Category: Investment case studies

Summary:

• Dunelm is a high quality, highly profitable business with durable competitive advantages. It’s the UK’s leading homewares retailer.
• Dunelm is not a defensive business, but it does operate in a growing market and uses relatively little financial leverage for a retailer.
• Dunelm has performed very well during the pandemic and its shares have performed even better.
• I still like the business, but after recent share price gains I think its valuation and dividend yield are no longer attractive.
• I recently sold all my Dunelm shares having owned them since 2016.

“Dunelm is market leader in the £14bn UK homewares market and active in the £12bn UK furniture market. It currently operates 173 stores, of which the majority are out-of-town, and trades online through dunelm.com.”

corporate.dunelm.com

Summary

• Xaar is a relatively young and small leading-edge technology business which I bought in mid-2018
• It’s a good example of how excessive R&D in highly cyclical businesses can produce bad results
• I sold because a 90% increase in Xaar’s share price since November means the company is no longer obviously cheap
• Although Xaar was a bad investment it has helped me define the boundaries of my comfort zone, which is defensive value stocks

Any investment which loses more than 95% of its value can only be described as a disaster. However, the lessons learned from this disaster are so powerful I would have to describe Ted Baker as a gift, albeit a painful one.

Key points

• Ted Baker produced consistent, rapid growth for many years
• Ted’s growth was largely funded by banks and landlords rather than shareholders
• External funding was used to drive growth because of Ted’s weak profitability
• Even before the pandemic, Ted had more debt and leases than it could comfortably afford.

This article explains why I sold Aggreko PLC as part of an ongoing process of “spring cleaning” the UK Value Investor model portfolio.

Ted Baker was by far my most disappointing investment in 2019.

As outlined in my recent annual performance review, Ted Baker’s share price fell by about 74% during 2019, contributing -2.7% to the UK Value Investor model portfolio‘s overall 2019 return.

Normally I don’t like to comment on the short-term ups and downs of specific holdings, but Ted Baker recently suspended its dividend and for me that’s more than enough reason to carry out a full mid-term review.

The eagle-eyed among you will know that this review comes only a few months after a similar mid-term review of Xaar. That, of course, is not ideal, but we are where we are and the best path forward is to review the situation, to learn, to evolve and to try to avoid similar situations in future.

And in case you’re interested in the history of this investment, you can read a 2018 review of Ted Baker which I wrote shortly before investing in the company.

At this time of year, many investors like to talk about which stock they think will perform best over the coming 12 months.

As a general rule I’m not a huge fan of cheerleading individual companies, especially over the short-term, but this year I thought I’d join in and write about Admiral Group, the UK’s leading car insurer, for the January issue of Master Investor magazine.

Let me be clear: I’m not in love with Admiral, but if I had to pick a favourite investment then Admiral would be it.

There are lots of reasons why, such as the fact that Admiral has produced consistent growth and average total shareholder returns of almost 16% per year since I first invested in 2013.

But that’s all in the past, and in investing it’s the future that counts.

And on that front, I think Admiral is probably more attractively positioned and more attractively valued today than it was when I became a shareholder.

The Restaurant Group (which I’ll shorten to TRG) joined the model portfolio in early 2016, shortly after the company published some very upbeat 2015 results.

Revenues were up 8% while earnings and dividends per share were up 13%, continuing the company’s long track record of impressive results.

But then things started to go wrong in its core restaurant business (TRG also runs pubs and airport concessions, and these continued to perform well).

Initially, this was put down to operational issues, such as a lack of focus on value and service. But despite operational improvements over the next couple of years, like-for-like sales continued to fall. 

By mid-2018, management admitted that TRG’s problems were structural rather than cyclical.

Key problems included reduced footfall at restaurants in out-of-town retail parks (thanks to the shift to online shopping), increased competition from other branded restaurants, new food delivery aggregators (e.g. Just Eat) and increasing costs such as the minimum wage, rent and business rates.

Management’s solution was to acquire Wagamama, a high-growth pan-Asian restaurant chain. This would bring economies of scale and allow TRG to convert underperforming sites into Wagamamas. 

However, Wagamama does not solve TRG’s fundamental problems which are, in my opinion, a lack of competitive advantages, a tendency to sign long leases and (thanks to Wagamama) high debts.

For these and other reasons, I have decided to sell TRG this month.

• SSE joined the UK Value Investor model portfolio in late 2011 with a track record of steady growth.
• Under the covers, there was a lack of focus, low returns and high debts which I didn’t fully appreciate at the time.
• The dividend is soon to be cut, and with the dividend goes any remaining reason to hang onto this problematic company.

“SSE is engaged in the provision of energy and related services in the United Kingdom and Ireland, and the developing, operating and owning of energy and related infrastructure”

Company website: sse.com

Vodafone was one of the first companies to join the UK Value Investor model portfolio way back in 2011.

At the time, Vodafone was a steady dividend growth stock with an attractive 5.5% dividend yield; but much has changed since then.

The company itself has changed, following the 2013 sale of its 45% stake in Verizon Wireless. This produced a windfall of $130 billion, much of which was returned to shareholders.

Note: This sale was largely responsible for the 55% decline in the value of the Vodafone’s shares, but that decline was effectively offset by a related return of cash and shares.

The company’s track record has also changed, with Vodafone’s revenues, profits, dividends and capital assets all stalling or going into decline over the last few years, while its borrowings continue to go up.

And my investment strategy has changed, or more accurately it has evolved considerably since 2011. Over the years I’ve added investment rules for profitability, capex intensity, indebtedness and other factors, and Vodafone now struggles to pass any of these ‘quality company’ standards.

In fact, Vodafone is no longer a good fit with my investment strategy, primarily because of its weak growth, weak profitability, high debt levels and high capex requirements. And that’s why I’ve finally decided to sell.

Compass Group joined the model portfolio in February 2018 as the world’s leading food services business.

From its earliest post World War 2 days, when it was known as Factory Canteens, the company has focused primarily on managing canteens for public and private organisations alike.

I added Compass to the model portfolio in early 2018 because it had an extremely impressive track record of smooth and steady growth, combined with good exposure to global growth markets.

And while the initial dividend yield of 2.4% and PE ratio of 20.1 weren’t in traditional bargain territory, the price still seemed to make sense given the company’s steady growth and high rank on my stock screen.

Just over a year later, a handful of factors have turned Compass from a buy into a sell.

First and foremost, its share price has gone up by about 20% in a year, making its shares less attractively valued. At the same time the company’s growth rate, growth quality and profitability have all decreased slightly, while its debts have increased.

This combination of an increasing share price and decreasing fundamentals (i.e. accounting results) are the main reasons why I decided to sell.

In 2012, one of the first companies I invested in as a defensive value investor was Centrica, the company behind British Gas.

It seemed like a good idea at the time. Centrica was a leading player in the defensive utilities sector, with a track record of growth and the best brand name a UK-based electricity and gas supplier could hope to have.

But the investment did not work out well.

Over a period of almost seven years, Centrica’s shares have lost more than half their value and, even with a tailwind from regular dividends, the investment has lost value at an annualised rate of 8% per year.

In this post-sale review I want to focus on:

(1) Why I bought Centrica in 2012,

(2) why I wouldn’t have bought Centrica if my now much stricter investment criteria were in place in 2012, and

(3) why I’ve finally decided to sell Centrica

But before I begin, here’s a quick snapshot of how Centrica’s share price performed.

When I added GlaxoSmithKline to my portfolio in early 2015, the company was heading for trouble.

Some of its key blockbuster drugs (such as Advair, which generated almost a quarter of the company’s revenues) were going off-patent, which meant the easy profits Glaxo had relied on for years were about to vanish.

In order to offset those lost profits, Glaxo was going to have to invest massively into additional research and development (R&D), with the aim of producing new drugs and medicines which, once patented, would provide new revenue streams and fat profit margins.

In total, Glaxo was going to have to replace something like half its revenues over the next decade. There was, and still is, much uncertainty around whether or not this is actually possible.

None of this sounds particularly enticing, but this is exactly the sort of situation which can produce heavily discounted valuations. In this case, the discount resulted in a dividend yield of almost 6% from a company with a long record of dividend growth.

Today, Glaxo’s future seems as uncertain as ever, with management now pinning their hopes on a separation of the company’s pharmaceutical and consumer healthcare businesses.

In addition to this uncertainty, the recent market decline means there are more attractive fish in the sea, so I have decided to sell.

After a relatively short two-year holding period and some unexpectedly rapid share price gains, I have decided to sell Victrex.

In this blog post, I’ll outline why I bought Victrex, what happened during its brief two-year holding period, and why I’ve decided to sell now.

After a relatively short two-year holding period, aircraft and truck component manufacturer Senior PLC has left my model portfolio.

In this blog post, I outline why I invested in the company in the first place and why I’ve decided to sell now, despite (or perhaps because of) recent share price gains.

I added BHP Billiton to the model portfolio in 2011 because its combination of rapid growth and apparently low price made it an attractive option for my then-embryonic “defensive value” investment strategy.

With hindsight, BHP’s growth rate was completely unsustainable and the purchase price was too high rather than attractively low, so the final results are not exactly impressive.

However, it was a mistake worth making because it contained some important lessons for the future, which I’ll outline below. But first, let’s have a look at the final result.

Summary:

• Beazley PLC is a leading international insurer which specialises in insurance policies that are complex and bespoke.
• I added it to the model portfolio in 2015 because it was a good company trading at a reasonable price.
• I decided to sell because the share price has almost doubled, leaving the shares close to “fair value”.

When I added AstraZeneca to my portfolio in mid-2015 it was the second time I’d invested in this well-known pharmaceutical company. The reasons for both investments were more or less the same:

1. AstraZeneca appeared to be a fundamentally sound company with a good track record and a strong balance sheet.
2. The share price appeared to be attractive because of the uncertainty caused by its “patent cliff” (where major blockbuster medicines see their profit margins collapse as patents expire).

The investment basically came down to a few assumptions which were directly related to those two reasons:

1. AstraZeneca had a long history of profitable medicine development, so new medicines might be developed quickly enough to replace the old.
2. The company had a strong balance sheet, so it could use debt to fund research and development and/or the dividend during the lean years.
3. At some point, investors would probably become more optimistic about Astra’s future and the share price would go up.

And that’s more or less what happened, although the final results were satisfactory rather than spectacular.

One of your primary goals as an active investor should be to extract as much educational value from each investment so that the lessons learned can be used to create additional financial value in the future.

That’s why I always carry out a post-sale review as soon as I make the decision to sell an investment.