When idly scanning through one of my stock screening lists recently, I was transported back to the Sunday afternoons of my childhood, and specifically the words of Jim Bowen. No, not “you can’t beat a bit of bully”, although that statement is as true today as it was then. It was the words that he uttered to some moustachioed, mulletted man from Walsall, at the very moment that they were suffering the anguish of seeing a speedboat that they never needed and would never have used slipping from their grasp: “look at what you could have won”.
You see a number of stocks in my screened list were showing gains, which isn’t necessarily unusual. What really stuck in my craw was that a couple of names caught my eye as ones that I had analysed in detail, only to discard as potential investment opportunities. Yet here they were, with a little green arrow next to them, taunting me.
As investors we are told to know the reason why we have invested in a company. This a strategy that has served me well, allowing me to ignore short term price volatility and focus on my original investment case – if this hasn’t fundamentally changed then I’m not going to be panicked into selling out. Yet I don’t think I’ve ever heard any advice to keep a record of why we didn’t invest in something. Not why we didn’t invest in something obvious, like a heavily indebted junior miner listed on AIM, but those companies that look good on paper, but after analysing them, we decide not to pull the trigger.
Yet surely this is as important as keeping a record of why we did invest in something. After all, if we keep choosing not to invest in stocks that go on to be long term winners, then we can learn from this and improve our performance. I call these stocks my ‘Bullseye Portfolio’, based on Bowen’s lament of what might have been. I don’t think any of these are bad investments, they passed my screening criteria after all. I just choose not to invest after weighing up qualitative factors. So here are some stocks from my Bullseye Portfolio, reminding me that, to use another Bowen catchphrase, investing isn’t always “super, smashing, great”:
Belvoir Group PLC (BLV)
Belvoir is an estate agent business that generates royalties from franchisees. On the face of it there is a lot to like. It’s a play on the housing market, which governments of any persuasion appear desperate to prop-up, the franchise system entitles them to a percentage of each franchisees profits and it has acquired the Mortgage Advice Bureau to add a complimentary service to its business. Revenues and profits are growing each year and it even pays a dividend. What’s not to like?
I tell you what’s not to like – yet another bricks and mortar estate agent. There are plenty of them and the barriers to entry are low. I have been unable to identify what Belvoir does that is better than any other estate agent out there.
At a recent Shares Magazine investor presentation, CEO Dorian Gonsalves implied that online estate agents having just 7% of the market share is a positive; perhaps customers prefer the in person touch? I’ve used various estate agents over the years, for buying, selling and letting property. I’ve never felt like I’ve got value for money from them. They take a percentage for doing very little, in some cases not even bothering to provide a decent level of customer service. I think the scene is set for an online estate agent, who matches low fees with excellent customer service, to take off and grab an ever bigger slice of the estate agent pie at the likes of Belvoir’s expense.
Perhaps Dorian Gonsalves agrees with me and that’s why he opted to sell options worth approximately £200k at the very beginning of 2020. I get that he already has a stake in the business, but if he is so bullish on the prospects for further growth, why not show that to the market by hanging on to these options. Despite my misgivings Belvoir continues to rise, up from £1.59 from when I decided not to buy to £2.17 today, a 36% gain.
Cake Box Holdings PLC (CBOX)
Cakebox holdings sell vegan cakes. Very impressive looking vegan cakes that are as eye catching as the distinctive purple and orange branding. It also operates a franchise model, that I tend to like, plays the growing vegan theme and like Belvoir, it is growing its top and bottom lines.
So what’s my beef with the vegan cakes? Although I had gazed longingly at the cakes in their shop windows, I had never sampled one, being somewhat vegan cake sceptic. So I took a look at on-line reviews of various stores in the franchise. A theme cropped up of customers complaining about the cakes being stale.
So at another Shares Magazine investor evening, I put the question of ‘how are franchise standards maintained’ to CEO Sukh ChamdalI. His response was that all sponges are made centrally and shipped to stores directly where they are decorated, which allows standards to be controlled.
Perhaps I expect too much after seeing the excellent Ray Kroc film, The Founder, but his response did not fill me with confidence. Either the sponges are stale when they arrived or the franchisees are hanging onto them for too long. Either one isn’t good, and his response didn’t show a desire to do anything about it.
The business of vegan cakes is also becoming a lot less specialist. All the major coffee chains now provide sweet vegan treats, so I’m not convinced that Cake Box can defend its moat, particularly if there are quality control issues.
The CEO also decided to sell over £6m of shares in September. He claimed that this was due to shareholder requests for greater liquidity, and I have no reason to doubt this. Yet selling just as the share price recovered to its pre-covid high struck me as suspicious. Still despite my misgivings Cake Box has served me a slice of humble pie, trading today at £2.63, up from the £2.12 that I decided not to buy at, a gain of 24%.
Polar Capital Technology Trust (PCT)
I like to pick up a good performing investment trust at a discount when I can. Such an opportunity presented itself in March when PCT briefly traded at a double digit discount off the back of a tech based correction.
This time my gun shyness in failing to invest was due to a very interesting interview the trust manager, Ben Rogoff, gave to the Investors Chronicle back in July 2020. Mr Rogoff stated that he invests very much with “an eye to the benchmark”, which he simply looks to outperform by 2-3%. He then went onto to explain how this prevented him from holding more Amazon when he wanted to a few years ago because it wasn’t in the benchmark.
This example is why I didn’t buy. I want my trust manager to be truly active and not to be constrained by the benchmark. I appreciate Mr Rogoff’s honesty, and he won’t be the only fund manager to have an eye on the benchmark with career risk in mind. But if I’m going active, that’s what I want for my additional fee. If I want to be conscious of the benchmark, I’ll simply invest in a tracker fund or ETF for a fraction of the price to compensate for missing out on winners like Amazon.
Still the Polar Capital Trust performance hasn’t been chilly, up from £20.85 in March to £23.60, a 13% gain.
The performance of these investments doesn’t surprise me. I don’t think that these are bad companies; they showed up on my screener for a reason and I seriously considered taking a position in all three. I understand why people invested in them. So why succumb to hindsight bias and torture myself with my Bullseye portfolio?
The curse of the investor is to always be haunted by the one company whose share price rockets after you’ve looked but not bought, the look at what you could have won. But we can’t buy everything we look at. For every investment we make, we are choosing not to invest in an alternative.
To truly measure my performance, to assess my investment effectiveness, I need to compare what I chose to invest in with what I almost invested in but didn’t and look at the long term effectiveness of both. Some of my actual investments may do better, some of the Bullseye portfolio may underperform, but at least this way I’ll know. Just writing this has raised the question of does selling by the CEO matter?
In few years I’ll have a better answer to that question and I can refine my analysis accordingly, but hopefully I won’t be looking mournfully at the investing equivalent of that speedboat!