Strong Balance Sheets

Issue 22: Venture Portfolio Update;

Having not updated you since Jupiter (JUP), I felt it was time. There are plenty of new ideas in the pipeline, i.e. dirt-cheap stocks, but the market has rallied, and it’s not (yet) their time. Who knows what will change next week? The recent K+S AG (SDF Germany) had been planned for Venture, but as I dug in, and with a solid balance sheet, it was fit for the Whisky Portfolio. It is hard to say how many ideas will flow, but it will vary.

I spent time on oil exploration stocks but couldn’t find what I would describe as a free lunch. The North Sea stocks are dirt cheap but need regulatory/tax changes to unlock value. Energean (ENOG) is interesting but highly indebted. Serica (SQZ) is dirt cheap, but the trend is weak. I am also looking at Saipem (SPM Italy), but I need to better understand the business and await a pullback. I could go on.

Venture was born last September. It is still early days, but I am pleased to see the winners building as the weeks and months pass, which is how it is supposed to be. Of the 21 ideas, most stocks have been UK-based, with two outside. Expect non-UK to grow. The split between mid- and small-cap has been roughly 50/50, with just one large cap. Financials and industrials dominate the table, with three trades in gold miners and some in growth and technology.

The original plan for Venture was to publish the ideas that were left behind because the Whisky portfolio, while dynamic and adventurous, rejected lower liquidity and higher volatility situations. That said, this area is also rich picking for investors seeking higher returns.

Looking at the list, I am pleased with the progress, with some standout winners.

The winners can take care of themselves, so I’ll focus on the losers. There have been four stocks down more than 10%, and today I want to re-examine them.

RWS (RWS)

RWS (RWS) has recently been reviewed by the four analysts following, with Barclays reiterating overweight with a positive outlook. The earnings outlook is unchanged. Fair value is twice the current price and RWS have been buying back stock, but this ended in February. That could be the reason for the price weakness.

RWS Share Buyback Complete

It is a good company, and we should wait.

Speedy Hire (SDY)

Speedy Hire (SDY) has seen downward revisions to forecasts, but they are not material. It is very clearly cheap, but there has been little news and no catalyst for change. The last trading update in January was positive, but growth was anaemic. The point of this trade was a straightforward economic recovery, where the stock would trade much higher than the 2x forecasts.

A Speedy Boost to the Economy Is Needed

Mobico (MCG)

Mobico (MCG), the bus and train operator, is a post-pandemic balance sheet recovery stock. EV is back at the 2009 low while revenues have recovered.

Rolling Stock

The market cap is £392 million, and free cash flow for next year is expected to be £132 million. That’s cheap, but debt is £1.78 billion, which is high but manageable. The nine analysts were all buyers, but RBC recently downgraded to hold due to general valuations in the transport sector.

The company had delayed results to review the accounts of their German subsidiary. They have made “good progress” since, and it relates to statistical measures used in Germany that drive pricing and profitability. I believe the market has overreacted to what they believe is a £15 million reduction in cost recovery. Too cheap, be patient.

Fisher (James) (FSJ)

Fisher (James) (FSJ), a specialist maritime operator, next reports on 2023 on 29 April. I expect slightly positive results compared to expectations mainly because the worst is behind it, and the management seems determined to deliver value. It has been yet another pandemic recovery play, and sales are on the up. They have announced the sale of RMSpumptools for £90m, which will boost the balance sheet.

Plain Sailing

The trading update in January said things were in line with expectations and the second half of 2023 was “resilient”. This is a good company with a robust yet cyclical business, and it needs more time.

Stop Losses and Profit Taking

I am a great fan of stop losses, but not with value investing. They work best in trading strategies with growth stocks or commodities. With value investing, I would be more likely to cut if the situation materially changed for the worse. Nothing stands out at this time. If an idea meets its forecast, I will review the situation, but often when a company manages to go that far, it goes further. Feel free to interject.

More ideas will follow as and when something interesting turns up. Soon, I hope.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture