I first introduced my watchlist here. Since then I have made some updates including recording my watchlist with scores in a spreadsheet.

This review looks at what has changed substantively to the watchlist since I first introduced it: what has been added, what has been removed and what has been considered but rejected. There’s been quite a bit of change to the watchlist since last time – I expect there to be a lot less churn next time.

New additions

A few shares have joined the watchlist by virtue of being sold from my portfolio: Ted Baker, Supergroup and Hargreaves Lansdown (see previous reviews for my thoughts on their quality and why they were sold).

There are also a number of new watchlist members. I have come across these principally through my screening (based on various combinations of ROCE, margin, long term relative strength, low debt, FCF compound growth, Stockopedia quality rank). The following I felt were high enough quality to join the watchlist, displacing some of the eliminated shares further below:

• Playtech: Playtech is a business with a very strong competitive position. It also generates a lot of cash and decent returns of capital (provided it does’t make silly acquisitions). My main concern with it is that it appears to be rather desperately on the acquisition trail and have limited ideas or opportunities for how to organically reinvest its cash. I don’t find this very attractive but overall it seems like a decent prospect.
• Tracsis: this is a software provider for rail companies with good economics and track record. It appears to have a decent competitive niche and growth prospects. By the looks of the share price chart there has been some recent disappointment but it doesn’t seem very serious on reading the RNS.
• Unilever: this is a somewhat obvious choice and doesn’t really need introduction. Defensive consumer brand owner with international growth prospects – not sure quite why I didn’t have it on my watchlist before to be honest.
• Autotrader: the online platform for buying new and used cars. I find the concept very attractive – buying second hand cars is an area where an online platform (particularly with info about trustworthiness of sellers) should be really useful and I like the economics of online platforms. Autotrader has a very strong market position yet sustained growth looks quite possible.
• Best of the Best: this lottery competition organiser is now the smallest company on my watchlist. Its main activity is to organise the win a car competitions in airports. I didn’t initially like what it does because it seems of appeal to a limited audience (growth prospects) but on reflection I think this is OK when put in context of its tiny market cap. Overall BOTB appears to have a competitive advantage in a small niche with very good economics.
• Fidessa: Fidessa makes IT platforms for trading (for stockbrokers). I have to admit not understanding exactly what it does but it looks like a business with great economics, a good track record and a very strong competitive advantage. My main concern is its growth prospects (also especially given current valuation) though this is not a major concern, particularly as Fidessa has recently been more bullish on this.
• Advanced Medical Solutions: this is a provider of advanced medical supplies for woundcare. It appears to have valuable IP and brands. It has a reasonable ROCE and very good track record of consistent growth. It looks like the sort of business I like.

Considered but not added

I considered a number of other shares that came up in my screens but ultimately decided not to include them in my watchlist:

• Persimmon: I no longer want to own any housebuilders – too cyclical and risky. I might look at housebuilders at (what appears to be) the bottom of a cycle but only then.
• Hikma: as a manufacturer of generic medicine I am unconvinced about its competitive advantage. It also has a patchy track record and recently falling ROCE. I’m not sure exactly why and I’m not interested enough to look further.
• Walter Greenbank: is a manufacturer of interior furnishings. I dismissed this on the basis of poor free cash-flow conversion conversion, because its track record is quite weak and because I’m not sure that it has a strong competitive advantage.
• XLM: XLM has great numbers (ROCE, cash conversion and track record of growth) but I don’t really like what they do. They provide online and mobile marketing services that “focuses on paying users[…] and directs them to online businesses who convert such traffic into paying customers”. Sounds like online advertising with banners and pop-ups etc. based on users cookies. I’m probably not alone in finding such advertising annoying. I’m also not sure how effective it is. I think this results in risks for a business like XLM (regulatory, technological). Then again TV advertising is annoying and that’s done OK over the years. Anyway it’s enough to put me off investing here.
• Taptica: this is another advertising technology company that’s been doing well recently. I don’t understand well enough what it does to feel comfortable it has a strong competitive position and is not subject to technological risk.
• Games Workshop: this has a lot going for it. It is defensive and extremely profitable with a clear economic moat. However, I’m not quite ready to add it to the shortlist as I’m a bit unsure about its growth prospects – it seems like quite a mature niche business and not sure about the longevity of its appeal. I also note the recent track record is a bit patchy.
• Rotork: this also has a lot going for it. It is a manufacturer of actuators (used for industrial valves). It has decent ROCE and a good track record. What puts me off adding it to the watchlist is that it fortunes seem quite tied to those of the oil & gas industry.
• Sanne: frankly I just haven’t yet quite understood exactly what this does or whether it has a strong competitive advantage. It describes itself as a specialist provider of outsourced corporate and fund administration, reporting and fiduciary services and it is based in the Channel Islands. I might revisit.
• ULS: this providers a conveyancing comparison service. It is recently listed. It has high ROCE and could be interesting but feel it needs more of a track record before I would be comfortable investing.

Eliminations

I have decided that I should limit the watchlist to about 40 shares – beyond that it becomes a bit difficult to keep on top of and a lower number provides a tighter threshold for inclusion. I’ve decided to axe the following shares from the watchlist:

• Imperial Brands: my decision to drop Imperial Brands is partly ethical – I’m not sure I really want to invest in tobacco. I also find the long term growth prospects and ROCE a bit unexciting. The tobacco industry will die a slow and horrible death, at some point.
• Aberdeen Asset Management: while Aberdeen is a fund manager with good economics, at the moment I am unconvinced that it has a sustainable competitive advantage. Also its fortunes depend partly on those of emerging markets which puts me off.
• Judges Scientific: the recent track record has been too flaky for me to invest here.
• Adept Telecom: I’ve invested in Adept in the past and its done very well. However, I  am concerned now that it is quite reliant on acquisitions for growth. While it has been doing well and is in a pretty noncompetitive market with long contracts and recurring revenues I am also concerned that it actually has little competitive advantage in the longer term and is subject to technological risk.
• DCC: from what I understand this is a high quality business with some scale advantages. It has a good track record. However, there’s not enough evidence of quality to convince me.  It has low margins and ROCE. As a distributor of a commodity I am unsure about its competitive advantage and am also unsure about its organic growth potential.
• CLS Holdings: I no longer want exposure to London property or to commercial property generally. The economics of these businesses is insufficiently high quality to interest me.
• MJ Gleeson: as mentioned above I’m no longer interested in housebuilders.
• Dart: similarly neither do I want to own an airline / travel agent.