio Review

It is good to get some respite from the damage & not to increase the number of columns with greater than 5% movements - swings and roundabouts as they say.

Lessons:

Rather than short term trading activity, think about it as short term rebalancing/opportunistic activity versus trading activity, although to make this worthwhile cost effective, would need to concentrate portfolio (probably more than I am comfortable with) and get better at trading, which is doubtful at best.

NB This is probably just BVXPSight (or more accurately not acting on foresight) & even more accurately not being aware that the company was reporting on that date.

More back to the future.

Actual lesson - do this on weekends - no market / no new news data - less cognitive dramas!

Find better way to manage watchlist/past sales - in fact just find a better way to monitor the market!

Transactions

Sell BOO 

• I covered the results in September write up and my conclusion was short term sell and that I had less confidence in the long term competitive positioning - in particular, I feel when high growth/quality companies start trading at value type multiples, the market is saying that those margins won't last.
• I look at results and I see the old retailers are growing online faster and as Next will say, stored help them with returns / logistics so maybe they will actually end up in a worse position.
• I like the growth at BooHoo, but I am not sure what they are doing that is different / unique - lots of companies are trying to build market places/sell online/build brands through influencers/social media
• With respect to the sale - I think the full year forecasts are at risk - October onwards really needs to move some against tough comparatives with higher costs and I expect another warning.
• Historically, I would have probably added automatically or let it run and then eventually capitulate (or wait for recovery after the next warning I anticipate as opposed to add) - I don't want to let it drift and with other opportunities, it would let me concentrate the portfolio a bit more.
• That said, I need to follow it because there may well be a time to buy 
• (Noted at time of sale) Better ideas in same space - specifically G4M - have direct address to Europe issue and upgraded, albeit pre peak supply chain - either way -think that is the better opportunity at current levels

Sell GETB 

• No good reason for the sale - nothing changed from my thesis originally but I don't buy companies that are loss making (notwithstanding that GETB have much better results presentation and a profitable product funding a new product) and also for whatever reason, I don't like holding companies with a sub 50m m/Cap - effectively it did not fit two criteria.
• Previously, would have held this - given risk discipline with such stocks - cannot add - and don't want to let it drift
• PS I see they have announced an update & couple of bolt on acquisitions today and the CFO has bought too - nothing would change my view on the company and therefore I will not buy back - think growth sustaining is a good sign - Board talk of increasing confidence.
• Far be it for me to speculate but one of the things I don't like about this company is that a decent sum of money/dilution happens if the share price is above 46p & a lot closer to 100p

Add GAW 

• Back to being my biggest holding, having bought back most of what I sold, the reason is in my view the share price has fallen back too much and whilst not value, it is certainly reasonable and may well be value on outer years.
• Earnings expand, Multiple Contracts
  
• Sales were ahead on a very strong Q1 in the prior year, although with product releases Q2 was strong in H1
• should be update in December - either it will be good & market will rally or 2021 annual return will be write off!

Add BMY 

• Again putting the cash to work - this is one of my favourite holdings and as such should be one of my largest positions.
• In the prior year, they did 185.1m Revenue, 78.3m in H1. FY forecast 193.4m. In the first four months of this year they have delivered Revenue of 63.1m vs 49.5m - in short in the prior year they delivered approximately a quarter of their full year revenue, in the current year they have delivered 33% - if the same seasonality is applied they should be on track for revenue in excess of £240m - which clearly will not happen given that H2 21 was outstanding but I can still see upside.
• The growth is coming from a higher margin business - digital - the business has re-rated but I think it is a higher quality & more diversified business (and it was already pretty high quality).
• Half year results on 27th October will be interesting.

Add SUP

• The share price had pulled back on no reason - well general market jitters - my investment thesis was entrepreneurial management team delivering growth in their higher margin businesses, therefore improving the quality & size of the business
• My original purchase was only a starter on the back of results & took advantage of weakness/market jitters to add - right size given recent IPO.

Add UPGS 

• Again, another company that has pulled substantially on the back of what was at last print and upgrade to expectations. I do not doubt that they have shipping costs challenges but I think management know how to deal with them.
• At the same time, at least some of the margin expansion story in forecasts is known - Salter licensing costs, implementation of WFH & they are a pretty cautious management team.
• I purchased the shares I regretted selling (which I held until the last possible moment) - don't regret that sale anymore - re-purchased shares sold.
• This is one I might prove to regret but I am willing to look through the short term issues - as I say there are certain management teams/businesses that make it easy for me to feel like a business owner & others that don't - this is firmly in the former camp.

Add CLX 

• Very strong update - ahead of prior year is a pretty sizeable upgrade given guidance at full year - would suggest upto 5p in EPS given no IPO costs in current year.
• Revenue & profit to be materially ahead and ahead of the record period in the prior year - All regions returned to pre CoVid spending patterns, except China which is in line with prior year
• Sustained positive response to the launch of Paragon Neo, Sentinel taken small uptake from hyperscale/datacenter operations
• No negative impact from semiconductor shortages - continue to monitor - robust cash position - bring forward investment in team to build capability in line with order growth
• I am not surprised - Damn not completing the other side of the admin transaction!
• This brings me to my lesson from the previous week - when you write things down, don't big fat ignore them anyway!
• Notes made at the time of review: 
• ADD to HOLD - valuation at 25x - not ridiculous - but then not ridiculous should not be the criteria for a  buy, which is what an ADD is
• NB - don't get frustrated by the fact that you have reduced at lower levels - it is what it is!!!
• I added anyway - I really hope it does not go the way of Best of the Best - I think their moat is more defensible & growth less dependent on marketing/people at home.
• The reason I didn't want to complete the other side of the admin transaction - didn't expect this level of upgrade & thought lock up expiration  for insiders would create weakness - Hmmm!
• HOLD

Add FCAP 

• Covered the update last week and noted it was an add - indeed it was an Add at the time of the AGM update but I dilly dallied.
• Adding to the starter position as my thesis was confirmed - my biggest worry remains a major market hoo haa, but I expect this management team to better manage hoo haas than other management teams.

New CCC 

• Another company that I have followed for a long time and not bought to my cost. 
• Seemed to pull back on the market jitters in spite of what I thought was a pretty reasonable update - indeed the commentary in the report was largely positive & they guided to beating an outstanding H2 even though they were mindful of challenges.
• There may well be an inventory build among their customers that is likely to unwind and that might cause some short term weakness in trading but again looking through the cycle, I think this is a quality company on a reasonable valuation playing into the digital transformation theme.
• Personally, I think if it wasn't for the illiquidity, it would not have had that level of pull back in the period.
• On the valuation, I will add that it is relative valuation - valuation is up against its own history but I think part of that is the market accepting that it is more than a "crappy" IT distributor
• Also, I don't think distributors should be maliged the way they are - all they do is make sure customers are happy and well stocked - I think those are important business functions.

New AVON 

• Another company I have watched longingly as it has gone up and then I have seen it come down to earth in a pretty spectacular way.
• My purchase thesis is that it is hopefully a good profit warning & that "good" is reflected in next year forecasts, which if met puts this as another QARP/GARP share. 
• It is a high quality business and pretty entrenched in the US Military with high levels of R&D spend - my portfolio has no exposure to the defence sector
• It was also an experiment in technical trading - seems to have found support & buyers after the huge falls on profit warnings - was very crowded and no longer being talked about - price action on back of recent contract win was telling
• A couple of days later, we had a trading update:
• Order intake at $280m, growth 34% (15% organic/ex Wendy) - closing order book $141m up 39% on PY (doesn't say what it is ex Wendy) - momentum underpins confidence in growth in 2022 (supports the good profit warning)
• $250m Revenue, $209, ex Wendy, down 2% - Military balistic revenues hit - Guide Adj EBITDA margin at 15-16% (37.5m$) - guided down from 17-18% (non cash impairment) - cash conversion better than expected at 80% (vs 50% guided) - maybe because of the non-cash impairment charge
• Inventory write down is new, combined with delays in contract suggest maybe there is a bigger issue - On the positive side - order in take & order book growth have accelerated since the August warning
• Given this is an Adjusted EBITDA warning, seems to have held up quite well - another piece of news and 15% write down to half year stock feels like it should get more reaction but share price has been resilient indicating the technical support
• HOLD - Note this is falling knife / profit warning / good profit warning play - if any of those are not coming out as intended (including respecting the technicals, Sell - Loss treatment - Assasin!!)

Portfolio Risers > 5%

IHC 16.7%, IXI 9.03%, SDI 6.9%, GAW 6.42%, BBOX 6.25%, G4M 6.13%, UPGS 5.66%, CLX 5.65%, IGG 5.28% & BNZL 5.09%

• Calnex - responds to a positive trading update discussed above & G4M also provided an update that allayed the market's concerns.
• I am not aware of any reason for the movements in the week for the other companies, ergo the title of this post!

G4M up 6.42%

• Revenues down 8% overall at 64.7m for half year to Septemebr (2 years up 48%), UK Flat, Europe down 16% - as they had said - expect full year in line
• GM remain strong at 28% (28.6% & 25.2%) - suggests own brand or order size is holding up - GP 18.1m (20.1m & 12.5m)
• 156.6m forecast, 14m EBITDA, 7.3m PBT - big investment in inventory 30m (vs 23m PY) - suggests they are expecting similar to PY or better (or are going to have a lot of excess stock to clear)
• AV - expands addressable market (which I think is a big part of coffee can stocks - assuming you want them to grow, not just sit in a coffee can)
• HOLD - Annoying didn't add yesterday when all the activity was happening - not urgent to add - dilly dallying!!!
• To explain that note, I sold BooHoo/GetBusy and bought GAW all on the same day & decided I did not want to do any more trades - expecting I had until 22nd October for G4M to update the market.
• My mum used to say - what you want to do tomorrow, do today, and what you want to do today, do now - I swear - one day I will start listening!!

Portfolio Fallers > 5%

IGP -10.4% ARC -8.92%, QTX -6.59%

• IGP & Quartix movements - I am not sure if it was because of updates, but updates were provided to the market
• Arcontech - that may well just be the spread but ARC - Leon Boros reducing stake - below disclosable threshold, which is post results - He knows the company well & probably was able to speak with management  - Interesting considering "pipeline has never been better"

IGP down 10.4%

• I am surprised by the reaction - guess the market wanted more, or alternatively the convertibles investors are reducing their stakes.
• Revenues 6 months - 4.9m£ - 9% higher CC, 2% reported £4.8m (PY) - positive Op Cash flow 8.5m - 8m at 31 March - call it about 0.5m
• 45m EV - revenue growth in line with expectations and hopefully the recent contracts should come through in H2 - headline reported is disappointing
• HOLD

QTX down 6.59%

• Getting hit - results to be in line with expectations - which in context of multiple was probably not enough (and big part of why I sold)
• Full year revenue 25m, EBITDA 5m, FCF 3.5m (plus 1m for 3g Swap) so 2.5m
• Subscription base up 12% - 195k units - 23m in ARR (vs 21.5m in PY) - New subscriptions up 22% on 2021 & 13% on 2019 - France & New territories - US is disappointing & the swap for 3g
• If the subscription base is retained there is very high margin long term revenue post installation & that is still growing, albeit not high levels of growth
• HOLD - Timely reduction given director sale & reception to this update - Buffetology might be a buyer - too expensive & valuation jitters drove my sale - they still remain

Additional Updates & Results

Majority of the portfolio news was covered in the movements and transactions detailed above, there were very short updates from Spectra Systems, City of London Investment Group & Anglo Asian Mining.

CLIG

• A zero surprise update from a quality operator at a reasonable price, although outflows remain disconcerting.
• Fees & income in line, dividend up 10% on prior year - continue to suffer from outflows
• BD to focus on EM, International, Opp Value & KIM Balanced mandates (additional capacity now available for prospects) - What happened to Real Estate (which if I remember now has a three year track record?)
• The outflows are concerning but I can see some pretty big movements in IT space now based on styles / factors / sectors - given that I think this is an environment where they might have a decent opportunity set.
• HOLD - No change from previous - would be an add candidate if I wanted to concentrate the portfolio - not a Sell

SPSY

• Along with AAZ, I would include this as a holding where positive news gets absolutely no reaction whatsoever, but for what its worth
• New yearly order as part of 5 yr renewal agreement - 50% higher than typical but 2020 was exceptional - based on size, confident will exceed market expectations in 2021
• Positive news flow against a negative momentum share price - in a battle of technicals & fundamentals I pick fundamentals
• HOLD - Full sized given risks associated

AAZ (for completeness)

• Production and sales prices down on PY vs Q3 2020, Silver & Copper higher production. Share price down as anticipated - if previous announcement couldn't move it, doubt this would.

And Finally

I think I mentioned I would hopefully have this written up and done on Tuesday and I didn't and other things came up and then it gets harder to write.

My mum used to say: 

What you want to do tomorrow, do today. 

What you want to do today, do now. 

One day I will start listening!!

Adieu