SGP sold, GAMA bought

I have sold my holding in Supergroup at £14.60 for a 10% loss.

supergroup

The reason for selling is simply that momentum has turned. I might have given it a bit longer to see if this persists but the other reason for selling is that I needed to free up some funds for personal expenses and Supergroup seems like the weakest link in my portfolio.

I am quite puzzled by the somewhat negative price reaction to the last results. I thought they looked good. Supergroup continues to look very undervalued to me given its progress. So is it a questionable decision to sell? Would I be better off hanging in there? Perhaps but it’s a tricky decision – I believe it’s better for my overall approach to sell when momentum turns rather than get hung up on individual shares and attempt to fight the tide. Still deciding when ‘momentum has turned’ isn’t obvious. I could have jumped the gun here. By recording the rationale for these decisions I hope to come back later and see if it looks like I’m systematically doing anything wrong.

I also need to bear in mind that Supergroup is not the only game in town – the question is whether it is a better prospect than the alternative (taking into account that trading is expensive of course). I have plenty of other candidates on the watchlist which look promising at the moment. Many of them are on a real tear at the moment having issued strong recent results or updates.

gamma

Gamma Communications: bought

With some of the proceeds from selling Supergroup I have bought a 1.9% holding in Gamma Communications. I have also added to my holding in Churchill China taking it up to 2.7%. I am withdrawing the remainder of the proceeds.

Quality

Gamma is a provider of telecommunications services primarily to SMEs. It looks like an quality share:

  • Competitive advantage: it is the UK market leading provider in more technological advanced services, such as VOIP and cloud based services, to businesses. Gamma has developed IP in providing high quality, technologically advanced services which it distributes primarily through downstream partners. It has a rapidly growing market share. The markets are fragmented and it faces some competition from small providers or the large telecoms providers though appears to have a competitive advantage over these in the quality of its offering and innovation. There appear likely to be some switching costs for customers (to ensure business continuity).
  • ‘Traditional’ communications markets are shrinking slowly while new more technologically advanced market are growing rapidly. Overall, Gamma operates in markets with strong secular growth. Given the nature of the market there appears to be some technological risk here i.e. that a competitor comes up with a new way of doing things – not clear how high this is.
  • Business economics: these look excellent as expected for this kind of business – good cost structure with high margins. Very high ROCE and net cash. High proportion of recurring revenues.
  • Historic performance: very strong and consistent growth in profits and cash flow in recent years. Quite recently listed with strong share price momentum since then.

Pricing

Share price momentum is good with price near all time high. Results come out next month – already flagged to be slightly ahead of expectations. Valuation is high with a forward PE ratio of 23 though based on very cautious expectations. Looks very reasonable given quality of the business and growth prospects.

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