Share Sleuth: stronger focus on portfolio gems amid minor overhaul

Richard Beddard has jettisoned two poor performers and added to his existing holdings in firms he judges substantially undervalued.

A few days into 2019, I removed Finsbury Food and MS International from the Share Sleuth portfolio and recycled the loot into XP Power and Goodwin, two existing constituents I believe are substantially undervalued. It is the first stage in a minor restructuring of the portfolio.

I liquidated Finsbury Food at a share price of 102p, which raised £2,070 after a £10 charge in lieu of broker fees. The removal of MS International raised a little more: £3,774 after fees. The share price was 206p.

Both sales were the result of conclusions drawn last year. As I wrote in January’s Share Watch column, I believe Finsbury needs to grow bigger to drive down the cost of baking cake and bread, but the quickest way to acquire scale is to buy other bakeries, which is expensive. Since I do not see a way out of this bind, I think there are probably better places for the portfolio’s cash, even though the shares are cheaply valued.

Finsbury was a profitable trade. I added the shares in January 2014, five years ago, but reduced the portfolio’s shareholding in December 2015. According to SharePad, the service I use to track performance, the investment earned an annualised return of a little more than 17% over the whole period.

MS International was not a successful trade, despite my adding to the shares three times: in September 2012, March 2013 and January 2014. The shares did contribute an annualised return of about 2%, but that was thanks entirely to dividends. The company is a supplier of naval cannons, petrol station signs and structures, and fork arms for forklift trucks. It operates in capricious and, possibly, declining markets, and I am not confident that it will be as profitable in future as it has been in the past.

The money raised from its sale, together with some cash that has collected in the portfolio from dividends, has funded the addition of 117 shares in XP Power. The share price was £21, and the total cost of the transaction was £2,479, including £10 in lieu of a broker fee and £12 in lieu of stamp duty. It has also funded the addition of 103 shares in Goodwin at a price of £23.97 a share. The total cost of the transaction was £2,591, taking into account similar charges in lieu of broker fees and stamp duty.

A graph showing the performance of the Share Sleuth portfolio's decline reflecting wider market falls

 

Substantial holdings

I briefly profiled both companies in last month’s magazine, when I chose them as two of my six favourite shares for 2019 and beyond. The trades mean XP Power is the portfolio’s second-biggest holding (7% of its total value) and Goodwin is its fourth (6%), which reflects my confidence in their long-term prospects and the attractiveness of their current valuations.

I had other options: Avon Rubber and Softcat, profiled in this month’s Share Watch column, and Computacenter, profiled in last month’s, would have made worthy new additions. I also think existing holdings Howden Joinery, Victrex and Next are good value and under-represented in the portfolio.

However, I have already broken a self-imposed rule that allows me only one trade a month. In fact I have refashioned this rule so that it is more flexible, allowing myself one big trade of up to 5% of the value of the portfolio or two smaller ones of 2.5% of its value. These limits are arbitrary, but sensible I think. An upper limit of 5% restricts the amount of risk I take in any given month. A lower limit of 2.5% ensures my trades are, nevertheless, meaningful. This month I have taken the second option, and by liquidating two holdings and not adding any new ones, I have reduced the portfolio from 26 to 24 constituents.

I would not be unhappy if it shrank further, to around 20 holdings. This would mean I spent less time analysing shares that are already in the portfolio and more time assessing new candidates. More competition for membership could increase the quality of the investments in the portfolio, without reducing its diversity significantly.

 

Share Sleuth portfolio table Feb 2019

 

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