SIF Portfolio: I Review Pan African Resources, GlaxoSmithKline, Somero Enterprises And Macfarlane

30th Nov '16 by Roland Head

15 comments 14238 reads

It’s the end of November, so it’s time to review stocks added to the SIF Portfolio six months ago, in May. Stocks that no longer qualify for my screen may now be sold. Stocks which continue to qualify will be held, and then reviewed on a monthly basis.

Such frequent trading goes against the grain for many investors, including me. When the portfolio reaches its first anniversary, I may consider extending the six-month minimum holding period, but for now, I’m sticking to the rules. After all, there’s no point in running a rules-based portfolio if you keep changing the rules. Frequent changes make it impossible to say whether any of the rules actually work.

Here’s a list of the four stocks which are under review this week. Each company name is linked to my original article on the company:

Gold miner Pan African Resources
Pharma giant GlaxoSmithKline
Concrete flooring specialist Somero Enterprises
Packaging group Macfarlane

Pan African Resources

At one point this year, Pan African Resources was the biggest riser in the portfolio. That’s not the case anymore. Pan African’s share price has pulled back with the price of gold, which has fallen by 13% from its 2016 high of $1,375/oz.

Despite this, the SIF portfolio’s holding in Pan African is still worth 25% more than it was six months ago. That’s not a bad performance.

What’s more interesting is that Pan African still qualifies for my screen, so will remain in the portfolio. Although the StockRank has fallen from 98 to 88, Pan African is still highly ranked for quality and looks cheap on current year forecasts:

I have a fairly neutral view on the outlook for gold, but Pan African has performed well this year and further gains may be possible. I’m happy to keep this stock in the portfolio.

Verdict: Hold

Total return so far: +25%

GlaxoSmithKline

GlaxoSmithKline is a relative outlier among the stocks in the SIF Portfolio. It’s both defensive and a big cap stock.

After six months in the portfolio, the pharma giant’s shares have risen by just 2.1%. However, it has provided some welcome defensive quality, plus cash dividends totalling 38p per share. This represents a 2.6% yield on my purchase price of £14.74 per share, pushing the total return on this investment…

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LongbeardRanger

30th Nov '16

Roland,

I may be missing something - but why are you removing Glaxo from the SIF portfolio? Presumably it now fails one or more of your portfolio rules, but I can't see where you've set that out. Sorry if I'm being dumb.

Rgds

Phil

P.s. re the frequency of trading, I tend to agree that it looks like your rules (which are quite stringent) are kicking stocks out of the portfolio very frequently. A minimum one year holding period would obviously reduce this. Alternatively, you could introduce an element of hysteresis - so for example a stock could have to fail at least two of the SIF portfolio filters to be sold, rather than just one. Just a thought.

Roland Head

Hi Phil,

GlaxoSmithKline (LON:GSK) doesn't meet all of the criteria for my screen any more. I didn't set out all the details in the article, but on checking it now fails on several counts:

- Earnings yield < 8%
- Net debt > 5* net profit
- Rolling PEG > 1.2

Hope this makes sense!

I do plan to revisit the trading rules for the portfolio in the spring, but I'm going to give it a full year before changing anything, in order to get a feel for how the rules are working.

Roland

Thanks, Roland. That does indeed make sense.

Fully understand your points on the trading rules, I think you are quite right to give it a full year. I wasn't suggesting that you amend them now, just offering some food for thought for if/when you do decide to make changes.

Thanks for doing this, by the way - the articles are always interesting.

Rgds
Phil

iwright7

Roland Re Somero Enterprises Inc (LON:SOM) 2017 broker EPS estimate. This estimate was made before Thump's election and given his undertaking to rebuild US cities looks far to modest to me. I suppose in the brokers defense Thump is not in power yet and no detailed infrastructure plans have been spelt out and the broker may be waiting on YE2016 numbers and outlook, before re-forecasting 2017. So I wouldn't be too down hearted about likely 2017 EPS growth yet.

Will Marsh

Dear Roland

Very interested to see your opinion of Somero as a sell. I bought these after subscribing to stockopedia on fundamentals and am doing pretty well, no small thanks to Paul Scott and his blog. My own view is that iwright7 is probably right and the share although now getting pricey is still on a stockrank of 97 so there are a lot worse shares to hold.

Also, fyi I concurr with your view on Glaxo, which was my biggest holding for some time which I swapped for BB Biotech (stockrank 83) which is worth a look and so far so good.

Hi Will,

My decision to sell Somero Enterprises Inc (LON:SOM) from the SIF Portfolio does not reflect my opinion on the stock!

Personally, I think Somero remains a decent hold. The stock has been sold from this (virtual) portfolio because it no longer meets the criteria for inclusion.

The SIF Portfolio is being run as a rules-based portfolio, so trading decisions are governed by the rules, not my opinion on the stock. My goal is to find out whether I can run a successful (i.e. market beating) portfolio in this way.

In the case of the trades outlined in this article, if they were stocks in my personal portfolio, I would probably have held onto all of them.

Hope this makes sense!

Regards,

Roland

Hi iwright7,

You may well be right re. Somero Enterprises Inc (LON:SOM). As I've commented elsewhere, my personal view is that this stock remains a decent hold. But the portfolio rules dictated a sale, so out it went!

Having said that, while the outlook and macro environment look good at the moment, there is some downside risk with Somero. It's still heavily dependent on the US economy and carries some currency risk for UK investors.

Regards,

Roland

Howard Adams

1st Dec '16

Roland

Thanks again for an insightful documentation of how to operationalise a rules-based portfolio. An objective so easily read and talked about, but one rather harder to implement. I have really appreciated reading about the tensions you are experiencing with regard to exiting these stocks. I am really valuing and learning from your write ups.

Regards
Howard

onederer

Another excellent article in a very interesting series. I hold Somero but have no intention of selling until it goes into a significant retracement. Hopefully, that will be in the distant future and from a far higher valuation.

JohnEustace

3rd Dec '16

The reasoning that says US infrastructure spend going up = more concrete = more business for Somero doesn't completely convince me.

Their business is about precision levelled floors in high bay warehouses. They don't have much to do with the things that need urgently fixing in the US infrastructure such as their crumbling bridges.

So yes an increase in US growth will help them in the sense that the rising waters lift all ships but I'm not seeing a direct link with infrastructure spend. Happy to be told I'm wrong.

5th Dec '16

John,

I tend to agree with you, hence my use of "presumably" in the article. But perhaps the market is pricing in a resultant wider surge of growth from Trump's presidency?

I don't know, but the timing of Somero's surge higher was clearly related to the election result.

Regards,

Roland

Roland,
I agree with you about the presumed driver for Somero's surge. It's the investors buying now for this reason who I think might be mistaken. But against that it has been historically undervalued and maybe the market is just giving it an appropriate valuation, whether for the "right" reasons or not.
Either way it will be an interesting test of the rules driven approach.

onlytrading

7th Dec '16

I have been buying SOM since 120 last year and sold out at 220 having topped up at 173 just a few days before. The reason I topped up is that I expected gains on any "US infrastructure" stocks. But I sold as China is SOMs major growth market and the hugely strong dollar puts an end to that idea. Until the dollar weakens I see the upside limited.

Chris Ashley

9th Dec '16

Hi

Interesting thoughts from various posters about Somero Enterprises Inc (LON:SOM). I bought in May 2016 when the share-price was 150p, and am happy to hold for now. At the time, I bought in because, as a fan of Warren Buffett's investment approach, Somero seemed to have all the hall-marks of a "durable competitive advantage" - ie. a patented design, operating in a niche market with high barriers-to-entry for competitors, though with the risk that the construction industry is cyclical. Together with a stonking set of results and the prospect of making in-roads into the Chinese market, the prospects at the time seemed bright. It was also an undervalued stock (in my opinion) at the time of my purchase, which the market has recently corrected - though the cause of the correction is not particularly clear for me. Was Trump's election and promise of infrastructure investment a direct cause for the correction, or a catalyst for something else?

Clearly, with Trump's election, the landscape changes. I'm now not optimistic about Somero's ability to break into the Chinese market, given Trump's threat to slap tariffs on Chinese goods. Like other posters, I also don't immediately buy the argument that, because Trump has promised to invest in US infrastructure, Somero will automatically benefit. As has been pointed out, Somero's specialism is high-precision level concrete floors in warehouses.

That said, if Trump follows through on his promise to improve US infrastructure, there could be a knock-on benefit for Somero if warehousing companies invest in new sites near any improved infrastructure. I also await to see what Somero management themselves say about their prospects under a Trump presidency - ie. could they diversify their business to directly benefit from the infrastructure investment?

So, right now, the jury is out for me on Somero. For the time being, I'm happy to hold until such time as the impact of Trump's promises on infrastructure investment on Somero become clearer.

Regards.

Further to my post above (#14), it's also worth saying that a question at the back of my mind is whether Somero's P/E value will shortly get re-rated upwards by the market.

As I said in my previous post, I felt the stock was undervalued when I bought in during May 2016 because, using the PEG measure, the share-price did not reflect the then forecast earnings growth (in other words, the share-price at time of my purchase was low relative to the forecasted earnings growth). The recent upsurge in the share price has, in my opinion, largely corrected that.

If Somero subsequently post another excellent set of results at year-end, then I wonder whether the "Trump effect" will cause a re-rating of the P/E upwards, with a corresponding uplift in the share price. As said, for this take place, I'm looking to see how Somero position themselves to take advantage of Trump's promise of infrastructure investment. I grant you - it's not immediately obvious when their specialism is high-precision level concrete floors. That's why, for me, the next Chairman's statement and outlook will be critical in determining whether to stay invested or not.

SIF Portfolio: I review Pan African Resources, GlaxoSmithKline, Somero Enterprises and Macfarlane

Pan African Resources

GlaxoSmithKline

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Roland Head

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