This week’s review contains an interesting twist: two of the three stocks which should be up for review this month have already left the SIF Portfolio.
In one case, I had no choice. Avesco was bought out at a handsome premium, leaving the portfolio with a tasty profit. But was my decision to sell Plus500 immediately after the FCA’s planned spread betting crackdown was announced a mistake? In this article I’ll run the numbers and find out what might have been.
The third stock under review this week is pawnbroking and personal loan group H&T. This firm recently published a strong set of 2016 figure. Small cap analyst Graham Neary said he was “pretty happy with the results”, but H&T’s position in the portfolio is now uncertain. Find out why below.
Avesco
This small-cap audio-visual services firm was taken over with a 650p per share cash bid in November. This left the portfolio with a 132% profit on a 280p buy price after just two months. I suspect that’s a record which will stand for some time…
In my view, there are two lessons to take away from this success. The first is that it doesn’t pay to focus too heavily on historic price action. Avesco’s share price had risen from 128p to 293p during the eighteen months before I added it to the portfolio. Despite this, the stock was still cheap enough to offer compelling value and attract a buyer.
The second lesson is that if you protect the downside, the upside should take care of itself. When Avesco joined the portfolio, it had an underlying P/E of 15.2, a price/free cash flow ratio of 6.9 and an earnings yield of 11.6%.
This profitable and cash generative stock was backed by net assets of 230p per share. Net debt was minimal and Avesco had a Piotroski fundamental health score (F-Score) of eight out of a possible nine.
Barring a run of very bad luck, shareholders’ cash ought to have been safe, even if a bid hadn’t come along.
Verdict: Taken over
Total return: +132%
Plus500
Plus500 stock fell by 30% at the start of December, after the FCA announced plans to restrict the leverage available to retail spread betting and CFD customers. As Plus500 is widely seen as being heavily dependent on inexperienced retail punters, investors marked down the stock sharply.
