SIF June Review: Redrow + I Revisit Alliance Pharma After 80% Gain

25th Jun '18 by Roland Head

9 comments 6623 reads

It’s the end of June, so it’s time for my regular monthly review of stocks that have been in SIF for nine months or longer. There are only two stocks to consider this month:

Alliance Pharma - this specialist pharmaceutical group has delivered a stonking 80% gain since last September. But do the shares still pass all of my screening tests?
Redrow - the portfolio’s oldest position at 15 months. My intuition suggests selling housing stocks, but my screening rules may say otherwise.

Alliance Pharma

Original coverage 20/09/2017

Specialist pharmaceutical group Alliance Pharma has delivered the SIF portfolio’s second-best gain to date.

This £480m AIM-listed group specialises in buying up niche medicines with well-established markets. It then sells them through its distribution network, reaping cost savings and other benefits of scale. It doesn’t develop new products, so the speculative risks of investing in most small pharma stocks don’t apply here.

The latest such deal was last week’s acquisition of anti-dandruff shampoo Nizoral for £60m from a subsidiary of Johnson & Johnson. The deal will give Alliance the Asia-Pacific rights to this product which had sales of £60m last year. The firm says that the over-the-counter medicated shampoo market in this region is worth £363m per year, so there’s room for growth.

This acquisition was funded with a £34m placing and £27.9m of new debt. This will take the group’s net debt to EBITDA ratio back up to 2.5. That’s a level that’s higher than I’m comfortable with, but borrowings are expected to fall steadily, as they’ve done after previous deals.

Up 81% in nine months

Since I added Alliance Pharma to the SIF fund, the shares have risen by 81% plus dividends (at the time of writing). But the picture has changed considerably over that period. It’s time to review the stock and see if it still qualifies for my screen.

What’s changed?

In September 2017, Alliance had a StockRank of 61, a Balanced RiskRating and a StockRank Style of Neutral.

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The shares looked very affordable for a for a dividend-growth stock:

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September 2017

Today the picture is rather different. Investors have embraced the group’s cash-generative growth and bid the stock to a far more demanding valuation. This…

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Nick Ray

25th Jun '18

If Alliance Pharma (LON:APH) is up 80% since purchase and it is still a strong business, with only the valuation metrics being less favourable now, why not top-slice it rather than sell all of it?

Roland Head

Hi Nick,

I agree that Alliance Pharma (LON:APH) is still performing well and seems a good business. Top slicing could work well in a situation like this, but my rules only allow for this approach when a stock has doubled (unlikely in most scenarios).

So I've now sold the whole position, but as always my comments are not advice and only represent my opinions. Please DYOR before making any choices.

Regards,

Roland

The Phoenix

Good article Roland as always keep them coming.

colinparker

26th Jun '18

Roland,
another insightful analysis.
Question, I see that you are currently not fully invested. Are you finding that a few years into running your fund that your screen naturally identifies when the market is over bought i.e. fewer results?
Have you seen any correlation between screen returning say 30 results against times of only 10?

regards
Colin

ezlifeme

Great Question Colin,

That's the sort of applied logic I like, gives me something new to look at

27th Jun '18

Colin,

Thanks for your comment. I have noticed that the screen sometimes returns much higher numbers of qualifying stocks than others. Subjectively, I'd say that this has been loosely correlated with times when I've viewed the market as expensive. But I'm not really able to measure whether there's a correlation between screening results and short-term market performance.

Regarding not being fully invested, there are a couple of reasons for this. The first is that the fund is below its maximum planned size of 20 stocks at the moment. The screen hasn't provided many suitable results for buying in recent weeks, but some stocks have been sold.

The other reason for the relatively high cash balance is that the fund's gains over the last two years mean that my original position size of £50k was no longer enough to utilise all the portfolio's cash. To try and address this I increased the standard position size to £55k in April.

This amount is based on subtracting 20% from the portfolio to simulate a market slump and then dividing by 20 (approximately). I don't want to risk running short of cash if the market goes into reverse.

Hope this makes sense!

Regards,
Roland

Hi Roland,

Just wondered if you had time at some point if you would be able to do a walk through on a stock using Stocko of what metrics/stats you use to spot red flags with a stock.

One i find useful is the average shares in issue stat if thats going up like a rocket will normally be enough to end my interest.

Thanks

Andy

28th Jun '18

Hi Andy,

Thanks for your suggestions, that's a good idea for a future article and I've noted it down.

My goal is to rule out most red flag scenarios with my screening rules, but there are other things I look for too that can be a cause for concern. I'll try to go into negative signals in more detail at some point, perhaps when new opportunities are thin on the ground!

Regards,

Roland

Thanks Roland

That would be great if you would spare the time to do an article on it, also do you try and time entry points or just buy in there and then if a stock passes your screen ?

SIF June review: Redrow + I revisit Alliance Pharma after 80% gain

Alliance Pharma

Up 81% in nine months

What’s changed?

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Roland Head

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