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SIF folio review for October (TAM, RWA, UPGS, SQZ, FIF, HEAD)

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It’s been another steady month for the rules-based SIF folio. I’ve added two new stocks and will shortly be selling two older holdings from this model portfolio.

In this month’s review I’m going to introduce a new section, based on reader feedback. In addition to looking at the stocks which I might sell, I’ll also list new shares added to the portfolio during the month.

In this way, these monthly articles should make it easier to track all activity in SIF and the progress of the portfolio.

SIF buys in October

After something of a dry spell, I added two new stocks to SIF during October.

Headlam (LON:HEAD): I’ve admired this floor covering distributor for a while. I was pleased to have the opportunity to add it to SIF. You can read my purchase review here.

Finsbury Food (LON:FIF): Cake and bread producer Finsbury Food was a slightly more contentious choice, judging from subscriber comments. You can see my purchase review and read the comments here.

Portfolio stocks under review

My policy is to hold shares for a minimum of nine months. I then review them to see if they still satisfy my screening criteria. There are four SIF holdings up for review this month:

  • Tatton Asset Management (LON:TAM) : A strong stock market has boosted assets under management at this financial services firm. Tatton is now SIF’s oldest holding. Can the good times keep rolling?

  • Robert Walters (LON:RWA) : It’s boom time for recruiters at the moment, thanks to strong demand from employers and rising wages.

  • Up Global Sourcing Holdings (LON:UPGS) : Shares in this consumer goods firm have retreated from the highs seen over the summer. Are shipping delays and rising costs likely to hit profits?

  • Serica Energy (LON:SQZ) : SIF’s move into the oil sector has proved to be perfectly timed. Is it time to take profits?

SIF Folio: October performance update

SIF has tracked the market over the last month and is up by just under 2% at the time of writing.

This steady performance has helped the portfolio maintain the lead it’s built up over the benchmark FTSE All-Share index so far this year:

This performance has been achieved despite SIF running a significant cash position for most of the time. This gives me optionality but also dampens returns. If the portfolio had been fully invested, returns would probably have been greater.

The portfolio’s (virtual) cash weighting remains high, at 30%:

This heavy cash weighting isn’t a deliberate decision on my part. My screen just hasn’t provided a sufficient number of shares to expand the portfolio and reduce the cash balance.

To wrap up this section, here’s a snapshot of all the portfolio’s current holdings. This was taken before any changes that might result from this review.

UP Global Sourcing Holdings (LON:UPGS)

(Buy report: 12 January 2021)

I have mixed feelings about the outlook for this consumer goods firm, which manufactures many of its ranges in China.

So far, the company has not warned on profits despite the impact of shipping delays and rising costs. In a full-year update in August, UPGS said it was prioritising customer orders over stock purchases. The company didn’t state the expected impact of this policy, but unless the situation normalises quickly, I’d expect some kind of negative impact on costs or future product availability.

The easy thing to do would be to wait until next week, when the company is scheduled to report its full-year results. However, I’m not going to do that. The systematic approach I use to run SIF doesn’t really allow such ad hoc decisions.

It’s also possible to make a case that the bull case for this business is softening. Momentum is weakening and without strong buying I don’t see this reversing:

Does UPGS still pass my screening tests? This stock’s weakening price momentum means that UPGS no longer passes all of my screening tests:

For this reason, I’m going to sell UPGS from SIF this month, even though I recognise that this situation might reverse following next week’s results.

UPGS shares peaked at well over 238p over the summer. The stock is trading at 172p as I write, so this position is already much less successful than it was.

I’m still not too disappointed with the overall result from this holding, which has produced a total return of 25%. I believe the outlook is now more speculative than it was nine months ago, so I’m happy to lock in a gain.

Total return: +25%

Verdict: Sell

Serica Energy (LON:SQZ)

(Buy report: 19 January 2021)

The oil and gas market is something of a guilty investing pleasure for me, so I’m quite pleased at the way SIF’s investment in Serica Energy has turned out.

The price of a barrel of Brent crude has risen by 55% to $86 since Serica joined SIF. The wholesale price of gas – which accounts for 80% of the company’s production – has risen by more than 50% since the start of February, based on Ofgem-supplied week ahead gas prices.

Based on forecast P/E ratios, Serica continues to look very cheap.

However, as I explained in my original buy report on Serica, I don’t share the view that this business is very cheap just because it has a low P/E. In this case, I think we can get a more meaningful view on valuation by focusing on two other metrics:

  • Dividend yield: 1.7%

  • Price/book value: 3.2

Neither of these metrics suggest obvious value to me. It’s also interesting to note that the company’s price/book ratio has doubled since I added the stock to SIF in January. Has the outlook really changed that much? On a medium-term view, I’m not sure it has.

I see this business as a special situation, operating assets that are in extended run-off. Serica’s oil and gas fields are producing reliably at relatively low costs today. But the remaining lifespan of many of these assets can be measured in years, rather than decades. The group will face significant decommissioning costs over time, potentially without the offsetting benefit of new long-term production.

I think Serica’s balance sheet situation and dividend policy support this view. Serica had a cash balance of £92m at the end of June and double-digit operating margins during the first half of the year.

But despite forecasting earnings per share of around 65p in 2021 and 2022, brokers only expect the company to pay a dividend of 3.4p for 2021 and 4p in 2022. That’s equivalent to a payout ratio of around 5% – extremely low for such a cash-generative business.

The logical conclusion I draw from this is that Serica’s management expects to need cash for other, more binding commitments. One possibility is Mamp;A, which could benefit shareholders. But my feeling is that Serica is also holding plenty of cash to ensure it can satisfy future decommissioning liabilities. For example, the group will be liable for 30% of decommissioning costs on the BKR fields, with staged prepayments starting from 2022.

Is this the top for oil and gas prices? In the short term, perhaps not. But I suspect that a lot of good news is already in the price at Serica.

Does Serica still pass my screening tests? Serica only passes 12 of the 14 tests in my SIF Sell Screen. The two rules the stock fails are:

  • TTM Earnings yield gt; 2%

  • Forecast dividend per share growth gt;%

This situation means I have little choice but to sell the shares from SIF. Although there is clearly some further upside potential here, I can also see downside risks. Given these, I’m not too unhappy at locking in an 85% total return in nine months.

Total return: +85%

Verdict: Sell

Tatton Asset Management (LON:TAM)

(Buy report: 08 July 2020)

The latest update from financial services firm Tatton Asset Management covered the six months period to 30 September and confirmed that trading is in line with expectations.

Tatton reported growth across revenue, profit and assets under management. The latter rose by 20% to £10.8bn during the period, thanks to net inflows of £0.7bn, market gains of 5.5% and the recent acquisition of Verbatim. I commented on this briefly in September.

SIF’s longest-serving holding continues to pass all of my screening tests, so will stay in the portfolio for at least one more month.

Total return to date: +90%

Verdict: Hold

Robert Walters (LON:RWA)

(Buy report: 13 October 2020)

Market conditions are strong for most recruitment firms currently. Robert Walters is no exception.

This founder-led business recently reported a 32% rise in fee income during the third quarter and upgraded its full-year guidance (again).

Robert Walters also continues to pass all of my screening tests, so will remain in SIF for another month.

Total return to date: +91%

Verdict: Hold

I’ll make the trades listed above after this article has been published this week.

As always, I’d be interested to hear your views and insight on the outlook for the sectors highlighted by this report. My comments reflect my opinion only and may well be wrong, so please DYOR before making any decisions yourself.

Disclosure: At the time of publication, Roland owned all of the shares listed in the SIF portfolio

Stockopedia


Source: https://www.stockopedia.com/content/sif-folio-review-for-october-tam-rwa-upgs-sqz-fif-head-890850/


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