SIF Folio: Headlam Could Still Be Cheap

13th Oct '21 by Roland Head

6 comments 2468 reads

This week I’m going to look at flooring distributor Headlam (LON:HEAD) and consider whether to add it to my SIF (Stock In Focus) portfolio. This popular small cap has impressed over the years and I regret not buying it in last year’s crash. I’ll be interested to see if the stock still tempts me after a strong rally over the last 12 months.

Before I start looking at Headlam, I want to take a moment to revisit the system I use to select stocks for SIF. I’ve been running SIF for over five years, but I’m aware that many newer subscribers may not be familiar with the original remit for this virtual portfolio.

In short, my aim is to try and consistently beat the market with a systematic approach to buying and selling shares. So far, I’ve succeeded. The system I use is to select stocks to buy from a screen that’s designed to highlight affordable, good quality businesses with positive momentum.

You can see the full version of this screen here. But the screenshots below show how my screening criteria map onto the three core factors used to power the StockRanks - quality, value and momentum.

Valuation

Quality

Momentum

This is only a snapshot of how SIF works. There are some other rules involved in my buying decisions, and I have a separate set of rules for selling stocks. But I hope this provides a useful starting point for understanding how this portfolio is run.

Headlam (LON:HEAD)

Headlam describes itself as “Europe’s leading floorcoverings distributor”. The company says it’s six times larger than its nearest peer and has the “broadest product range” in the market.

This £425m business operates 66 businesses in the UK, France and Netherlands. Each of these operates under its own trade brand, but benefits from Headlam’s sourcing and logistics network, plus other centralised resources.

One way to look at Headlam’s business model is as an aggregator. It buys centrally and in size and then sells locally to many small customers. By doing this, the group can secure better pricing. Headlam’s operating businesses and their customers can then benefit from a wider choice of products, at more competitive prices.

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Zipmanpeter

13th Oct '21

£Head - Agree - the company has a conservative balance sheet with reasons why revenue and margin will go up medium term - the latter will turn the dial on profits most

fixing its sales coverage in larger a ccounts - neglected as it focused on mopping up and dominating the small end of the trade
cutting its costs (new dist centre, more efficiently routing of deliveries, fewer sales people better deployed
increasing internal margins (better trade counters, better buying and sku control)
I think ultimately, there will be a moment to simplify all the UK brand names into a national brand which give further savings/opportunities.

The strategy is a bit dull but likely to be a highly effective one. Its market is only growing slowly but steady (5%+) divi returns long term and some capital appreciation looks likely..

In the short term , it will be interesting to see how supply chain issues play out for it. My guess is neutral. Its relative size will help it gain better rates/speed than smaller players but it probably delay the rate it can ramp up margins as delivery and import costs go up faster than it can pass on prices ...but in medium term will then benefit as rates come down but prices need not (I hold).

KevinS1

Thanks for the write-up Roland. Headlam (LON:HEAD) is my 2nd largest holding currently and I have done very well since investing into them in Sept last year. I have also really bought into the longer-term strategy and now see this as a core holding for the foreseeable future, helped by a reasonable dividend.

As mentioned by yourself and others there remains a lot to go at with regards developing a leading brand, consolidating across its multiple brands and also continuing to develop its logistics strategy. I also really like the idea of it tackling those other markets where it doesn't have so much of a stranglehold.

A great mid-cap sized company and one for the future I believe.

Best wishes

JohnEustace

I would keep an eye out for their recently floated competitor Likewise (LON:LIKE) They have a lot of ex-Headlam experience in their management team.

Roland Head

14th Oct '21

Hi John,

Good point re Likewise (LON:LIKE) . My hope is that this business will require a lot more time and investment before it becomes a serious threat to Headlam (LON:HEAD) .

But over time, I can see some risk that Likewise will keep Headlam honest and put pressure on margins.

Regards,

Roland

@Zipmanpeter

Thanks for your comment re. Headlam (LON:HEAD) . "Dull but highly effective" certainly works for me. I think excitement is overrated in investment!

Stu the Moo

15th Oct '21

Just to mention: I'm taking part in the Telegraph's Fantasy Funds and in searching for a methodology I thought I'd apply SIF to the FTSE 350 to give me my share selections.

Although it's less than a week, I must say I've been pleasantly surprised at currently being 70 odd out of 1700 or so (I peaked in the top 10 for the day on Wednesday when the building stocks in the screen rose en mass).

I'm making adjustments daily (not having to worry about trading costs!) and plan to stick with it during the course of the game to see how it fairs over time...

Note: you get to run two strategies and my other is based on Relative Strength which is in the green, but lagging behind

SIF Folio: Headlam could still be cheap

Headlam (LON:HEAD)

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Roland Head

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