Simon’s 2019 Year End Review – What a Year!

Simon’s 2019 Year End Review – What a Year!

Whilst dominated by lots of negative news including political shenanigans (May out / Boris In), Brexit, and a string of high street businesses going to the wall, 2019 has also delivered some positives…….…um…….ah yes……..25th July 2019 was the UK’s hottest day on record, England did pretty well at the cricket and Donald Trump is one year closer to the end of his term in office.

The other piece of good news, from a personal investing perspective, is that my portfolio has generated the best annual return since I started investing some 20+ years ago. But there are still 6 trading days left to go I hear you all say…..well yes that’s true, but I’ve officially finished work for the year as of the 18th and want to get all my admin out of the way so I can fully down tools for Christmas and get the festivities started!

To give my portfolio performance some context it would be remiss of me not to draw readers’ attention to some of the main stock market indices YTD:

  • NASDAQ +35%
  • S&P 500 +27%
  • DOW +21%
  • Nikkei +19%
  • FTSE All-Share +14%
  • FTSE 250 +24%
  • FTSE Small Cap (ex. Ins Trusts) +11%
  • FTSE AlM All-Share +9%

Clearly, the stock markets (certainly US/UK) have done very well indeed so an investor with his hard earned in a simple index tracker fund could quite probably have made a double-digit return with zero effort – but where’s the fun in that!

Portfolio Composition

After a fair bit of strategic chopping and trimming during Q3 2018, my portfolio on 1st January 2019 comprised the following 19 stocks in order of size:

  1. D4T4 Solutions (D4T4)
  2. Driver Group (DRV)
  3. Alliance Pharma (APH)
  4. Haynes Publishing Group (HYNS)
  5. Airea (AIEA)
  6. Goodwin (GDWN)
  7. Games Workshop (GAW)
  8. T Clarke (CTO)
  9. National Milk Records (NMRP)
  10. RA International (RAI)
  11. PCF Bank (PCF)
  12. Christie Group (CTG)
  13. Aukett Swanke (AUK)
  14. Bonhill Group (BON)
  15. Modern Water (MWG)
  16. WYG Group (WYG)
  17. eServGlobal (ESG) now WJA
  18. Ashley House (ASH)
  19. Field Systems Designs Holdings (FSD)

Some of these stocks, such as D4T4, I’ve held since 2011; others such as PCF Bank had been purchased just the year prior (2018).

The overall portfolio comprises 3 distinct investment ‘buckets’ as set out below (Jan 2019). As with most things stock market related this 3 bucket ‘categorisation’ is more art than science with a dose of subjectivity in some cases:

Grade A Grade B Grade C
D4T4 DRV BONH
GAW AUK MWG
GDWN PCF ASH
HYNS CTO CTG
RAI AIEA ESG/WJA
NMRP WYG FSD
APH

 

Grade A stocks are typically those with some form of competitive/economic moat, typically distinguishable by high ROCE/ROIC, ROE and Gross Margins or companies that have historically had such characteristics but are going through a period of change (i.e. HYNS, GDWN). They also typically pay a dividend. These will typically be large positions making up 50-70% of my PF in total and where I plan to hold them for many years.

Grade B stocks typically make up 20-40% of my PF in total and may also have some form of more narrow moat but are more likely to be held due to an alternative investment thesis and over a shorter time frame perhaps 2-3 years. Examples of investment rationale include:

  1. I believe they are a likely M&A target and the price is wrong. Examples of such are DRV, AUK and WYG.
  2. I like the business but I feel it is either cyclical (CTO), outside of my circle of competence (PCF), too tiny/illiquid (FSD) or some other such factor.

Grade C stocks typically make up around 10-15% of my overall portfolio in total. These stocks will be those where:

  1. I am holding them primarily to trade them but may have spent lots of time researching them and attending AGMs over the years (MWG).
  2. I believe they are mispriced and have potential to re-rate but they have no moat (ASH).
  3. I have recently bought and I am still researching (BONH, CTG).
  4. They are an outright punt (ESG/WJA).

Portfolio Performance.

So, how did this motley crew of stocks perform during 2019?

Unsurprisingly the Grade C stocks were largely a disappointment and each was sold during the course of this year:

  • BONH was sold for a 6.5% loss as I felt I would not be able to gain an edge or proper understanding of the business and it did not appear to have a moat of any form.
  • CTG was sold for a loss of 21% (having bought in 2018) on the realisation that I had concerns about the executive management and that their loss making ‘SISS’ division was likely to remain a long term drag on the business despite mgt efforts to turn it around. Shareholder returns over 10+years are pitiful.
  • ESG/WJA was sold for a 13% loss (having bought in 2018) upon the realisation that it was just a punt and my capital/effort was better off spent elsewhere.
  • FSD was sold for a 13% loss as it was just incredibly tiny and illiquid and their expansion into the Energy from Waste (EfW) sector had not gone as hoped.
  • Last but not least is ASH where I suffered a clonking 30% loss, the gory details of which are covered in detail here.  Now sold.

The only Grade C stock to make any money was MWG which is a surprise with the valuation down circa 80% YTD. I closed my last trades in November 2019 to realise a 57% profit since first buying the stock in 2013 and holding it on and off ever since. I have to question the opportunity cost here, however.

My Grade B stocks had mixed performance during 2019 but were largely profitable – only two still remain in my portfolio:

  • DRV is still in the portfolio as a slightly smaller sized holding but is down 11.5% YTD. I believe it’s a nailed on M&A target and I was delighted to see Traction AB (who have also held Waterman Group and WYG) taking a 14.2% stake this week; buying the stock from none other than Keith Ashworth-Lord who had held it in his Buffettology Fund for at least 2 years although selling down during this year. I believe it was one of KAL’s smallest holdings.
  • AUK also remains in the portfolio as a smaller sized holding and I’m delighted to note that it is up 50% YTD. Another M&A target with results out in January. If they turn in a profit as anticipated it will be an excellent performance against a torrid UK macro backdrop for UK / London based architects. No dividend is frustrating.
  • PCF was sold recently for 2.5% loss as Financial Services are not my area of expertise and whilst I like the management it was never going to be a conviction holding for me.
  • CTO was sold for a 36% profit between April and September 2019 on worries that their order book was slowing and Brexit was likely to have a negative impact. I still really like this business and missed a trick not re-buying them at 95p in October as they are now back up to 130p+.       It would unlikely have been a hold forever stock anyway due to its cyclical nature.
  • AIEA was sold for a thumping 30% loss in August when their interims noted adverse market conditions and Brexit headwinds. Whilst very much liking the re-shaped business (focused around their ‘Burmatex’ offering) I could not see any short term relief and chose to fully exit. I may revisit.
  • WYG was the shooting star of my Grade B holdings. Having initially bought the stock as high at 105.5p in 2017 as an M&A play and added throughout 2017/18 (with some trading as prices permitted) by the end of 2018 I was getting increasingly uncomfortable with the size of my position and the precarious nature of the balance sheet so I considerably reduced my position at 44p to a smaller ‘watching brief’ position hoping for cheaper prices. On 13th February the Group announced they were in breach of their banking covenants and by 16th February 2019 the price was just 16.5p.  Over the next 2 months I loaded up, buying at prices as low at 14.5p taking it to a 10%+ of portfolio position at an average price of around 15.7p. My expectation was a multi-bagger and just a few weeks later on 20th May 2019 it was announced that Tetra Tech (US) had made a 55p cash offer for the Group. I netted a fabulous 246% return to sit alongside other premium takeovers in prior years from the same sector (Atkins, Sweett Group and Waterman).

My Grade A stocks have had a very good year and all but one still remains in my portfolio:

  • D4T4  – up just 12% YTD, however, this is a superb business and my largest holding at circa 20% of PF. I’ve written about it before here and my colleague Michael Taylor has also covered it a number of times in his ‘Shifting Shares’ column. I anticipate them hitting H2 numbers and delivering further positive newflow leaving just the small matter (!) of the transition to SaaS to navigate, although I believe that D4T4 are in a slightly unique position via their key partner structure to make this transition less painful. We will all have to wait and see how it pans out but longer term D4T4 is going to be a much more valuable company and I look forward to the journey with high hopes that this business will remain in my portfolio for another 8 years assuming it is not acquired for a SaaS type multiple in the next couple of years.
  • GAW  – up an incredible 97% YTD and is my 4th largest holding at circa 12% of PF.
  • GDWN  – up 16% YTD and is another fabulous owner managed business with plenty of moaty characteristics. Yesterday’s H1 numbers came as a disapointment but with a very strong order book and contracts delayed due to the elections anticipated to unwind in H2 (along with better quality earnings), I don’t see any reason to change my stance on this business  – circa 10% of PF.
  • HYNS  – up a staggering 149% YTD following superb prelims in September 2019 followed by news that the business was being put up for sale. I most recently wrote about Haynes here. Having been as high as 20% of my PF, I recently trimmed a few to reallocate to D4T4 and hence its currently 16% of my PF.
  • RAI is disappointingly down 10% YTD and despite the business being deemed uninvestable by some (Recent IPO / Africa / Construction sector / Dubai based / Repeated Missed Forecasts), I like the culture of this business and its moaty characteristics. Whether having 8%+ of my PF exposed to them is sensible will no doubt become clear during 2020…
  • NMRP  – down 14% YTD following a nasty IT hack back in September which took a chunk out of 2019 profits. This business has an enviable moat and pricing power and I have high hopes for 2020 and beyond. I’ve written about NMRP before here and here. Circa 6% of PF.
  • APH was fully sold in February 2019 following a change in CEO, a non-exec representing a major shareholder (MVM) leaving the business and the realisation that the economics of the business were not moaty enough to earn a place in my PF.

There have been just a handful of new additions during the year:

  1. RPS Group (RPS) – I’ve watched this company for years but had never owned it as similarly to WYG I didn’t take to the previous management team and the price was never cheap enough. New management and 100p offered (26th June 2019) was too good to miss. I’ve written about this business before here so won’t repeat it. Up 72% since that initial June purchase and it’s a pure M&A play. I’m hoping to see a bid arise in the 220p area during 2020/21. Grade B.
  2. SDI Group (SDI) – This business is fairly well followed by the retail investor community and hence doesn’t really need an introduction. Annoyingly I first reviewed the business in early January 2019 at sub 35p but rejected it as it didn’t pay a dividend and seemed fully priced. To show me I was wrong it duly rallied to 50p by April and I had to stump up the cash (49p/50p) in June 2019 to get myself on the register. I’ve since attended the AGM and met the very capable management team at Mello. The stock is up 112% YTD. Grade A 
  3. Mountfield Group (MOGP) – I’ve written at length about this business here and here so I won’t repeat it again other than to say it just about falls into my Grade B box, as although its tiny (sub £5m mcap) it has the potential to re-rate and/or be acquired and is quite a niche player in its sector.
  4. Newmark Security (NWT) – This was a business I only bought in November having seen them at Mello London. Management own a decent chunk of the business and its US operations seem to be performing very well; there is also activist investor Duncan Soukup (Thalassa) on the register to add a little spice. It’s up 20% so far and falls into Grade C as it’s a small position until I see the next set of results in January. Unlikely to be a hold forever stock.
  5. Northbridge Industrial Services (NBI) – I’ve owned this business before, initially buying stock at 158p in July 2010 and fortuitously selling out between August 2013 and November 2014 at prices up to 574p. It took a huge whack in 2015 and has slowly been recovering. I looked at it at 80p in 2016 but couldn’t see enough green shoots. Although forecast to still make a loss in FY/19, I have bought this as a trade up to 170-190p area as there are clearer signs of improvement, book value is 130p and other valuation metrics would imply its undervalued. The chart is also nicely trending up. I bought sub 122p earlier this month. Grade C

I have to add that I also tried to buy some stock in Renew Holdings (RNWH) on 26th November 2019 after reviewing their excellent prelims and duly placing a limit order at 400p with my broker which I could have swore I saw filled that morning but alas no! The price now less than 3 weeks later….522p!

Lastly, I have dabbled in the few speculative trades during the year including Fevertree (FEVR) and Hurricane Energy (HUR) but to no avail, closing both at breakeven or a small loss.

So I am finishing the year holding just 13 stocks (down 6 holdings on December 2018) but with a significantly higher weighting given to quality businesses that I plan to hopefully hold forever.

Show me the money!

So, the fruits of my investing endeavours as of writing this (19th December 2019) are:

  • My SIPP – 53.6% YTD
  • ISA’s – 21.7% YTD

These returns include dividends received during the year and allow for all trading costs.; the combined performance YTD across all my portfolios being 42.1%.  

In summary, the big winners have been WYG, GAW and HYNS (all up circa 100% or more) and the big losers have been ASH and AIEA (both at a 30% loss).

It’s been quite a year!

That said, I will not get complacent and the environment in 2020 may be very different with Brexit negotiations now firmly back in the spotlight.  As for my 2020 strategy, the plan is to do as little as possible other than watch the eggs already in my portfolio ‘basket’ closely, attend AGMs, keep talking to the respective management teams and continue researching / learning.

Assuming the Board of Haynes Group find a buyer, the proceeds will need reallocating to a suitable replacement and I look forward to finding some suitable short list candidates in the New Year. I already have 9% cash put to one side which is unusual for me as I’m typically 100% invested, plus I am also selling an investment property in the New Year to further add to my equity capital and pave the way towards full-time investing over the next couple of years.

I was anticipating that RAI may further disappoint investors short term to allow me to add more in early 2020 but this week’s update, whilst stating profits will only be ‘broadly’ in line, was otherwise positive with 83% of 2020 sales already in the bag. The big question is how they manage investor expectations going forward; certainly if they can secure one of the large UN rations contracts they are bidding for (not currently in the forecasts) it would be a game changer. Personally, I’m happy for them to just continue to execute their strategic plan since raising money at IPO and patience should be rewarded.

The intention is to add 1-2 more high quality business during 2020 to sit alongside GAW, GDWN, SDI, NMRP, D4T4 and RAI to have around 8 core ‘Grade A’ holdings as the engine of my PF with perhaps 3-4 peripheral ‘Grade B/C’ holdings to allow myself a little room to dabble; although this year’s review has proved that dabbling in lower quality or value type businesses generally isn’t worth the effort (or stress).

That’s the plan in a nutshell.

It’s been another great year for retail investors with events such as Mello and a growing investor community on Twitter and Stockopedia so let’s all hope for more good things to come in 2020.

Season’s Greetings and Best Wishes to everyone.

At the time of publication the author may hold a long position in any of the companies mentioned.

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  • comment-avatar

    Awesome write-up.

    I share the positive future outlook with RAI.

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    • comment-avatar

      Thanks for the feedback. #RAI divides opinions but I think they are carving out a nice business offering a wide set of services and if they treat they clients well and offer an exceptional service then good things should happen.

      Reading my report back I’ve noticed various things I should have perhaps clarified, particularly with WYG, namely that only once I had suitable comfort they the banking covenant breach wasn’t going to be curtains for the business did I move in.  This is where knowing the sector and management can be an advantage but of course it could still have gone wrong as anyone who read the offer documentation would have seen.

      I like a focussed portfolio of around 12 stocks as I find that more than enough effort with a day job. I want to know my holdings well so that I know how to act when the inevitable bad news (hopefully temporary) comes along. I’m still working on it! 

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