SIF Folio Q3 review: fully invested despite uncertain outlook

As we head into the final quarter of the year, it is perhaps harder than usual to ignore the external factors that could affect the market over the coming months – and in some cases already are affecting investors’ behaviour.

Close to home, investment news headlines are being dominated by talk of potential tax changes in this month’s Autumn Budget. UK consumer spending and economic growth also seem a little uncertain.

Further afield, November’s US presidential election and the growing geopolitical risks in the Middle East and Ukraine may be relevant.

We don’t yet know how these factors (and others) might affect corporate results. So far, the combination of stable earnings forecasts and weaker share prices has meant that my rules-based SIF portfolio has remained well populated with new stocks, especially small caps.

I haven’t seen a repeat of the shift to cash that my rules-based system has enforced in the past.

That might still happen. Or I could instead find myself long and wrong on UK equity.

For now, however, let’s take a look at the state of the portfolio after the third quarter, when SIF comfortably outperformed the wider UK market.

SIF Q3 performance review

As a quick recap for recent subscribers, the SIF Folio is a rules-based portfolio. I select shares to buy from the results of this stock screen.

The SIF folio tracked here is a model portfolio, but I also make all the same trades in a portion of my own personal portfolio.

The overall focus of the screen is on value and momentum, alternatively described as growth at a reasonable price. Typical holding time is nine months – this is a trading strategy, not a long-term buy and hold approach.

You can find a more detailed explanation of the SIF system here and a full archive of past coverage here.

Performance

The portfolio’s performance has recovered from the decline in May/June that I discussed in my half-year update.

SIF was up by 12% for the year-to-date at the end of September, versus a gain of 6.6% for its FTSE All-Share index benchmark.

This is a satisfactory result, in my view, but much could still change in the final quarter of 2024.

On a longer-term view, here’s how the portfolio has performed against the wider market since its inception in April 2016:

The portfolio has gained 97% since its inception in April 2016, equivalent to 8.3% annualised. This includes estimated costs but excludes dividends.

Including dividends, my records suggest the portfolio has delivered a total return of 132%, or 10.4% annualised.

SIF doesn’t target income specifically, but my screening rules do require all companies to pay a dividend. I do this because I believe regular dividends provide benefits for investors, including enforcing greater capital allocation discipline on company management.

SIF portfolio review

I added five new stocks to the portfolio and sold seven during the third quarter.

This left SIF with 16 open positions at the end of September, in line with my target number of holdings. (Follow these links for details of my Q1 trades and Q2 trades.)

Here’s a snapshot of the SIF portfolio on 2 October 2024, after my June trades were completed:

Stocks sold in Q3

I sell shares from SIF by following a set of rules, not by making a discretionary decision.

After an initial holding period of nine months, stocks must pass all of the rules in my selling screen in order to stay in the portfolio. In other words, they must appear in the results of the screen.

Stocks will also be sold if they fall more than 25% below my purchase price or issue a profit warning.

Here’s a review of the stocks I sold during the second quarter, including the profit or loss achieved on each holding.

Galliford Try Holdings (LON:GFRD)

This construction group had recovered from its pandemic-era lows by the time I added it to SIF. But my purchase in April 2023 came just ahead of a terrific run that saw both earnings forecasts and the share price rise steadily.

Trading still appears to be positive and the company has continued to announce regular new contract wins. But this remains an ultra-low margin business in a sector that’s prone to periodic problems.

I would also argue that the forecast P/E of 13 is not especially cheap for a business of this kind, especially as earnings growth is expected to slow over the coming year.

This combination has lifted the stock’s PEG ratio, causing Galliford to drop out of my screening results in July. I admit I was quite relieved when this finally happened and I was able to lock in a handsome 80%+ return, including a 13% contribution from dividends.

Bought: 178p on 14 April 23

Sold: 303p on 30 July 24

Total return (inc. dividends & costs): +83%

Zotefoams (LON:ZTF)

Did I sell Zotefoams too soon?

I suspect the answer will depend on whether the company’s potentially ground-breaking ReZorce product is a commercial success. ReZorce is intended to be a recyclable replacement for liquid paperboard (e.g. Tetra Pak) in food and beverage cartons.

Recent newsflow looks promising to me, with a large trial underway. But commercial adoption could still take a while and may face unforeseen obstacles.

In the meantime, current profits do depend quite heavily on the firm’s Nike (NYQ:NKE) contract.

The sportswear giant’s flagging sales (Q3 sales fell by 10%) leave me wondering about Zotefoam’s near-term growth prospects. Brokers are bullish, however, so the shares might still be attractive on a longer-term view than mine.

I’ll continue to watch Zotefoam’s progress with interest.

Bought: 284p on 26 October 23

Sold: 467p 30 July 24

Total return (inc. dividends & costs): +66%

Vesuvius (LON:VSVS)

I added this FTSE 250-listed metal flow engineering specialist to SIF in June, but had sold by early August. My decision was made after I decided (along with the wider market) that the evasively-worded outlook statement in the half-year results was really a profit warning.

Stockopedia’s research has found that it often pays to sell quickly after a profit warning. Sure enough, Vesuvius’s share price has continued to drift lower:

Broker consensus estimates have also been falling steadily:

I think Vesuvius remains a leading player in its sector, but I have no idea about the near-term outlook for the business.

Bought: 462p on 28 June 24

Sold: 410p on 6 August 24

Total return (inc. dividends & costs): -12%

PayPoint (LON:PAY)

I have followed this payments business intermittently for a number of years and had previously owned the stock, so I’ve been interested to see signs of momentum and real growth returning to this small cap.

In my view, the main difficulty for anyone analysing the business is the sheer number of moving parts. I find it hard to be sure of the precise profit contribution made by each element of the business.

However, this has always been a cash-generative and high margin business, and remains so today, as far as I can see.

With profits expected to continue rising, the stock’s sub-10 forecast P/E and generous yield still look tempting to me:

Although it doesn’t quite qualify for my screen, I think PayPoint is probably still worth a closer look.

Bought: 561p on 14 November 23

Sold: 703p on 27 August 24

Total return (inc. dividends & costs): +30%

Centamin (LON:CEY)

Egyptian gold miner Centamin only has one producing asset, the Sukari mine, but it’s a good asset that’s generated a lot of surplus cash for shareholders over the years.

Against a backdrop of record gold prices, South African sector heavyweight AngloGold Ashanti has now decided it would like to consolidate Sukari into its portfolio of mines.

The South African firm recently made a 163p offer for Centamin shares, valuing the business at c.£1.9bn.

I expect the takeover to complete, so I opted to sell the shares for 155p in late September, generating a respectable 75% total return.

Bought: 91p on 8 August 23

Sold: 155p on 24 September 24

Total return (inc. dividends & costs): +75%

Ocean Wilsons Holdings (LON:OCN)

This quirky, family-controlled group owns a stake in a Brazilian shipping services group Wilson Sons, alongside a somewhat complex $300m+ investment portfolio.

It’s been a perennial value stock, often trading below book value with an attractive dividend yield. For me, the attractive part of the business is Wilson Sons, due to its hard-to-replace infrastructure assets and established market share.

Ironically, it’s the possible disposal of the Wilson Sons business that’s provided a catalyst for the shares over the last year:

Ocean Wilson’s recent results highlighted a strong showing from the Wilson Sons business and a slightly less impressive performance on the investment side.

However, the shares now trade comfortably above net asset value and the dividend yield has dropped below 5%. Earnings forecasts have also flattened out.

I think the shares are probably still quite affordably priced, but they’re certainly not as cheap as they were when I added them to SIF at the end of 2023.

The strategic review is still ongoing and there’s not yet any decision on whether the company will sell the Wilson Sons business. As SIF is not a long-term portfolio, I’m happy to have closed the trade at a comfortable profit and moved on.

Bought: 1,095p on 6 December 23

Sold: 1,360p on 24 September 24

Total return (inc. dividends & costs): +30%

Airtel Africa (LON:AAF)

This African mobile group is one of the largest operators on the continent, rivalling Vodafone’s African operations in scale. Unlike Vodafone, Airtel Africa has also consistently generated high margins and attractive returns on capital employed.

However, the group’s finances and geographical exposure aren’t without risk, in my view, and net debt levels remain material at c.$3bn.

Some risks were highlighted by last year’s results. Airtel Africa’s mobile services revenue rose by 19.4% in constant currency terms last year, but the group’s reported revenue fell by 5%.

This was largely due to the group’s exposure to the devaluations of the Nigerian Naira and Malawian Kwacha last year.

These currency crashes resulted in Airtel suffering derivative and foreign exchange losses of $807m for the year ended 31 March 2024, leading to a full-year net loss of $165m.

Fortunately, the underlying business has always been cash generative since its 2019 listing on the London market. The shares still support a dividend yield of nearly 4%.

On balance, I think this could be an interesting business to research for investors who want exposure to Africa and are comfortable with the founding Bharti family’s controlling shareholding:

SIF’s Airtel Africa position closed broadly at breakeven. Given the downward drift in earnings forecasts, I’m not too unhappy with this outcome:

Bought: 122p on 18 December 23

Sold: 119p on 24 September 24

Total return (inc. dividends & costs): -1%

Note: You can see a spreadsheet showing all completed SIF trades since inception here. E&OE.

New stocks added in Q3

I added the following companies to SIF over the last three months, selecting from shares that qualified for my buying screen.

Card Factory (LON:CARD)

The high street greeting card retailer has been covered extensively in the SCVR and was one of SIF’s top performers – until recently…

The firm’s recent half-year results warned of a second-half weighting but left full-year expectations unchanged. Paul discussed the numbers here.

SIF’s position has dropped to a loss, but I’ve continued to hold the shares as they haven’t (yet) triggered either of my rules for an immediate sale – a profit warning or a 25% drawdown.

Unchanged consensus forecasts confirm that Card Factory’s brokers have left full-year estimates unchanged and have not slipped a profit warning through the back door:

I added CARD to SIF at 110p on 23 July 24.

Frp Advisory (LON:FRP)

This small cap business advisory group specialises in insolvency. It’s performed well since IPO in 2020:

Last year’s results were ahead of original expectations and the company’s brokers have pushed through a steady stream of earnings upgrades over the last year:

The stock still doesn’t look too expensive to me, for a business with a net cash balance sheet that’s generating 30% returns on equity:

However, as always with this type of consultancy business, it’s worth remembering that key assets walk out the door every night, and acquisitions can sometimes misfire.

More generally, I don’t have any feel of the near-term outlook for this business, beyond a vague recent AGM statement:

The short and medium-term outlook for our business remains positive and we are confident of continued progress.

I added FRP to SIF at 134p on 6 August 24.

Epwin (LON:EPWN)

Epwin produces UPVC windows, doors and building products such as fascias.

Housing market conditions are relatively depressed at the moment, but the company’s trading has remained relatively strong in my view and its valuation still seems reasonable to me, at less than 10 times forecast earnings.

Importantly, Epwin’s balance sheet seems to have remained in relatively decent health over the last couple of years.

Balance sheet strength is a priority for me at this point in the cycle. Sound finances provide some protection against permanent equity losses and should support stronger returns for shareholders when market conditions do improve.

As with all my SIF purchases, Epwin was selected from the results of my buying screen. But I do also see this sector as a possible UK macro play at the moment – a theme I discussed recently here.

Time will tell how well this turns out!

I added EPWN to SIF at 85p on 13 August 24

Morgan Advanced Materials (LON:MGAM)

I only added shares in this FTSE 250 materials specialist to SIF in late August, but I’m unsure as to whether I should perhaps have sold them already under my profit warning rule, which stipulates an immediate sale if guidance is cut.

My confusion is due to a vague outlook statement in August’s half-year results.

We are cautious on demand in a number of our end-markets and now expect revenue in our second half to be in line with that in our first half. Nevertheless, we are well-positioned with our market leading differentiated positions and expect constant-currency* full-year revenue growth to continue to be towards the top end of our financial framework at 4-7%.

The company also said that full-year margins are expected to be in line with previous guidance. However, management chose not to explicitly confirm whether full-year earnings are still expected to be in line with expectations. This seems slightly evasive to me.

I don’t have access to any broker notes here, so I am left guessing. But I think there could be some read across from Vesuvius (see above) and I can see that broker consensus has edged lower since the start of August:

SIF’s holding in Morgan Advanced Materials is now sitting at a double-digit loss, as the share price has dropped c.14% since my purchase.

The company normally issues a trading update in early November, so I may review the situation at that time.

I added MGAM to SIF at 310p on 20 August 24.

Hilton Food (LON:HFG)

This food production group describes itself as a multi-protein producer. Its core business is in meat production, while seafood is of growing importance.

Hilton Food was a reliable performer for investors for many years, but suffered a profit setback in 2022, since when profits have been rebuilding.

Bears will point to Hilton Food’s structurally low margins and dependence on large trade buyers, such as supermarkets.

I can’t argue with these risks, but I would also point out that the business is currently quite cash generative and has a track record of generating double-digit returns on capital employed (far higher than most supermarkets).

In my view, these shares could still offer decent value at current levels if trading remains on track. Stockopedia’s algorithms also have a fairly positive view, at present:

I added HFG to SIF at 891p on 11 September 24.

Cash weighting/position sizing

In H1 I wondered if I’d overcommitted by cutting the target number of holdings for SIF from 20 to 16 (with a proportionate increase in position size).

I contemplated reversing this decision in Q3, but I have decided not to do so, at least for the time being.

The level of cash in the portfolio increased from 14% at the end of H1 to 27% at the end of September. I will leave things unchanged in Q4 and see how the picture looks at the end of the year.

Final thoughts

We’re heading into what could be an uncertain final quarter of the year. However, SIF is essentially fully invested, and my screen is continuing to find plenty of affordable growth opportunities.

Poor investor sentiment towards UK equities, especially small caps and AIM stocks, may help to explain the value I can see in the market, reflected in my screen results.

However, the growth side of my rule set still requires a positive outlook for sales and earnings in order for a stock to qualify as a possible buy.

My guess is that the next few months could see an increase in volatility. However, on a longer-term view, I think there are still some attractive opportunities in today’s market.

I’ll be back at the start of 2025 with a review of Q4 and a round-up of SIF’s performance over the whole of 2024.

In the meantime, please let me know what you think, as always, in the comments below!

Disclosure: Roland owned all shares listed in the SIF folio at the time of publication.