January 2024: Monthly Performance & Holdings
A challenging start to the year but still eleven more months to play for
Performance Summary
YTD to 31 Jan 2024 : -3.8% vs FTSE All-Share benchmark -1.4%
CY2023: +9.7% vs +3.9% benchmark
3yr (2021-2023): +49% vs +15% benchmark
Summary for Jan
Not a great start to the year, as I am now starting more than -2pp behind my chosen benchmark, the FTSE All-Share.
I had more aggressively deployed my cash in Q4 last year. My cash position was 34% in the first 9 months of 2023, 20% in Q4-23, and 21% at end-Jan. This helped me get some outsized positive returns in Q4. But some of those shares have given up gains in Jan. I increasingly see the markets as frothy - in particular the USA. Although this hasn’t helped the FTSE in January (-1.4%). The divergence of performance between USA and UK continues.
I am intending to sell rather than buy in the next month or two, especially where prices are close to being fully valued, even if they don’t hit my sell targets. As I still think inflation will be more stubborn than most expect, resulting in lower expectations for central bank rate cuts. I also think the Commercial Real Estate (CRE) problems will spill over in some form and affect the wider markets, and I struggle to see central banks offering aid or bailing out directly to mitigate the pain. Both of these can be catalysts for a risk-off mode for shares, leading to 5-10% declines generally.
Most Private Investors have this black and white notion that you should ignore all macro if you’re an individual stock-picker. Don’t “time the market”, just buy whenever you think the price is right. However, I take a more nuanced view. A big chunk of share price movements, especially over a year or two, is down to the macro market movement. So when you’re buying a share, you are buying in some part, that macro. It pays to have a view, and it pays to incorporate this into buy and sell decisions.
Notable shares
System1 (SYS1) - This was my best performer in January, up +c25% and continuing its upward momentum from December. The market had completely lost interest due to the management changes and missed expectations in the past. But finally, their star solution (Test Your Ad) is coming good, and showing some robust, sustained growth rates. I will be writing a detailed post on this soon, and there is more about my recent partial sell in the section below below.
Direct Line (DLG) - after a strong performance in Nov23 and Dec23 to set a year high, it has given up -c10% in January. Probably due to some profit-taking, the big amount of storms passing through this year, as well as some regulator investigations into a small car insurance product niche. I debated whether to sell out when news of the storms and floodings hit. But I suspect that DLG will do OK, as home insurance is a smaller part of the business, and I think car insurance (their largest) will have quite a pleasing update soon. Prices have really increased YoY, but repair costs as well as second-hand car prices are declining. I also think they might see a moderation of accident rates as driving behaviour and driving expertise moderates post-COVID. Lets see.
Hang Seng Tech ETF (HSTC) - I wrote in my 2023 end year review that I was going to abandon my dabble into index-type ETFs. I should have done it quick and easy and sold out of my last remaining ETF in my portfolio. Instead, its suffered about a -15% loss in January, following the wider sell-off of Chinese equities. I see this as temporary though, as I think the media and investors are too bearish in China. With a lack of understanding combined with a media that is anti-China, should we expect the financial news to be accurately reporting the economic state in China? Or does the combination of these two things result in inaccurate reporting of a negative slant? I myself concede that I have a lack of understanding, along with most Western observers. But I contrarian-ly believe that the situation being reported in the Western media is probably more inaccurate negatively than positively. Thereby the investor dumping of Chinese equities is probably over-done. So I will continue to hold for a while longer, as I believe the prices of Chinese equities are currently too low. If I was still allowing ETFs in my portfolio, I would be tempted to pick up more Hang Seng indexes or maybe even China A-share, CSI-300 indexes.
Oxford Biodynamics (OBD) - This has given up a huge amount since the HY Sep23 results in mid-Jan, down more than -50%! The results disappointed massively. CiRT sales growth has stopped, with the company offering vague excuses of key sales people leaving. This company desperately needs CiRT sales to get up the few £m a year, and PSE sales too, as they are burning around £10m a year at the moment. My calculations is that they might get to say £3m total revenues this year, in a reasonable scenario. Cash was £5.3m as of Sep23. Tellingly, the company conveniently left out mention of the current cash balance. What is not said is usually more important than what is. I think they would have burned another £4m in the HY to Mar24. So another fundraising is inevitable, unless they can execute a licensing agreement for other EpiSwitch tests in the pipeline. It is conceivable these might bring in a few million, which would see OBD have a runway till next year. By the time I got round to analysing the HY results, the shares had fallen from 30p to 15p, and at this price I think any fundraising would be executed at these levels (or even a premium), so there is no point selling. It is also less than 1% of my portfolio, so I’ve left it for now. If it drops even more to a less than £20m market cap, I might pick up a few more shares.
List of trades
Sell All - Camellia (CAM): I did a comprehensive analysis write-up here on my decision to exit this position completely. Asset disposals are not going to plan, and management do not still have a clear strategy and grip on the business. There is still huge tangible asset value in here to be unlocked, but it is slowly decaying, and I await a catalyst or change in management before I am tempted to buy again.
Buy - Comptoir (COM): I detailed my investment thesis and analysis of Comptoir in a recent post. I see this as a survivor of the carnage currently sweeping through the restaurant sector. The valuation is way too low, because of super-bearish investor sentiment and most investors barge-poling this sector and this share. Yet, I think the management is now refreshed, the operations too, and the proposition much stronger than before. Management are also starting to roll out growth opportunities - new locations, as well as franchise licensing overseas. There is also enough cash to fully fund the growth. Once that growth potential gets firm momentum in the next 12 months, I see a big re-rating of Comptoir to come.
Sell Partial - System1 (SYS1): Write-up to come, but I decided to bank some gains from this given the recent share price surge. This is the third time lucky for me; the first buy/sell I did in 2021 netted +56%, the second +40%, and now the third +114%. I seem to have a knack of knowing when this is under-valued or over-valued. Maybe because I work in marketing, especially on the data/tech side of things, and System1 fits into this category. I still think that this share, to be fully valued in the next 12 months, should be around 450p+. But that’s only another 10% extra from the current price. Given my macro market concerns outlined in the Summary section, I’ve decided now is a good time to lock in and crystallise some of the gains. Have sold about half my holdings. My one concern is that despite it being a platform subscription, Test Your Ad is still an enterprise SaaS sale type model. It still needs sales teams to knock on doors, demo, convince clients to buy. To maintain its growth rate, it needs to sign up more and more new clients. This requires more sales staff. However, I do not see them recruiting heavily. This has definitely helped operational gearing profit growth now, which is what the market is getting excited about. But they are now capping mid-term growth rates IMO through this cost-capping strategy. So I fully expect the growth rates to moderate substantially within 6-12 months, maybe to like 10-20%.
Sell All - Zytronic (ZYT): This was a very recent buy in December, and I had detailed my investment case and analysis for Zytronic. The main crux rested on the potential unwinding of their order book in 2024. They stated that orders have a long cycle from pitch to production, typically 18-24 months. They also stated that it was hard to get new orders during COVID due to meeting restrictions, but that projects quickly started being commissioned from start of 2022 (post-COVID). CRM pipeline opportunities were up +17% YoY, project values of £69m up +17% too. Compared to current FY23 revenues of £8.6m. So clearly, potentially a game changer if a modest amount of the pipeline converted into sales. However, buried in their Full Year Sep23 Results was the admission that their newly recruited sales director is undertaking an audit of their CRM numbers. As we all know, it is very easy to fudge pipeline numbers. I therefore decided to exit.