The first set

Following my deciding to refresh my opinion on the stocks in my portfolio – I take a rather laissez faire approach to letting my decisions run wild  – I’m starting with the biggest four constituents, solely because they showed up first. A good bit of logic there, I think!

Barratt Developments

I notice Stockopedia had a piece on Barratt today, along with a number of other listed housebuilders. The piece included a brief recap of the fundamentals behind the sector, which chime pretty well with why I bought them in the first place, and some discussion of the momentum the stocks have picked up. At the moment, that issue of momentum is my main uncertainty around Barratt. I don’t think Barratt is a fantastic business – I just definitely liked it at 0.3 PTBV or whatever it was trading at in the lows of last year. That figure now stands at 0.83, a figure which includes a sizable chunk (~£200m) of those interest free loans Barratt was granting to keep sales going. This strikes me as basically deadweight and (at best) unproductive, but doesn’t particularly concern me. It’s probably getting close to the point I’d want to sell, then, but for that matter of momentum. This question ties me in knots. The momentum effect is known to exist – rising stocks outperform those which have recently fallen – but how applicable is it in practice? The most common piece of advice that’s given is that private investors hold losers too long and cut winners short. But the market doesn’t know when I bought, and doesn’t care – and hence the only logical conclusion to placing a lot of emphasis on that train of thought is that I should start actively looking for momentum investments. I’m not sure I’m comfortable with that.

Verdict: Close to hitting where I want to sell

Howden Joinery

Howden Joinery, on the other hand, I really like as a business. I’ve said it before, but it bears repeating – they have a great business model, they’re upfront with investors in management communications and they have a good deal of growth that should be more or less ‘free’ – see my very first post on them here. In that post I also discussed how unit demand has fallen through the recession, a trend which doesn’t seem to have reversed; another potentially positive factor for Howden should things pick up again. While I think it was unambiguously cheap when I first picked it up, now it’s more of a case of trying to gauge whether the business is worthy of a premium valuation or a ‘normal’ one, if there’s such a thing. My uncertainties around that mostly revolve around a) how much growth is still available (given their great returns on capital, potential growth is hugely positive) and b) whether any competitors will pop up. As I say, returns on capital are great and I’m not completely convinced they have a rock solid moat. What’s to stop other people doing what they do? I guess there’s a lot of entrenchment, long-term relationships, logistics and supply chains etc.. but there doesn’t seem to be anything cast iron. That makes me a bit nervous. Still, on a forward and historic P/E of about 12 it’s not exactly ‘premium’ yet.

Verdict: Not unambiguously cheap, but comfortable to hold


Lookers have just broken the barrier of a P/E of 10, and forecasts are for pretty much flat EPS for the next few years. That seems reasonable if they don’t make many acquisitions, but I buy the company line on the sector they’re involved in – fragmented and characterised by small individual branches of relatively inefficient dealerships, which can benefit from being brought together under one brand. The recession and the effect its had on results makes it difficult to ascertain whether they actually do add much value when acquiring; there’s lots of noise involved there. I think it suggests they do, though. The company’s balance sheet is pretty clean with a relatively small amount of debt. They should be able to pursue acquisitory opportunities if they see them. Aside from that is obviously the point that the P/E isn’t particularly strong and, while I’m surprised how well they’ve managed to hold up in the recession – which suggests on the reverse they won’t gush cash simply because of an economic recovery – it’s not like I’m buying at the peak of their cycle. Management rejected a bid at 80p last year as significantly undervaluing the business – not that that means a great deal!

Verdict: Still like them, though many of the reasons are sectoral. Keep up to date with the other players in case moving out of Lookers and into a competitor looks good

British Polythene Industries

BPI are one of the latest additions to my portfolio, but they’ve followed the smallcap rally and significantly outperformed the market since their inclusion. In the period since they’re inclusion they also released a set of interim results, which were unexciting and in line with what management said they would be in previous communication. While revenues are down 7%, operating profit remained at roughly the same level, which seems a pretty strong performance and highlights the work they’ve been doing on the cost front. Regarding that, one of the more volatile bits of looking at British Polythene involves the various input costs, mostly related to oil in one way or another. I take the approach of leaving the legwork on this to management and not trying to predict variables which I have no idea about. That may be foolish – not having an opinion on one of the drivers of its profitability – but I think indications are that the company has enough pricing power to manage these itself. It strikes me that the company is earning a far better RoCE than it has historically, even with all the talk of input cost inflation and the like, so my conclusion is either that they’re doing something very right at the moment, or management are blagging themselves some extra slack and we should temper our expectations for a continuation of these great returns. Even in the second scenario my unenlightened guess is that they’re not going to worth much less than their current value given their size and importance to so many different industries.

Verdict: Hold, but treat the optimistic forecasts with scepticism!

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