Diary of a Private Investor

Shuffling the Pack

One of my lessons from 2016 and therefore, a resolution for 2017 was to trade less often. So here we are less than 3 weeks into the new year and I have already made 19 trades (9 sells and 10 buys). I decided to write this article to try and explain my rationale, as much to myself as to my readers.

Firstly, it’s worth noting that when I first buy into a share, I tend to take a small stake in order to become more intimate with the holding before building a larger stake. I’ve tried doing this via watchlists but it just doesn’t work as well for me as actually taking a stake. The other thing with these smaller holdings is that it is always my intention to add to them over time, either through dividend reinvestment or by cascading funds as I liquidate or top slice my larger weighted holdings. Therefore, part of my decision making with smaller holdings revolves around “would I be happy to increase my position size in this share?”.

The other factor that has driven this flurry of early year activity is that I have a sense that 2017 is going to be a year for growth stocks, as long as one is in the right shares of course. I suspect that the benign business conditions of the past few years are over and that we are more likely returning to boom and bust – and I am referring here to business performance rather than market volatility. The trading updates I have seen so far this month have reaffirmed that dollar earners are doing rather well and even though the GBP has regained some ground against the USD this week, I don’t see it recovering to the 1.50 level anytime soon. Companies such as housebuilders and retailers that are internally focused also seem, selectively, to have done OK in 2016 on the whole. However, I am not as confident for 2017 regarding internal, UK focused businesses, although there will inevitably be some exceptions.

As ever, my assessment of the macro environment could be completely wrong. Maybe “Hard Brexit” will work out just fine. Perhaps President Trump will not invest in infrastructure. Perhaps the Fed will not raise interest rates in 2017. We are already seeing signs of inflation being imported into the UK and perhaps the BoE will choose to raise interest rates earlier than expected. For now though, I am sticking to my dollar earners and companies that I don’t think will be negatively affected by the macro shift that is taking place. I have inserted a little more growth at a reasonable price (GARP) into my portfolio and have dropped some of my more benign pure income plays.

Here is my share-by-share summary of the January churn:

Sold VCT – Despite mediocre numbers being reported, this share rose 12% since October and the forward yield is no longer a stand-out anomaly. I decided to take my income from this share via the capital gain, although I concede that they might still keep going up, just not enough confidence on my part.

Added more WTM – The UK infrastructure sector is interesting and I suspect it will come under pressure at some point. However, WTM have secured a number of large projects which will mean 2017 profits and dividends should be relatively safe and the shares currently trade on an undemanding forward PER of 9.3 with a forecast yield of 5.5%

Sold WPCT – OK, the clue is in the name but I am not currently patient enough to retain this holding, especially as this is not a dividend paying holding. They might well rise in 2017 but equally, they might just continue to tread water.

Bought G4M – This is definitely a flighty, higher risk purchase. However, the rate of growth is impressive and the company really seem to have a great online strategy and are executing well.

Added more IGG – I believe this is a solid business that will more likely benefit from the increasing regulatory environment than suffer. A forward yield of 6% with, in my view, good growth prospects and potentially a takeover target, gave me confidence to build a larger stake.

Sold BOTB – With hindsight, this turned out to be a mistake (certainly from a timing perspective). Positive interims on Wednesday saw the shares rise to 360p compared to my 280p sale price. In truth though, I am not excited by the business and couldn’t see myself buying a larger stake. I also saw it as a flighty, higher risk holding and decided to let this one go in favour of buying G4M.

Bought PHNX – I love the PHNX business model and they are becoming a dominant player in the closed life fund sub-sector. They pay an excellent dividend which I believe will be maintained and increased over time, so I was happy to increase my stake and will likely continue to do so as funds become available.

Sold GFRD – There are mixed messages coming from the house building sector with PSN being the standout performer so far in relation to 2016 results. While 2017 might be OK for housebuilders, I am not confident. Add to this GFRD not delivering a January trading update, preferring instead to wait for results day, I decided to cash in my chips on this one.

Bought SOM – I had intended to buy into SOM back in October but I had opened an account with a new broker and at that time, I hadn’t completed the relevant documentation for US investments (even though this is UK listed). With hindsight, I probably should have held back the funds until the paperwork was completed because they issued a very encouraging trading last week. Better late than never I guess.

Sold ADT – This is a share that sits between two stalls. It is rated quite highly as a growth share (arguably too highly) and yields too little to really be an income share. I have sold out for now but kept it on the watchlist.

Sold NET – Very similar to my view on ADT, although NET does pay a higher dividend. Nonetheless, it still sits between two stalls, so I have sold out for now but kept it on my watchlist.

Sold CLIG – I still think CLIG is a decent income share but with only limited growth prospects. My reason for selling was really diversification. I already held LIO and was buying into IPX (see below) and I think two asset management holdings is enough. I also hold FEET and HFEL which provide exposure to Asian and emerging markets. I might revisit this holding when I am looking to reinvest funds in income rather than growth.

Sold PHP – A rock solid income share but with limited growth prospects. And the yield is less than 5%, so in light of my quest for more growth, I decided to sacrifice my PHP holding.

Bought SFR – This is a cyclical business but profits are rising rapidly, it has momentum and a StockRank of 95. And yet, it sits on a forward PER of 14 and a PEG of 0.70, so there should be more growth to come. I might not hold SFR long-term because of its cyclical nature but let’s see how 2017 pans out.

Bought CAKE – Apart from loving the ticker, this is an interesting retail niche that continues with a successful roll-out. It is on quite a high rating but it is moving from 140 to 200 stores I believe and also growing its online business. Along with the two other retailers I own, RBG and SCS, I might not be holding them long-term but I will assess performance and outlook throughout 2017.

Bought and Sold REC – No, that’s not a typo. I bought REC yesterday and sold today and it was not meant to be that way. I have heard others speak about REC being a value trap but it had begun to gather momentum these past few months and given the highly volatile forex markets, I thought this could be a good play while also offering a decent yield. However, there was a red flag in today’s Q3 trading update (they are losing more clients than they seem to be winning), so I decided to sell and move on.

Bought IPX – Just like LIO, I really like the look of this up and coming asset management firm. It is one I need to learn more about before I increase my stake but with a 4% forecast yield and a PER of 14, I might just have picked up a decent growth and income share.

Bought PAY – This was an income share that had fallen through my notional stop-loss, so I had a decision to make. While I don’t usually average down on a growth share, I view income shares a little differently. The 2017 yield is forecast to be 6.2% at the current price and as I had given up a little income from the above trades (around 0.2% overall) and that PAY seem to be doing a decent job of implementing their new strategy and consistently increasing the dividend payout, I decided to buy more income, accepting that there is risk attached with this share.

In other news…
Despite being quite erratic with some of my entry level holdings, I have not traded any of my high conviction holdings. Moreover, I am happy so far with the trading updates that have been coming through; RBG, AAZ and SCH all in line with expectations although interestingly, all quite negatively received by the market. Whereas BJU today issued an excellent update and the share price has so far responded with a double digit gain.

I am going to reboot my new year resolution and try not to trade again until my quarterly rebalancing at the end of March. This said, I have updated the current holdings page to reflect this early 2017 reshuffle.

Happy investing folks
Simon

 

Disclosure – At the time of writing, I hold long positions in WTM, G4M, IGG, PHNX, SOM, LIO, FEET, HFEL, SFR, CAKE, IPX, PAY, AAZ, RBG, SCH, BJU

 

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