Review of Paul's top 20 share ideas for 2023

Other articles which I highly recommend

(although judging from the thumbs ups, many of you have already found them!) -

New Years NAPS - the tenth year of Ed's automated stock selection system, which has beaten all relevant fund managers over the long-term.

Megan's review of how the StockRanks performed in 2023.

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Introduction

This time last year, for the first time, I decided to write an article with my top 20 value/GARP shares for the year. After all, writers here fancy ourselves as being able to select good shares and hopefully avoid bad ones, so we should have the courage of our convictions to publish our ideas for scrutiny and eventual praise or ridicule! Obviously we cannot predict the future, so some ideas will work, and some won't - it's the same for everyone.

My performance (personal portfolio)

Another way to show you’re good at investing is to make loads of money from the markets in real life (as many subscribers have done)! My track record here has been a massive rollercoaster, famine to feast and back again at least 3 times in the last 20 years, due to my liberal use of gearing. After a £2m loss in one personal account alone in 2022, I decided to ditch gearing completely. So this is now classified as a “discontinued activity” in my personal finances!

Instead I now just focus on traditional share ownership, including the use of SIPP and ISA for the generous tax advantages. These ungeared accounts have produced excellent results since I took control of my SIPP in 2012 - I’ve nearly 10-bagged my portfolio, without putting in any new funds, which is a compounded annual return of c.22% over 12 years.

A fair bit of those gains happened in 2023, where I grew my ungeared portfolio over 100%. This was partly luck - takeover bids for my largest positions happened twice (Seraphine, then BOTB) early in 2023.

Then I spotted a tiny, obscure oil services company called Plexus Holdings (LON:POS)  in August 2023, with news of its biggest ever contract win being ignored by the market for several months, despite it being forecast (Cavendish) to trigger a long-awaited return to profitability in FY 6/2024. So I bought up every share I could get my hands on, after poring over the detail at great length, and assessing risk:reward (which I think is favourable).

Plexus has been the UK market’s biggest winner, rising over 1000% in 2023, from c.2p to c.20p. I managed to catch a good part of that move, which has turbocharged my performance this year.

Risky? To a certain extent, yes. However, the deeper my research, the more convinced I became that the upside justified a big move up. Long-serving management owning 59% made me initially worry about de-listing risk, so I contacted them to ask questions, and from a conference call it quickly became apparent that the stock market listing is seen by management as essential, and highly favourable to the business (giving credibility with major oil & gas customers). Not to mention a long track record, as a proven tech, which was profitable until 2015, commanding a peak valuation of c.£300m. The CEO propping up the company with c.£3.2m in additional personal cash in 2022-23, demonstrated to me that he sees a bright future, despite 7 years of heavy losses.

Anyway, Plexus has given my portfolio a large boost in 2023, and remains by far my largest holding, so I’m excited about the potential for 2024, with strong industry & environmental tailwinds finally addressing the shocking industry problem of methane leaks.

Definitely not for widows and orphans though, so as always this is my personal opinion, never investment advice.

Trading

This might surprise regulars, but I’ve also done a little shorter term trading, for bounces after profit warnings. I got caught on the WANdisco fraud, losing about £30k, but I made it all back again by buying loads more when it came back from suspension having been refinanced, then quickly selling the >100% bounce.

There were a few other things like that, where I bought oversold companies on profit warnings, just for a bounce, only holding for a fortnight or so - eg. tinyBuild (LON:TBLD)   (a c.100% gain briefly held, rubbish company), Cab Payments Holdings (LON:CABP) which looked oversold after a profit warning (although I fluffed the timing, and exited around breakeven), and more recently Future (LON:FUTR)   where a strange market reaction to an OK update provided an easy 20% profit.

Strategy

What on earth is my strategy then, you might ask? I’d say value/GARP is my intellectual home territory, hence why I’ve been writing the SCVRs for 12 years. However, with my own money, I’m happy to get involved in anything where I see favourable risk:reward. Special situations in small/micro caps particularly interest me, and highly selectively, can be lucrative. It’s also a minefield though, so saying no to practically every share idea is essential I think. As sentiment improves, we might see more investor appetite for risk, hence more multibaggers amongst micro caps possibly?

Also, given that I now use a cheap online broker (£5.95 per trade), this has opened the door to me looking at shorter term trades, and that’s mostly gone well this year, with no big losses.

I take the view that, now I’m not using gearing any more, I can take a bit more individual stock risk, as there are now no circumstances where I would become a forced seller, unlike when I used gearing. No more margin calls (when a geared account broker demands instant, and usually large cash is deposited into the account) are now a thing of the past, and life is so much more relaxed as a result.

Concentration

I highly concentrate my own money into my best ideas. This is risky, no doubt about it, so ideas have to be very carefully researched. Typically I’ll have the bulk of my portfolio in my top 5 share ideas, then a long tail of small positions where I just want to keep an eye on things of potential interest. Everyone has their own way of investing, that suits your own personal situation, so I’m not recommending anything, just detailing my personal way of doing things.

Prompted by year end updates from friends, I’ve made this list -

Common traits of the most successful private investors 

(that I have observed amongst my network of investor friends)

1. Highly selective - they say no to practically all share ideas.

2. Concentrated - most of their money in their top 10, or even top 5 positions.

3. Successful investors do lots of research work before and after buying, and they enjoy it.

4. Independent thinkers - often spotting some angle that others have missed.

5. Patience - giving good investment ideas time (often years) to gestate.

6. Happy to change their mind when the facts change.

Performance of my published top 20 share ideas for 2023

I’ve frozen my spreadsheet with mid-prices at close of 29 Dec 2023. This shows a super result in 2023, of +17%.

Since most of these 20 shares are AIM listed, I’ve used the AIM All-share as my benchmark, which was down 8%. So it’s a lovely out-performance of +25% in the year.

I’ve used mid-prices for opening & closing prices, for simplicity. Doesn’t this flatter the results? Yes it would, so I’ve excluded dividend income, which would more than offset the opening & closing spreads.

I’ve also made a copy of the spreadsheet here, which will continue updating prices live from googlefinance. This is because I picked shares with a long-term view, not just 1 year (a shortish period in investing), so I want to see how my 2023 share picks perform over the longer term.

In my own version of “adjusted EBITDA”, I made 2 mistakes in my 2023 list - firstly omitting by accident one of my favourite shares, Warpaint London (LON:W7L)   . I just forgot to include it, despite raving about this share in 2022 and 2023. Also, Watkin Jones (LON:WJG)   never should have been included, as I was warning about a likely profit warning in the SCVRs, but for some bizarre reason, it ended up in my top 20 list. Substituting those items would have lifted my performance from 17% to 25%. Still, we can’t amend lists retrospectively, so my adjusted figures are as nonsensical as many companies’ adj EBITDA!

Note that our Graham produced a fantastic +25% without any adjustments (although he did include divis), make sure you read Graham's 2023 review here. Very well done Graham, that’s an outstanding result! I’m sure we’ll all be carefully scrutinising his 2024 top 10!

Selection criteria

The detail is all in my original article from 6 Jan 2023, but to summarise it, I picked my top 20 2023 share ideas as follows -

1. Cast the net wide - Graham, me and Roland covered 607 unique companies in the SCVRs in 2023, but I think it was a bit less, c.500 in 2022. The best ideas from the SCVRs made it through onto my shortlist. I then selected further using these themes …

2. Good business models, as far as I can tell - obviously judgemental, but a lot of financial measures help assess this, eg Quality Ranks.

3. Modest valuation with clear upside potential.

4. Trading well, with positive outlook comments.

5. Decent balance sheet, so little risk of dilution or insolvency.

6. I favour higher StockRanks, and 18/20 of my 2023 picks had StockRanks above 50.

7. Long-term investment ideas, not short term trades.

This approach worked pretty well, so I’ll use the same approach for my 2024 top 20.

Individual shares performance

Winners

(best first, then descending order) -

1. Rotala (ROL) +74% - a special situation. Bus operator, flagged in SCVR 28/12/2022 where a property deal left mkt cap equal to cash. Takeover approach from mgt at 63.5, Sept 2023. Illiquid micro cap.

2. Goodwin (GDWN) +74% - family-controlled engineering group. I was attracted by big increase in order book & pipeline. Good interims & solid outlook in late 2022.

3. Angling Direct (ANG) +72% - cash pile attracted me, as equal to mkt cap in late 2022. Trading at breakeven, with recovery potential.

4. Renold (RNO) +64% - an SCVR favourite. Industrial chains & gearboxes group, Good H1 results, positive outlook, and cheap valuation attracted me in 2022. I remain positive, so it’s going on my 2024 list. Pension deficit has proven manageable.

5. MJ Gleeson (GLE) +40% - I believed that housebuilder shares were oversold at end 2022. GLE was my pick, due to it serving first-time buyers with low priced houses. Discount to NTAV underpinned valuation. Worked great! I’m less keen now the discount to NTAV has gone, in strong Q4 recovery.

6. Belvoir (BLV) +33% - looked oversold to me in late 2022, especially considering lettings income largely recession-proof. PER was 9, plus 5% yield. It’s since re-rated to a more sensible 13.8x, and 4.4% yield. Still reasonable, but not stunning value now.

7. Cerillion (CER) +33% - I was worried about including this highly valued software company last year, but it’s delivered very well, with all the 33% gain coming in Q4 of 2023.

8. BOTB (delisted) +32% - delisted at 535p due to takeover bid. Disappointing price, but management had already effectively sold out when they stitched up fund managers (including some big names) previously at £24 per share. Still, it was a gain for me.

9. Volex (VLX) +28% - quite a modest gain in share price I think, considering how resilient its performance has been in 2023. Seems adept at making acquisitions. So it remains a strong GARP share, in my view. Although debt has increased, but not alarming.

10. Macfarlane (MACF) +13% - successful, acquisitive packaging group. I described it as “inexplicably cheap” this time last year. I continue to view MACF shares favourably. PER only 9.6x, despite prudent accounting policies.

11. Zotefoams (ZTF) +5% - spent most of 2023 underwater, but recent rally gave it a boost. I remain positive, with a reasonable valuation, and blue-sky upside in for free, for its ReZorce recyclable drinks container project. A nice each-way bet still, I reckon.

12. .Hargreaves Services (HSP) +5% - plus 21p (about 5% yield) divis in 2023 - special situation engineering group. I haven’t really followed it closely in 2023, as it’s complicated to analyse. Graham was positive in 2023, most recently SCVR 9/8/2023. Superb forecast divi yield 8.7%, and well below NTAV. Could be worth a fresh look?

13. SThree (STEM) +4% (plus 4% divis in 2023) - similar to many other small caps, this staffing group recovered all its 2023 losses in Nov-Dec. We like it - resilient trading in tough macro, strong balance sheet with plenty of cash, and reasonable divis. Seems well managed.

14. Wickes (WIX) -2% (plus 10.9p divis, 7.7% yield = c.5.7% total return) - I like the decent balance sheet, and resilience in the hangover from the 2021 lockdown DIY boom. But very low profit margin means I’m a little less keen now. OVerall though, it produced a positive 2023 shareholder return of almost 6%, vs AIM down 8%, so it’s earned a place in the winners section..

Lacklustre performers (in terms of 2023 share price)

1. Sanderson Design (SDG) +1% (plus 3% in divis) - an OK share price performance overall. SCVR reviews were positive in 2023 - we like strong balance sheet, resilient earnings (licensing offset weakness elsewhere) and competent, ambitious management, with growth plans to expand in USA especially. Remains v good value.

2. Portmeirion (PMP) -4% - this pottery group unsettled investors in 2023, with seemingly good progress then supplanted by a profit warning and big forecast cuts stealthily slipped out in a positive-sounding TU. Not good. Still, with 15.5p divis (5% yield) in 2023, it achieved just above breakeven in total shareholder return in 2023, but gave up a large early gain. The jury is out for the time being, I need to see 2023 results when they come out.

3. Wincanton (WIN) -8% - logistics group, it warned on profit in March 2023, due to the loss of a lucrative contract with HMRC. Impressively, it then gradually regained almost all the losses in the rest of 2023, and we stuck with it at the SCVR, being green on last update 10/10/2023. In line trading, and key point is pension scheme now fully funded.

Poor performers

- where the fundamentals have deteriorated in unforeseen ways, or I just made a mistake and shouldn’t have included it on this list in the first place!

1. Sosandar (SOS) -23% - this time last year, SOS had delivered stunning organic growth, and was heading for c.£3m forecast profit. Management dropped a bombshell in Oct 2023, saying performance would now only be breakeven, and they’re changing strategy to open some physical stores. Upside is now much less exciting, so I’ve lost interest in it.

2. Watkin Jones (WJG) -42% - never should have been on my list in the first place, I had a brainstorm including this! I wrongly thought it could ride out a downturn in property development, but remember saying in the SCVRs earlier in 2023 that I thought it would miss forecasts & post a profit warning, which it did. Although shares have bounced from the lows. Outlook too uncertain now.

3. Quiz (QUIZ) -58% - this time last year it looked good - decent trading & outlook, and strong balance sheet. Trading markedly deteriorated in 2023, with a series of profit warnings. It’s now doing a strategic review, so likely to be bought out by controlling family, I suspect. So now it’s purely a punt on what they decide to pay to small shareholders. Family made a killing from the float, so I hope they’ll be moderately generous to outsiders, but we don’t know.

Overall

Given what a tough year this has been for small caps in 2023, on reviewing the above I’m actually quite encouraged that my value/GARP approach worked very well overall. It also had little to no drawdowns during the year - from memory, I think the low point was -1%.

Profit warnings are inevitable for small caps investors, they cannot be avoided. Especially in really quite tough macro conditions, as we’ve had in 2023 - economy teetering on the edge of recession, consumer despondency and a squeeze on real incomes from high inflation and energy bills, numerous problems still lingering from the pandemic lockdowns & supply chain disruption. What’s interesting in the above list, is that several (PMP and WIN) were not derailed overall by profit warnings, and still produced an OK annual results. SOS got away lightly with a 23% fall, given its forecast profits vanished altogether!

I remember this time last year, when I was considering publishing my 2023 share picks, I thought to myself you must be mad! Conditions and sentiment were so bad at the time, that it looked as if I was setting myself up for a humiliatingly poor performance. However, the valuations seemed so compelling in many small caps, I took the view that at some stage there would likely be a recovery in really very cheap UK small caps.

That’s certainly happened in Q4 of 2023. However, we’ve also had a boost from loads of takeover bids. My list of 20 above got a significant boost from 2 takeover bids. I did a supplementary list of 12 “runners up” that nearly made it into my top 20, and there were 3 more takeover bids in that list (LOOK, SCS, and FIF). It’s good to see value/GARP shares attracting bids, not just the usual tech and healthcare companies that private equity often pay high prices for.

There we go, that concludes a frustrating, challenging, but ultimately successful year for me. It’s funny how things work out isn’t it! As I was saying almost every week in my podcasts during 2023, we have nothing to fear if we’re invested in decent companies, with sound balance sheets, and good fundamentals, on modest valuations. At some point, the bombed out share prices will recover, they always do.

My outlook for 2024 is much more positive than it was this time last year. With interest rates set to fall, hopefully before they do too much damage, and consumers set to receive a potentially major boost to disposable incomes, I think we could move from a squeezed consumer, to a strong recovery, even a consumer boom. Time will tell!

I’m happy to be signing off 2023 on that relatively upbeat note.

I’ll start work on my top 20 for 2024, although regular readers of the SCVR will be familiar with all the shares - it will basically be my favourite shares from the ones we’ve marked GREEN in our traffic light system in the SCVRs.