International SIF Folio: A big clear out as my shift to US amp;amp; Europe continues

This week it’s time for my monthly visit to the international version of my Stock in Focus (SIF) portfolio.

The International SIF is strictly a virtual portfolio. I want to see if I can build a rules-based portfolio that invests in overseas stocks, using broadly the same rules as my UK SIF portfolio.

So far, my results have been mixed. But I’m not giving up just yet. The start of 2019 has seen a welcome rebound in markets that’s helped me to recoup some losses:

Alongside this, I’m redoubling my efforts to shift the focus of the portfolio to the US and European markets. I hope that this will deliver two benefits:

• Focus on markets that are more comparable to UK and easier to understand

• Cover a greater number of companies that are of interest to readers – US stocks are the most popular non-UK choice with Stockopedia subscribers

My plan at the moment is to alternate buying and selling months. Last month, I added three new stocks to the International SIF, two US firms and one large German company. This month it’s time for a portfolio review.

My rules is that all stocks that have been in the portfolio for at least 10 months must be sold unless they continue to qualify for my International SIF screen. Reviewing the folio’s holdings for this piece, I found that of the seven stocks I’ve held for 10 months or more, only one still passed my screen.

As a result, I’ve had a pretty major clear out, closing a number of holdings at a decent profit. I’m also relieved to have got rid of a couple of chronic underperformers.

Here are the companies I’ll be covering in this piece:

• Cement group China Resources Cement Holdings (HKG:1313)

• Australian poultry producer Inghams (ASX:ING)

• Cyprus-based Russian rolling stock operator Globaltrans Investment (LON:GLTR)

• Spanish pulp mill operator Ence Energia y Celulosa SA (MCE:ENC)

• US department store group Kohl’s (NYQ:KSS)

• Japanese property developer Leopalace21 (TYO:8848)

• Japanese audio electronics firm Foster Electric Co (TYO:6794)

China Resources Cement Holdings (HKG:1313)

Original coverage: 22 November 2017

This Hong Kong-listed Chinese firm appears to be China’s answer to FTSE 100 building materials group CRH. It has also been my biggest winner yet. The shares were sold from my virtual portfolio on Monday for a gain of 50%.

Profits doubled in 2017 and broker forecasts suggest that they doubled again in 2018. However, a fall in both earnings and sales is expected in 2019. As a result, this stock no longer passes all of my screening tests.

Real shareholders might not choose to sell. The StockReport indicates a prospective yield of nearly 8% and trailing price/free cash flow ratio of less than 8. Stockopedia’s algorithms also like the shares, awarding them a StockRank of 99.

Growth may be faltering, so the stock has to go. But it’s been a good performer.

Verdict: Sell
Profit: +50.6pc

Inghams (ASX:ING)

Original coverage 6 March 2018

This Australian poultry producer delivered an 18% increase in earnings last year, while continuing to reduce its borrowings.

Cash flow improved notably, such that free cash flow was more than 50% higher than earnings per share:

I’m not sure if this level of cash generation will be sustainable — such impressive cash generation often comes from tightening working capital and other one-off tricks. Although I should emphasise that I haven’t looked into this directly — I’m making assumptions from the StockReport.

Stocko’s algorithms still like this business and give the firm a StockRank of 96. Inghams also qualifies for six Guru Screens, so could still be worth a look. However, a rolling PEG ratio of more than 2 means it no longer passes all of my screening tests.

Verdict: Sell
Profit: +13.5pc

Globaltrans Investment (LON:GLTR)

Original coverage 6 March 2018

A Cyprus-based firm that operates railway services in Russia and has a London listing. What could possibly go wrong?

As it turns out, nothing much seems to have gone wrong. The stock remains very cheap at face value. Its financial performance continues to suggest that it could deserve higher valuation.

Generous dividends backed by free cash flow may also appeal:

I wouldn’t buy this stock for the SIF folio anymore, as I’ve ruled out Russian companies. This is partly to do with corporate governance and political risk. But it’s also because I’m reluctant to invest in firms controlled by a handful of rich Russians. My view is that their need to protect and preserve their wealth doesn’t necessarily align well with the western system of using stock markets to create wealth for outside investors. This is only my opinion, of course. I could be wrong.

In any case, I’ve sold the shares from the International SIF because forecasts for slower earnings growth in 2019 have pushed the PEG ratio above my screening limit of 1.2.

Verdict: Sell
Loss: -3.1pc

Ence Energia y Celulosa SA (MCE:ENC)

Original coverage 6 March 2018

This £1.4bn Spanish pulp mill business still passes all of my screening tests. It will remain in the International SIF until my next review in two months’ time.

The outlook remains positive. Broker forecasts suggest earnings growth of 40%+ for 2018, with a similar performance for 2019:

Happily, it’s also the best performer in the folio at the moment, up 21%. With a forecast P/E of 9.4 and a prospective yield of more than 5%, I’m happy to continue holding.

Verdict: Hold
Profit to date: +21.7pc

Kohl’s (NYQ:KSS)

Original coverage 4 April 2018

Department store groups in the UK seem to be having a dire time. At the current rate, it won’t be long until Mike Ashley and Sports Direct own all of them… But in all seriousness, the business model for these stores appears to be changing. They look risky investments to me at the moment.

Are things different in the US market?

Department store group Kohl’s is closing a few stores, but the firm’s StockReport suggests to me that it’s in good health and could be attractively valued:

The group’s net debt has fallen by about 30% over the last two years, while profit margins have stabilised. It will be interesting to see if this solid progress can continue.

Unfortunately I’ll have to do this as a spectator, because the stock’s slowing earnings growth has pushed up Kohl’s PEG ratio above my maximum of 1.2.

Happily, this retailer’s departure leaves behind a respectable profit.

Verdict: Sell
Profit: +18.7pc

Japan: Leopalace 21 (TYO:8848) amp; Foster Electric Co (TYO:6794)

Original coverage 4 April 2018

Leopalace21 is a Japanese property developer specialising in apartment block projects. Foster Electric Co makes audio electronics, such as headphones and speakers.

When they joined the International SIF in April 2018, both companies appeared to have strong balance sheets, good cash generation and attractive valuations. Both have since delivered large losses.

I don’t follow either company so I don’t know what’s happened, but broker consensus forecasts suggest that both firms have issued severe profit warnings this year. Forecasts for growth have been replaced with predictions of full-year losses:

Foster Electric Co:

Leopalace21:

You can’t win them all. Both companies now fail my screening tests on a number of counts. They will exit the International SIF this week.

Leopalace21
Verdict: Sell
Loss: -37.4pc

Foster Electric Co
Verdict: Sell 
Loss -43.9pc

I’d love to hear more about your views and experience of investing in overseas stocks, so please feel free to share in the comments.

I’ll be back next week with a look at my UK SIF folio, which continues to show encouraging signs of a turnaround.

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