SIF June review: Taking profits against the trend (VLX, TAM, STCK)

It’s the end of June, so time for my monthly review of stocks that have been in my virtual SIF folio for at least nine months. There are three companies in the spotlight this month:

• Volex (LON:VLX) – is growth about to slow at this AIM-listed cable manufacturer?.

• Tatton Asset Management (LON:TAM) – this financial group has just published a strong set of results

• Stock Spirits (LON:STCK) – the drinks group proved its defensive credentials last year, but the outlook is fairly flat.

As usual, I’ll also take a look at the performance of the portfolio over the last month. However, before I get started, I’m going to take a quick look at how I run this rules-based portfolio.

Disclaimer: I’d also like to emphasise that the trading decisions I discuss in SIF articles are not stock tips or advice. My comments represent my opinion only and are intended to illustrate how I use Stockopedia’s tools and data to run a rules-based portfolio. Please DYOR (do your own research). I am often wrong!

How does SIF work?

A comment from Paul last week reminded me that it’s been a while since I discussed the system I use to run SIF. I’ll try to do that here, briefly.

SIF (Stock In Focus) is the name of a £1m virtual portfolio I’ve been running here at Stockopedia since April 2016. As I write, SIF is valued at £1.65m plus dividends, so to date it’s been moderately successful. 

(SIF vs FTSE All-Share index)

I also own all of the SIF shares personally, in a portion of my own portfolio.

When I launched SIF, the challenge I agreed with Ed was to see if I could beat the market with a rules-based portfolio. 

The rules are fairly simple. I select shares to buy from the results of my buying screen, which you can see here. Broadly speaking, my rules are aimed at finding stocks which offer affordable growth and are showing positive momentum.

New stocks are normally held for a minimum of nine months. They’re then reviewed against the criteria in my selling screen (here). Slightly confusingly, stocks must pass all the rules in my selling screen to remain in the portfolio.

SIF doesn’t have strict size or diversification rules, but I have a soft maximum of 20 stocks. I also aim to avoid stocks which obviously overlap with existing holdings.

I hope this all makes sense – please feel free to quiz me in the comments if not!

SIF Folio June performance update

Getting back to SIF – here’s how the portfolio has performed over the month to 28 June 2021:

Note I’m using Stockopedia’s new time-weighted returns feature to compare SIF (blue) to the portfolio’s benchmark, the FTSE All-Share Index (grey).

We’re almost at the half-year mark, so here’s a snapshot of the portfolio’s year-to-date performance, compared to the FTSE All-Share index. 

The portfolio’s cash weighting remains high, at 22%. This snapshot was taken before any sales which might result from today’s review. 

To address this, I’m going to increase the default position size from July. I’ll cover this in more detail next time I add a stock to the portfolio.

Finally, here’s a snapshot of the portfolio, as it stood on 28 June 2021:

Right – let’s take a look at some shares.

Volex (LON:VLX)

(Buy report: 05 August 2020)

Portfolio gains tend to be driven by a handful of big winners. Certainly much of SIF’s strong performance this year can be attributed to AIM favourite Volex. SIF’s holding in this company is up by 170% at the time of writing, after 10 months in the portfolio.

Is there more growth to come from this Nat Rothschild-led business? Probably, I think. I agree with the bull case that electric vehicles offer structural growth opportunities. Data centres could also drive long-term growth. 

However, I’m less attracted to this stock than I was when it was cheaper. At its heart, this is a capital-intensive manufacturing business. Profitability is pretty average. 

Although margins and ROCE may improve a little more, I think gains are likely to be incremental. Even really high-quality manufacturers such as Spirax-Sarco Engineering (LON:SPX) and Halma (LON:HLMA) only generate 16% returns on capital, according to Stockopedia data.

I’m also a little unsure how strong the group’s organic growth is. Volex’s acquisition spree has made in-house growth hard to measure over the last couple of years. This month’s results didn’t shed much light on this, in my view.

In a similar vein, I think the company’s definition of underlying profitability is quite generous. Volex’s underlying profits exclude acquisition-related costs and share-based payments, even though both are a regular feature of the group’s operations. 

Finally, I’d note that Volex’s profits have been boosted by deferred tax credits over the last couple of years. In FY21 these accounted for $9.5m of the group’s $38.9m net profit. I don’t know the story behind this situation, but I assume these credits will run out at some point. That could slow profit growth significantly.

All of the above is only my opinion. But my screening system has also turned cautious on Volex. The stock no longer passes all the tests required to remain in the portfolio, failing on two counts:

PEG ratio: this price/earnings growth ratio has risen above my maximum of 1.8

EPS forecasts: Volex’s recent results do not seem to have encouraged City analysts who cover the stock. Growth is expected to slow this year and consensus forecasts have been trimmed over the last few months:

The consensus trend is no longer rising, and at least one broker seems to have downgraded the stock:

Finally, Stockopedia’s algorithms have also become more cautious. Volex’s StockRank has fallen from from 85 to 69 since the company’s full-year results were published on 17 June:

Conclusion: Volex shares no longer pass all of my rules, so I have no choice but to sell the stock from SIF. 

To be honest, this aligns with my personal view. The stock is now trading on 21 times forecast earnings and yields under 1%. At this level, I think Volex is probably up with events. I’m not too unhappy at booking a profit at this time.

Total return: +171%

Verdict: Sell

Tatton Asset Management (LON:TAM)

(Buy report: 08 July 2020)

Tatton Asset Management also trades on more than 20 times forecast earnings. But unlike Volex, it generated an operating margin and a return on capital of more than 30% last year. The dividend yield remains useful, at 2.8%, and net cash is building on the balance sheet.

Like Volex, Tatton published its full-year results earlier in June. The highlights were pretty strong, in my opinion:

Tatton provides services to financial advisers, including asset management services. The group now has nearly £10bn under management, so it’s becoming a fairly substantial business.

This month’s results haven’t really added much to the view I laid out in my review last month, so I’m not going to repeat myself here.

I continue to like Tatton’s solid growth and strong profitability. Anecdotally, I hear that it has a good product that’s well-liked by clients.

The only thing I think does deserve an explanation is the fall in statutory profit, which I’ve highlighted above. Reported profits fell due to several adjusting items. By far the largest of these was a share-based payment charge of £3.74m. 

What’s happened is that the FY20 payout was withheld due to the pandemic, but has been released this year, along with the payout for FY21. So the company has effectively booked two years’ worth of share-based remuneration payments in one year.

Although I believe that the (non-cash) cost of share-based payments should be included in adjusted profits, it’s not a dealbreaker for me in this case. However I look at it, Tatton is highly profitable, cash generative and growing.

As I’ve said before, my main concern is that a market downturn would cause a drop in the value of assets under management, cutting fee income. For now, there’s no sign of this. Earnings forecasts are positive and improving:

Tatton  continues to pass all of my screening tests, so will remain in SIF for at least one more month.

Total return to date: +50%

Verdict: Hold

Stock Spirits (LON:STCK)

(Buy report: 16 September 2020)

Stock Spirits is an Eastern Europe-focused drinks firm that has a 30% share of the Polish vodka market and a sizeable presence in the Czech Republic. The group also has some operations in other European markets.

This business proved its defensive worth last year. Although 15% of sales have historically come from the on trade – restaurants and bars – comparable revenue rose by 7% during the year to 30 September and was only down by 3% during the six months to 31 March 2021.

However, forecasts suggest that both revenue and sales this year are likely to be flat or slightly lower. 

The shares have pulled back since the half-year results were published in May. As a result, Stock’s share price has underperformed the market, leaving it with negative relative strength.

As a result of these factors, these shares now fail my screen on three counts:

This situation means that I have no choice but to sell Stock Spirits from SIF this month. This should crystallise a satisfactory 32% profit, including some decent dividends. 

Total return: +32%

Verdict: Sell

Final thoughts

Am I taking profits too soon on Volex? Only time will tell. 

However, I think there are a couple of more general points worth making about how I aim to run the portfolio.

Firstly, SIF is always about being fairly middle-of-the-road. I aim to avoid outliers and other extreme situations, where investment outcomes are often less predictable.

Secondly, I’m happy to leave something for the next person, whose appetite for risk and whose knowledge of the situation may differ from mine.

I’ll be selling SIF’s holdings in Volex and Stock Spirits after this article is published this week. I intend to sell my personal holdings in Volex too, but will continue to hold some Stock Spirits shares in my long-term portfolio.

Disclosure: At the time of publication, Roland owned shares of all the SIF portfolio stocks.

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