Magic Hat Portfolio update: BA out, IRV in

It’s that time of the month when I update the Magic Hat fantasy fund on Stockopedia. (http://www.stockopedia.com/fantasy-funds/magic-hat-463/)

BA. (British Aerospace) departs the portfolio. It’s a pretty easy call on two counts:

• It has the lowest EY (Earnings Yield) in the portfolio
• The market reacted badly to the finals issued on 20-Feb-2014, sending the shares down 8.3%.

 

The market was probably spooked most by “goodwill impairment of £865m in US businesses, due to increased weighted average cost of capital and taking into account lower US spending”. Offhand, I don’t see why an increase in cost of capital should produce a goodwill impairment in and of itself. Surely it just means that it’s more expensive for BA to raise finances? (??) No doubt there’s a “logical” explanation, but I have to admit, on the face of it, the statement makes no sense. “Lower US spending” … now that makes sense.

BA went from a net cash position to a net debt position, although they had returned £850m to shareholders. That included £212m on the share repurchase program. A cynic might say that it stretches the meaning of the word “returned”.

“I keep telling you, I didn’t WASTE my dough, I INVESTED it in beer and hookers”.

Perhaps the idea is to leverage up the balance sheet, such that with good cashflows (which seem a little in jeopardy just now) the debt gets paid off and there’s some nice returns through paying off the debt. Presumably their cost of capital can only increase even more through such an action.

I like this statement: “Robust, investment grade balance sheet”. Which is interesting, because Stockopedia lists their Earnings Manipulation Risk as High, and they’re actually in a short selling screen due to their low Z-Score.

They also reported:

”the Group’s reported earnings per share is expected to reduce by approximately 5% to 10% compared to 2013.”

As you might expect, analyst sharply downgraded their forecast estimates in March.

I see that BA. was purchased in the portfolio at 306p on 10 July 2012, and sold out today at 419p. That’s nearly a 37% gain, during which time the ASX is up 24%. So, it’s been a useful out-performer.

Unfortunately, I’ve archived my notes, so I can’t see why I bought BA at the time. I seem to recall that I thought it was undervalued at the time, and bought on weakness. Woodford was also making positive noises about it at the time, IIRC.

Maybe the US will become more aggressive in the near future, which will help BA.. Still, now seems like a good point to take profits.

In today is Interserve (LON:IRV) , at 634.5p. I was chewing over whether I should buy PAF (Pan African Resources) or RM (RM). I figured that IRV seemed more “certain” than the other two.

According to Stockopedia:

“Interserve Plc is a support services and construction company. The Company offers advice, design, construction, equipment and facilities management services for society’s infrastructure. Its operational segments include Support Services, Construction and Equipment Services. ”

Yawn.

IRV is a magic formula stock with an Earnings Yield of 22.2%, which is cheap. The annual results issued on 28 Feb looked pretty good, with revenues up 12%. Headline EPS was up a more modest 5.3%, and the dividend was up 4.9%. Analysts have pencilled in 13.1% growth in EPS for 2014. So we’ve got a situation where we’ve got high earnings yield, and some good growth expectations.

It gets better. The company also did a placing at that time to purchase Initial Facilities off of Rentokil. So I would expect analyst forecasts to be revised upwards.

IRV has a Stock Rank of 98, which is good to see.

IRV reacted well to all this, and the share price rose 5% on the announcement. They’ve been on a rip-roar since then; but momentum has petered out during the day, so I wouldn’t be surprised to find that I’ve bought on a spike and that they’ll be a retracement over the next few days.

Technically, the shares aren’t into overbought territory on RSI, although “they’re up there”. Price vs 50dMA is -3.11%, and against the 200dMA it’s 4.25%, so if you’re bullish, I would count them as good support levels.

It’s market cap is £826m – so hardly a tiddler.

IRV has a lot of its ducks in a row. We shall see.