Monthly Performance Update
February has been a busy month, with two companies being bought and three being sold. The number of companies held is now 16 as at the end of February and my aim is to increase that to 20 over the coming months as part of a drive for more diversification.
The 1 year returns are about 6% behind the FTSE 100 total return, but in the longer term since 1st January 2010 I’m up by about 8%. However, this is far too short a timescale on which to judge the performance of any equity fund and unfortunately it’s next to useless at indicating future performance. Generally five years is suggested as a minimum timescale on which to invest in equities and on which to judge any given fund, including mine.
Waterman Group – Sold for 10% profit
“Waterman is an international engineering and environmental consultancy providing multi-disciplinary services to the property, infrastructure, energy and environmental markets around the world” (watermangroup.com)
When I bought Waterman in October 2009 it marked another step in my evolution as an investor in that it was the first company I’d bought that was trading above tangible book value. Originally my approach was to only buy companies that were trading below two thirds of tangible book (along with a raft of other balance sheet checks like current ratio > 1 and so on), an idea which was similar to Ben Graham’s net-net idea (current assets minus all liabilities) but with a somewhat wider scope. This gives quite a small universe to work with and so having read up on the pros and cons of intangibles (there was no clear winner) I added Waterman as a toe in the water for above-tangible-book companies.
The sale returned a profit of just over 10% in about a year and a half which is not spectacular, but this might be more my fault than Waterman’s. My estimate of fair value is still some 80-90% above the current share price so normally I wouldn’t have sold yet but sometimes I get impatient and manage to find reasons to sell. I managed to come up with two reasons in this case:
1. Diversification. At almost 10% of the fund Waterman was a large holding and in order to increase the diversification some of the larger holdings are being sold off and replaced with two or more smaller holdings.
2. More attractive opportunities. I currently use a quantitative model used to calculate the potential of any given company. Although the model suggests a 90% gain in share price before a normal valuation is achieved, Waterman has little in the way of financial momentum behind it (the Piotroski F-score is 4). This means that any improvement in fortunes required to return the company and its share price to normal levels may be some way off. This in itself is not necessarily a bad thing but there are other companies out there that score substantially higher by either having higher potential rewards or better momentum.
An interesting point about Waterman is that it had been a consistent dividend payer over the last decade and during my ownership almost 6% of the 10% gain came from dividends. Dividends are something I’d like to look into a little more as their potential benefits suit the type of fund that I’m running (personal pension making up the vast majority of my net worth) .
For business history buffs you can download a company biography that Waterman commissioned in 2002 from their publications page at:
Interserve – Sold for 45% profit
“Interserve is one of the world’s foremost support services and construction companies, operating in the public and private sectors in the UK and internationally” (interserve.com)
One of the strange things about the stock market is the way that Mr Market will decide one day that a company is suddenly worth 40% more than it was only the week or so before. That’s more or less what happened with Interserve and I’m still not sure what reason Mr Market had for the change in price. The share price had been climbing through late December and early January, but on January 11th they put out a statement saying that revenues might be stable in 2011 at less than, but close to 2 billion pounds. That was enough to cause a jump of over 10% which was followed by a further 10% over the next week.
At this level the company is still likely to be undervalued, but less than it was. My push for diversification has resulted in this 45% gain in only three months. I must point out that this is more fluke than skill so please don’t expect to see this kind of result becoming the norm.
I’ll post my recent purchases in the next week and they include Yellow pages, Johnston Press and Helphire group, all three of which I would class as high risk high reward and so they’re likely to be followed by something a little less extreme (British Petroleum anyone?).
Richard Beddard says
Yowser! Yell, JPR and Helphire all companies I've rejected because they're so risky and Waterman's one of mine. We're developing anti-portfolios made of each other's cast-offs 🙂
John Kingham says
Hi Richard. Risk was a point I wanted to make actually. An issue with not having any fixed hurdles for companies to leap – my current rapidly evolving approach only gives everything a weighting – is that some factors dominate. Price is one of those and the most dominant. So no matter how bad a business looks, if the price is low enough it will score well. Hence those three companies.
However, I added them anyway since they only total 12% of the fund and the experience is worthwhile. They have spurred me on to look at what I'm doing and how prepared I am for another credit crunch.
That's why BP and some other larger more stable dividend paying companies will be coming in (or back in in the case of Interserve as I re-bought it the other day after the shares dropped after their mediocre profits, but more on that later).
Salis Grano says
I, too, have Waterman, but a small amount, having bought in summer last year. If they survive, I think they have good long term potential, but probably little upside this year. There is always a chance, also, that they will be acquired, like Scott Wilson.
I've been short YELL — sadly only in the sense I wouldn't buy them with a bargepole – for two years now. Very curious to see what I'm missing. 😉
Mr Salt (if I may call you that) – I like waterman and was somewhat saddened to see them go, but they haven't really done anything in the last decade and the weak must be swept aside or something.
Monevator – I think you may not be missing anything with YELL! You're probably right that they're not worth touching and in fact the best thing they've done for me is to re-connect me with the other side of what I enjoy about investing (beyond just number crunching). I enjoy reading about good companies that do good things and make money and grow and all that stuff. That's not YELL.
Once I've got past this hump of 'trash' that I've bought recently you'll hopefully see some above average companies at below average prices, which I think it what I'm aiming for. I've had enough of buying companies and wondering whether it's double or bust, I have enough grey hair as it is (what little hair I have left!).
I'm investing in ETI too, so I started following you last month when I got a Google alert on your blog and I saw that you are also investing in HHR, which I too have a position in.
I was wondering why you prefer JPR over TNI, both in the same field and not very differently priced, only TNI has an interest coverage ratio of almost 4, will return a third of the debt this year and can theoretically be debt free in 3 years.
Wondering if you had any thoughts on that.
Hi Liron. To be honest I probably wouldn't invest in ETI, HHR, JPR or TNI now! Sorry to be so fickle, but the only constant is change as they say.
I'm trying to stay away from turnaround situations as they give me a headache with their will-they-won't-they go bust or make a profit. I'm moving towards buying good, solid companies with sustained growth over a long time, and buying them at a fair price.
At to your point about TNI or JPR, my position now would be that TNI haven't grown in a decade, so you can't rely on future earnings growth to power any capital gains, therefore the only thing you can rely on is the dividend. If they get that back to 15-20p which is their historic range then a share price of 150-200p seems fair.
JPR are in much the same position, just worse. If they get their dividend back to 5p then the stock might be worth around 50p, but both stocks seem to carry a lot of uncertainty, especially JPR.
Interesting. I'm actually not from England, so hearing from you those opinions is very helpful for me.
BTW, I agree that HHR, JPR and TNI are mediocre (or less) businesses with very low prices, but isn't ETI in a different situation? It is a market leader with pricing power and with recent changes to its largest competitor, PUB, I thought it can be a stronger leader.
I'm wondering specifically what do you think of ETI and possibly if you think that pubs in England are a thing of the past.
Hi Liron. I agree about ETI but it has a massive amount of debt. Until they can get earnings back to 'normal' the debts going to be a huge drag. And I don't think that pubs are a thing of the past! People will likely be going in pubs long after we're all gone.
I'm happy to hear that. That's what I thought, but everywhere you read on the web it seems like people are only buying drinks in supermarkets rather than pubs. I didn't think it is a real threat to the business model, but it's good to hear from an Englishman.
Agree about the debt. I would be much more confident had they have something like 2.5B debt.
The good thing is that it is long term, low and fixed rate debt, so interest rate rise / inflation / etc. will only do them good.