MI – Misanthropic Investor: A Stock Supreme?

The virtues of a founder led company are often extolled. Research shows that founder led companies invest more aggressively than their peers in research and development, capital expenditure, and mergers and acquisition. As a result they grow revenues at a faster pace and, to quote Peter Lynch, “corporate earnings drive stock prices”.

I try as much as possible to factor this into my stock selection process. I don’t just buy founder led companies, but if a company fulfils enough of my criteria, I ideally want the management to have plenty of skin in the game. One such stock that ticked both such criteria is AIM listed Supreme PLC.

High CEO ownership

Supreme manufactures, distributes and licenses consumer staples in the form of lighting, batteries, vaping products and sports nutrition and wellness products (think multi-vitamins, protein bars and emal replacement shakes).  Supreme CEO Sandeep Chadha started working in what was then his father’s business after leaving school. He bought his father out in 2003 and still holds over half of the company following its listing on AIM in 2021. Supreme also boasts some significant institutional holdings for a sub-£250m market cap, including a near 5% holding by Mark Slater, the heir of GARP investing.

Supreme major shareholders

Growth at a Reasonable Price?

Supreme looks on paper to offer investors a potential growth at a reasonable price investment. At the time of writing SharePad had Supreme on a forecast PE of 15 and a forecast PEG of 1, both of which appear to be fair especially when compared to some AIM listed small cap darlings. Both revenues and profits have been growing with revenue showing a CAGR of 14% and EBITDA a CAGR of 26% between 2018 and 2021. Both the top and bottom-lines are forecast to continue growing.

Supreme revenue/profit growth and forecasts

However, this doesn’t tell the whole story. Not all elements of the business are driving this growth equally. The more mature battery and lighting parts of the business are growing slower (or not much at all in the case of batteries), with revenue from branded household goods actually reducing. The vast majority of the growth is coming from the well-established vape business and increasingly from the newer sports nutrition and wellness lines.

Performance of Vaping (Red) and Sports Nutrition (yellow) business lines

Fortunately there are tailwinds for Supreme in that the market for both categories is growing. Supreme has strong relationships with the discount retailers, who stock lines in both of these categories. The increasing growth of the discounters has a corresponding benefit to Supreme, who now have product lines in more stores as a result of this expansion. Supreme are also now seeing their vaping and nutrition products stocked in main supermarkets, including Sainsbury’s and Asda, exposing them to a different customer base.

Vaping has been a strong performer for Supreme and now represents half of the gross profit. Although regulatory concerns have long been raised for vaping, Public Health England and the NHS have endorsed vaping as a method for people to quit smoking that is much less harmful than smoking cigarettes. Supreme have managed to grow their customer base further by securing a contract to provide vapes to prisons (the very definition of a captive audience!), along with vitamin D and protein bars, which has further grown revenues and profits. However, despite the impressive domestic growth, the CEO has freely admitted that growing the vaping business in Europe will be difficult, which places a potential limit on just how much this business line can grow by.

With the maturity of the batteries and lighting division, sports nutrition has been critical for providing growth beyond the vaping business. Supreme are aiming to become a cut price Holland and Barrett and claim that their scale and virtual integration model allow them to do this. It is a strategy that the CEO has successfully executed in other business lines and he looks to be repeating the trick again here, with their Sealions vitamins range offering a year’s supply for just £5 and proving popular on Trustpilot. Investors will be aware that being the lowest price operator, even in a low margin area such as consumer staples, can become a powerful moat.

Cost Control & Dividend Dilemma

One aspect that comes across clearly in all of his communications is the CEO’s laser like focus on cost control.  This has included examples such as:

  • Buying ‘last minute’ advertising slots when agencies become desperate to fill them, making the marketing budget deliver more bang for buck.
  • Acquiring brands/businesses when they are in distress or management are looking for an exit, allowing a favourable price to be negotiated that limits the downside risk to Supreme.
  • Introducing the Supreme lean management model to those acquired businesses, retaining only key staff that are adding value (this strategy is detailed in this interesting podcast with CEO Sandeep Chadha).
  • Bringing as much manufacturing in-house as possible, such as producing their own vaping bottles and making their own vitamin pills.

This commitment to cost control is commendable and just what I like to see. This is likely a key contributor as to why Supreme have demonstrated good returns on capital for a business of this nature. The issue for Supreme will be that cost management can only contribute so much to the bottom line and the key question if for how long growth can continue organically.

Supreme has had an impressive Return on Capital Employed of over 20% & EBIT margin of over 10%

Supreme have acquired businesses recently to supplement the sports nutrition division and the CEO has made noises that he would like to do the same again. Whilst the CEO has a good track record on acquisitions can he continue to do so in a manner that adds shareholder value in the form of returns on capital and improved margins rather than destructive acquisitions that grow revenues at the expense of shareholder value?

There’s also the issue of the dividend policy. At IPO Supreme committed to a dividend policy of paying out 50% of net profits, largely to entice income focused institutional investors. This limits funds available for extra growth and is a policy the CEO has admitting to having regrets about. The risk to investors is that further growth is financed by debt, which needs to be serviced, or equity, which will dilute existing shareholders.

Supreme debt has begun to be reduced in recent years as the business has generated more cash

Unfortunately a management incentive which provides a hefty annual bonus is based largely on the ridiculous measure of ‘adjusted’ EBITDA. Such a measure does nothing to discourage acquisitions financed by either debt or dilution or prevent value destruction through reducing returns on capital and margins. At this stage it would be better for Supreme to reengage on it’s 50% dividend policy to target a sustainable way of funding further growth, a measure most shareholders would surely support.

Despite the bonus incentive, the CEO would benefit more than anyone in Supreme continuing to grow and add value to shareholders so he should be aligned with shareholder interests. Supreme offers ownership of a growing business that is supplying growth markets at a reasonable valuation and could be considered for a long term, appropriately sized investment that also offers some income.

Bull Case

  • CEO has plenty of skin in the game and a good track record.
  • Strong growth in vaping and sports and nutrition product lines that are themselves in a growing market.
  • Wide customer base including discounters, traditional retailers, government and direct to consumer.
  • Vertical integration model increases margins and limits supply side risk.
  • Lean management model led by a long serving team with a focus on cost reduction.
  • Vaping business could appeal to big tobacco as a potential takeover target.
  • Institutional ownership by managers with a good track record.
  • Transparency – the CEO and CFO appear to be very upfront and clear in their communications and are very happy to answer shareholder questions.

Bear Case

  • Performance appears to be heavily dependent on the CEO.
  • Illiquid. Over half of the stock is held by the CEO who is currently in a lock up period.
  • A risk that the vaping product, which now accounts for half of gross profit, could be subject to regulatory pressures.
  • Further growth appears to be somewhat dependent on continued acquisitions.
  • 50% dividend policy limits the use of reinvesting profits for growth, increasing the risk of the business taking on further debt or equity raises to facilitate growth.
  • Retailers tend to force suppliers, rather than their own customers, to absorb cost increases and these are a significant part of Supremes’ customer base.
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MI – Misanthropic Investor: 2021 – A Retrospective

It seems that much like Ned Flanders and his tax returns, no sooner does the clock strike midnight and the bells ring for new year that a flood of investors publish their reviews of the year only just gone. My review is tardy by comparison, arriving at the end of the first full week in January. As a long-term investor, a year seems like far too short a time to review performance, but publishing a review every 10 years would be quite the task. So a yearly review it is then.

See the source image
It’s January 1st – time to get going on that portfolio review!

The Aim – FYMF

Before I delve into those performance numbers that everyone on social media loves, what is the point? By that I mean why do I invest in the first place? The answer: FYMF. Fuck You Money by Fifty. Essentially I am aiming to have enough wealth to be financially independent by fifty. I’m not expecting to earn enough to build my own rocket ship and race around space with Bezos, Branson and Musk, just enough to live much like I do now, with the huge bonus of not having to be at the behest of ‘the man’ (or whatever the woke non-gender specific term for ‘the man’ is).

In order to realise the FYMF dream, I’m targeting a return of 10% a year. If I fall short and end up with Fuck You Money by Fifty-Five, or even Sixty, I’ll still be happy with that. Particularly given that the majority of my generation is likely to have to work until they keel over. I managed 16.5 % in 2019 and 12.2% last year, not worthy of a rocket emoji, but performance that buys me some room for when the next market correction inevitably hits.

How to Get There

After a dalliance with deep value investing, I have refined my investing style to focus on three ways of selecting investments:

  1. Profitable & cash generative; Double digit ROCE & CROCI; Low/manageable debt; High insider ownership; Discount to valuation; Ideally mid or small cap stocks that can offer growth. Essentially QARPy GARP type stocks.
  2. Recovery plays based on macro impact on a company or industry that I think is overdone, taking a basket approach if it’s sector wide. Choose the companies that fulfil enough of the criteria in point 1 & have the most attractive valuations.
  3. Investment Trusts, Funds and ETFs to get world or thematic exposure. Aim to target well managed Investment Trusts trading on a discount.

This approach is reflected in my current portfolio allocation:

Portfolio Asset Allocation as at the end of 2021

While following my investment selection methods, I also have two golden rules, both inspired by everyone’s favourite billionaire investor, Mr Warren Buffett:

Golden Rule 1: Valuation is key

For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments“Warren Buffett

Any investment that I have made must be within my valuation. I use a Discounted Cash Flow to calculate an intrinsic value as it makes sense to me that the value of a business is the sum of all its future cashflows, discounted back to the present day value. I want to purchase investments that offer a margin of safety, so the share price must be lower than my DCF calculation.

Golden Rule 2: Patience

“The stock market is a device for transferring money from the impatient to the patient” – Warren Buffett

I believe that the main source of edge that the private investor has is patience. We don’t have to worry about benchmarks, yearly bonuses or clients pulling their cash to put it into what was last quarters top performer. I therefore only want to invest in companies that I’m willing to hold for a minimum of 5 years. This doesn’t mean I won’t sell if the investment case changes, just that I’m not interested in trying to play the game of jumping in and out of stocks trying to snatch profit here and there.

I also look to scale into positions, to reflect the fact that I can’t time the entry point perfectly and to allow me to learn more about the company once I’ve taken a small initial stake. Once I have built a stake of up to 5% of my portfolio, I’ll stop adding but let my position grow organically for as long as I’m happy to hold it.

2021 Performance

This year my portfolio returned 16%. I’m delighted with that – it exceeds my 10% target. Admittedly an S&P tracker would have done better but I think that my valuation based approach gives me better downside protection, particularly given the current valuations of American stocks. As ever it was a mixed bag in terms of how the underlying assets performed, so I will cover some of the big winners and losers next (figures based on performance between 01/01/2021 and 01/01/2022).

Star Pupils:

Harbourvest Global Private Equity (HVPE) – Up 33.9%

An investment trust picked in accordance with my investment style no. 3 detailed above.  HVPE had a big discount and has a good record (the discount is still amazingly in double figures). HVPE invests in a number of underlying funds, offering diverse private equity exposure, and has some impressive holdings including some ‘unicorns’. ShareSoc members can learn more here (if you’re not a member, you should be; combined membership with SIGnet is just £60 per year).

Secure Income REIT (SIR) – Up 32%

One of my recovery plays described by my investment style no. 2 above, I wrote at length about why I invested in SIR here. It’s nice to see one of my investment thesis playing out as hoped for once – as expected the portfolio of theme parks, pubs and Travel Lodges have proved to be resilient. My 2021 dividends represent a yield of just over 5% on my average price and this is forecast to increase. Regional REIT and Schroder REIT have also both given me a double digit return this year, just not as an impressive a return as SIR.

Howden Joinery (HWDN) – Up 29%

A classic quality company described by my investing style no. 1 above. The 2020 crash allowed me to add HWDN at a reasonable price. My only regret is not adding more before the market quickly recovered and therein lies a lesson. You can’t call the top or the bottom of the market, if you get the chance to add a quality company at a discounted price, do it, don’t think you can wait for the price to keep drifting lower.

Class Dunces:

Arcontech (ARC) – Down 54%

Ouch! The performance of this one has been anything but like an ARC, as the share price has continued to sink since I entered. I made the cardinal sin of investing in something I didn’t really understand. The ARC products weren’t clearly understandable to me and the main product simply seems to aggregate financial data from other sources, which doesn’t offer much of a moat. I let the fact that in ticked a lot of my investing style no.1 boxes, along with the fact that it operates in the potentially lucrative tech space and was valued cheaply, sway me. Not an error that I will make again. When I’m confident in my investment thesis, I’ll use a price drop to add more. The fact I didn’t with ARC speaks volumes – I’ll look to exit my position in the new year. The positive is that my rule on scaling in means that the loss will only represent 1 % of my portfolio.

Ali Baba (BABA) – Down 18.4%

My position in BABA is a very different story to my position in ARC. I remain confident and continue to average down. BABA is a quality company and is available at a very reasonable price. The problem is that the market rarely gives you an opportunity like this without making it uncomfortable.

In the case of BABA, this discomfort is from the recent crackdown of the Chinese government on large tech companies and the delisting of Didi from the NYSE to the Hong Kong exchange. A lot of investing commentators now appear to be experts on Chinese government policy (few people, even those that are in the Chinese government, I suspect are!) and are fearful that companies like BABA will also now delist. I find this claim speculative. I suspect that the Chinese government knows how much the likes of BABA have contributed to the growing wealth of the population and that the crackdown will stop with higher taxes, which the forecasted growth can more than cope with.

Even if BABA did delist and follow the lead of Didi, my broker has confirmed that they would simply switch my holding to its Hong Kong listing accordingly. Worst case is that the stock would not be allowed to trade outside of its Chinese listing, which would bar foreigners from investing. Whilst not impossible, I think it’s very unlikely and a risk I’m willing to tolerate given the potential rewards for owning a company of this quality at current valuations. BABA still derives the vast majority of its revenues and profits from its commerce business. If its cloud computing business can be even half as successful as Amazon Web Services, the current share price looks like a bargain.

Fidelity China Special Situations (FCSS) – Down 22%

One of my top performers in 2020 has fallen from its perch, for much the same reason as the BABA. Given the current size of the Chinese economy, which is underrepresented in world indexes, and the longer term prospects for this region, I see China exposure as essential for longer term investors (a view echoed by Ray Dalio). I’ve been happy to add at a lower price and increased discount to NAV throughout the latter half of 2021 and will continue to do so whilst the opportunity is there.

Positions exited in 2021

I sold out of one position in 2021, Eleco, after deciding that recent behaviour of management was less than stellar (see my musings on this here). Fortunately I banked a 35% profit, selling out at £1.24, and the share price has since slumped below £1. I appear to be in good company too with the Free Spirit Fund, ran by Buffet disciple Keith Ashworth-Lord, also exiting their position recently.

New positions in 2021

In addition to ARC and BABA which I discussed above, I took positions in two companies in 2021 that fit my QARPy GARP methodology, both small caps with high levels of insider ownership. The digital transformation at System 1 (SYS1) has started well, although management lowering their LTIP bar took the gloss of bullish statements about becoming a £1billion company. Supreme (SUPR) has a very interesting and growing nutritional supplements business to go along side their established vaping, batteries and lighting businesses. I’d recommend listening to the Chief Executive on the Inside the Four Walls podcast for a clear and fascinating insight into the business. Both look to have good long term prospects, with the share price rising before I had a chance to buy as much as I would have liked to. I’m also dripping into the EMQQ ETF, which offers exposure to a growing trend in e-commerce in emerging markets, at a interesting valuation.

Key Lessons from 2021

  1. Only enter a position if I fully understand the business and have a high level of confidence in my investment thesis.
  2. When I do have a high confidence level, take higher conviction positions sooner.

Book recommendations

I’m an avid reader and my top recommendations based on what I read in 2021 are:

  1. 100 Baggers – Christopher Mayer
  2. Investing against The Tide – Anthony Bolton
  3. The Laws of Wealth – Daniel Crosby

Honourable mention to Built on a Lie by Owen Walker, a fascinating insight into rise and fall of Neil Woodford.

MI – Misanthropic Investor: System1 shifts the Goal Posts

The old adage is that there is no such thing as a sure thing in the world of investing. I’ve increasingly started to come to the conclusion that there is one sure thing when it comes to investing – the board of a listed company will always be rewarded. The key word being always. The performance based bit of performance based pay seems not to distinguish between good or bad. The company has performed, so regardless of how that performance has been, here is the reward for the board.

A case in point is AIM listed System1. System1 have recently transformed their business into an ad effectiveness company, using their technology to assess the effectiveness of marketing before the costly campaign is run. There has been some encouraging recent progress – their automated prediction product has went from 1% to 15% of revenues in under a year and they have partnered with major advertisers in ITV and LinkedIn.

The board are bullish on the prospects for the business, proclaiming at the front of the annual report “We believe that System1 could be worth £1 billion eventually”. Unlike most boards they are putting their money where their mouth is, owning over 30% of the shares.

High insider ownership at System1

Even better there appears to be something even rarer in place at System1, a long-term incentive plan (LTIP) that genuinely aligns the interests of the board with shareholders. Or so I thought.

System1 are currently not even halfway through a 5 year LTIP introduced in September 2019. The LTIP awards a generous amount of shares provided that certain levels of gross profit are hit, with each tier of gross profit resulting in an additional award.

System1 LTIP Gross Profit Targets

This approach is laudable as profit is what really matters to investors rather than some of the more easily manipulated measures out there such as ‘adjusted’ EBIT. Gross profit was £22.1m in 2019 so shareholders would be more than happy for the board to be rewarded for achieving the targeted level of gross profit growth. Just one problem – gross profit has went in the wrong direction since then.

Gross profits have reduced since the LTIP was introduced

If the board can turn around the gross profit then they have two more hurdles before they can claim their reward. Profit after tax has to be at least £7.0m and the average share price of the Company during the month of July in the year in which the awards vest must be at least £9.945.

The only problem for the board is that profit after tax was just £1.7m in the most recent set of results. To compound matters the sluggish financial performance have seen the share price punished by the market. Shareholders that held a stake in System1 at over £10 in mid-2017 have lost over two thirds of their investment, with shares currently priced at £3.20.

System1 share price performance over 5 years

Still at least if the shareholders have suffered so badly, the board won’t profit regardless. The LTIP has been successful – the board and shareholders are aligned and the board can’t profits whilst the shareholder have suffered.

Except the board now don’t quite fancy the LTIP performance targets. Perhaps they realise they have a challenge on their hands. Rather than rising to the challenge or taking it on the chin (as long suffering shareholders have had to), the board now fancy lowering the performance bar, considerably so.

The board appointed PWC to look at the LTIP target. Funnily enough PWC came to the conclusion that the very same board who had paid PWC to look into this matter should have a much lower LTIP performance hurdle. No conflict of interests here at all! The key changes that have been proposed are:

  • The share price underpins for vesting of awards to occur will be reduced from c.£9.95 to £4.00.
  • The Gross Profit performance measure will be replaced with Revenue. The Revenue required for threshold
  • performance is proposed to be £45m and the Revenue required for stretch performance is proposed to be £88m.

    Several spurious reasons are given to justify this lowering of the performance bar. Outrageously the board claim that this will align with the shareholder experience. I’m not sure how this could be the case when if the share price gets to the £4 that triggers the board award, some shareholders would be left with a 60% loss.

    The board also claim that this is needed for staff retention. Apparently a six figure salary for the three executives is not enough for them. Perhaps they should compare what’s in their pocket with the shareholders who didn’t even get a dividend last year.

    This has led me to ask the following questions which I submitted to investor relations ahead of the AGM, which given the horrific nature of the proposals, will aptly be held on Friday 13th August:

    1. Does it not make a mockery of the ‘long term’ aspect of the LTIP that you are now seeking to change it only half way through its duration?
    2. The current LTIP, with its focus on gross profit and a higher share price target, is more aligned with shareholders interests than the proposals for a revenue based target and lower share price target. It simply looks like the board are shifting the goalposts to a lower target to suit their own financial interests at the expense of the shareholders. If you can’t achieve the original targets, that is due to your performance failure. The proposal to change the LTIP half way through it to an easier set of targets is a ‘heads we win, tails you lose’ approach from the board.
    3. The Annual Report attempts to justify the change to the LTIP on the basis that  participants in the 2019 LTIP do not participate in the Company’s annual bonus or profit share scheme and that the only remuneration that they will receive will be base salary and benefits. The three executive Directors account for just over £600k per annum in remuneration plus anything that they eventually receive as a result of the LTIP. Are the board seriously suggesting that this isn’t sufficient, given that this accounts for over a third of 2021 profits of £1.7m?
    4. In the Annual Report you confidently claim that System1 could be a £1billion business. This bullish opinion is at odds with your attempt to lower the LTIP performance bar considerably. If you genuinely believe System 1 could be a £1 billion business then there is no need to set the bar of the existing LTIP so much lower than what it currently is, as the board will do very well if System1 gets anywhere near this valuation.
    5. Can you confirm that insider shareholders will abstain from voting on this issue given the clear conflict of interests. Allowing them to vote on this would reflect poorly on corporate governance.

    I had a reply stating that the questions would be passed to the board and they’ll be addressed shortly. I’m still waiting for a response. Hopefully this will be done at the AGM but I’m a little sceptical that this will be the case. I can only hope that come Friday fellow shareholders, or those ones that aren’t on the board, give these proposals the short shrift that they deserve.

    MI – Misanthropic Investor: Counting the £Cost

    It’s been a rough few years for holders of Costain. The share price of the construction contractor has plunged from just short of £5 in early 2018 to below £0.60 today. It has traded at around this level since the covid crash and has shown little sign of escaping its sideways price movement.

    Yet despite this I think there is an opportunity for Costain to follow peers such as Balfour Beatty and Morgan Sindall in bouncing back above their pre-pandemic share price. But before we get into that, how did Costain find itself in this mess?

    A Steep Slide

    The Costain share price slide

    Costain CEO Alex Vaughan must be cursing his bad luck and timing. The long-time Costain employee has had to endure blow after blow since taking the helm in May 2019 from Andrew Wyllie, who appears to be wily in both name and nature given the timing of his departure. Mr Vaughan had to announce delays to contracts, cancellation of the M4 project and a £9.8m arbitration loss just one month into the job. The stock market responded with a 32% hit to the share price. Still, at least he got the bad news out of the way early into his reign. If only…

    In late 2019 Alex Vaughan was the bearer of more bad news. Despite winning an initial adjudication ruling, Costain subsequently lost the final arbitration to the Welsh government on the A465 project to the tune of £45m. Then to prove that bad luck really does come in threes, Costain announced a £100m Capital Raising at the worst possible time in March 2020, just as the covid crash hit. The share price took an immediate hit of 22%, slumped further just weeks later as covid ran riot, and has had the share price equivalent of long covid since, failing to get anywhere close to where it was in early 2020.

    It is difficult not to have some sympathy for the much maligned Mr Vaughan. Construction is a low margin world full of risk and uncertainty and he has suffered the consequences of bad decisions made before he assumed the top job. Yet despite being hit by blow after blow, is the Costain now at the point where it is darkest just before the dawn?

    More of a Margin

    Encouragingly Costain appear to have recognised that being involved in a race to the bottom in terms of margin is not the way for a business of this nature to be successful. The likes of Carillion and Capita have learnt the hard way not to ignore the sage advice that ‘revenue is vanity, profit is sanity’. Costain are avoiding the trap of ‘buying’ work and have signalled their intention to focus on higher margin work such as consultancy and digital.

    Costain’s renewed focus on margin

    There has been some noteworthy contract wins in these fields to date, notably on the £350m Anglian Water Strategic Pipeline Alliance and the £150m Cadent programme management consultancy. It will take time for these higher margin activities to hit the bottom line, but when they do, the share price should follow suit.

    Innovative Infrastructure

    Costain are also attempting to rebrand themselves as a ‘smart infrastructure solutions company’ that embraces new technology, rather than the stereotypical images of JCBs and concrete that this industry conjures up. I typically take such statements with a pinch of salt; it is rare to find a company that isn’t trying to portray themselves as a technological innovator these days, and rarer still to find one that can evidence this.

    Yet there are encouraging signs of this strategy taking hold too. Costain have developed a strategic partnership with Microsoft to bring digital led savings to their clients. Just weeks ago, Costain were awarded funding to trial an electric road system for HGVs similar to those that have been successful in Germany. A small start, but an encouraging start nonetheless.

    Levelling up

    If Boris Johnson is to deliver on his levelling up promise, infrastructure is key. This has been a much neglected sector in the UK, with funding typically sucked in to London and the South East whilst other regions have been left with sticking plasters on crumbling assets. Only large contractors can take on projects of this scale and Costain are one of a handful of UK operators that fit the bill. With contracts already in place for HS2 and a number of major highways projects, Costain could profit from this shift in political priorities.

    Skeletons in the closet

    The word adjudication must send a shiver down the spine of Costain shareholders given how the company found itself unexpectedly on the wrong end of the A465 decision. Yet Costain faces the prospect of another uncertain outcome following the termination of it’s contract with National Grid to upgrade several gas compressors.

    But Costain have applied a healthy dose of scepticism to this issue after having their fingers burnt on the A465 and recorded a charge to the income statement of £49.3m to reflect what they have been advised is the worst possible outcome. In reality the range of outcomes could range from a further £57m loss to a receipt of £50m. The worst possible outcome is therefore already factored in to the share price; anything other than this would be a boost.

    Bad news built into the income statement

    Signs of life

    Is Costain a high quality business. Not particularly. Does it have a moat? Of sorts – a contractor of this size is one of a handful of UK outfits that can deliver large projects. Yet there are signs of life. The recent half year trading update, whilst unlikely to set pulses racing, confirmed that Costain are on track to deliver their forecasted profit growth. More importantly they have a £4 billion order book and its cash position, at £113m, is over 70% of it’s £157.5m market cap.

    Costain is a business in transition although there are some encouraging signs of the new strategy taking shape. It is not guaranteed to succeed by any means, but I think that the current share price, on a forward PE of 7.5, represents a ‘heads I win, tails I don’t lose too much’ opportunity for those investors patient enough to wait to see if the margin growth targeted by 2024 can be achieved.

    What are your thoughts on Costain as a medium term recovery play? As ever, do your own research.

    MI – Misanthropic Investor: Eleco-Shock

    UPDATE SEPTEMBER 2021

    A lot has happened at Eleco since I wrote my original article below in July 2021. Management appear to have rowed back on their strategy to treat shareholders with contempt by making a number of announcements, so perhaps I had a point after all?

    After suffering the ignominy of three of their resolutions being voted down by shareholders at the AGM, management then announced that they had rejected the Requisition Notice due to it being ‘invalid’. But despair not, shareholders got what they wanted anyway. In August they announced that Kevin Craig, who was the Chair of the Remuneration Committee who’s proposals drew so much ire from shareholders, was stepping down from the board to “to focus on his other growing business interest”. How convenient! Still at least shareholders got the right outcome belatedly, although not before Mr Craig’s questionable remuneration proposals had been pushed through without shareholders being given a chance to vote on them.

    In a further volte-face, Serena Lang also ‘decided’ to give up her Executive Chairman position, returning this role to it’s rightful place as a non-executive position, but declined to leave the company as a result of this shoddy governance. I guess one sacrificial lamb in the form of Kevin Craig has been deemed sufficient. Although if share holders have long memories perhaps Serena Lang’s stay of execution will only be temporary as Eleco have finally announced that “as part of our ongoing drive to continue to enhance our Corporate Governance the Board is pleased to announce its intention for all Directors to stand for re-election at the Annual General Meeting in 2022 and in subsequent years. This is in line with corporate governance best practice”. Welcome but long overdue; I can only wonder what took them so long?

    Whilst we’re on the subject of good governance, perhaps Eleco can commit to a full scope audit that covers move than just two thirds of revenues and profit before tax, particularly given the revenue recognition risk that I highlighted in my original post.

    Management also never did get back to me to ‘fess up’ to just how much genuine truly recurring revenue in the form SaaS subscriptions they had rather than license agreements. But their interim results update in mid-September did shine a light on this, which again indicates that perhaps my concerns were valid. Specific points mentioned in the update were:

    • The strong revenue growth in new licence sales from our Building Lifecycle businesses and increase in services revenue has resulted in the slightly lower recurring revenue as a percentage of total revenue.
    • We therefore expect a temporary reduction in our level of profitability over the next 18 months as the SaaS subscription model and strategic initiatives bed in and deliver our long term growth.

    So shareholders are looking at a hit to profits in the short term at least. Still, perhaps I should cut the Eleco board some slack. They finally look to have at least attempted to correct some of their governance issues, albeit as a result of having their arm twisted by their biggest institutional shareholders. Also Serena Lang and CEO Jonathan Hunter also decided to put their money where their mouth is and finally buy some Eleco shares, although Jonathan Hunter’s purchase of less than £15ks worth is not quiet ‘skin in the game’, but more of a finger tip. I remain unconvinced by the management of Eleco and for now I’ll remain uninvested. They never did reply to my email…

    ***************************************************************************************************************

    ORIGINAL ARTICLE JULY 2021

    An aspect of investing that I have always struggled with is when to sell. I see myself as a long-term investor. I hold for the long term to allow compounding to work its magic. I tell myself that I won’t be scared out of positions by Mr Market. I will only sell if something fundamentally changes from my original investing thesis. It’s also hard to let go, especially if the share has performed well for you. My reluctance to sell has however been transformed by recent shenanigans at one of my now former holdings, Eleco.

    The Honeymoon Period

    I first noticed Eleco on one of my Sharepad screens which looks for companies that generate cash and have a high Cash Return on Capital Invested (CROCI). In fact, it still shows up in that screen. I was drawn to Eleco as it was a technology play in the somewhat antiquated construction sector that is ripe for some disruption.

    The financial metrics look good, as did the share price when compared to my Discounted Cash Flow calculation. I also liked the fact that Eleco already had some big clients and had a large amount of recurring revenues. The (now-former) CEO John Kettley had plenty of skin in the game with an 11% holding. This was all enough for me to take a small holding.

    Recent years have seen Eleco FCF growing & CROCI consistently above 10%

    So far so good. After a period of doing nothing, the share price started to tick up. I love it when a plan comes together! Then one morning I was alerted by an RNS that looked concerning. JM Finn Nominees Ltd and Fiske Nominees Ltd, two of the Company’s largest shareholders who hold 11.1% combined, had requested a General Meeting Requisition.

    The request was that the Chair and the head of the remuneration committee both put themselves up for re-appointment as directors. Also, they requested that directors put themselves up for re-appointment each year and that shareholders be allowed to vote on if the remuneration policy should be accepted.

    This all seemed very reasonable. In fact, I was surprised that shareholders were not been given the opportunity to vote on these matters at the AGM. Strictly speaking AIM listed companies don’t have to put directors up for re-appointment each year or allow votes on the remuneration policy but this courtesy to shareholders is a given at the vast majority of publicly listed companies. I decided to find out more and dived into the murky world of social media.

    The Non-analysing Analysist

    I foolishly took to the world of Twitter to see if I could garner what was going on at Eleco. It wasn’t long before I came across an analyst who was very bullish on Eleco’s prospects and had just published an article to that affect. Yet strangely, he hadn’t mentioned any of the issues raised by the General Meeting Requisition. It was like it hadn’t happened at all. Perhaps I was worried about nothing?

    I decided to reach out and ask this analyst why he hadn’t touched on this subject. His response was to repeat his bull points and ignore my question. I again asked him if he simply wasn’t concerned or had he chosen to ignore it and remarked that as an analyst, his clients would presumably not happy with his failure to even recognise what had been referenced by the General Meeting Requisition. His response was to block me, which struck me as a little extreme given the polite way I had asked. Aren’t investors supposed to welcome debate?

    My now silent analyst had previously enthused about Eleco many times on a podcast, which I will call ‘Box Markets’. He made some spurious points on the podcast, for example hailing the new board, when it is essentially John Kettley’s same old crew. He was however damming of a bearish report on Eleco from Ciphersense Research and highly critical of its author, before essentially undoing his argument by stating that he hadn’t read the report and never would because it was 100 pages long.

    This led me to a new question – what type of analyst ignores a research report because it has too many pages. The answer would appear to be an analyst who works for a company that is named after himself! As ever if you want a sensible view on a stock, Twitter isn’t the place to seek it.

    Do Your Own Research

    So after failing to find enlightenment from the so-called professionals, I decided to take a fresh look myself at Eleco. Diving into the details did not put my mind at ease. Shareholders were being diluted each year; perhaps this is the reason for the growing cash? Also although the recurring revenues were growing Eleco still relied heavily on an outdated license model rather than Software as a Service (think Microsoft pre and post its subscription model).

    Eleco shareholders have been significantly diluted between 2015 & 2020

    I normally find myself irritated by the language from the auditors when reading annual reports, as they often hint at issues but use a form of language that is so benign that it is difficult to know exactly how concerned the auditors are. Not so in the case of Eleco. See this pearl of wisdom from the Independent Auditor’s Report:


    Independent Auditor’s Report – Eleco Annual Report 2020

    By anyone’s standards ‘material misstatement due to fraud’ is hard hitting but coming from an auditor it is like taking a right hook to the chin from Mike Tyson. At this point I had one foot out the door and the second one hovering very closely behind it. But I decided to give management one more chance. They had previously responded to my questions very quickly so I thought it fair that they have a chance to explain. I sent them the following highlighting my concerns and asking for a response.

    What did I get back? Nothing. Nada. Zilch. Even after I sent them a polite reminder. Perhaps they’ve employed that twitter analyst who works for a company named after himself to head up their investor relations team? In any case I was now invested in a company who:

    • Don’t want shareholders to vote on their performance.
    • Don’t want shareholders to vote on remuneration.
    • Don’t respond to question from investors.
    • Has auditors that have concerns about fraud.

    This forced me to ask myself the question ‘would I invest in this company now if I didn’t already hold it’? Even for a reluctant seller like me this was a no-brainer. I sold out and thankfully I had made a profit. More importantly I was much happier to know that I was rid of such an unscrupulous board of directors. As ever, Mr Buffett was right when he stressed the importance of company management. I’ll certainly be looking at this in much more detail before investing in the future.

    MI – Misanthropic Investor: The Bullseye Portfolio

    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?

    Belvoir Turnover & Profit since 2008

    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.

    Cake Box Turnover & Profit since 2017

    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!

    MI – Misanthropic Investor: The REIT Stuff

    MI – Misanthropic Investor: The REIT Stuff

    Ah, is it just me or does anybody see
    The new improved tomorrow isn’t what it used to be
    Yesterday keeps comin’ ’round, it’s just reality
    It’s the same damn song with a different melody

    The More Things Change – Bon Jovi

    The Great Fire of London in 1666. London burns, watched by people on the river. 1666

    I recently heard a tale about how the Great Fire of London impacted London. In the immediate aftermath of the fire, it was royally decreed that London would be built back better with buildings spaced out so that flames would never be able to spread so easily again. Then reality took over. The public were eager to return to normal and wealthy landowners started to rebuild in the same footprint of their burnt buildings, keen not to surrender any square footage in the name of spacing. Politicians lacked the will to argue for the contrary with either party. Sir Christopher Wren’s new plans of a Parisian vision for London were left in tatters and the new London looked pretty much like the old one. So what has this got to do with Real Estate Investment Trusts (REITs)?

    Is it REIT

    For diversification purposes I had eyed adding a REIT or two to my portfolio for some time. Why? I don’t hold bonds, which are the typical way to add some diversification to an equity portfolio. I see corporate bonds as being too correlated with the stock market, offering slightly lower risk for a lot less reward. Yields on GILTS are incredibly low, leaving them susceptible to any slight increase from our historically low interest yields. REITs however are an asset that offer a hedge against inflation (property prices, land and rents all tend to increase with inflation) and are a different asset class to equities. Yet I was put off by the price demanded by the market in response to investor demand for yield. Most REITs that interested me traded at par or a slight premium to a NAV based on slightly frothy property prices. That all changed in 2020 with the covid lockdowns. People didn’t go shopping, didn’t go into the office, and commercial property REITs crashed.

    When is a commercial property REIT not a commercial property REIT

    Despite your investment platform having a neat filter for commercial property, not all commercial property is the same. A quick search of commercial property REITs on my platform brought up trusts holding property classified as retail, industrial, offices, warehouses, supermarkets and combinations of all of these. We can all tell the difference between an office and a warehouse, or a supermarket and an industrial estate, so it seemed strange that such a varied group of property could be banded under the single label of ‘commercial’. REITs with an exclusive supermarket or warehouse theme held up, but the rest were sold off indiscriminately. Yet my view is that much like in the aftermath of the Great Fire of London, post pandemic human habitats will return. This presented a potential opportunity for me to add some REIT exposure at a knockdown price.

    The Macro View

    The first thing I did was to screen out any REIT that was predominately retail focused. The demise of the likes of Intu was inevitable as people shifted to shopping online. Bricks and mortar retail was already in intensive care before the pandemic; although the pandemic didn’t put it there, it did pull the plug a little bit quicker. This left a handful of candidates who could benefit my portfolio should we see a vaccine led recovery.

    Secure Income REIT (SIR)

    SIR holds a portfolio of theme parks, hospitals, pubs and hotels (predominantly Travelodges). In the early days of lockdown things looked grim for some of its tenants, with Travelodge entering into a CVA. SIR explored alternative tenants for its hotel properties but ultimately stuck with Travelodge and rents are back up to 70% of contracted amounts. If we’re all vaccinated by summer then the Travelodge portfolio could benefit from a staycation boom. You may not be able to socially distance on a roller coaster but theme parks will also benefit from a vaccine led economic reopening, doubly so if this coincides with the summer holidays. By consensus the British public are all desperate for a return to pubs and SIRs tenant in this area, Stonegate, should be big enough to weather the Covid storm. Finally a large part of the portfolio income is from healthcare, a growing investing trend and a more defensive area to SIRs other tenants.

    SIR’s management team clearly agree. There has been a number of director purchases whilst the share price has dropped. This is not a token amount to try and calm investors – we are talking in excess of £5m. SIR directors now hold shares worth over £6.5m. This is more than just skin in the game, this is having a major limb or two in the game. I like to invest where directors are putting their money where their mouth is – the SIR board are doing this.

    Regional REIT (RGL)

    The recovery potential for SIR is clear; it is not as obvious for RGL. RGL predominantly holds a portfolio of offices based outside of London. Offices I hear you cry, the office is dead. Teams, Zoom, WFH, living in the country! Not so fast I say.

    RGL Portfolio

    Human behaviour is difficult to change even in response to a once in a lifetime event, as shown by the London response to the great fire. People may go into the office less, but the idea of never going into the office is a fantasy in my opinion. The general consensus from my colleagues is that after a year of working remotely they are looking forward to returning to the office. I listened with interest when, on a recent Investors Chronicle podcast, Dale Nicholls, the manager of Fidelity China Special Situations, observed that in the largely covid free south China region commuting had returned largely to pre-pandemic levels. People are the same everywhere so I expect something similar in the UK. The human desire to socialise, plus the scepticism of bosses (Barclays and Goldman Sachs are already railing against full time home working) means that the office is far from dead. What happens when employees working from home start missing out on promotions to office based staff who have more visibility and have developed relationships that simply can’t be developed as well over a computer screen? What happens when bosses begin to suspect that home workers are spending more time gaming than grafting? The days of 5 days in the office may be coming to an end, but the days of 3-4 days in the office are very much alive, and for those 3-4 days, workers need an office building to house them.

    RGL’s anti-London focus also plays into the trend being led by the UK government of decentralising away from London. Where central government hubs go, the private sector tends to follow, hoping to build relationships and get a slice of the publically funded pie. The private sector is also likely to note that not only is commercial property cheaper outside of London, the wages of the staff inhabiting it are too.

    In the inevitable economic downturn immediately following the end of furlough, demand for office space may well drop. But demand could yet bounce back in the medium term due to all the factors mentioned above. In 7 Mistakes Every Investor Makes, Joachim Klement implores investors to look at the supply side, not just demand, showing the example of how a consolidated tobacco market in the late nineties benefitted despite a sharp decrease in demand for their products. Office demand may remain flat or even reduce slightly in the short term, but developers aren’t rushing out to build more of them. RGL could therefore also benefit from a supply side shock.

    The Micro View

    That’s the qualitative view but what do the numbers say? Taking a closer look at RGL and SIR reveals more aspects of both that I like the look of:

    Debt levels: The property sector typically has high levels of debt as mortgages are used to buy property to generate a yield. Nobody would ever advocate a 100% or higher mortgage, yet some REITs have levels of debt greater than the value of their assets. This is not the case here; both RGL and SIR have debt levels of around 70% of assets and this has been falling in recent years.

    Debt as a percentage of assets

    As a result of having a manageable level of debt the income generated by RGL and SIR comfortably covers interest expenses. This leaves room for dividends to be paid to shareholders – a key attraction of REITs.

    Interest cover

    Room for Returns: The primary attraction of a REIT is the income they generate. From the point at which I started buying into RGL the yield, assuming a return to pre-pandemic levels, would be 10.3%. The dividend for 2020 held up reasonably well for such a covid hit sector, at 6.45p compared with a 2019 dividend of 8.25p. Similarly for SIR, a return to 2019 dividend levels would represent for me a yield of 7.6% and the 2020 dividend was again healthy at 11.5p (16.53p in 2019). Both RGL and SIR have reported strong rent collection levels despite the impact of the pandemic.

    My intention with these holding is to hopefully reinvest their combined average dividend return of approximately 9% into equities that offer the potential for a higher level of capital appreciation. However both RGL and SIR are trading at a historic discount to NAV. If they can return to previous levels of trading at or close to par then there is a nice bit of, if not mind blowing, capital appreciation to be had. If the value of the underlying properties keeps pace with inflation them that capital appreciation should steadily tick upwards in the long run.

    Price to NAV

    REIT or wrong

    I think that RGL and SIR offer my portfolio an attractive dividend yield and scope for the discount to NAV to reduce significantly, whilst also offering an inflation hedge and diversification to my equity heavy portfolio. As ever this is not a recommendation to buy and you should do your own research. Will the post pandemic world be much like the old one, or am I a luddite that is ignorant to the technical revolution? Post away and let me know your thoughts.

    MI – Misanthropic Investor: Lessons from 2020

    I was bitten by the investment bug in 2018 having had an epiphany when reading Rich Dad, Poor Dad – my money should work for me! I started investing in Vanguard funds and began learning more about investing until in mid-2019 I finally felt confident to take the plunge and buy my first individual company stocks. So 2020 was my first full year of investing since I started picking individual stocks and what a year to start! I reflect here on what I’ve learnt about investing and how I do it and, grits teeth, how I performed.

    Going to bed a little smarter each day

    When I first started buying individual stocks in 2019 I did so based purely on quantitative value measures. The concept of value investing – buy what’s cheap, wait for mean reversion, count the pound notes – made perfect sense to me and I began to pick stocks based on traditional value metrics. But despite value investing making sense, a lot of ‘cheap’ stocks appeared to be cheap for a reason. I found myself lacking confidence in what I had picked, essentially because all I could say for why I had bought them was that they looked cheap based on valuation metrics.

    In 2020, influenced by Lord Lee’s How to Make a Million – Slowly and Phil Oakley’s How to Pick Quality Shares, I found myself changing my approach to finding cash generating companies with low debt at a low price and including a qualitative assessment before buying. I’m now much clearer on why I’m investing in an company, which gives me the confidence to ride out temporary falls in share prices and even potentially see these as a buying opportunity.

    Through either good (or dumb) luck or judgement, investments I have made using this approach have performed better than my now defunct value only approach. Though I still constantly obsess over what I don’t know (am I the dumb money?) and strive to read more and learn more. ShareSoc’s recent master class on remuneration will now form part of my assessment of a company as no doubt will their forthcoming masterclass on Financial Analysis (if you’re not a member of ShareSoc, sign up here, the best £45 per year that you will spend, and while you’re at it go for the SIGnet add on too which provides a great forum for learning from other investors).

    Mastering the Mind

    Psychology is a big part of investing, so I laid down on my reclining couch and wondered about what Freud’s take on my decisions and behaviour in 2020 would be?

    Mega Mind – March, when markets were plummeting, provided my first test of not only if I could hold my nerve amidst the panic and avoid selling out but could I be ‘greedy when others are fearful’. I was greedy! Not only did I stay invested but I also embraced the opportunity and bought shares in a few companies that I had previously admired but was put off by the price and added to some other positions that suddenly were on sale in the covid induced fire sale. How did I resist the panic?

    1. I only invest what I am prepared to lose and I have an emergency savings fund that I built up before I started investing. The money I invest is therefore money I can afford to lose. Don’t get me wrong, I don’t want to lose it, but I view this money as gone when it is paid into my ISA. Because it’s not money I’m counting on for say a house deposit or car, I’m prepared to leave it in my ISA forever. So seeing the sea of red arrows in March didn’t phase me, it inspired me to go on a stock shopping spree.
    2. I’m stubborn. When I’ve researched a stock and invested cash in it something fundamental would have to change to make me change my mind and sell. This could well prove to also be a weakness but in the panic induced drop in spring it proved to be a strength as I remained invested to benefit from the rapid rebound.

    My only regret is that I didn’t have more cash in my ISA to snap up more bargains when the market was crashing, which brings me onto…

    Brain Freeze – ‘Only swing at the fat pitches’ is one of the classic Buffet quotes. As my wife would attest, I find it easy not to spend in everyday life but for some reason when cash is sat in my trading account, it burns a hole in the pocket of my trading trousers. Doubly so when the market is creeping up and that cash is sat there earning nothing. This means that I am guilty of trying to find something to swing at when I perhaps should wait for that fat pitch. Some of that money invested during the short lived Boris bounce (Boris-one-bounce?) would have been better put to use in March and beyond. From now on I’m trying to invest less each month than I pay into my ISA so that I’ve got plenty of bats to swing when the fat pitches come along.

    The FTSE Boris bounce followed the same trajectory as his approval ratings

    Good Hunter, Bad Assassin

    Lee Freeman-Shor’s excellent book The Art of Execution categories investors as either Assassin’s, Hunter’s or Rabbit’s. My hunting skills were sharp in 2020, taking the tanking market in March as an opportunity to buy more of the stocks that I already owned at a discount and benefiting from this approach when the markets rallied. But there were some holdings of mine that crashed and I did nothing, positively rabbit like. These were stocks that I selected using my old pure value based approach. I don’t think covid fundamentally changes their long term prospects, but perhaps my lack of action belies a lack of confidence in these holdings and I should sharpen my assassins blade and get rid.

    Double Bubble with Investment Trusts

    Some of my best performing investments this year have been Investment Trusts, largely because I bought or added to them in March when the crashing markets brought a double bonus. Because ITs were being sold off, they traded at a wide discount to an already reduced NAV. This meant I not only benefitted from the fall in NAV, but also the widening discount to NAV. This is shown below where I managed to pick up an IT I had long had my eye on, Lindsell Train (LTI). In March LTI was trading at a rare discount to an already depressed NAV. Yet less than a year later LTI is now higher than ever and trades at a premium. In future crashes I’ll look to fill my boots with good ITs that have been sold off to benefit from both a NAV recovery and discount reduction.

    LTI trading on a rare discount to an already depressed NAV – its bounced back & them some since

    The Final Score

    As 2020 closed, it was with some trepidation that I finally got round to uploading my portfolio into SharePad. Would my efforts have been worth it, or could I have saved money and pain by simply investing in a low cost tracker fund or ETF. The good news is that I managed a total return of 12.3% and outperformed my benchmark of the Vanguard FTSE all-share (having more fun in the process). 12.3% may not be a superstar return and I’m sure plenty performed much better given the bargains that were on offer in March, but I’m happy with it. I’ve also picked up what I think are some good cyclicals that haven’t bounced back yet that I think will benefit post-pandemic, so there’s some potential to reap the benefit of this in the near future assuming a vaccine led reopening of the economy.

    2020 Report Card

    Star Pupil – Fidelity China Special Situations, a double bagger for me that continues to head upwards.

    Class dunce Secure Trust Bank is yet to recover from it’s covid crash and the outlook for banks isn’t encouraging given that interest rates look set to remain low. One for the cull list.

    One to watch – Secure Income REIT has remained flat but people are likely to want to visit theme parks and stay in hotels post pandemic. The agreement with Travelodge could be a positive if we’re confined to UK staycations in the summer. The yield looks encouraging and the share price is still 34% down from where it was pre-covid.

    ‘Friend & Fry’ worth a try

    Friday 1st February 2019 was a national day of mourning in Middlesbrough. The night prior to this now infamous day the English Football League transfer window closed. As it slammed shut the whole of Teesside peered into it to catch a glimpse of who laid behind it. The answer? Nobody.

    Some of the hysterics that have greeted this sight of nothingness are incredible. Fingers have been pointed, accusations made and criticism dished out to all and sundry employed by the club. The consensus is that the club has been run poorly and changes must be made.

    Now I do not dispute that point, in fact I made it here just over a year ago in response to the appointment of Tony Pulis. But the lack of transfer window activity is not a negative thing to me. I view it as a positive sign that the club have acknowledged their mistakes and have set about changing their ways.

    The cash thrown recklessly around by the club during the McLaren/Southgate era, the Strachan era and the Monk/Pulis era succeeded in doing nothing but saddling the club with players on big wages who could not be sold for anything like the fees that they were signed for. The resulting austerity was painful for all. Yet the recent lack of transfer activity suggests that the penny may have finally dropped and not, for once, into the pockets of players and agents.

    Fans have short memories and a tendency to err towards confirmation bias. Southgate is largely exonerated for his part in Premier League relegation, yet this is the manager who ultimately gave his blessing to sign the likes of Afonso Alves, Mido and Didier Digard. Some claim Pulis hasn’t been backed, in part due to the Pulis propaganda that he has only made three permanent signings. Yet those three signings have cost the best part of £20m. McNair has rarely played. Flint and Saville, despite looking solid enough, don’t look like £7m players. If cash is in such short supply Tony, why target these transfers who don’t look to be worth what was paid for them?

    I suspect Steve Gibson has surveyed the signings, the dire football, the horrendous home form and the fan discontent. He may have concluded that Pulis is unlikely to take us into the top two, even with additional players. So why, when Pulis’ contract is up at the end of the season, risk throwing good money after bad when we’ll likely have a new manager in the summer who wants to tear it up and start again. What if the lack of window wingers is actually the start of the longed for long term vision at the club?

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    A vision of ‘Friends & Frys’

    Florentino Perez once had a vision of ‘Zidanes y Pavones’ for Real Madrid, a team of top transfers and youth team products. My hope for Boro is that this barren transfer window is the start of a ‘Friends and Frys’ era – well scouted value for money transfers supplemented with top Teesside talent from our expensive and productive youth academy. Throw in a managerial appointment that looks beyond the tired usual suspects (Wilder, Farke, Moore and Bielsa have shown the merit in this) and I have no doubt that fractured faithful at the Riverside will once again unite behind their team.

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    Boro field a starting line up of 10 academy players against Fulham in 2006

    It may make the Premier League dream harder to achieve but frankly that dream has went the same way as the oft touted American one. Gone are the days when a middle sized club can compete with the Premier Leagues biggest and best. The cash grab by the top clubs has stacked the deck too far in their favour for that. As a result we now have the most predictable league in the world, one that I now find boring despite the quality on offer, due to the lack of genuine competition outside the top six clubs.

    So give me a team that tries to play good football. One that is packed with Teesside talent. One that eschews expensive transfers in favour of hidden gems. One that plays in a genuinely competitive league. That’s a team that I can get behind regardless of results. I hope that Steve Gibson agrees and gives the ‘Friends and Frys’ a try. Finances may mean that he is soon forced to.

    Rodwell Rage Ridiculous

    What happens when a football club no longer wants to play with that once shiny new expensive transfer? The answer was illustrated during the excellent ‘Sunderland ‘Til I die’ scene were Martin Bain, the much maligned Chief Executive, is pleading with £10m+ signing Jack Rodwell to terminate his contract and leave the club.

    Bain’s hope was that siphoning Rodwell’s £70k weekly salary from the Sunderland wage bill would free up funds. Funds that Bain, who earned a seven figure annual salary himself, and Sunderland would then like to throw at yet more signings as the club battles to beat the drop. Which is what Sunderland did in a futile attempt to remain in the Premier League the previous season. Bain is obviously not familiar with the widely accepted definition of insanity.

    As it becomes clear that Rodwell is going nowhere, Bain’s desperation turns to anger. Apparently Rodwell had said that ‘it was about the football’. This is translated as ‘walk away from your contract and your wage’. In increasingly uncomfortable scenes Bain tries, and fails, to effectively bully Rodwell into walking away. I was hoping that Rodwell would respond with words to the effect of ‘if it’s all about the football why not give me a chance to play rather than leaving me to rot in the reserves in the hope that I’ll leave’. Words that would have been made more pertinent by Rodwell’s positive contribution to Blackburn Rovers Championship campaign this season.

    Not only was Rodwell the Bain of Martin’s life, an increasing number of Sunderland fans also turned on him. This absolutely baffles me. It is not Rodwell’s fault that he was the only player that Sunderland did not insert a relegation clause into his contract which would automatically reduce his salary. Some of those same fans who now lament the spendthrift Sunderland approach to signings are likely to be the ones who demanded the club show ambition and splash the cash whilst the Premier League sun was shining.

    This is not limited to Sunderland fans as shown by a similar issue regarding Stewart Dowing’s contract being played out distastefully on social media by some Middlesbrough fans. The same fans who are demanding that cash be thrown around to back Boro’s promotion bid. Football fans often expect to have cake and to eat it without even a trace of self awareness.

    It often baffles me that when it comes to football players supporters often set standards that they would never expect from themselves. If your current employer tried to force you into leaving your job so that you could then do the same job on a lower wage you would likely end up in an employment tribunal. Yet the same people expect a footballer to do this with the minimum of fuss. However if the same footballer performed well and demanded a transfer to obtain a wage rise they would be maligned as mercenary. Imagine leaving your job for another for, shock, a pay rise. Cake and eat it indeed.

    Footballer’s have a short career despite the handsome rewards for those that make it to the top. When Rodwell signed for Sunderland, injuries had started his transformation from the ‘great England midfield hope’ he was at Everton to the ‘what could have been’ tale of woe familiar to all football fans. If he was honest Rodwell likely knew this himself, with the consequence being that he would never again command the kind of wage that Sunderland were paying him. The fact that this fate had befallen him is a reason why Sunderland, with all due respect, were able to sign him in the first place.

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    So would those lining up to lambast Rodwell, knowing that they would never get as good a salary again, knowing that they may only have 10 years of earnings left, knowing that they are one injury away from the scrap heap, have done anything differently? Some claim they would because of the vast sums of money involved. I treat this opinion with a heavy dollop of scepticism given that people tend to adjust their lifestyle to their earnings. Very few of us would accept a pay cut for doing our job, particularly if the reason given was “I thought it was about the job”.

    So set aside your hypocrisy and perhaps challenge why clubs are expected to throw vast sums of cash around instead in a futile attempt to challenge those same 5 or 6 top clubs that unfairly hoard the lions share of cash. The Rodwell rage is ridiculous.