Bought FDM, XPP, NMC; sold ACSO

Another busy week for me, both at work and with a number of trades. On Monday I bought FDM and XP Power after both issued excellent updates. I also reinvested into NMC Health and then sold Accesso Technologies on Wednesday.

It was another good week for the portfolio, with it rising another 4% (less good for me who was working some long hours on a very difficult case). The decision to increase portfolio concentration appears to be continuing to pay off so far.

I’ve been struggling to find time to write new posts and am currently just writing the blog once a week to keep up to date with my trading. I have a number of topics I want to write about when things get a bit less busy, including an article on valuation methods I’ve had on the back-burner for a while.

I rebought XP Power on Monday following an excellent trading update and then added to the holding as the share price broke out to new highs. XP Power has been trading well, has a strong order book, some new products coming to market and now expects to be ‘comfortably ahead’ of expectations for the full year. I have written about XP Power before here, so won’t do so again.

I reintroduced NMC Health to the portfolio. as share price momentum seems to have resumed and it is reporting its half-year results near the end of the month. I expect these to be good following the last update and I thought it prudent to add a small holding now to add to if the results are as good as I’m hoping. Here’s a link to where I previously wrote about NMC.

I sold Accesso Holdings for a 4% loss after the share price continued to fall post my purchase. I didn’t give this one much room to fall as the opportunity cost of holding a falling share seems so high at the moment, with the rest of my portfolio doing so well. My decision to buy Accesso was a bit unusual, as it had poor share price momentum and I was hoping for support from the recent placing price. I’ve made a mental note not to do that again…

FDM Holdings

I bought a new holding in FDM. FDM is an IT professional services company whose business is to train IT professionals (who it calls ‘Mounties’) and then place them at client sites. It has set up a number of academies around the world to train its staff. It seems to have a bit of a hybrid business model, somewhere between a recruiter and a consultancy.

Quality

At a high level I am a bit ambivalent about FDM’s business model. On one hand, it I am suspicious about whether it is providing something that is really essential to its clients and whether it really has much of a competitive advantage over a more traditional recruiter. On the other hand I am attracted by the consistently high profitability and growth and can see some possible sources of competitive advantage. Overall I think it is a high quality business:

  • Business economics: FDM has excellent business economics and is highly profitable. It’s model is to recruit and train candidates before allocating them to client sites where it earns a consistent revenue stream from them. It seems to have worked out how to recruit and train at a relatively low cost perhaps benefiting from economies of scale. As a result, it has consistently very high returns on capital and margins and generates a lot of cash.
  • Track record: FDM has consistently delivered a high level of growth in revenues and profits since 2011 and the share price has correspondingly risen since it (re)listed in 2014.
  • Competitive advantage: I have to confess some scepticism about FDM’s competitive advantage and it’s only just about convinced enough it has one to consider investing. It seems to have a bit of a niche in being able to offer consistently skilled consultants to large organisations who may value this convenience over recruiting themselves. Training its own staff may give it something of an edge over more traditional recruiters in being able to offer greater consistency in quality of staff. Customers may also become reliant on staff who are embedded into their organisations. However, I am sceptical over how much of an edge it does have over other methods of recruiting IT staff and in the value of its training, having seen a few negative reviews on Glassdoor. I do have some concern that it is underinvesting in its competitive advantage to drive greater short term returns.
  • Growth prospects: the growth prospects seem very promising. It appears to have a scalable business model and is likely to benefit from economies of scale. It has a lot of room to continue to expand geographically and is growing at a very fast rate in the US currently. The one drawback is that it is likely to be quite cyclical and I note that macroeconomic risk is high up on its risk register.

Pricing

FDM has great share price momentum with the price breaking out with the announcement of its half year results on Monday. The results were well ahead of expectations and it expects to be comfortably ahead for the full year. The valuation seems about fair given the growth prospects.

 

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