July has been fairly uneventful for my portfolio so far, with very little volatility as the gainers and losers seem to be cancelling each other out. It’s been quite a while since I’ve had a chance to update on my recent trades, so I now have three to catch up on.
As I noted in my recent portfolio review, the number of profit warnings has picked up this year. Quality businesses are also getting hit. A couple of fairly significant ones popped up on my radar this week. Netflix missed expectations for growth in subscriber numbers fairly dramatically and suggested that part was probably due to price hikes (geographies where it hiked prices were hit harder). This calls into question the extent of untapped pricing power Netflix has from its competitive position. It’s enough to make me dump it from my watchlist. AG Barr, producers of Irn-Bru and a range of other soft drinks brands, was also hit by a profit warning from some price hikes that turned sour. AG Barr has been a favourite of quality investors like Keith Ashworth-Lord and Nick Train. I’ve considered it as a potential watchlist candidate before but didn’t really see the quality – growth has been pedestrian for a number of years and the brands don’t strike me as particularly strong.
Thankfully I haven’t suffered any profit warnings for a while. Generally I think my strategy of sticking to the best businesses with strong momentum does pretty well at avoiding profit warnings, but it’s by no means fool-proof and I know it’s only a matter of time until I get hit. The likelihood of a coming profit warning is one of the things I think about when deciding what to sell – I find weakening momentum and more guarded news flow tend to be pretty good leading indicators. I don’t sell every stock with weakening momentum systematically (i.e. with stop losses) as most of the time share prices will bounce back. Being overly sensitive to volatility can end up doing more harm than good. Instead I restrain myself to only rotating at most one position every couple of weeks, applying a bit of judgment to decide what my weakest position is. Applying this restraint also gives me plenty of time to plan my trades and avoid making stupid mistakes. I don’t normally describe the thought process behind my trades on the blog in much detail, but I thought it might be interesting to do it at least once as an illustration:
At the moment my portfolio has a few stocks which are starting to ‘roll over’ as momentum weakens, so I have a few possible candidates for the chopping block this week when I rotate:
- Sopheon (32% off highs): momentum at Sopheon is weakest in my portfolio though the price seems to be finding some support around the £10 level. The newsflow has been good, though there is relatively high uncertainty about near term trading. It looks relatively cheap compared to other opportunities on my watchlist. It should update on trading in August. I’m on the fence about whether I should sell.
- Burford Capital (23% off highs): Burford’s share price is trading within a narrowing range and seems to be converging to an inflection point around the time it reports results on Thursday. It looks relatively cheap and I have high conviction so I’m not going to sell unless the results are disappointing.
- Gamma Communications (20% off highs): Gamma has fallen recently following its trading update the week before last. This was a bit surprising as the update was positive. Most likely some investors have taken the opportunity to take profits as the valuation multiple was fairly high. I’m not minded to sell.
- Scientific Digital Imaging (16% off highs): SDI had results last week. I thought they were pretty decent, though the market was evidently underwhelmed. I’m not minded to sell.
- Atoss Software (16% off highs): Atoss has fallen sharply over the last week for no apparent reason, perhaps other than having risen sharply over the past few months to a level where it was starting to look expensive. Atoss has results next week so will see how these go before deciding whether to sell.
On the buy side I’m always monitoring a handful (normally ten) potential candidates to buy from my watchlist a bit more closely based on momentum, recent news and (particularly at the moment) valuation. Near the top of that list at the moment are RELX, Euronext, IHG, Cintas and Monster Beverage. I’m not wildly keen about any of these opportunities but they generally seem decent.
So based on all that my plan for next week is to wait till Atoss and Burford issue their results. If those go well then I’ll need to decide whether to rotate out of Sopheon or stick with it for a bit longer.
On to my recent trades:
- I sold Autotrader just over a month ago for a 25% overall profit. I was not wildly enthused with the outlook set out in its last results and so decided to sell as momentum started to weaken. I replaced it with PayPal. I’ve held and written about PayPal fairly recently so won’t do so again here.
- I then sold Boohoo three weeks ago for a 10% profit as momentum started to weaken. I replaced it with London Stock Exchange. LSE is another stock I have held and written about fairly recently so I won’t go over it again.
- I was (sadly) a forced seller of Microsoft last week, making a 25% profit on one of my larger positions. I bought another familiar holding, Churchill China in its place.