Watchlist review: May 2017

There’s been quite a bit of change since my last watchlist review so I think it’s time for an update. 

New additions

I’ve picked up quite a few companies in my screens recently and several have been worthy of addition to the watchlist, ousting several of the larger businesses on it. I’ve also sold out of a few shares in my portfolio and added them back to the watchlist (Micro Focus, AB Dynamics, Churchill China, Compass, Hilton Food, RWS).

The new additions are:

  • Accesso  Technology: Accesso is a company focussed on ticketing and virtual queuing technology for events and theme parks. It seems to be a clear global leader in this very niche field and has been growing at a fast rate. It’s ROCE and margin are currently modest (both around 10%) but this is because it has been investing heavily for growth as it expands globally. It looks like a great business though currently the valuation is a little demanding based on my conservative assumptions for growth. I think it’s reasonably likely I’m being too conservative so one to watch closely.
  • Games Workshop: I considered but Games Workshop but decided not to add it in my last watchlist review. I have since changed my mind as I am a bit more sanguine about its growth prospects having researched it a bit further. I’m still not wildly enthused but the competitive moat and excellent profitability of the business are undeniable. I really feel I know where I am with this one which I think is a very useful characteristic of a potential investment.
  • NMC Health: I have already bought NMC Health into my actual portfolio following some recent good news and have written up my views on it here.

Considered but not added

I had a closer look at the following shares but ultimately decided not to add them to the watchlist. There’s quite a few that look interesting but don’t quite make it to the watchlist:

  • Quartix: Quartix is a provider of vehicle tracking systems and services. It has consistently high ROCE and has been growing at a fast rate for the last few years. It appears to have a successful product and may have some competitive edge but is operating in a very competitive market. It looks interesting but I’m not comfortable enough with it at the moment to add to the watchlist.
  • Jupiter Fund Management: Jupiter is a fairly large fund manager. Like many fund managers it has very high profit margins and ROCE. It has been growing fairly consistently for a number of years. While it looks great on paper, I’m not so convinced it has a sustainable competitive advantage and, unlike the smaller fund manager in my portfolio, Liontrust, I’m not so excited about its growth prospects.
  • James Fisher and Sons: James Fisher is a specialist engineer supplying the marine and energy industries. It earns a fairly decent but not great ROCE in the low teens and margins of around 10%. It consistently carries out fairly significant capital expenditure. It has a very good long term track record. Overall, I like it and it looks like a decent business but not currently quite good enough to dislodge anything currently on the watchlist.
  • Softcat: Softcat is a recently listed IT services provider to businesses. It has excellent ROCE but fairly low margins. Its track record is good but doesn’t go back that far. At the moment I am unconvinced that it has a sustainable competitive advantage so am not adding to the watchlist.
  • FDM Holdings: FDM is another IT company but has a somewhat more novel business model where it recruits, trains and places consultants (who it calls Mounties) in customer businesses to provide IT support. The business model delivers very high ROCE and decent margins and it has a good track record of growth. It looks great on paper but I’m a bit dubious that the value of what it offers to its customers is anything special. This makes it difficult for me to understand its competitive advantage, if it has one. It could well be that I just don’t get this business yet of course.
  • Scapa: Scapa is a manufacturer of bonding products and adhesive components for applications in the healthcare and industrial markets. It has a fairly short track record and is fairly profitable though has historically been investing a lot of capital. I like the sound of what it does and think it is probably a good sector to invest in but I’m not sufficiently convinced by Scapa’s current numbers to add it to the watchlist.
  • Focusrite: Focusrite is a recently listed developer and manufacturer of audio hardware and software products. It has a fairly short track record but consistently high returns on capital and margins and has been growing fairly rapidly. It appears to currently have a decent competitive niche but I am not at this point convinced about how sustainable it is in a market where technological change seems fairly rapid.

Eliminations

I’ve decided to eliminate a few of the large cap companies on the watchlist: Unilever, Reckitt Benckiser and Diageo have all been axed. Despite them all being obviously very high quality businesses with durable competitive advantages I feel their existing size limits their growth potential too much, and they are less likely to become as miss-priced as smaller cap stocks.

I’ve also eliminated three small caps I’m now less confident in:

  • Tracsis: after adding Tracsis to the watchlist a couple of months ago, I was more recently looking back at its last trading statements and noticed references  to increased price competition. I don’t see this as a good sign so have eliminated Tracsis from the watchlist.
  • Character:  I have decided to eliminate Character, despite some fond memories of having made quite a bit of money from it in the past. It has a very profitable business model though licenses rather than owns most of the important brands it creates toys for. This does expose it to some risk that I think I’d be better off avoiding.
  • James Halstead: James Halstead is a manufacturer and distributor of flooring products. It has consistently very high ROCE and margins suggesting it has a sustainable competitive advantage but I just can’t see why. It is also exposed to quite cyclical demand and its cost base to commodity price changes. I’ve decided to avoid it.

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