Share Sleuth: Success forces some trading

It feels wrong at this time of year to be reporting trades. But try as I might not to think about money, I’ve made more virtual trades in the Share Sleuth portfolio this December than in the year so far.

The trigger is partly psychological. As a long-term investor, I’ve resisted trading until the portfolio has become so bent out of shape that the dam has burst and I can no longer contain myself. It has been distorted by the state of the stock market. There’s been a huge run-up in the share prices of the kind of shares I like, which means some of them have begun to look expensive, at least to me.

So I’ve sold shares in companies that over the past year or so I’ve begun to question. When I promised to document every trade in the Share Sleuth portfolio, I didn’t anticipate making so many in one go, so I’m afraid I must drown you in figures. Hold your breath. The sale prices in brackets are actual prices quoted by a broker and I deduct £10 broker’s fee from the portfolio’s cash balance for each trade. 

-The 10 best performing funds of 2017

The shares I’ve lost confidence in (they’re no longer in the portfolio table that accompanies the chart) are Sprue Aegis (189p), Air Partner (135p), Animalcare (319p), and Ricardo (892p). 

Making money

All of these trades have been successful in one respect. They’ve made the Share Sleuth portfolio money. SharePad, the software I use to track the portfolio, says the least profitable was Air Partner, which returned 105 per cent in five years. The most profitable was Ricardo, which returned 245 per cent in eight years.

Space precludes a thorough explanation of my motivations for selling each share; the basic explanation is that there are things I don’t understand about all four companies, which makes me uncomfortable holding them at their elevated valuations.

Smoke detector designer Sprue is heavily dependent on legislation to drive sales, which makes it difficult to determine how profitable the company will be in future. Animalcare recently took over a larger but less profitable and more indebted rival, and that also makes it difficult to judge future profitability. Engineer and environmental consultancy Ricardo is a business I just don’t feel I understand well enough, and air charter broker Air Partner is changing by acquisition into a much more diversified provider of air services, which I find difficult to evaluate.

It’s easy to take the money and run when you’ve lost confidence and the market hasn’t. I’m finding it more difficult to pull the trigger on a second category of stock, though. These are businesses that I’m very confident will prosper, but whose share prices have risen so high that I wonder if even they can achieve the expectations of the market.

High on the list are wargaming and modelling company Games Workshop, Treatt, a flavour and fragrance producer, and XP Power, which makes power adapters for machinery. The problem goes beyond their high stock market valuations, because these holdings have grown so much they are the portfolio’s biggest, each accounting for about 7 per cent of its total value. I have no intention of selling out completely, but I may decide to reduce my shareholdings in these companies.

That would create another problem. I’m reluctant to buy shares in obviously inferior businesses just because they trade on lower valuations, especially as, thanks to accumulated dividends and the ‘easy’ sales I’ve made, over 10 per cent of the portfolio’s value is already in cash, which is looking for a home. The companies I’ve selected in this month’s Wealth Creation Guide are obvious candidates, but the portfolio already owns all of them. With bargains apparently thin on the ground, it looks as though I’ve got plenty of work to do in the New Year! One member of the portfolio, FW Thorpe, is profiled in Share Watch this month along with three candidates. 

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