Last Updated September 19, 2011
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?).