Out with the old and in with the new...

When I wrote my ‘Final Countdown’ piece 6 weeks ago I was hopeful that some of my 2013 picks would rise a little further on positive news to increase the virtual growth portfolio performance above the 30% or so gain it was showing at that time. How wrong I was. The main problem has been IOF that has tumbled on two pieces of bad news in that period; first a perception that their water permit application for Montana has been denied and secondly, an end of year update that has warned on 2013 revenues being lower than expected and plant roll-out being slower than expected (as per my ‘reset expectations’ earlier this week). IOF has not been the only problem in this period; FAST has dropped further despite positive news for 2014 exploration and farmout, SRT has dropped on lack of mandate/project orders for H2 and PRM has dropped after a trading update that did nothing to suggest near term commercial progress. In fact, the only member of the portfolio to have held its ground in the past 6 weeks has been GEM.

The net result is that a 32% gain 6 weeks ago has turned into a 15% loss on the year, turning the portfolio size from £90,000 to £75,000 – although it is still worth noting that the virtual portfolio is up 50% over the two years it has been running. This is a huge disappointment and in real life, I am having to take my medicine just as I am with the virtual portfolio. It serves as a harsh reminder of how volatile the stock market can be, especially smaller companies and emphasises that the risk warning I carry on every page of this site is there for a reason.

However, I am now looking forward to 2014 and not just looking to recoup recent losses in the virtual portfolio but also to generate some meaningful growth. My picks for this year are below and to begin with I have allocated a virtually equal weighting to each of them. This year I have also added a watchlist of companies that didn’t quite make the final cut. Some of these I will be following on this site during the year. The other change I might instigate this year, is the occasional intra year trade whether that is to lock in profits, protect capital or because the investment case has changed or indeed, because I spot a compelling opportunity elsewhere.

Pick #1 Nighthawk Energy (LON:HAWK) – Regular readers will notice that I have started covering HAWK in the past couple of months. This is a great turnaround story. New management appear to have made some astute lease purchases, their drilling program is accelerating and oil production (exit annualised rate) has exceeded their start of year expectations by more than 50%. I can see more of the same in 2014 with a very interesting production update to come early in January which I hope will give the virtual portfolio a nice boost at the start of the year.

Pick #2 Iofina (LON:IOF) – I believe the fall in share price over the past few weeks has been overdone and see the current price as cheap, so I am going to stick with a company that I believe will turn out to be a great growth story. Much will depend on management restoring confidence by delivering on the business plan AND managing their market communications more effectively. The first quarter provides plenty of opportunity for market sentiment to reverse in the bulls’ favour with; completion of plant builds and commissioning of IO4 and IO5 (possibly IO6), positive progress on the water extraction permit application and confirmation that inventory levels have been cleared early in the year.

Pick #3 1pm (LON:OPM) – This is an interesting company that specialises in lending to the SME sector in the UK. The company has been expanding its loan book at an impressive rate and in its recent trading update confirmed there will be decent increases in both revenue and profits when its interim results are published during the second half of January. The 2014 outlook is promising, although I do have some longer term reservations around the sustainability of 1PM’s growth, especially when the banks begin to expand their loan books again.

Pick #4 Inditherm (LON:IDM)  – Inditherm is a specialist provider of heating systems that broke into profitability during 2013. Strategically they have shifted to focus on selling their innovative heating technology into the medical sector and while this will mean uneven and somewhat unpredictable sales performance, I believe the current valuation of less than £5m is simply too cheap for the growth prospects being targeted by IDM.

Pick #5 Ithaca Energy Inc (LON:IAE)  – I had begun researching IAE when I noticed an excellent write up of the company and its prospects on TMF. In summary, IAE are an oil company whose current production provides decent downside production while their 2014 exploration could add significant value throughout the year. In many ways, this is a similar story to HAWK but on a larger scale and I like the risk/reward that is presented in these situations.

The WatchlistI have added 7 companies to my watchlist this year to complete the dirty dozen. I plan to follow these companies during the year and might feature them in articles on the site as the year unfolds. I might also make some trades within the virtual portfolio in 2014 and some of these companies might replace existing constituents.

Gemfields (LON:GEM) – Since diluting shareholders early in 2013 to buy the Faberge brand, GEM have gone about integrating the acquisition and building a retail operation. I expect the value to start showing in results through 2014 and for further progress on mining operations.

Minoan (LON:MIN) – MIN is a travel business that has undergone significant change through rebranding, reorganisation and rationalisation and I expect these changes to show in improved financial performance during 2014. With their Crete project gaining fast track approval, this should offer further upside potential early in the year.

Obtala Resources (LON:OBT) – An interesting African based agricultural company with a growth opportunity from their tomato plantation in Tanzania. I believe we will see decent revenue growth in 2014 but I am not sure what forward growth rating will be applied by the market.

Proteome Sciences (LON:PRM) – On the surface, this company has some extremely valuable and cutting edge intellectual property. However, they have been slow to commercialise and it will be interesting to keep an eye on progress. I do believe that when commercial revenues begin to take off, the growth here could be significant.

Quadrise Fuels International (LON:QFI) – QFI were the closest on the watchlist to making the 2014 virtual portfolio and primarily missed out in order to reduce exposure to resource stocks. The potential for this company is enormous but they are largely pre-commercial and it is a little earlier than I prefer invest, especially when the company is valued at over £350m.

Simigon (LON:SIM) – This company provide simulation software for the air defence sector and more recently have moved into the oil and gas industry. Sales seem to be growing well and I can see further progress being made in 2014.

Software Radio Technology (LON:SRT) – I have covered SRT previously and I believe their marine software technology provides an opportunity for significant growth. However, I also think there is a decent chance that they will not meet market expectations for the current financial year and the share price could be punished accordingly. This said, it might just be a timing situation and I remain positive on SRT as a longer term investment.

So there you have it, out with the old and in with the new – it will be interesting to see how things pan out.

I wish all readers a happy, healthy and prosperous 2014.

Disclosure – I currently own shares in IOF and HAWK. I do not currently own shares in any of the other companies featured in this article.