It feels somewhat uncomfortable writing a post entitled ‘buying spree’, given my current ambition to trade less. However, it seemed appropriate given I bought three new positions this week. Quite a few decent looking opportunities have been cropping up and it seemed foolish not to capitalise on at least some of them.
The markets have been steadily recovering from trade wars jitters over the last couple of weeks. No doubt there is more volatility ahead. However, I’m now a bit more relaxed about remaining near fully invested rather than trying to anticipate the next crash. I’ve decided to take advantage of opportunities to invest in Churchill China, XP Power and Gamma Communications. I have held shares in all of these businesses before and know them well. I’ve decided to buy Churchill China following an ahead of expectations trading update. I have written about it fairly recently, so won’t do so again here. It has been a while since I reviewed XP Power and Gamma Communications. I have some further thoughts, so have refreshed my write ups on these below.
I’ve also sold out of Portmeirion for a 20% profit, following its recent trading update. While it was fairly decent, I was hoping for a bit more. More significantly, I have been having second thoughts about Portmeirion’s quality. I’ve intermittently held Portmeirion in my portfolio and watchlist for several years and its become a bit of favourite. A useful article by Phil Oakley has made me think again. On reflection Portmeirion is more cyclical than I had given it credit for and I’m not sure its other attributes adequately compensate for this. There are a lot of other opportunities on my radar from the many higher quality businesses on my shortlist, so I’m happy to take my small profit and move on.
On to the buys…
XP Power is a developer and manufacturer of power converters for high end original equipment manufacturers, e.g. medical equipment. I’ve held it several times in the past and always done well. While I’ve always been a little sceptical of the sustainability of its competitive advantage, its quality passes the bar for me to invest in it. Right now the cheap valuation and business momentum make it seem very appealing.
- Business economics: XP Power is a manufacturer and not as capital-light as some of the other businesses on my watchlist. However, it is consistently highly profitable with decent operating margins and returns on capital consistently in excess of 20%. I think the reasons for its high profitability are both that it targets the higher specification part of the market and that it has vertically integrated its operations into manufacturing as well as distribution.
- Track record: XP Power has a consistent track record of growing sales and profits. Its growth rate has not been spectacular over the years, though has been accelerating recently.
- Competitive advantage: XP Power has some competitive advantage from its IP, its provision of high quality service and its relationships with customers. However, its long term moat appears somewhat limited and it acknowledges some vulnerability to competition in the future e.g. from low cost Asian producers. There is clearly some risk here. XP Power carries out some of its own manufacturing in Vietnam and is attempting to move up the value chain with more own label product. It may also face technological risk from product innovation, though I don’t think this is cause for concern.
- Growth prospects: XP Power has growing market share and has been doing very well recently. Demand from its customers seems to be very stable and steadily growing. I don’t believe it is very cyclical, but is a little as some of its customers face cyclical demand. Given it has fairly good revenue visibility there are unlikely to be any big unpleasant surprises.
There is strong underlying business momentum and the valuation looks very reasonable. The share price is near its highs, but has been consolidating for the better part of the year. I’m anticipating that its next trading update, due near the end of the month, could be a catalyst for its next leg up. I’m ready to add to my position if it’s a good one.
Gamma is a provider of telecommunications services primarily to SMEs. It is in the middle of the telecommunications supply chain, providing cloud services rather than the underlying infrastructure, which it mostly sells via downstream distributors. I’ve held it previously but unfortunately got cold feet and bottled. I know quite a bit more about its market know and as a result have a lot more confidence in its long term prospects than I did previously.
- Business economics: Gamma is a highly profitable and cash generative business. Returns on capital are consistently in the high twenties. The operating margin is respectable for the type of business. Quite a bit of capex spending is required but this is compensated for by healthy and reliable cash flows.
- Track record: the track record is not that long but is very impressive nonetheless. Gamma has experienced very strong and consistent growth in profits and cash flow in recent years. It only listed on the stock market fairly recently in 2014.
- Competitive advantage: Gamma is the UK market leading provider in more technological advanced services to medium sized business, such as VOIP, SIP trunking and cloud based services. Gamma has developed IP in providing high quality, technologically advanced services which it distributes primarily through downstream partners. It has a rapidly growing market share. The markets are fragmented and it faces some competition from smaller providers and the large vertically integrated telecoms providers, though it appears to have a competitive advantage over these in the quality of its offering. Most importantly, Gamma is likely to benefit from the switching costs faced by its customers. The services provided by Gamma are business critical and customers are wary of the potential for disruption when switching.
- Growth prospects: are about as good as you get. Gamma operates in very defensive markets likely to experience strong secular growth for years to come.
I bought Gamma just after an update that trading has been at the top end of expectations. The share price is just breaking out to new highs. The valuation is fairly high but seems reasonable given the growth prospects.