July 2019 Portfolio Update

5th Aug '19 by Damian Cannon

11 comments 3362 reads

A month to forget!

Purchases

Hollywood Bowl Bought at 219p - July 19

I've held a starter position in Hollywood Bowl for about a year now and have been very happy with its steady progress. The share still passes my quality and value screens easily and is perhaps even better value than it was a year ago. After all the price has barely moved but profits have increased while debt is notably reduced. In addition analyst estimates for 2019 have edged up gradually over the last year to 13.7p and now point to earnings growth of 9.2%. I think that this could be a slight underestimate given that at the HY profits rose by 13.6% to 8.92p and they could easily make 5p in the second half. However when it came to actually buying any shares in the market I had a devil of a job getting a quote from a market maker for the deal size I had in mind. In the end I decided to put in a limit order at 220p and leave it for a couple of weeks to see if anyone would fill it. As it happens my order executed a few days before expiry at a price which looks more like the offer than the bid! Chalk up a victory for patience.

SimplyBiz Group Bought at 218p - July 19

I've held SimplyBiz for a while now and was pretty happy with their core business. However their acquisition of Defaqto, back in March, struck me as a genius move. In a stroke they materially grew the company while gaining a very complementary business line. Given that management believe that Defaqto will be earnings enhancing in the first year (which makes sense given that it generated £5.3m of EBITDA on £12.8m of sales in 2018) then it strikes me as odd that analyst forecasts have actually reduced a little in the last few months! At the time I didn't want to chase the price up, given that it's performed strongly this year, but after hitting a high of 240p the price came back almost 14% before stabilising at just below 220p. With a pre-close trading statement imminent I judged this to be on opportune moment to double my holding at a reasonable level. Guess we'll know shortly!

Quartix Holdings Bought at 278p - July 19

As mentioned below I like the strategy that management are…

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doug2500

5th Aug '19

Hi Damien,

Thanks for the write up. It's reassuring to know others are feeling a bit bruised too. A pain shared is a pain halved maybe....

I do get the feeling small caps are out of favour just now, which would be fine if I had more cash but not so cool when your mostly invested. It might be a time to concentrate on company performance, bank the dividends and try not to worry about prices.

rhomboid1

Great stuff as ever Damian...it’s certainly a tricky market to navigate...my sense is that as long as you concentrate on the Q of your holdings..which you do...you’ll emerge in good order

Thanks for posting

tony akram

Excellent report - I am always reassured when we share some holdings !!

Thanks

jonno

6th Aug '19

Great write up Damian, as always. I look forward to your monthly summaries, very cogent and pragmatic. There are a number of quality small cap shares at enticing prices at present. I have added to a few holdings, £HAT being one, as the price of gold in Stirling has gone through the roof, which to my view is a positive for the company and its contemporary, Ramsdens.

The elephant in the room at present, or at least one of them is the expensive squabble between Trump and China, so it is highly probable that good small caps will get cheaper before the dust settles.

All the best

RichardK

Thank you, Damian. I find your reviews very helpful, especially as we have several holdings in common.

I fear that the US-China trade and currency war, and the serious prospect of a no-deal Brexit will lead t a contraction of global and UK trade, and consequent slowing or even negative growth. The current market malaise looks likely to continue.

Richard

Damian Cannon

Thanks for the feedback everyone - much appreciated. I tend to agree that we're in for some medium term economic volatility by the looks of it. Although there's some cognitive bias here in that the miserable current news flow is casting an outsize shadow. So, as ever, I think that it's best to focus on quality and trading while remaining open to opportunity.

As an example I picked up some more Burford Capital (LON:BUR) yesterday morning at £13.66 on the basis that the company is being materially under-valued due to the complexity of its accounts and natural lumpiness in its revenues.

Damian

Well that was really unfortunate timing, or luck, as there seems to be a major panic over a possible shorting attack today.

Like you I thought £BUR was a compelling share, I bought a few last week at 1440p, and I'm not sure how to react. My gut feel is to ride it out, but I do take note when shorters pop up, I wouldn't just dismiss them as sharks.

Yeah you could say that! It'll be interesting to see what the shorters have to say (if Burford Capital (LON:BUR) really is the target) but I haven't found previous dossiers to be compelling. Either way I have no plans to sell my shares (without any actual news from the company) and will probably add more if the price remains under pressure. The obvious danger is that I've become enamoured with the company and don't perceive its flaws....

Damian

cafcash49

19th Aug '19

Hi Damian, On the subject of Burford, have a read of Mr Bearbull in IC wk16/8-22/8. He demonstrates how we were all fooled by Burford and how with debt and the issuance of more shares the figures have been misleading. I am certainly revising and going to become a bit more in depth when it comes to the accounts. Great report as always. I am not so good at watching my capital decrease and have sold 14 shares and only kept 5. I have put my sold ones into a Stocko fantasy portfolio to see if I did the right thing or not. Keep up the great work. Charles

Thanks for pointing me towards that article - I found it in the google cache! There's a lot to be said for comparing operating profits to operating cash flow and I certainly intend to be much more cautious on that front in future. However I still haven't made my mind up about Burford as they say they almost never need to mark down profits that have previously been taken mid-case. I am concerned about just how true this is and then there's the small matter of actually collecting the money when a case is successful. There is much to consider here!

20th Aug '19

While I agree Burford's accounts are not straightforward I always appreciated that they were not cash positive. It seems fairly obvious to me that all cash received was rolled over into new investments. I view it as a growing investment company rather than a trading company, where cash flows would be more crucial.

The next point is to take a view on whether these investments will pay off in the mid to long term. If they do the cash should follow, and if they stop growing it will be available to return to shareholders. I took their commentary at face value on the likely success of their cases, maybe naive but what else do you go on?

Then you have to judge whether having won the case they can collect any cash. This is tricky.

Then there's the issue of valuing cases and booking profits. To me I always thought they had been fairly upfront about this and pointed out that accounting rules made them use fair value on something with a binary outcome, which is tricky again but not difficult to understand.

The aim listing may be an issue for their size, but I'm invested in plenty of really good aim companies so it wasn't an issue for me.

The fact most profits come from a few cases wasn't news, my own investments follow the same pattern.

Governance may be an issue.

To me the secret is to view it as an investment company, not trading. And so maybe NAV should have been more prominent in my thinking. But it is a tricky beast to value.

I find it disappointing how many experts have appeared after Muddy waters (seldom before) and how easily holders have been shaken out with what was largely freely available info. One look at the cashflow report on stocko reveals the situation so why did it come as such a surprise to so many?

For now I hold.

July 2019 Portfolio Update

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Damian Cannon

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