SIF November Review: Putting My New Rules To Work (MOTR, DMGT)

2nd Dec '20 by Roland Head

6 comments 2997 reads

By the time you read this it will be December, so it’s time for my usual month-end review of stocks that have been in the virtual SIF folio for at least nine months.

If you’re new to these monthly reviews, then the general format is that I review the portfolio’s performance over the last month. I then consider each of the companies listed below in more detail, to decide whether they should be held or sold.

This process hasn’t changed, but this month I’ll be testing each stock against the rules in my new selling screen for the first time. You can read about this in more depth in last week’s piece. In short, I hope using these rules to screen for stocks to sell will allow me to hold good, growing companies for longer than I’ve previously done.

There are two companies up for review this month, both of which were acquired in January:

Used car supermarket chain Motorpoint (LON:MOTR)
Media conglomerate Daily Mail and General Trust (LON:DMGT)

I’ll come to these shortly, but let’s start with a quick look at the performance of the whole portfolio.

SIF performance: November 2020

The portfolio has lagged the wider market slightly over the last month. Here’s a chart showing SIF (blue line) against its benchmark, the FTSE All-Share index:

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Happily, SIF remains well ahead of the market over the year-to-date. The portfolio is now down by just 5% from the market highs seen at the start of the year:

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These gains have been helped by a handful of big winners, notably Volex, which I added to the portfolio in August (if you haven’t seen it already, I’d suggest taking a look at Jack’s recent Volex Stock Pitch):

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So far, so good. Let’s see what December brings. The near-term outlook remains uncertain. But I’m confident that good businesses should be able to shine, if they’re bought at suitable valuations.

Motorpoint (LON:MOTR)

(Original coverage: 14-Jan-2020)

When used car supermarket Motorpoint (LON:MOTR) floated in 2016 I was a little sceptical about its prospects. But as I’ve followed the company’s progress over the last few years, I’ve become increasingly impressed. Last week’s half-year results did nothing to change that view.

Motorpoint’s nearly-new business…

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Neil W

2nd Dec '20

Good aticle

Phil117

Thanks for the interesting perspective. With the greatest of respect though I don't think 'screens' are well suited to valuing conglomerates such as Daily Mail And General Trust P L C (LON:DMGT), where a large part of their value is in 'non-consolidated' JVs/Associates. At today's closing price DMGT had a market cap of £1.68bn. Strip out net cash of £0.168bn and DMGT's 20% holding in Cazoo of £.409bn (as per the latest year end report) and you have an effective Enterprise Value of c. £1.1bn for the legacy DMGT business. That implies a historic EV/Revenue of less than 1x and a cash operating income yield of c. 10%. And that's in a year, as you point out, in which DMGT's events business has been massively held back by COVID, and via a methodology which factors in no valuation for DMGT's other associates over and above Cazoo. In line with other legacy media groups DMGT undeniably faces challenges in re-positioning for the digital age. But with its large online presence DM is arguably better positioned than most. Add in its stable of resilient B2B businesses and I would argue the current valuation significantly underestimates the LT potential of DMGT. Of course when that value will be unlocked is the $64K question. But I would strongly argue current valuation should represent an excellent entry point on a mid to long term view. Definitely not a SELL in my book

Gromley

That's a really interesting insight Phil.

I guess the counter to it would be that many (maybe all?) companies could so form of special pleading as to why screens or factors do not accurately reflect their valuation or worth.

I guess the point though of screens and factors is that they don't have to get every call 'correct' just on average produce an effective result.

One thing that I have considered about the StockRanks (but never gotten around investigating fully) is that there is an implicit but systemic bias towards certain industries and business type (no - I don't know which!) yet still they produce superior results.

You may well be right on Daily Mail and General Trust P L C (LON:DMGT) (I have not properly kicked the tyres) but the fact remains that it did pass the SIF screen back in January so it is, by the rules of SIF, a less good investment now that it was then.

There is always a risk that screens will sometimes throw out the baby with the bathwater, but so long as there is a good enough ratio of babies to bathwater remaining (perhaps not the most appropriate idiom ever!) then they can still be successful.

On a separate point £DGMT would have (obviously) also been discarded under the old selling rules.

However, Motorpoint (LON:MOTR) (retained under the new rules) would also have been discarded by virtue of it's TTM earnings yield having fall to 7.25% which is below the 'buy threshold' of > 8%.

Whether Motorpoint will go up or down from here is of course yet to be determined, but this does at least seem to be an intended result of the new rules.

Roland Head

3rd Dec '20

Hi Phil117,

Thanks for your comment on Daily Mail And General Trust P L C (LON:DMGT) and for providing this extra information. As I said in my piece, I do think there could be a long-term opportunity here for investors who understand the moving parts within this conglomerate.

I agree that screen-based systems do take quite a broad brush approach to selecting and valuing stocks. I've always tried to combat this by focusing on fairly conventional, mainstream businesses. But inevitably there may be times when the screen fails to pick up potential hidden value.

However, I would suggest that one possible downside of non-consolidated associates is that (by definition) they are unlikely to be under the full control of DMGT management. So future results may be less predictable than might otherwise be the case.

Cazoo is a good example. The holding may be valued at c.£400m, but as far as I can see, the business itself reported a £19m loss last year, with an operating cash outflow of £68m.

https://find-and-update.compan...

Who knows what Cazoo will eventually be worth? Some caution on valuation might be justified, perhaps.

All the best,

Roland

Roland,

Thanks for the reply! I don't disagree with any of your points, especially as regards the ultimate valuation of Cazoo and the lack of control. To be fair DMGT doesn't have a bad record of creating value with their 'investments', e.g. their excellent result with Zoopla but obviously that's history now. TBD whether they can achieve a similar exit with Cazoo and their other investments. And I just want to reiterate that I'm absolutely not against screens per se. They are generally an excellent short cut. I guess I just felt that in the case of DMGT the headlines numbers, for the reasons mentioned, do them a slight disservice. But as long holder I'm no doubt biased.

As an aside I just wanted to take the opportunity to thank you (and the rest of team) for your contributions. Really enjoy the platform and the associated insight from both the regulars and the wider user community.

Best,

Phil

SIF November review: Putting my new rules to work (MOTR, DMGT)

SIF performance: November 2020

Motorpoint (LON:MOTR)

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Roland Head

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