My holding in Burford is up about 150% on my average purchase price and has grown to more than 10% of my portfolio so I have trimmed it back to 7.2%, releasing some funds.

Somewhat reluctantly because Burford has just released pretty incredible results for the previous year which seem to prove the case for buying it further. I find its reports very clear and well written. Interestingly compared to other businesses they seem to talk more directly and in more detail about things I am interested in like the size of the addressable market and the threat of competition. The valuation still does not appear expensive given the very substantial value not yet on the balance sheet and the growth prospects. The momentum is accelerating. I wouldn’t recommend selling Burford at the moment to be honest but I’ve decided to maintain discipline and follow my self-imposed rule of not letting holdings become more than 10% of the portfolio.

With some of the proceeds I have topped up my holdings in Fevertree (to 4.9%) and Compass Group (to 2.5%). Both of these are continuing to show good momentum and Fevertree has results next week. I have been struck by the availability of Fevertree in my travels – it has been available in several supermarkets and restaurants in Colombia.

Elsewhere in my portfolio my holdings in Ted Baker and Abcam are starting to look a little shaky. For both I have quite high conviction so am more inclined to ride out short term dips in the share price. Ted Baker has broken short term trend slightly downward but reports results next week so hopefully this should be catalyst for a rebound. Abcam is still in a medium term uptrend.

Paddy Power Betfair: bought

With the remainder of the proceeds from selling part of my Burford holding I have opened a new position in Paddy Power Betfair (1.8%).

Quality

Paddy Power Betfair needs little introduction. It is the product of a recent merger between Paddy Power, the best performing high street bookmaker, and Betfair, the innovative betting platform, where users can take opposing sides to each others bets.

Overall I think Paddy Power Betfair is an extremely high quality share:

• Business economics: It is slightly difficult to interpret Paddy Power Betfair’s figures because of the recent merger. However, before the merger it is clear that both businesses were earning high margins and returns on capital. Both businesses are naturally highly cash generative have a very substantial online focus.While the fixed assets / retail aspect of Paddy Power’s business are somewhat unattractive the brand is continuing to grow and take market share from its competitors.
• Track record: Both Paddy Power and Betfair have excellent track records for growth in recent years. Obviously the merger complicates things and it appears to have possibly resulted in higher costs than expected though all operating divisions of the combined business are experiencing double digit growth in revenues.
• Competitive advantage: Paddy Power Betfair’s competitive advantage appears to be immense. It benefits from cost advantages from its scale. It owns two very strong and complementary brands with some of the best technology and customer features. Betfair in particular offers quite a unique proposition, while Paddy Power has an advantage over its rivals from sheer scale of marketing budget. Technology and scale advantages appear to give the business a substantial advantage over its competitors in pricing as well as allowing it to offer betting on a very wider range of events.
• Growth potential: given this business is larger than those I tend to invest in, growth potential is important. Pleasingly, the business appears to have a huge amount of scope for further growth from further increasing market share, international expansion where it is already starting to become well-diversified, introducing new products and secular growth in its markets, particularly online. I think it has the potential to become a real global leader.
• In gambling the risk of regulatory change is ever-present and, while I cannot see imminent threats (e.g. Paddy Power does not operate fixed odds betting terminals), I think is a big drawback for investing here. I have been ‘bitten’ by this before in my investment in IGG. However, I think given Paddy Power Betfair’s other competitive advantages and increasing diversification mean that this is a risk worth taking in this case.

Pricing

The valuation of Paddy Power Betfair seems very attractive at about PE 20 given the business quality and anticipated growth. Momentum, however, is not so great currently with the share price having fallen and then stalled for the past year. The reaction to the recent results was immediately quite negative but then the price has risen again over the last few days.I rarely buy when momentum is not good but have made an exception here as the valuation is good and the price appears to maybe be turning up again.  I believe the poor recent momentum is due to short term issues such as merger costs being higher than expected. We’ll see if this was a mistake later!