Share Sleuth: why I am cutting my losses on this share

Richard Beddard on a head versus heart tussle over a UK company.

This month, I have been agonising about something I am very bad at: selling a loser. Specifically, I have been torn between reason and sentiment, which is ironic because that is what System1, the company concerned, is all about.

System1 is a market research agency that used learnings from behavioural science to pioneer a new methodology. Instead of asking people whether they are persuaded by an advertisement, for example, System1 asks how it makes them feel. Advertisements that score highest tend to be memorable and make you feel good. They explicitly say next to nothing about the product or brand they are advertising, like the John Lewis Christmas advertisements.

Outperformance gap widens

Share Sleuth outperformance graph from inception to date


Behavioural edge

Although behavioural science has been adopted by mainstream market researchers, System1 has the most experience. The company earns more money providing ad-hoc consultancy to companies developing new products and concepts (“innovation”) than it does testing advertisements, but testing is potentially more lucrative.

System1 has tried to reach the marketeers at the big brand owners. It has changed its own brand from quirky BrainJuicer to serious System1. A sales push in the US did not work. Neither did setting up its own advertising agency. So the company has turned to technology, automating advertising testing so the results are delivered with very little human intervention. This has reduced costs and bolstered flagging margins, but has not yet lifted revenue.

Despite these sometimes costly initiatives, the underlying business has performed profitably though inconsistently. Really big brands owners like Unilever and Procter & Gamble are customers of System1 but, ironically, it has not been able to persuade them to take up advertising testing. John Lewis, HP, Camelot, IKEA and Chanel are all famous customers, but they are effectively single brands.

Now System1 is doubling down on data. Big market research firms provide portals allowing marketeers to interrogate research and integrate it into their business systems, tying them to the provider. System1 still largely delivers results in PowerPoint presentations, but it has recruited a chief information officer to digitise the business.

AdRatings is perhaps its first digital product. AdRatings is a standalone subscription database that allows advertisers to compare the performance of their advertising against that of rivals. System1 has developed a free app that will introduce marketeers to the full service. The company hopes it will go viral and infiltrate the marketing departments its salespeople have not penetrated.

It is a bold plan, and my heart tells me to stick with System1 as it tries to take on market research Goliaths like Kantar and Nielsen. But my head tells me that to succeed, System1 must develop a new capability in technology where its competitors already have an advantage. In investment, there used to be a saying that no fund manager got sacked for buying IBM (everyone bought IBM). The same seems to be true for marketeers and the big research firms.

One huge mandate would transform System1’s performance, but I cannot judge how likely that is or whether System1 can retain its behavioural edge.

The company scores 5/10 according to my scoring system. In July, I liquidated Share Sleuth’s small holding of 463 shares, added in January 2015 at a total cost of £1,793. At a share price of 214p, the trade raised £982 after deducting £10 in lieu of broker fees. In four and a half years, it paid dividends of £287, limiting the overall loss to £524 or about 30%.

System1 holding liquidated

Portfolio     Cost (£) Value (£) Return (%)
Cash       4,088  
Shares       120,156  
Since 9 September 2009     30,000 124,243 314%
Companies   Shares Cost (£) Value (£) Return (%)
ALU Alumasc 938 999 868 -13
ANP Anpario 937 3,168 3,233 2
AVON Avon Rubber 192 2,510 2,404 -4
CFX Colefax 434 943 2,213 135
CGS Castings 1,109 3,110 4,636 49
CHH Churchill China 341 3,751 5,422 45
CHRT Cohort 1,600 3,747 7,016 87
DTG Dart 456 250 3,561 1,325
DWHT Dewhurst 735 2,244 8,085 260
GAW Games Workshop 198 568 9,286 1,535
GDWN Goodwin 266 6,646 9,044 36
HWDN Howden Joinery 748 3,228 3,788 17
JDG Judges Scientific 252 5,989 8,883 48
NXT Next 45 2,199 2,546 16
PMP Portmeirion 349 3,212 3,525 10
QTX Quartix 1,085 2,798 2,984 7
RM. RM 1,275 3,038 2,984 -2
RSW Renishaw 92 1,739 3,487 100
SOLI Solid State 1,546 4,523 7,374 63
TET Treatt 1,222 1,734 5,475 216
TFW Thorpe (F W) 2,000 2,207 6,500 195
TRI Trifast 2,261 3,357 4,420 32
TSTL Tristel 750 268 2,239 735
VCT Victrex 150 2,253 3,099 38
XPP XP Power 339 6,287 7,085 13

Notes: No new additions. Transaction costs include £10 broker fee, and 0.5% stamp duty where appropriate. £30,000 invested on 9 September 2009 would be worth £124,243 today. £30,000 invested in FTSE All-Share index tracker accumulation units would be worth £66,335 today. Objective: To beat the index tracker handsomely over five-year periods. Source: SharePad, 25 July 2019.

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