Watchlist review

It has been quite a while since my last watchlist review in May and there has been quite a bit of change since then. Here is an update on companies I’ve added to the watchlist, considered but not added and eliminated.

New additions

I have eight new additions to the watchlist since May:

  • Jupiter Fund Management: I considered this fund manager previously but wasn’t quite convinced enough at the time to add it to the watch list. I’ve now changed my mind and decided to add it. Like many fund managers it has good business economics. It is capital light and generates a lot of cash, which it pays off in healthy dividends. Its weakness is that the sector is competitive and it may lose clients if it underperforms or loses staff. I think fund managers make good investments as a momentum investor as, when they are doing well, they can grow rapidly for extended periods of time. Due to the nature of their business they naturally tend to be quite cyclical. What I like about Jupiter is that it has a good recent track record of delivering consistent growth.
  • Microgen: I’ve added Microgen to my portfolio already and written about it here. I’m a big fan and really should have had it on the watchlist before.
  • Victrex: I previously had Victrex on the watchlist and have decided to add it again. Victrex is a chemicals producer that specialises in a substance known as PEEK (a polymer used for medical devices and in various industrial markets). It is a world leader in its field and is able to make very high margins and returns on capital in the face of limited competition. My main concern is that at some point more competition will emerge, if its markets grow and given the commodity like nature of what of it produces this would be bad news indeed. This is quite a big sticking point but I’ve decided that this is likely to be some way away and it does have potential to improve its competitive moat through vertically integrating downstream into manufacturing using the polymers it produces (as it is currently doing). While it comes with some risk, I reckon it has the potential to be a very profitable investment for some time yet.
  • WH Smith: high quality is probably not the first thing that springs to mind if you think of WH Smith, but after looking into its business model in more detail, I’m actually becoming quite a fan. Its recent track record of profitability and growth is quite phenomenal. While its high street business does not really seem to have a very exciting future (though in my view has an OK brand and niche), the jewel in its crown is its ‘travel’ business, located in railway stations and airports around Europe. The basic business model is to exploit these locations by attracting footfall with its brand and charging huge margins to less price sensitive customers who value the convenience. Having been into some of these stores in airports on several occasions to buy last minute travel supplies before boarding a plane, I think I can see why it is so profitable. I think it should also be quite defensive. The main uncertainty for me is the extent to which it can sustain the high levels of growth of recent years through finding more of these locations.
  • Focusrite: I previously looked at Focusrite, a developer and manufacturer of audio and music products, but wasn’t sure about it. It popped up on my screens as the numbers look good and it has a short but good track record. The thing that held me back previously was being unsure about its competitive advantage. I still have some reservations, but since I first looked I’ve found quite a lot of positive commentary and reviews of the quality of its products and this has made me see it positively enough to add it to the watchlist.
  • Diageo: I’ve generally been eliminating the megacap shares from my watchlist due to the more limited prospects they have for future growth. However, I’ve made an exception for Diageo as I think it’s a pretty rock solid prospect over the longer term. I’ve written about it previously here.
  • FDM Holdings: FDM Holdings is an an IT ‘in’sourcing business. I’ve added it to my portfolio already and written about it here.
  • Kainos: Kainos is a IT software provider for the healthcare industry. It is very capital light with high returns on capital and cash generation. It is recently listed with a fairly short track record but has been growing fast. It looks like it has a decent competitive niche and ‘sticky’ customers. Growth prospects look good too. It’s definitely high quality enough to add to the watchlist.

Considered but not added

A few shares that have popped up in my screening but I have decided not to add to the watchlist:

  • Andrew Sykes: Andrew Sykes is a hire company specialising in portable air conditioning and heating equipment. It makes really good margins and returns of capital. I haven’t added to the watchlist because I’m a bit wary of the capital-intensive nature of equipment hire businesses and because I don’t understand whether Andrew Sykes has a competitive advantage.
  • Jarvis Securities: Jarvis is a stock broker. It has good numbers but it is small and I am not convinced at this point that it has a competitive advantage. I’m a bit wary of  stock broking as a market liable for continued disruption.
  • Gresham Technologies: Gresham Technologies is a financial software company. It is recently-listed, looks like it may have a good product and is in a high growth phase, but I don’t feel I understand enough about it yet to be able to add to the watchlist. I’m going to look into it a bit more first.

Eliminated

I continued to eliminate some of the larger businesses on the watchlist, where the growth potential appeared more limited. This included Burberry, ITV and Shire. In addition:

  • System1: I eliminated System1 (ex-Brainjuicer) from the watchlist after a profit warning that hinted that it might have less of a competitive edge than I previously thought.
  • Hilton Food: I had grown to like Hilton as a reliable and profitable business, but I feel its tight margins and reliance on Tesco as a customer create an unacceptable level of risk so I eliminated it.
  • Aveva: Aveva was acquired, as had appeared possibly on the cards for a little while.
  • Domino’s Pizza: it’s a very profitable and attractive business but I’m worried that its growth prospects have become more limited and competition is increasing. I’d sooner bet against it rather than buy in to the dip following the recent dip.
  • Animalcare: I eliminated Animalcare after having second thoughts about whether it indeed benefited from much of a competitive advantage. It seemed a weaker prospect than other shares on the watchlist (and also currently overvalued in my view).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s