QVM Portfolio Update - a new all-time high and Alliance Pharma out

Well January has kicked off with a bang, and it’s about to get busier. A tsunami of trading statements is upon us until the end of January, before full year reporting season hots up in late February. Already, we’ve seen several announcements from NAPS portfolio holdings, and one takeover bid now needs decisive action. So let’s dive in.

As I shared in the New Year piece, we’re taking a new direction with this more active version of the NAPS - working title the “QVM Portfolio”. It’s going to respond dynamically to company and market events. Will it outperform the “do-nothing” NAPS? Only time will tell. As of now, the portfolios are the same - but today they diverge.

And what a good start to the year!

The portfolio hits a new high

Alliance Pharma received a takeover bid at a 40.9% premium, the gold miners surged 10-15% and good news from other companies have pushed the valuation higher by 5% since January 1st. This is a new record high valuation, finally breaking out of a drawdown that’s lasted since September 2021.

Company Updates - what’s been happening?

The team on the daily stock market report have been doing an outstanding job, but here’s a little more colour from me on some of the holdings.

Currys (LON:CURY) - profit ahead of expectations

Trading statement positive

Curry’s was the dog of the portfolio, down 13% on continued retail depression post Reeves budget, but has saved itself with an excellent announcement today. They are guiding profit “ahead of expectations” which we always like and talking more automation and cost savings. They are guiding profit up from £140m to £145-155m for the full year. It’s close to its 1 year high, which is remarkable given the retail climate.

Journeo (LON:JNEO) - contract win and small beat

Contract win & Trading statement positive

Last week, Journeo secured a contract for the Stoke-on-Trent Bus Service Improvement Plan (BSIP), worth £1.4 million. While not hugely significant in the grand scheme of things, it’s a significant portion of the overall £10 million allocated by Stoke to the plan. The BSIP is a national initiative with £1.2 billion of government funding, so Journeo taking a 14% share of this Stoke contract quite promising. There's a nice regulatory tailwind here.

Beyond that the Trading Statement yesterday was solid, with revenue up 9%, and profit before tax expected to hit £5 million, slightly above expectations.

They are still sitting on their £12m cash warchest - we want some action there.

MTI Wireless Edge (LON:MWE) - $1m Israeli contracts

Contract win

MTI Wireless Edge is a tiddler, but it secured three new contracts yesterday from an Israeli “local system house” worth $1 million. These were follow on orders to be delivered throughout the year. The CEO mentioned a growing trend of outsourcing for antenna solutions, which is positive. Nonetheless, eps growth is forecast to be very flat, and this contract isn’t going to shift the needle.

Metals Exploration (LON:MTL) - Condor gold acquisition completes

Acquisition closes

Metals Exploration completes its takeover of Condor Gold today. This brings exposure to new exploration and production regions for the company, at a time when its Runruno mine in the Phillipines is depleting. The deal has been approved and the shares start trading tomorrow. Darren Bowden, CEO is giving a live presentation on Investor Meet Company Thursday evening. Given the lack of broker research this presentation should offer shareholders valuable insights. I'll be on the call.

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The Alliance Pharma Takeover - Time to Sell?

But the big mover for the portfolio is Alliance Pharma (LON:APH).  A takeover bid came in from major shareholder DBAY Advisors at 62.5p a 40.9% premium to the 44.4p close on the 9th January. If you haven’t read up on takeovers, you can learn more in Mark’s excellent piece in the Academy.

Shareholders have a few options.

1. You can sell some or all of your position now.
2. You can wait to receive full proceeds from the takeover:

• either receiving 62.5p in cash
• or receiving unlisted "rollover shares".

These rollover shares would make you a shareholder in an unlisted, private company post-takeover. This comes with risks: limited liquidity, no clear dividend policy, and no certainty around when you might benefit from equity upside.

My view is why bother?

Ok, the shares are being bid in the market for 61.1p - a slight discount to the takeover price. If you wait you might pick up a 6-8% annualised return. But the NAPS has historically delivered 13% annualised, plus dividends. We believe we can do better reinvesting the capital.

So that's what we'll do - we'll sell to the merger arbitrageurs and move on. 

QVM Rule #1: Sell all on a Recommended Takeover Bid.

What now? Replacement Candidates

So now need to find a replacement stock for the portfolio. Sticking with our rules-based process, we’ll replace Alliance Pharma with another high-ranked healthcare company. The top ranked Healthcare stocks aren’t quite up to scratch:

1. Beximco Pharmaceuticals (LON:BXP) - it’s dual-listed, which means its primary listing is on a foreign exchange. It was excluded from the NAPS on this basis, and it’s an immediate no.
2. Integrated Diagnostics Holdings (LON:IDHC) - it’s foreign-currency denominated. I don’t want to deal in dollars on LSE. It’s another no.

I’ve been burned in weird listings too many times on the UK stock exchange… so:

QVM Rule #2: Avoid all dual-listed and foreign currency denominated stocks.

Enter SDI group

So this brings us to the next highest-ranked stock in healthcare - SDI (LON:SDI) - a once high flyer that has struggled recently. For a long time, many viewed it as the heir to Judges Scientific - as an acquisitive rollup company in the healthcare space. But it's not been as successful in choosing self-managing companies to acquire. The big question is whether they can turn things around?

Well, that's not a question for me to answer. Just like the NAPS, the QVM Portfolio is going to load up on high-ranked stocks, and let the weighing machine of the market do its work. SDI has a really horrible chart, and the only smooth trend is downward. I don't like the technicals but it trades far below its long term P/E, and maybe the bearishness is overdone. Mark seemed to think so recently in the DSMR with an Amber/Green rating.

It enters the portfolio today.

QVM and NAPS - starting to diverge

This QVM Portfolio will diverge gradually from the NAPS. The portfolio will maintain a very high exposure to high-ranked Stocks, but the rules will not be set in stone. We’ll be selling on profit warnings and takeover bids, and using stop losses, but the buy rules are going to be subject to change as we move through the year. And I’m not ruling out some significant changes towards much more dynamic buy rules. So stay tuned as this evolves.

Here are the movers year to date before the latest changes: