Share Sleuth: a colossus cut down to size

Richard Beddard says the re-rating of a company is justified, but its weighting in his portfolio is too large.

A sudden re-rating of shares in Judges Scientific means Christmas came early for the Share Sleuth portfolio, but also left me with a thorny problem.

I first added shares in Judges Scientific to the Share Sleuth portfolio less than two years ago in March 2018, at a price of £23.20. With uncharacteristic haste, more followed in January 2019 at £24.40. By the end of November, when I reduced the portfolio’s holding, the share price was £53.80. The shares had risen by 120% in 10 months and, due to dividends and a slight rise in price before then, the portfolio’s holding has earned a slightly stronger return.

Disciplined acquirer

My view of Judges Scientific has not changed. It is a disciplined acquirer of small but established businesses that make scientific instruments for universities and industries around the world. The specialised nature of the equipment limits competition, which means the earnings of the companies that it comprises persist and can be used to pay off money borrowed to fund acquisitions, clearing the way for the next ones.

Judges Scientific profits because the cost of borrowing is low and the returns from the companies it buys are high relative to the price it pays. Its continuing success depends both on excellent relationships with its bank and a near two-decade reputation for straight dealing with the private owners of the companies it ultimately buys.

The views of other market participants have changed, though. Revenue and profit growth, and the announcement of a special dividend in November, may have revealed what long-term investors already knew: that the businesses Judges has bought cheaply are good businesses, and once they have paid for themselves they go on earning money for Judges Scientific in perpetuity. Until December 2019, when it acquired Moorfield Nanotechnology, Judges Scientific had not bought a company outright since 2017, yet its results improved markedly. New acquisitions may be the company’s growth engine, but it is not reliant on them for growth.

The new interest in Judges Scientific means the enterprise is valued at a heady multiple of about 29 times adjusted profit – reducing the appeal of the shares, but not enough to lose faith in their long-term potential. Such is my confidence in the business, I score the shares 6.6 out of 10 despite the high valuation.

Even so, because I added two tranches of the shares and the share price subsequently took off, Judges Scientific was the portfolio’s largest holding, accounting for over £13,000 or 9.2% of its total value. While I am content to hold some Judges Scientific shares for the long term at its current valuation, I am not comfortable with it being the portfolio’s largest constituent. Redeploying some of the money invested in Judges Scientific into a higher scoring share will both increase the portfolio’s diversification and, hopefully, improve its prospects.

On 27 November, I reduced Share Sleuth’s holding by just under 40% from 252 shares to 159, netting the portfolio £4,993, with the holding value just under £8,500, at 6% of the portfolio.

Next month, there is plenty of money to invest. The most likely candidates remain PZ Cussons, a new addition, and Victrex, a top-up. Both companies are among the highest scoring of all the companies I follow (see the table in Share Watch). But I restrict myself to one trade a month and there remains another thorny issue: Games Workshop. It is too highly rated; and now I have cut Judges Scientific down to size, Games Workshop is the portfolio’s largest holding.

Forging ahead to an all-time high

A graph showing the Share Sleuth portfolio over time (Jan 2020)

 

Judges Scientific cut down to size

Portfolio     Cost (£) Value (£) Return (%)
Cash       9,395  
Shares       140,542  
Since 9 September 2009     30,000 149,937 400%
           
Companies   Shares Cost (£) Value (£) Return (%)
ALU Alumasc 938 999 854 -15
ANP Anpario 937 3,168 3,092 -2
AVON Avon Rubber 192 2,510 3,926 56
BMY Bloomsbury 1,256 3,274 3,567 9
CGS Castings 1,109 3,110 4,392 41
CHH Churchill China 341 3,751 6,189 65
CHRT Cohort 1,600 3,747 10,736 187
DTG Dart 456 250 7,643 2,957
DWHT Dewhurst 735 2,244 7,074 215
GAW Games Workshop 198 568 11,444 1,915
GDWN Goodwin 266 6,646 9,629 45
HWDN Howden Joinery 748 3,228 5,007 55
JDG Judges Scientific 159 3,825 8,014 110
NXT Next 45 2,199 3,278 49
PMP Portmeirion 349 3,212 2,426 -24
QTX Quartix 1,085 2,798 3,667 31
RM. RM 1,275 3,038 3,723 23
RSW Renishaw 92 1,739 3,612 108
SOLI Solid State 1,546 4,523 9,160 103
TET Treatt 1,222 1,734 5,719 230
TFW Thorpe (F W) 2,000 2,207 6,700 204
TRI Trifast 2,261 3,357 4,183 25
TSTL Tristel 750 268 2,715 912
VCT Victrex 150 2,253 3,690 64
XPP XP Power 339 6,287 10,102 61

Notes: No new additions. Transaction costs include £10 broker fee, and 0.5% stamp duty where appropriate. Cash earns no interest. Dividends and sale proceeds are credited to the cash balance. £30,000 invested on 9 September 2009 would be worth £149,937 today. £30,000 invested in FTSE All-Share index tracker accumulation units would be worth £68,570 today. Objective: To beat the index tracker handsomely over five-year periods. Source: SharePad, 18 December 2019                    

 

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