Portfolio review

To get things started I’m going to review my current portfolio. I have 23 holdings currently so this might take a bit of time!

In this post I’ll start by going through my 3 biggest holdings and give a brief explanation of why I hold each one, first discussing ‘quality’ i.e. why I think it is a great business and second ‘pricing’ i.e. whether now is a good time to buy it given the current price.

Once I’ve gone through the individual shares I’ll review the portfolio and the performance of my strategy as a whole to try and identify weaknesses, risks and possible improvements.

burford

Burford Capital

My holding in Burford is currently 9.3% of my portfolio and is currently up 144% on my purchase price. It is nearing the point at which it becomes 10% of my portfolio, where I intend to reduce the holding and take some profits.

Quality

Burford is a specialist provider of litigation funding and financial advice. There are several reasons why I think Burford is likely to make consistent and growing profits over the long term:

  • It is operating in a newish market with a lot of growth potential.
  • It is the major player in this market and appears to have a competitive advantage.  Its competitive advantage is not very transparent qualitatively but I believe may come from a first mover advantage, know-how and management.
  • It is likely very non-cyclical and should be able to grow throughout the cycle
  • It is managed partly by founders who still have skin in the game
  • It has listed fairly recently but profit and revenue are on a consistent growth trajectory as has been the share price. This has accelerated recently in light of some transformative acquisitions.
  • ROCE and IRR high and improving. There currently appear to be lots of opportunities for it to reinvest its cash profits so there appears to be substantial scope for compound growth.
  • It has high margins and low borrowings.
  • Diversification across investments is increasing as it grows potentially giving it a scale advantage.

I’ve noted a couple of downsides / risk factors but they do not seem very major to me at this point in time:

  • Not much of a concern while market is in growth phase but more competition may emerge in future. It is not clear that Burford’s competitive advantage would necessarily be sustainable.
  • From my perspective the accounts are not so clear as it is a slightly unusual business (financial). This does create some risk that profits do not turn into cash or that hidden costs escalate over time.

Pricing

The price and business momentum is really excellent with a lot of positive newsflow and accelerating share price growth. The price has risen a lot since I originally purchased but given its current growth trajectory and future prospects I don’t believe it looks that expensive. Some experimentation with a simplified discounted cash flow model confirm this (though really is just a product of the assumed future growth rate you put in!) I would buy or add to it at the current valuation if my holding was smaller.

somero

Somero

My holding in Somero is 8.1% of my portfolio and is up 54% on my purchase price. Given its cyclicality I am beginning to become a little uncomfortable with the size of holding and may reduce soon. I don’t want to hold too many cyclical shares across the portfolio.

Quality

Somero manufactures laser guided equipment for making concrete flat. Its customers use it for constructing warehouses and the like. Somero has one significant weakness in that the demand for its products is highly cyclical. This is acknowledged by management and evident from its share price in the 2008 downturn. This puts me off quite a bit but nevertheless I find Somero to be an attractive business in spite of this.

  • Somero has an easy to understand business with accounts that are easy to follow.
  • It is a global monopolist of a narrow niche. It is currently protected from competition through its IP, though may face possible technological threats in the future.
  • The addressable market appears big. Wider adoption by customers and global expansion particularly into China appears to give plenty of scope for further growth.
  • Its numbers over the past few years demonstrate its market power with high margins, consistently growing profits, high ROCE and FCF conversion and a rock solid balance sheet with a lot of net cash.

Pricing

Price and business momentum is great with a rapidly growing share price and results that are consistently beating expectations for the last few years. I find it a bit more difficult to value a cyclical business as you have to account for occasional precipitous drops in profit in the future and the impact this will have on compounding. In spite of this, given the obvious quality of the business, growth prospects and net cash position, I think Somero looks very cheap. I would buy now if I didn’t already own.

boohoo

Boohoo

Boohoo is currently 6.6% of my portfolio and is up 369% on my purchase price. It is my most successful holding and I have trimmed the position back a couple of times as it became too large.

Quality

Boohoo is an online fast fashion retailer with low cost business model. I think Boohoo possesses many characteristics that suggest it will be likely to compound profits at a high rate far into the future:

  • It appears to have cost advantage over competitors from the fact it manufacturers its own-brand, low cost supply chain and flexibility to respond very rapidly to demand.
  • The other part of its ‘moat’ comes from brand. Its accelerating growth suggests that its brand appears to be gaining recognition and has obvious appeal. The proposition appears differentiated to most online competitors in that it is much lower cost. This appeals to many but apparently particularly to teenage girls who need a big wardrobe. It now has PLT and NastyGal brands too.
  • It is benefiting from a big shift by consumers in purchasing from high street to online. Given this and Boohoo’s focus on the value end of the market I believe its business is not very cyclical.
  • Massive scope for geographic expansion particularly in the US starting to take off. Also scope for targeting different demographics.
  • It is founder managed
  • Its numbers confirm superior margins, high growth and high returns on capital.

Pricing

Momentum is currently excellent with consistent exceeding of expectations. The valuation at about 60 forward PE does imply a lot of growth – my rough calculations suggest that it could implies a medium term (next 5-7 years) growth rate of 25-30%. I believe this should be comfortably achievable on current trajectory especially if US takes off, but with this ambition there is plenty of scope for things to go wrong! In the long term given the apparent quality of the business I believe this is going to do very well.

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