LON:GAW | Water Or Weed, Run Or Rebalance - What To Do With £GAW?

9th Nov '19 by JollyBiologist

10 comments 1118 reads

So I've got an interesting decision to make.

I first bought Games Workshop (Games Workshop (LON:GAW)) back in January 2017 for 852p a share - a small starter holding. Since then, using a somewhat imprecise strategy of buying into strength, I've added a further ten times. After the big rise on Friday, I'm now up by over 130% on my entire investment, not counting the dividends which are now more than twice my initial investment. GAW now represents 16% of my portfolio (19 other holdings).

And this is where investment advice/wisdom can become confusing or contradictory. On the one hand, I've done extremely well here by running a winner, watering a flower, buying into strength and not snatching a profit.

On the other hand, we're reminded frequently to re-balance portfolios, that taking profits is seldom the road to ruin, and to sell when everyone else is buying. I've also noticed cannier investors than me (John Rosier, for example), selling GAW at around £5 and buying back again after an inevitable pull-back.

I'm not inclined to sell any time soon, but I'd be very interested in what other people think.

Paul

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wildshot

9th Nov '19

I first bought GAW in 2011, then sold down most of my holding in 2013 when the company was clearly hitting some issues. I continued to hold a small amount to help me follow their story. Then in Nov 2015 I went back in again to form a 50% investment compared to the most (100%) I would put into any one holding. I hold over 45 different shares (I think I have too many separate holdings). Anyway, my average purchase price is £5.90.

With no further trading of the share since 2015 I am now up 800% and GAW is my biggest single holding at nearly 13%. of my portfolio I don't normally like a holding to > 10%. However I believe in the GAW story and have noticed patterns of big rises, ease off of price for a while then the move for the next leg up.

As an investment it has been fabulous and the yield on my cost is superb. I see little reason to sell yet as I can see justification in running my winner here. Out of interest GAW is not my highest % gain share, that is 4imprint (LON:FOUR) which is up c. 1200% since I bought in between 2010 and 2015. This share I did top slice in later 2015 and whilst I've more than recovered my initial stakes I can only just imagine what profits and values would be now if I'd not sliced. This is another winner that is worth to keep running if the news outflows from the company are positive/reassuring.

By the way I'm not gloating with the above. GAW and FOUR are the two best current performers in my portfolio. I do and have had stinkers in my time too and I lost money on Globo (this was before I started reading the daily Small Cap Report here so never educated myself enough from Paul Scott's observations.)

Nick Ray

10th Nov '19

Personally I use a yearly rebalancing to top-slice profits on a position which has grown too large. This has the advantage that you stay invested in your winners, but you are also taking some profits.

Games Workshop (LON:GAW) is an obvious buy candidate based on its excellent quality and momentum metrics. However, as it happens, it does now have a couple of warning signs based on my tests of "too much of a good thing" which are derived from empirical experiments:

"% Price Chg 5y" <= 500 fails (currently 890)
"Altman Z score(2)" < 55 fails (currently 67)

I don't think this should necessarily be a sell signal, but it might be a caution for anyone looking to buy.

iwright7

Games Workshop (LON:GAW) to has been one of my best performing shares and I too have bought and sold some along the way, usually on results. Possibly instructive to look back at buying notes, including a note to myself a year or so ago.... Looks like the re-rating and serious gains are over - How wrong!

I do recommend writing your buying reasoning down (in my case into a Word file) because years down the line I know I will have forgotten the detail.

Feb 17 826p Buy. Very high 99 SR, 100 QM and F9. 52 Week High. Classic slow reaction to recent good news/metrics. Above market expectations and big broker upgrades so still good value and great quality metrics. No debt. 75% sales overseas and sales benefiting from £/$ exchange. New CEO in Jan 2015 appears to be doing an excellent job in recruiting new younger players via shops and social media. New products and increased figurine/computer game royalty are also boosting sales - an unlikely combination.

Mar 18 re-brought Games because entering FT 250 where tracked. Has a PER of 15.6 so good value. Trading statement expected soon

Jun 18 Looks like the re-rating and serious gains are over.

Dec 18 Re-brought after positive H1 trading update with PE of 18. Buffett – On the ideal business; ”something that costs a penny, sells for a dollar and is habit forming.

Rcl

Hi Paul

I think portfolio decisions are incredibly dependent on your personal aims/requirements. So my comments here relate only to my view of the GAW business.

Everything the company is doing suggests they are preparing for sustained expansion for years to come, e.g.

More than doubling factory capacity (just completed)
New UK distribution facility (google 'Games Workshop East Midlands gateway')
Enlarging US distribution facility (google 'Games Workshop Memphis distribution)
Targeting move from top 150 global brand to top 50 global brand (was outside 150 in 2017; in at 137 in 2018; up to 133 in 2019).

As the CEO said in the last annual report - he couldn't promise continued growth, but he also couldn't see anything significant that would get in the way. That is incredibly bullish for the very restrained style of this CEO.

The profitability and cash generation aspects of the company are ridiculously good.

Unlike most companies, it's also pretty easy to broadly gauge ongoing performance by watching stock levels on new releases on sample retailers - their job adverts also indicate ongoing confidence in their continued expansion. The licensing income is less transparent - so Friday's news was a nice surprise.

In contrast, I struggle to see fundamental business reasons for selling (and I do keep looking for them given the large size of my holding). The only threats I can think of are 3d printing and Chinese recasters - but these have been raised as a threat to GAW's profit margins for many years now, and GAW has only got much stronger during that time.

Good luck with whatever you decide.

rcl

Personally, I’m not a fan of rebalancing – and believe in concentrating/adding to winners. There is a reasonable argument that passive investing works not because most stocks are good investments, but because the bulk of stock market gains come from a relatively small number of successful companies and an index tracker ensures you own those big successes and you hold on to them for the duration.

Is GAW plausibly one of the relatively few stocks that will be the source of outsized gains?

Well we know it has been over the last 3+ years, but what about the future? I think there are strong signs that GAW still has years of growth ahead of it – which is not yet priced into the share price:

New factory, more than doubling capacity - only just completed.
New UK/global distribution centre (google “Games Workshop East Midlands gateway) – contract just signed.
Enlarged North America distribution centre (google “Games Workshop Memphis distribution” – work started this year.
Stated intention (in job advert this year) to move into top 50 global brands (2017 outside top 150; 2018 at position 137; 2019 at position 133) - and we know licensing income has just had a big jump from Friday's RNS.

In the most recent annual report, the CEO said he couldn’t promise continued growth but does “not see anything significant that will get in the way”. That is an incredibly bullish statement for a CEO who is typically very understated.

GAW has no competitors – it dominates its niche. It is very disciplined about maintaining or improving its margins.

While many people struggle with the idea of fantasy miniatures, the evidence is that this hobby is global. North America is now GAW's biggest market and GAW's China sales, while currently small, grew at 67% last year.

From a bear perspective:

As GAW continues to raise its product prices, year-on-year, I do see continued customer references to 3D printing and/or moving to other (cheaper) game systems. But, experience to date has been that GAW has only got stronger in this period. For most customers they just seem pleased that their hobby is being supported with new product that they can spend (a lot of) their disposable income on.
At the moment, the only clear negative that I can see is that, because most of GAW's revenues are non-sterling based, there will be a weakening of revenues when sterling eventually (presumably) appreciates. But this is a one-off correction of probably 10-15%.

Of course, no matter how good a business is, it’s not a good investment if we overpay. But, personally I’m still happy that the current price is not overvalued on fundamental business prospects.

And ultimately it's about opportunity cost - where else would I rather invest? At the moment, I'm (clearly) still a bull on GAW. Most other growth opportunities I look at are far more at risk from competitors or have far less performance transparency between trading updates (which is fine in a broadly diverse portfolio, but I prefer to hold very few stocks with much higher conviction).

Ramp over. :-)

jjis

A few observations:
1) FWIW Regulated funds usually are expected to own no more than 10% in an individual security for risk control reasons.
2) You say you have 20 holdings in total, how do you decide about your position sizing, equal weighting? Degree of confidence in Company, its risk or how much you think it might be undervalued?
3) Are you reinvesting your income & adding cash over time to your portfolio which might naturally dilute your other holdings over time?
4) Thinking about the downside would you be comfortable with losing 8% of your portfolio if for some unforeseen reason a stock that you had 16% in halved one day?
5) Can you find something else that offers better value that you think might have equal or better potential than GAW?
6) Although re-balancing goes against the old adage of running your winners, taking some profits along the way and buying other promising candidates can help to increase your diversification / reduce stock specific risks but of course may or may not increase your returns.
End of ramble not sure if any of that helps?

JollyBiologist

12th Nov '19

Many thanks to everyone who has taken the trouble to reply - and to reply with such detail - I really do appreciate it and have found it both interesting and useful - interesting to compare and contrast the different investment strategies/styles/suggestions - and useful to help me formulate my own ideas.

As a biologist, I adopt a sort of Darwinian approach to my portfolio. When I first find a company that I'm prepared to invest in, I start with a small sum of about 1.5% of my portfolio value. My current Starter Shares are Tracsis (&TRCS), Goodwin (Goodwin (LON:GDWN)) and Pantheon International (Pantheon International (LON:PIN)). If it transpires that I've got it wrong, I exit fairly smartly on a 20% stop loss, thereby limiting initial risk to 0.3% of portfolio, but if the good news keeps coming, I will add, taking the holding up to 3% of the portfolio. These currently include SDI group (Sdi (LON:SDI)), Solid State (Solid State (LON:SOLI)), AB Dynamics (Ab Dynamics (LON:ABDP)), Anglo Asian Mining (Anglo Asian Mining (LON:AAZ)), and Strix (Strix (LON:KETL)). Really high quality share that keep on giving become a big chunk of the portfolio. Bioventix (Bioventix (LON:BVXP)) is currently at just under 10%, Sylvania Platinum (Sylvania Platinum (LON:SLP)) has reached 10%, and Games Workshop (Games Workshop (LON:GAW)) is 14%. Very much survival of the fittest.

I do topslice if it looks like things are slowing down or are getting ahead of themselves, though I often (usually???) get this wrong either with timing or just as a judgement. So, for example, I recently reduced Judges Scientific (Judges Scientific (LON:JDG)) to 6% from 10% (experimenting with using RSI as a sell signal) and halved my holding in Central Asia Metals (Central Asia Metals (LON:CAML)) to 2.8% (mainly because I wanted the money for other shares and despite the lovely dividends, couldn't see an immediate catalyst for the copper price to go up). The former has yet to show any sign of slowing down (patience, patience!) and the latter responded by putting on over 10% - grrrr...

As for my earlier attempts to be clever with market timing, I found that getting in and out of a particular share was usually a complete failure! I also ignored my stop loss on Somero Enterprises (Somero Enterprises Inc (LON:SOM)) because I really liked the company and had a very high regard for management and went from a situation where I had massive paper profits to one where I just about broke even when I finally sold - aaarghhh!!!!

I also reinvest dividends and add cash to the ISA as and when I can, so this does dilute the holdings to a certain extent. I have about 5% in cash.

So where does that leave me with Games Workshop? After much reflection, I plan to hold - I think the risk of it suddenly halving in value is very small, and it still looks an exciting growth share, with a lovely combination of Quality (97 in the Stock Ranks) and Momentum (also 97). I also can't see anywhere else at the moment where I would rather have the money.

Many thanks again to everyone who gave feedback - and I hope the above is of interest to someone.

jwebster

I think rebalancing only makes sense if you believe mean reversion will occur. Hence selling winners and shifting capital to cheaper holdings works, if expensive reverts to cheap and cheap reverts to expensive. In my view this makes sense across asset classes in macro time frames, stocks, gold, bonds, property, as they run in big cycles.

For individual stocks, in my experience, rebalancing is not correct, as winners have a tendency to stay winners for a long time. Positive momentum in a firm with underlying growth. The best stocks grow across years.

Potentially, rebalancing could weed your flowers and water your weeds :)

brucepackard

15th Nov '19

My heuristic on when to sell is:

Normally a poor reason to sell a stock just because the price has risen.
Better reason to sell when the story changes, or outlook is weakening (eg competition becoming fierce, balance sheet or profitability ratios deteriorating, duff acquisition etc.)

whitmad

I believe in running your winners - up to a point, Having a large percentage of your portfolio in one stock increases your exposure to risk on that specific stock, and that risk can take many forms including failure to meet expectations, competition, accounting irregularities (seen all too often of a late), changes in the market for the companies products, etc. etc. You need to make a judgement on when the risk of excessive concentration becomes too great. Diversification may reduce your gains but should also reduce your risk. Your appetite for risk, and your assessment of risk for a particular stock should guide you in reducing to a level that you feel comfortable with. If you are comfortable with your holding, don't rebalance.

FWIW I hold GAW also.

Water or weed, run or rebalance - what to do with £GAW?

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JollyBiologist

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