SIF Folio Review For October (TAM, RWA, UPGS, SQZ, FIF, HEAD)

27th Oct '21 by Roland Head

23 comments 4231 reads

It’s been another steady month for the rules-based SIF folio. I’ve added two new stocks and will shortly be selling two older holdings from this model portfolio.

In this month’s review I’m going to introduce a new section, based on reader feedback. In addition to looking at the stocks which I might sell, I’ll also list new shares added to the portfolio during the month.

In this way, these monthly articles should make it easier to track all activity in SIF and the progress of the portfolio.

SIF buys in October

After something of a dry spell, I added two new stocks to SIF during October.

Headlam (LON:HEAD): I’ve admired this floor covering distributor for a while. I was pleased to have the opportunity to add it to SIF. You can read my purchase review here.

Finsbury Food (LON:FIF): Cake and bread producer Finsbury Food was a slightly more contentious choice, judging from subscriber comments. You can see my purchase review and read the comments here.

Portfolio stocks under review

My policy is to hold shares for a minimum of nine months. I then review them to see if they still satisfy my screening criteria. There are four SIF holdings up for review this month:

Tatton Asset Management (LON:TAM) : A strong stock market has boosted assets under management at this financial services firm. Tatton is now SIF’s oldest holding. Can the good times keep rolling?
Robert Walters (LON:RWA) : It’s boom time for recruiters at the moment, thanks to strong demand from employers and rising wages.
Up Global Sourcing Holdings (LON:UPGS) : Shares in this consumer goods firm have retreated from the highs seen over the summer. Are shipping delays and rising costs likely to hit profits?
Serica Energy (LON:SQZ) : SIF’s move into the oil sector has proved to be perfectly timed. Is it time to take profits?

SIF Folio: October performance update

SIF has tracked the market over the last month and is up by just under 2% at the time of writing.

This steady performance has helped the portfolio maintain the lead it’s built up over the benchmark FTSE All-Share index so far this year:

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Roland Head

27th Oct '21

Thanks Jeff!

BlueFrew

I've held Serica Energy (LON:SQZ) for quite a while now. I have topped sliced some recently, as it is now an absolutely huge part of my portfolio. I'd just point out that the forecast dividends, certainly for next year, are clearly wrong. They paid 3.5p this year and their latest interims said the following: "2020 dividend of 3.5 pence per share (2019: 3 pence per share) paid in July. The level of dividend for 2021 will be reviewed in light of the strong gas price trends currently unfolding in the second half of this year."

https://www.investegate.co.uk/...

I'm expecting a lot more than 3.4p next year that's for sure.

mojomogoz

I think there may be a scaling issue here. Direct to EU individual customers is very small part of business. The main EU business is supplies to big retailers (increasingly in Germany). Am I missing your point though?

I've been an investor in Up Global Sourcing Holdings (LON:UPGS) since its post IPO lows few years back. I did sell a bit above 220p feeling sp a bit over-exuberant plus simply decent point to take a bit of profit but I've mainly held on...

I think this is a multi-year growth company with its underlying growth trajectory under appreciated due to the underlying transformation business has experienced. This is little out of date but sketched out here:

https://www.stockopedia.com/co...

I admit to some trepidation around forthcoming results. All managements can sugarcoat and/or put off bad news hoping for miraculous change. I think that the post IPO bust has taught UPGS to be pretty straightforward and mgt seem keen to temper expectations prudently not hype talk but that said the coming year end results may be when they view it as appropriate to warn...so there's definitely a risk of a sting in the tail. And they did tap the market for cash and acquisition...which is always a potential driver of prior overhyping.

I have some optimism that they will show they have been able to trade better than others through supply chain and China power issues. It may still hurt a little but that's definitely priced to a moderate degree now in sp.

Its conceivable that direct to consumer has been backburnered a bit recently so as they can maximise their relationship and delivery to retailers. This could mess up numbers a little...but if they strengthen their relationship with retailers as they have been able to source when others couldn't then that is super valuable (a fall on that type of news would likely be a great buying opp). They are unusual in their on the ground China team, sourcing and quality control and have very broad factory relationships. People with relationships have been best placed to keep things moving.

China focus is a risk...but if its taking UPGS down then there's a much bigger market and geopolitical story that is not priced in markets yet and the sp of UPGS is a rather trivial matter for most portfolios.

On balance, my guess (and it is very much that!) is that UPGS will please markets next week.

andywillz94

My thinking is that if they completely cant ship direct to individual customers outside of the UK at all they are very likely to have been impacted in shipping to the retailers.

I think we can agree its the shipping costs that have made it significantly less profitable to sell direct to customers. Who knows how high these additional costs have run RE shipping to international retailers?

I actually wanted to pick up a small position on the company when I initially looked in to it, they really do have an outstanding set of businesses. they could be poised for a great couple of years once shipping normalises. However, I've been hit very hard by these supply chain worries and so i'm going with my gut instinct which is telling me to wait and see how they have mitigated it.

I hope you are right though and that the SP bounces up nicely!

I just did a bit of checking on their brand websites for UK direct to consumer sales and there was pretty good availability of product for Beldray and Salter (key brands)...eyeballing and non systematic I'd say its >75-80%. Progress is a smaller brand that they are pushing hard. Availability there patchier...but its the brand they are pushing in Germany rather than UK. Intempo was a bigger brand but faded a little but its small electronic stuff seems well stocked onsite. I haven't made this sort of check previously so I don't have a benchmark

With European retailers they ship direct to them rather than via UK. I'd be curious whether they use overground rail for some of these deliveries.

Hi BlueFrew,

You could be right about the Serica Energy (LON:SQZ) dividend, forecasts for such small companies are not always entirely reliable. But I suspect that management won't want to have to cut the 2022 payout if gas prices return to more normal levels. So I expect this year's payout ratio to remain relatively low.

Obviously I could be completely wrong. But Serica has had net cash for a few years now, and has shown no inclination to return much of it to shareholders.

Regards,

Roland

Monty Carlo

Roland

Thank you for your pieces, which I read with interest.

Please would you clarify what "performance" you are showing? Your commentary would seem to indicate you are assuming total return.

Stocko have confirmed to me that if you use the Allshare in their Folios (which is where your chart appears to come from?) you get the index with dividends excluded - they are not willing to make the total return index available for "business reasons".

Are you adding in the dividends for the SIF portfolio or are you showing price performance only?

Total return is essential for any longer period to assess performance properly. Just knocking out some of the special divis has a material impact on the stats. Just look at the special divis that have been paid recently e.g. £RIO.

I would be grateful for your clarification here.

Tombholliday

28th Oct '21

You can sell gas into the U.K. market to the end of January at between 220-230p a therm so up six fold over the year might have been better to wait until the results next March to see that in the numbers particularly as by then they will have had the first quarter of a 100% of revenues from The BP fields. Field life has stretched out to 2030 who is to say at current prices they may continue beyond that

icm

30th Oct '21

Thanks for the snapshot of current holdings - very helpful.

AnonymousUser1782684

Thank you Roland. Newbie question. Why do you select stocks P/E >=7 but not lower ratio? Thanks.

Logical David

31st Oct '21

Hi GenX, clicking on your name I see you only joined Stocko about 8 weeks ago and hence why you are asking Roland the question. I'm sure he will reply to you in due course but in the meantime I will give you some reasons why I don't like investing in such low P/E companies. When a company has a low P/E it sometimes means there is some bad news going on behind the scenes, such as:

1. The company is drowning in debt and it might be on the verge of going bust so the smart money will sell their shares in the company, which in turn lowers the share price, which in turn lowers the P/E.

2. The company is being sued and the legal claim made against a company is huge. So much so that the outcome is not clear cut. Hence, there is a possibility the company might go bust or it may have to pay out huge sums of money as compensation if it loses the court case, so investors sell which in turn lowers the share price and lowers the P/E.

3. The company has an enormous pension deficit which is resulting in the company drowning in debt. Or at best, a large chunk of its profits are being used to fund the company's pension scheme which doesn't leave much profit left to invest and grow the company or even pay a dividend.

There are many more reasons why a company can have a low P/E but I find once a P/E drops to 4 or below, it is generally not a good time to be invested in that company and it is time to sell and move on. Incidentally, mining companies seem to have a low P/E because some people don't like to invest in that sector because the output of mining companies (and thus profit) can sometimes be an unknown quantity due to such things like earthquakes, mineral price movement, etc.

David.

Hi David, thanks very much for this useful insight. Yes, well spotted, I'm new to the "hobby". In March last year, I got some trackers on "sale". That was easy. Recently I started looking into individual stocks. This is trickier but more exciting, and potentially more rewarding. Stocko is a great resource.

Thanks for explaining how debt, deficit and litigation may affect P/E. I didn't think of that. I'm currently using the Stock In Focus (SIF) BUY screener and added some debt ratios: Debt / Assets Latest < 40%, Gross Gearing Latest < 50%, Gross Gearing including Pension Latest < 50%.

I recently acquired some Sylvania Platinum (LON:SLP) stock. Good to know about the miners.

gus 1065

Hi David.

I wouldn’t disagree with any of what you say but suggest that perhaps the main reason many miners trade on low P/Es is that they operate in very cyclical markets where the price of the underlying commodities tends to fluctuate widely over time. As a result even when output is relatively predictable the difference between the AISC and market price ( i.e. there operating profit) can go from a lot to nothing (or even minus) in a matter of a few months. Similar reasoning applies to the O&G sector. Some of the bigger companies look to hedge this risk using forward sales or derivatives but rarely cover the full level of output for an extended period.

Gus.

1st Nov '21

Thanks Gus, for a great comment re P/E ratios.

3rd Nov '21

Hi GenX,

I missed your comment earlier, but hopefully you'll see this.

In my experience, there's often a reason why a company has a very low P/E. This might be sinister or it might just be that the company is ex-growth and unloved. Tobacco is a good example of this latter group.

The reason why I avoid these stocks in SIF is because I want to avoid outliers of all kinds.

My rules-based selection approach is deliberately designed to focus on middle-of-the-road businesses. I particularly want to avoid companies where the market is flagging up some kind of unusual situation.

Sometimes, this might mean I miss an interesting opportunity. But other times it means I avoid a disappointing result.

I hope this makes sense! You can find a more detailed explanation of the system I use to run the SIF portfolio here, in my June review:

Monty Carlo,

The performance charts I use in these articles exclude dividends, so they are comparable with the FTSE All-Share index.

However, where I refer to total return I am including dividend payments.

I'm a big fan of dividends and fully share your view on their importance in total return. To capture this information I run a second version of the SIF folio to which I add all dividend payments.

Here's how they've both performed since inception in April 2016:

SIF Folio ex-dividends: +74% since inception

SIF Folio with dividends: +96% since inception

Dividends have added almost 22% to the portfolio's total return since April 2016, even though they aren't reinvested. Nor do I target high yield.

I hope this answers your questions.

Just a quick follow up on Up Global Sourcing Holdings (LON:UPGS) - I watched some of the results presentation on Equity Development this week. The company explained that they've prioritised supplying retailers ahead of stocking their own direct online sales.

Retail is seen as a priority for the business, as it's the biggest earner.

However, what struck me as interesting is that management say that stock is now coming through strongly and online availability is improving.

I'm not sure what this tells us about the broader supply chain situation -- unfortunately I wasn't able to watch the whole presentation. But I wonder if the worst is already nearly over for supply chain issues.

In fairness, UPGS seems to have handled supply chain issues quite well -- extra costs of c.£2.5m have been offset by around 50% (£1.3m from memory) of pricing increases/cost savings. According to management, they've won plaudits from big retailers such as Tesco for their ability to keep supplies coming.

The European (i.e. Brexit) issue is likely to be solved as they'll soon have warehouse and fulfilment capacity in the EU. This is seen as an exciting opportunity.

Thanks Roland, much appreciate your response

4th Nov '21

As with all these things...time will tell!

My surprise was no talk of production problem due to energy supply in China and reduced working. That said this was highly variable regionally in severity and UPGS have quite disperse manufacturing relationships in China and a long established team on the ground (got to be quite advantageous in the environment since covid re control and access when some will struggle to have presence). I'll probably follow up on this.

Supply delays mean that, with delay, you can still fill up your stock....so maybe we are seeing this. But then that means you've got to keep rolling this forward too. And that can get complex and has risks...

In effect the supply delays and goods stuck in transit (ships off LA etc) is a massive inventory overhang for everyone. So in reality the world is massively oversupplied with goods but doesn't know it! This 'inventory' will not be fully recorded or aggregated well across everyone (clearly individual businesses have been over ordering to get as much stock as they can now). This means that retailers in general have a risk at some point of the channel being over stuffed with product... -> big sales for consumers coming.

The above is not specific UPGS risk and I'm sure they are aware and managing (as they always do)

5th Nov '21

Thanks Roland

SIF folio review for October (TAM, RWA, UPGS, SQZ, FIF, HEAD)

SIF buys in October

Portfolio stocks under review

SIF Folio: October performance update

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Roland Head

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