My portfolio had a fairly decent week last week, breaking out more convincingly to new highs. We are in the middle of results season, with five companies in my portfolio reporting this week: Estee Lauder, Paycom, MasterCard, Moncler and Howden Joinery (new buy). All of these reported earnings and revenues ahead of analyst expectations. However, some of their share prices fell on the news, including fairly substantial falls from Estee Lauder and Paycom, presumably as speculators were hoping for even greater outperformance. Thankfully my portfolio did well in spite of this, or I might have felt rather hard done by…
One reason for the strong performance of my portfolio this week was the continued rapid fall of the Pound against the Dollar, buoying the performance of my US shares. I flagged the glaring break in the Pound’s uptrend last week. This break seems to have followed through, following more weak UK economic data and controversy over whether or not the UK should stay in an EU customs union post Brexit. I think the Pound is probably fundamentally undervalued from a more long term perspective, so I suspect the current weakness will prove to be temporary. I am therefore wary of increasing my exposure to US shares for the time being.
As my portfolio has continued to perform well and the markets are seeming to regain some composure (especially in the UK), I’ve been steadily reducing my cash balance by topping up some of my existing holdings. I’ve particularly focused on my two highest conviction positions at the moment: Bioventix and MasterCard.
I also bought one new holding this week: Howdens Joinery. I’m starting to expand the number of holdings in my portfolio, now at 17. While I still see some of the benefits to concentration I wrote about previously, my portfolio has grown in overall size fairly substantially since then and I’m monitoring a much larger watchlist of UK, EU and US shares. To ensure better liquidity, improve diversification and reduce the incentive to over-trade, I think I’d do better with a few more positions. I’ll still try to make sure I’m sufficiently focused in my best positions and that I don’t make the mistake of cutting winners too quickly. I don’t intend ever going beyond 25 positions (and probably won’t get near that anytime soon).
Howdens makes fitted kitchens that it sells to small local builders. Originally a spin-off from MFI it has gone from strength to strength since. I’ve followed it for some time but this is the first time I’ve owned the shares. I’ve bought Howdens now as I think it provides some useful diversification, being a more lowly valued high quality UK cyclical.
- Business economics: Howdens is a very profitable business with ROCE consistently above 40% and operating margins of around 18%.
- Track record: the track record is excellent with consistent growth in revenues and profits going pretty much back to the financial crisis. Howdens profits were hit fairly severely by the financial crisis, indicating its cyclicality.
- Competitive advantage: Howdens competitive advantage comes from its dominance of the most efficient and effective distribution channel of selling directly to local builders. Selling to builders avoids many of the costs associated with retailing directly to customers, whilst still targeting an very influential agent of customer decision making. Howden has been taking market share from more traditional retail rivals for years. It is highly unlikely that any rivals wanting to replicate its business model would be able to match Howdens distribution network, service quality or economies of scale any time soon and prospects for competition from more disruptive technology seem limited.
- Growth prospects: on this factor Howdens scores rather more weakly. A big downside is Howdens’ cyclicality, meaning it is likely to be hit disproportionately at times of recession. Another downside is that Howdens now has rather limited further revenue growth potential in the UK market. It does not have much room to open many more depots, though probably still has room to further grow profits through further market growth coupled with operational gearing and efficiency measures. It is also trying to establish itself in several European countries, though this is fairly early days and to expect it to replicate its UK success is probably overly optimistic.
Momentum is good with a positive trading update issued just this week and the share price hitting new highs. The valuation seems pretty cheap and only requires fairly pedestrian growth to justify it (though the cyclicality means that Howdens growth is likely to be temporarily curtailed at some point, limiting the valuation multiple it should command).