February 2024: Monthly Performance & Holdings
An improvement on Jan and finally a takeover situation!
Performance Summary
YTD to end Feb 2024 : -1.6% vs FTSE All-Share benchmark -0.8%
CY2023: +9.7% vs +3.9% benchmark
3yr (2021-2023): +49% vs +15% benchmark
Summary for Feb
Feb saw a massive improvement on my horrendous -3.8% performance in Jan. I am now just a smidge below the FTSE All-Share, and this early on in the year I am not worried. Still plenty of time for my strategy to work. Last year, for example, I had an even split of 6 negative months and 6 positive months, but still managed a +10% return.
I have finally gotten some takeover action! At the end of Feb, Direct Line Insurance (DLG) fessed up that it had received a takeover offer. It took the suitor (Ageas) going public for DLG to make this disclosure. It is unacceptable that the UK allows boards and directors to sit on takeover offers and not inform shareholders. DLG had received the preliminary approaches and bids back in mid-Jan, and it took them more than a month to inform the market! In my Jan update, I had shared that I considered selling DLG. I am so grateful that I decided not to.
When I bought DLG almost a year ago, I wrote a short paragraph on Stockopedia (paywall) of my buying reasons. It seemed obvious that they had a temporary problem that was eminently fixable. Ballooning car repair costs and used car prices were temporary. Their underwriting struggle could be sorted out with new management, and their regulatory capital base was strong enough to withstand this. I even mentioned at the end of the paragraph that I wouldn’t be surprised if a takeover bid materialised - and it has! Now that the car insurance market has resumed normality, and DLG is likely to have a profitable claims ratio again, it feels like Ageas is trying to buy Direct Line on the cheap, just as it is exiting the crisis. I would be annoyed if DLG gets sold for less than 250p; I paid 151p for my stake, and my calculations were that it could be worth more than 300p after full recovery.
I can’t remember when the last time I had some takeover activity in my portfolio; that’s how long my drought has been. Was it the Appreciate acquisition, back in early 2023? Wow, that has been a long time. Especially as FTSE companies have been rich pickings over the past year for overseas raiders.
I’m toying with the idea of focusing on companies that could be acquired? The FTSE continues to be unloved by investors and valuations looking like they remain below international peers. Rishi’s £5k “Buy British” ISA won’t help one iota. The only way to unlock that value is through M&A. We’ve seen plenty of big premium takeovers over the past year.
Are there certain characteristics of companies that make them more attractive for a takeover? One that I could build into a preliminary screen? If you have a view, let me know in the comments!
Feb was a quiet month of activity for me; only two sales (more on that below). There just wasn’t anything that I wanted to buy that was at the right price, and nothing to sell from the portfolio either. I was also quite busy with my day job work, and so have probably spent less time on The Boon Fund than I would have liked.
The indexes don’t scream BUY to me at the moment. Once a month, I track the typical index metrics - P/E, Div Yield, P/B, EPS growth, breadth. To give me a heartbeat whether shares as a whole are cheaper or more expensive at this particular time. This influences my purchase and sell decisions a bit. When I see that indexes are attractively valued, then I am likely to relax my buy target price a bit, but hold firm on my sell target price. Vice versa when the indexes are looking overvalued. I do this, because a company’s individual share price doesn’t exist in isolation. Movements in the index, and by proxy passive investment flows (eg ETFs), is the tide that lifts all boats up or down. I do not decide to buy things just because the index is cheap or sell when expensive; but I recognise that my target prices (buy or sell) are approximate anyways, and thus I flex depending on where the indexes are.
Are we in a bubble? Why is it that almost every other financial news article poses this question. For me, it is simple to answer. We are not. At least, not a market bubble. I think we might have localised bubbles in specific shares (cough cough Nvidia cough cough) but overall, I think the market as a whole is not about to pop. Why? Because a whole-of-market bubble needs to have mass market euphoria, sucking in the general public that otherwise do not invest in shares. I see no Uber drivers trading on their phones while they bring me from A to B. I see no newspaper articles about the 20 year old that now is a millionaire, drives a Ferrari, with a babe in both arms. There is no article about the 35 year old day trader that stuck it to his boss because he’s now made enough trading options in the evening to retire. No articles about the explosion of sign-ups on r/wallstreetbets again. The signs are just not there that the market as a whole is in a bubble.
Some individual shares might be in a bubble and pop. Especially those in the Magnificent 7. These won’t be enough to catalyse a wider market meltdown. No mania signs widely across shares and asset classes. Even Bitcoin, at $70,000, I would not consider a market-wide bubble sign.
Notable shares
System1 (SYS1) - Partial sell at the start of Feb - I decided to top-slice some of my gains so far (over 100%), but think there is enough momentum here to get them to c450p in the next few months. I was worried a bit about the crazy gains in Tech over in the USA, and worried a pullback there might send these illiquid shares crashing down. I need not have worried; the NASDAQ continues its rip roaring momentum, keeping System1 nice and high.
Zytronic (ZYT) - I sold out at the start of Feb, writing in my last update that it looked like a revision to their rosy CRM pipeline numbers was on the horizon. I was right, the latest trading update was an admission that those numbers were inflated, and written down. Quite substantially. In addition, poor trading momentum has continued, 2024 has not started well. No reasons given. Nor any hints of proactive tactical activities or a strategic shift to try to get them out of this funk. It seems like management don’t know how to get out of this soft patch, and just waiting for fate to intervene. I will not be going back in until there are clearer signs of a turnaround, or new management. It is a pity - they have what seems like good tech, they still have a safe balance sheet to get them to a better place. But time and money is being squandered.
Time Finance (TIME) - Another profit upgrade, I have lost count how many there have been over the past year. Its been such a regularity that I think the next time there is only an “in-line” statement, the shares will probably sell off.
Yet, Time is still so undervalued. Barely trading at 8x PE (for FY May24) with a now proven growth flywheel. They have found the way to scale revenues, AND expand their profit margin at the same time. There is still gas in the tank left for this flywheel. Stockopedia gives it a StockRank of 99, and that is even before the outstanding FY May24 results to come gets factored in.
The risk, of course, with a financial firm is that someone is cooking the books. Either fiddling the recognition of revenue/income from the loans. Or, they are lending out too aggressively, and bad debt is about to explode. Management here do not have a huge stake in the business. They are incentivised to go big, so their options and share plans vest massively, but they stand to lose little if things go pear shaped.
On the plus side, their largest shareholder, Arena, know all about lending. So here’s hoping they are taking a more active approach with Time, have done their due diligence. This also offers an interesting potential exit; Arena owns 20% already. GPIM are stale investors (from when Time acquired Wellesley), holding another 20%. If Arena manages to convince Ronald Russell (who retired off the board at the end of 2023, holding 12%) then they would have over 50% of the votes sewn up for a takeover.
Watch this space, I think either Time will get further EPS upgrades PLUS a PE expansion from 8x to 10-12x. Or a bid will come from Arena to take it private and keep all the future upside to itself.
Direct Line Insurance (DLG) - written already in a section above.
Paypoint (PAY) - Continues to surprise me. First was the Appreciate acquisition. Then the contract with the DVLA for international driving permits. Now the partnership with Royal Mail for parcel drop-offs. What do they all have in common? Leveraging Paypoint’s large, unrivalled network of corner shops across the country. None of these are really transformative in terms of incremental revenue. But it demonstrates the network effect value they possess. I hope they manage to find the one or two big propositions that will truly step-change the revenues. For now, happy to hold. Still so modestly rated on current revenues and profits, getting growth optionality for free. And being paid a nice dividend just to sit and wait for more surprising news to come.
List of trades
None since System1 (SYS1) and Zytronic (ZYT) were sold at the start of Feb, and covered in the Jan Update post.