Just married…

It’s been a busy time for me lately, the main thing of course being my wedding last week. A huge amount of time, care and anguish has gone into preparing this three day extravaganza, so I’m delighted that it’s been a resounding success and more importantly that I tied the knot with the love of my life.

Needless to say, this has kept much of my attention away from markets (and politics), though I can’t help noticing things have been busy there too! Unfortunately I’m unlikely to have much time to devote to the blog in the near future as I’m straight back into the thick of it at work. All very exhilarating but also quite exhausting…

 

It seems we are cursed to live in interesting times. I’m studiously avoiding commenting on the substance of the Brexit drama on this blog as it is such an explosively divisive issue. In any event, I don’t think it has very much bearing on the performance of my portfolio, save on a couple of holdings and through its impact on the exchange rate. The falling Pound has been a useful tailwind over the last few months. I’m expecting this to unwind at some point but it doesn’t seem a significant enough factor to affect my investment decisions.

A more significant concern for investors like myself, who focus on more international rather than UK focused businesses, is the current global slowdown in economic growth and the potential for a severe recession. There are a few ominous signs. While many aspects of the US economy still look robust, the economic outlook in some sectors such as manufacturing, and in regions such as Europe (particularly Germany), is looking pretty grim. The US China trade war continues to rage on and the yield curve has convincingly inverted once again.

While I understand relatively little about exactly what’s going on in the global economy, I’m still unconvinced that there is sufficient justification for moving away from equities or raising cash. With little sign of inflation, there still seems to be plenty of scope for support from expansionary monetary policy and it seems likely that the systemic risks to the financial system from bad debt have fallen substantially since the financial crisis. Incidentally, my attention was brought to the following blog post which discusses the relationship between yield curve inversions and recessions. It’s a little technical but very interesting and apparently well-reasoned – I highly recommend a read.

Over time I have become increasingly confident in systematically following my trading strategy and no longer feel much need to tamper with it. My mechanical benchmark portfolio in particular has continued to deliver the goods and I have been aligning my actual investment decisions more closely to it. A useful benefit of following a systematic strategy is that it becomes much easier to ignore the macro noise and avoid the costly temptation to occasionally dash to cash when there is a little volatility. While it is somewhat troubling that quality / momentum investing continues to grow in popularity, I don’t think we are yet near a point where it is going to start underperforming, especially if executed well.

I have a couple of trades to update on. Three weeks ago I sold out of Burford Capital again for a 20% profit. While it still seems highly undervalued, I had second thoughts about holding onto Burford again. I still think the Muddy Waters short-selling attack has little substance to it. However, they do seem to have been successful in trashing investor sentiment and it is unclear how long this will take to recover. I decided to sell as it is a complex situation that is not consistent with the rest of my strategy. As a result, it was taking up too much mental bandwidth. I am also concerned that the political situation in Argentina doesn’t seem to bode well for its large Petersen investment. I will revisit when momentum has returned. I replaced Burford with Cintas.

Last Monday I sold out of Gamma Communications for a 34% profit and swapped it for Accenture. This trade was purely on the basis of relative momentum. However, the timing was rather unfortunate as Gamma released a positive trading update on Tuesday that sent the share price right back up. It’s possible I may end up buying back in again fairly shortly. Oh well.

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Cintas

Cintas is a large business (worth around £22bn) that distributes corporate uniforms to purchase or for rental and a range of complementary products and services (including laundry of its uniforms) in the US. It pursues a fairly acquisitive strategy, over time buying up many smaller regional businesses to consolidate what was a very fragmented sector.

Quality

  • Business economics: Cintas is a highly profitable business with returns on capital approaching 20% and margins of around 16%, which seem decent given the nature of its business. It’s not exactly a capital-light business but capital expenditure is not too high and profits largely turn to cash. A lot of the costs of its distribution network are fixed so there is a high degree of operational gearing.
  • Track record: Cintas has an excellent track record of rapidly growing revenues and profits over the past few years. It seems to be a very well-run business and its executives have quite a bit of skin in the game.
  • Competitive advantage: Cintas is the largest player in a generally fragmented market where it competes with many smaller local and regional players. It has been successful in increasing its market share over time. Its competitive advantages come from its greater scale. Without getting much into the detail, there seem likely to be a number of aspects where scale looks likely to be an advantage in this business, particularly in running an efficient distribution network and negotiating with suppliers. I don’t think running a large distribution network efficiently is a particularly easy thing to do and it is reassuring to see that Cintas is investing heavily in upgrading its IT systems and executing this well so far.
  • Growth prospects: over recent years Cintas has managed to grow fairly rapidly, both organically and through acquisition. It has also gradually increased its margins. There still seems plenty of scope for it to continue to grow through further increasing market share and through offering additional complementary products and services to its customers. One commonly cited risk with this investment is that Cintas may be quite cyclical and its fortunes closely tied to employment prospects of the US economy. This is something to watch out for. However, looking back at its performance during the financial crisis, I wouldn’t say this risk was particularly severe.

Price

Momentum is excellent. Cintas’s recent last results beat expectations and the share price is consolidating at its highs. The valuation is quite punchy but not enough to put me off given the quality of the business.

 

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Accenture

As I am sure readers are aware, Accenture is a global management and IT consultancy. Accenture works closely with its customers to help them define their strategies and digitally transform their businesses.

Quality

  • Business economics: there is no question that the economics of this business are excellent. Accenture is a highly profitable capital-light business. Its margins are consistently in the low teens and it makes returns on capital of around 40%.
  • Track record: Accenture has a solid track record of growing revenues and profits. It is not growing especially rapidly (about 6% revenue growth a year on average in recent years) but growth is steady.
  • Competitive advantage: Accenture is a clear market leader in IT consulting, though it is increasingly likely to come into direct competition with the large software providers. Despite this I believe it is likely to have sustainable competitive advantages from its customer relationships and global reach and its reputation and brand. Customer relationships really are key in offering enterprise software solutions and I am optimistic that Accenture’s ability to offer complete, bespoke solutions to its clients via its consulting business should stand it in good stead going forward. Accenture’s scale and brand also should enable it to attract high quality staff and continue to innovate and generate valuable IP.
  • Growth prospects: Accenture operates in markets that should offer strong secular growth potential for years to come. It is already large and unlikely to experience very rapid growth but it should be able to grow steadily for some time.

Price

Momentum is excellent with Accenture’s recent results impressing and the share price breaking out to new highs. The valuation seems reasonable given the quality of the business.

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