SIF portfolio: New stock Motorpoint makes me uncomfortable

Wednesday, Dec 06 2017 by
6
SIF portfolio New stock Motorpoint makes me uncomfortable

After a round of profit taking last week, I’m heading to the shops this week. Cyber Weekend may be over, but the SIF screen has come up with a retailer to consider adding to my SIF fantasy fund.

Sharp-eyed readers will note that used car group Motorpoint isn’t the highest-ranked qualifying stock in my screen results.

However, H&T, Redrow and Harvey Nash were ruled out as they’re already in the portfolio. Robert Walters was disqualified as it’s a recruiter, like Harvey Nash.

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Hogg Robinson is a previous portfolio stock and has a giant pension deficit. Although such deficits have been falling recently due to higher bond yields, I’m going to maintain my self-imposed ban on super-size deficit companies for a little longer.

This brings me down to Jersey-based investment company Tetragon Financial. I decided to rule this stock out as the portfolio already has an asset manager, Standard Life Aberdeen.

Thus my choice for this week is Motorpoint. This is undeniably a cyclical business that’s heavily exposed to the UK economy. So I see some risk of overlap with stocks such as Redrow, even though it doesn’t have any direct sector peers in the portfolio.

I’m not comfortable with this

On a personal level, I’m not comfortable with the idea of adding a car retailer to the portfolio. Recent figures from automotive trade body, the SMMT, suggest that the new car market has peaked. Is now really a good time to invest in a car retailer?

What could go wrong? The risk of falling used car values and stale stock is obvious. An increase in finance costs could also threaten profits.

This could work: I suppose you could argue that Motorpoint’s focus on used cars under three years old might be countercyclical for a while. Some new car buyers might trade down to a nearly-new car next time round. Or perhaps fund manager Neil Woodford’s contrarian bet on the UK economy will be vindicated, and the car market will remain relatively healthy.

There’s a lot of uncertainty, to my mind. But fortunately I don’t have to base my investment decisions on an uncertain macro view. As SIF is a rules-based portfolio, I just need to follow the rules and assess the numbers.

Strong H1 triggers £10m buyback

Motorpoint…

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Motorpoint Group plc is an independent vehicle retailer in the United Kingdom. The Company's principal business is the sale of vehicles, of which are approximately two years old and which have covered over 15,000 miles. The Company sells vehicles from brands representing vehicle sales in the United Kingdom, with models from Ford, Vauxhall, Volkswagen, Nissan, Hyundai, Audi and BMW. The Company operates from over 10 retail sites across the United Kingdom. The Company has a national contact-center dealing with online enquiries. In addition to sales of vehicles, the Company operates Auction4Cars.com, a business to business online auction platform for vehicles. The Company also offers ancillary products to customers, including customer finance packages, vehicle guarantees, insurance products and vehicle protection treatments. more »

LSE Price
208p
Change
1.5%
Mkt Cap (£m)
208.4
P/E (fwd)
10.8
Yield (fwd)
3.1



  Is Motorpoint fundamentally strong or weak? Find out More »


2 Comments on this Article show/hide all

whitmad Wed 8:42am 1 of 2
1

Speaking to someone recently at a business in the south-east with what appears to be a similar model, they sell ex-lease cars at competitive prices, wafer-thin margins and with fast turnaround. Most of the profit comes from selling the finance deals, which is great when you go in as a cash buyer. I assume that MOTR is similar. I took a small stake in MOTR recently as I see this as a disruptive and growing model in the used car market, the risk as it appears to me is that if new-car lease deals decline, then that would adversely affect the supply 2-3 years down the line.

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Roland Head Wed 12:19pm 2 of 2

In reply to whitmad, post #1

Hi whitmad,

That's interesting, thanks for your comment. I'm not sure how to predict what will happen to the used car market is new sales slow. I'd guess that it might depend on the state of the wider economy.

Regards,

Roland

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About Roland Head

Roland Head

Private investor & writer on stock markets with a particular fondness for free cash flow, dividends and value, plus an interest in resource stocks.In earlier life, I worked as an engineer in telecoms and IT. The quantitative, rule-based mindset required for this type of work is probably reflected in my investment style. Another factor that affects my investment choices is my experience working for a large telecoms company at the turn of the century, when tech stocks were booming. Watching this bubble inflate and then implode from the inside was very educational. more »

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