SIF November review: A 37% gain from Plus500 + should I keep NWF & Motorpoint?

We still don’t know whether Theresa May’s Brexit deal will be supported by MPs, but I have a strong feeling that a cliff-edge Brexit is increasingly unlikely. I feel this could be good news for our stock portfolios.

Markets hate uncertainty and according to this article in the FT (paywall), $1tn $20bn (the article has been corrected) has been withdrawn from UK equity funds since the referendum in 2016. Data provider EPFR says that money has been pulled from UK equity funds “every week since the UK voted to leave the EU”.

If this uncertainty can be resolved, then perhaps 2019 will be a better year for stock market returns. In any case, I’m pleased to see that after a difficult couple of months, the SIF folio has stabilised and remains ahead of the wider market:

Three stocks up for review

It’s the end of another month, so it’s time to review stocks that have been in SIF for nine months or more. Three companies are in the spotlight this week:

• Used car supermarket Motorpoint (LON:MOTR)

• Spread-betting and CFD firm Plus500 (LON:PLUS)

• Farm feed, fuel and distribution group NWF (LON:NWF)

Here’s how each stock has performed so far during its time in the portfolio (excluding dividends):

Motorpoint (LON:MOTR)

Original coverage 06/12/2017

This used car supermarket group has become the folio’s longest-serving stock. I’ve become a reluctant fan of this business, which generates outstandingly high returns on capital:

Having said that, I’m not blind to the high level of operating leverage on display here. Last year, a 20% increase in sales resulted in a 65% increase in operating profit.

Although this seems to be an exceptional result, I guess such leveraged gains are to be expected when most used car stock is purchased with a credit facility. The group’s main fixed costs are its sites and staff, neither of which changes significantly when sales rise.

Of course, the downside of high operating leverage is that it works both ways. If sales fall or consumer credit availability tightens, profit could fall fast.

My decision: I’ve run Motorpoint through my screening tests to see whether I can keep the shares for another month. On paper, Motorpoint fails to qualify for my screen because its earnings yield (EBIT/EV) has fallen below my 8% minimum.

However, on closer inspection it’s still very close indeed:

Motorpoint is due to publish its half-year results on Thursday (29/11). Broker forecasts suggest profits are expected to rise this year. This view was backed by the firm’s half-year trading update, which reported a 9% increase in revenue and operating margins at “a similar level” to last year.

I’ve decided to hold onto Motorpoint for another month, so I can see whether the stock still qualifies for SIF after a fresh set of accounts have been loaded into Stockopedia’s database.

This decision isn’t without risk. If this week’s half-year results are worse than expected or contain a negative outlook, the shares are likely to suffer.

As always, this is only my opinion. Please do your own research before making any decisions about your own investments.

Verdict: Hold
Total return to date: +14pc

Plus500 (LON:PLUS)

Original coverage: 20/02/2018

This Israeli financial trading firm tends to attract strong views. There’s no doubt that its free cash flow and profits are real. But it’s always been hard to understand why it’s so much more profitable than rivals such as IG Group (in which I own shares).

Understanding the operating model: Whatever your view on Plus500, I would strongly recommend Graham Neary’s detailed analysis of the group’s risk management process. This was published after the firm’s July trading update. Graham’s report prompted a strong reader response and the comment thread is well worth a look.

I continue to feel that this is a business with an uncertain long-term future. But I’ve given up trying to guess when things might go wrong. Plus500 has certainly delivered fantastic shareholder returns so far.

A volatile year: Back in August, the SIF holding was up by about 70%. Shortly after, the group’s interim results warned that “it is unlikely that the exceptional performance of H1 2018 will be repeated”. Management also cautioned over the impact of new EU rules limiting leverage for retail traders.

This news was followed by a £145m share sale by three of the firm’s founders. Understandably, many investors saw this insider sale as a sign that profits may have peaked. It’s only recently that the stock to regain some of its previous momentum:

My view: Although this firm’s results have a track record of beating expectations, it does seem likely to me that the new leverage limits and the likely end of the cryptocurrency boom will hit profits from the group’s fairly inexperienced client base.

In any case, forecasts for falling earnings mean that the shares no longer pass all of my screening tests and must be sold from the SIF folio.

An 18% dividend return: Although Stockopedia’s Fantasy Funds don’t include dividends, I run a mirror Folio in Stockopedia which does include dividends.

My timing with Plus500 has been good in terms of income. I’ve circled the payouts I’ve received in the picture below, taken from Stocko’s dividend report:

These payouts totalled about 217p per share, assuming a rate of $1.30:£1. This works out as a dividend return of 18pc. Not bad for nine months.

When added to the stock’s 19% gain, this gives me a healthy total return of 37%.

Verdict: Sell
Total return: +37pc

NWF Group (LON:NWF)

Original coverage: 13/02/2018

Selling fuel oils, agricultural feed and running a logistics business are all activities characterised by low margins and low investor interest. Despite this, NWF is a profitable and successful business that scores very highly with Stockpedia’s algorithms:

The firm delivered bumper profits last year, as the long, cold winter boosted heating oil sales. Thanks to some poor planning I had to order oil for my home boiler during the cold spell in March. It was clear to me that suppliers took advantage of the cold weather to hike prices.

NWF admitted as much in its full-year results, noting an increase in pence per litre profit:

The company expects “a return to more normal trading conditions in Fuels” this year. This is expected to translate into lower profits. Analysts are currently forecasting a 14% reduction in earnings per share to 14.3p:

(The company’s own adjusted eps figure for 2018 was 16.7p, giving a slightly larger decline than shown above.)

My decision: I like NWF. It has a strong balance sheet and appears to be well run. I’d see it as a dividend stock to buy on the dips and hold long term. But that’s not my aim with the SIF folio, which requires companies to demonstrate continued earnings growth.

Falling earnings forecasts mean that NWF no longer passes all of my screening tests. As a result, it will be sold from SIF this month.

A lacklustre share price performance means that the holding has broken even after receiving a dividend return of 3.7%.

Verdict: Sell
Total return: +0.4pc

Next week

My SIF stock screen is showing just nine shares at the time of writing.

Most of these are already in the folio or are duplicates of stock which are. This means that I may not be able to add a new stock next week. If this happens, I will take a look at results from recent buy Character Group and Motorpoint, both of which are due on 29 November.

Disclosure: Roland owns shares of IG Group, NWF, Plus500, Character & Motorpoint.