StockRanks 1, stock picking 0.
At least that’s the lesson so far from my decision in May not to add XLMedia to the SIF portfolio, despite its then StockRank of 99.
If I’d accepted the wisdom of the Stockopedia algorithms and hit the buy button, I’d have enjoyed a 32% return before dividends in less than five months. But I thought I knew better! Ironically, it was my understanding of XLMedia’s business model that left me sceptical about the durability and quality of its earnings.
Tuesday’s interim results from XLMedia prompted me to take a fresh look at this stock. Revenue rose by 39% to $51.2m during the first half, while pre-tax profits were 20% higher at $15.8m. Net cash and short-term investments were flat at about $42m, enabling the group to increase the interim dividend by 47% to 3.82 cents per share.
Organic expansion into new territories (mainly the US) and acquisitions have enabled XLMedia to deliver significant growth. Management are “extremely confident of meeting profit expectations for the full year”. These put the stock on a forecast P/E of about 11.8, with a yield of around 4%. Stripping out net cash reduces the effective P/E to just 9.7.
So was I right to ignore my screen results and avoid XLMedia? In the short term, obviously not. Over a longer period, I would still argue that XLMedia’s earnings and margins may be vulnerable to external changes.
But the SIF Portfolio isn’t a long-term buy and hold portfolio. Stocks are selected based on a set of screening criteria, and all holdings are reviewed after six months. Within this framework, I should have bought XLMedia.
A psychological risk?
I don’t feel too bad about missing out on XLMedia. As an experienced investor once told me, it’s important to remember that there’s always another stock that’s about to rise.
I hope I’ve learned from this mistake -- but I’m wondering if my decision to avoid XLMedia could affect my future decisions. Will I end up overcompensating for this missed opportunity by taking more risk in the future?
It’s a relevant question for me this week, as the stock I’m going to add to the SIF Portfolio is CFD provider Plus500. In my view this company is cast from exactly the same mould as XLMedia. Both are:
- AIM-listed Israeli tech stocks
- Still cheap despite strong financials and proven cash…
