Portfolio

Buys, sells and questions

HAT

The place I must start, obviously, is with H&T Group. I posted quite bullishly on them last Friday, and today they’re down 19% on their half yearly figures. One of the perils of being a stockpicker, I guess, is that you’re bound to be shown up like that sometimes! I’m actually quite surprised at the scale of the fall given the results. Profits are down, as expected, mostly on the decline in the fortunes of gold. The dividend cut must’ve been expected by anyone anyone giving the business any serious thought – if one of their major profit streams is drying up and profits are heading back to a more normal level, expecting the dividend to stay as it was before is naive. I think the fall is overdone, and I might go as far as to say that I prefer the stock now. There are a few things that bother me with the update, though.

For instance – management says they think ‘consolidation or rationalisation’ may be likely in the ‘medium-term’. They’re fairly ambiguous terms, in my view, but the first means – to me – mergers or takeovers; fewer operators, basically – and the second means store closures. That they’re still opening any stores and haven’t rule out any further seems a little strange. Perhaps that’s being overly nit-picky; stores take a while to set up, so there’s a lag between deciding to open no more and no more actually opening. But the overall tone of the statement is also rather negative when they produced what, to me, looked like pretty credible operating figures in their quieter half of the year. Finance costs are down considerably with a refinancing (the group is financially strong), something that’ll continue to help in the full year, and the group has cut operating costs on a larger store base.

There’s more to be said, but there’s also more I need to do on my end, so I’m holding off on buying/selling for now. I’ll pen a more complete write-up later in the week, hopefully, or next week if not – but it’s at the top of my list given the price!

HWDN

This one took much umming and ahhing – I spent a fair few hours staring at spreadsheets with the constituents of  my portfolio and their relative valuations. Eventually, I decided to – after over 2 years of dedicated service – sell Howden Joinery. This is, without a doubt, an excellent company. It’s grown consistently and profitability, earns well over its cost of capital, and has a reasonable number of drivers of operational improvement; including some of which that don’t really require them to do anything. As stores mature, for instance, returns will improve; so that’s growth without any additional investment. There’s several identifiable positives which made me hesitant to sell:

– The aforementioned growth with store maturation
– Management reckons there’s potential for about 30% more stores in the UK
– France/Europe, in which they already have a foothold, present opportunities for enormous growth if they’re able to translate the model

If you’re noticing a theme, it’s a pretty simple one; companies which earn good returns on capital – good companies well run, basically – are very attractive when paired with strong growth prospects. That’s pretty simple when you think about it; strong returns on capital mean the business has a competitive advantage. Having a competitive advantage means that you’re doing things better than anyone else – and that means, by virtue of your business model, you’re able to offer customers a more attractive proposition than competitors. It’s a virtuous circle.

Alas, and it was by no means an easy decision, Howden Joinery’s price now reflects a good deal of market optimism about its quality. While a bit of me still thinks it’s probably a good share to hold, on balance I think it’s making way for a share with more obvious potential for appreciation.

QRT

I’ve bought a good chunk of Quarto for the portfolio at the top price it traded at today, 155p. I discussed much of my reasoning behind the company in a few posts – find the most recent of them here, and the others linked from there. I haven’t anything in particular to add to my thinking on those occassions, and the price is only marginally higher than it traded at then, so I reckon it’s still a good bet.

While pondering Howden’s fate, I (as I often do) found myself staring at a rather wonky portfolio with some rather strange weights. Two shares in particular – Creston and Plastics Capital – now represent about 3% of the portfolio each, a ludicrously small sum when my largest constituent (Northgate) sits at something like 17%. I’m not averse to having such small holdings, but given their size I haven’t taken the care I should do with considering them. I’m very much of the opinion that too much diversification simply dampens returns, so I want to either reaffirm that I like the shares – and therefore buy more – or decide that holding them simply because they haven’t done much and I haven’t given them much thought is a fool’s errand, and therefore sell. Expect a post on that soon!

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