Weekend Rebel Review

Valentines Day approaches, will stocks start to feel the love?

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

I thought this week I might chat a bit about risk versus reward as this is something I try carefully to manage. We all estimate our risk and reward subconsciously, on practically every investment or trade, or we should do but how much risk to have v potential reward is very different for each of us. The most averse risk-takers might want to invest or save their money in a UK bank.  As long as you invest under £85k your money is guaranteed by the government. By locking your money in you may be able to guarantee your annual return.  That sounds pretty risk-free but if the £ fell v the $ say, at something like 10%, then you have lost money in purchasing power against the $.  So there are always hidden risks, often something you cannot do much about. You may also gain from that currency movement too of course.

When it comes to your portfolio, you can prevent risk by investing in a spread of stocks in a spread of sectors. You could also invest monthly so that your purchases and sales are spread out over time, ‘pound cost averaging’ meaning you never buy on a high or sell on a low.  But to the same token you are never going to fully benefit that cracker of a stock and being heavily invested in that stock and maxing out on the gains.  Basically we are all trying to get to a position where we are comfortable with the amount of risk we are taking for the potential gain we may make.  I’d say when I first started investing for a living in 2000, I was far more risk averse than I am today.  I rarely used to let a position go over 10% if ever. I was caught up in the ’87 Black Monday Crash, overly invested.  That fear of being in an incident like that again probably made me too risk averse during the tech boom so that I never maximised my gains during that time.  On the other hand, that fear probably helped make me decide to sell up in  April-May 2000 and avoid giving a lot of my gains back.

Today I work differently.  My first thought is what is the worst I can envisage losing in this position in reality?  Obviously I could lose 100% of a position but I focus on the likely possible risk and in nearly every case Invest in, I make sure the likely maximum loss looks to be around 30% without me being able to bail out. From this guide point I’m looking for shares that can grow as much as 100% in a year or more.  From then on it’s a matter of filtering for the most likely ‘365 day one baggers’ with the lowest likely downside.  I think probably the best thing I have done over time is doing my own thing.  There is a lot of books around but the way to make money is to do what works for you.  I’d say the first thing to do is look back at all your trades.  What trades came off, what didn’t?  Is there a pattern?  Did a certain type of trade do better or worse on average?  When you look across the gamut of your trading, how much is the return?  Would you have been better finding just a few better-quality stocks and buying and holding?  Dealing charges, spread, taking losses, all trim your gains and increase your risk.  What research did you do?  The books will tell you to read the annual report, see the profits and the balance sheet and dig into those but have you looked at the board?  Have you searched the CEO and CFO on Google, Linked-In etc?  It isn’t uncommon even in UK listed companies to discover that the CEO has bad financial form and you basically invested in a company where Dracular running a blood bank. 20 mins work could save you more than you might be able to earn in 20 weeks. Doing research reduces your risk and helps you feel comfortable with your investment. I focus my time on what is important to me.  As a buyer of bombed out recovery candidates, the balance sheet isn’t likely to look great, that’s why the price is so cheap. I do buy stuff on highs if the stock is compelling, rather like AT. and W7L, on incredibly low PE’s for the staggeringly strong growth, giving a very low PEG.  The risk is different in these, the risk is they are fully priced or growth slows substantially.  All co’s have different risk, it’s a matter of finding those that have the greatest risk/reward ratio loaded towards reward.  Today I hold fewer stock, I accept there is greater risk but also greater reward potential and researching helps reduce that risk to an acceptable level. Inevitably, with some companies, no matter how much research you do, some bad eggs will slip through, that’s just life.  The best thing I do when it comes to stocks that go bad, like WOSG recently, is just accept it, decide whether to sell or hold on and then move on – dwelling on the bad doesn’t help you make decisions for the good. Stocks that go wrong cab damage your confidence and exacerbate things because you then tip toe into a great buy when you should buy heavily. I find it a great exercise to look down my entire portfolio, stock by stock and keep asking ‘can this double within a year and what is the likely risk here?  That helms me decide what to trim and what to increase.

Onto the macro stuff and while there wasn’t a lot of data last week there was stuff to note.  In the US the S&P hit a new high.  It seems to me the US indexes perform better and I suspect many are trading US stocks over UK stocks.  I think that may be a crowded market here or soon will be, when valuation get scrutinised and prefer to invest in the less crowded, dare I say pretty deserted market of the UK.  It’s amazing how many stocks have been flying 20% or more on news, which tells me investors are there, they are just not participating out of fear.  It’s a stock-picker’s market especially if you can identify great, hidden value imo. UK macro data has been outperforming Europe on nearly all fronts but I think the looming election here is creating shyness.  Since the end of Dec the FTSE250 has given back 3%+ FTSE Small Cap the same and 1.5% off the FTSE100 so it’s definitely a stockpickers market.  Things may liven up this week as on Tuesday it’s US CPI and Weds UK CPI, RPI and PPI, that should be a market-moving day to the positive if inflation comes in near where expected and a fair bit lower.  Whatever happens it’s a stock-pickers market and that sorts the wheat from the chaff. I’ll skip on to stockpicking and have more macro next week after the inflation data.

S&P

So to my holdings and firstly AVON.  These have won $60m in contracts in recent weeks.  Ahead of the Capital Day on Thursday, traders dumped, as they often do, with it better to trave than arrive. I watched the Capital Day online and there was nothing there to disappoint me, in fact it boosted my confidence.  This is a slick co, with world beating products, a new board that really know how to run a co imo. Mid teens operating margins are promised along with Sales CAGR of ‘over’ 5% (high single digits is a phrase they have used Recently too).  The Rebreathers are the best in the world, the Norwegian Navy saying compared to the competition, it’s like ‘comparing a Tesla with a model T Ford’. With the helmets (and helmets all come under Team Wendy now) these too are the best in the world and miles ahead of the competition, in fact where Avon are vertically integrated and manufacture everything for the helmets, their competitors buy in components and put their helmets together. 

This gives Avon more control, higher quality and it shows in the test videos they had from the Dept of Defence with Avon’s helmet stopping bullets at huge speed while the competition helmet just let to through – dead soldier.  The CEO’s comment was that their helmets are ‘years ahead of the competition’ and their patents help prevent the competition get near to them.  Respiratory masks are already leading the world and are the highest margin division.  Margins to get to 14-16% medium term. I recommend investors watch the presentation (I’ll be watching it again this weekend).  There was a great anecdote from one of the directors who went to a presentation of their gas masks.  When he got there they asked him if he believed in his product?  ‘Every faith’ he said.  So they told him to put one on which he did, then they proceeded to fire CS gas at him.  You can watch the presentation for yourself and see the story, it’s much better told by Justin Hine, (timeline 1hs 2min).  I came away from it feeling good and even more confident.  The company now has $20m of R&D being funded by outside sources – all of this is likely to lead to future orders.  Obviously do your own research as ever and don’t trust some old guy on the internet like me, watch it for yourself with a nice mug of tea and a bundle of biscuits.

https://stream.brrmedia.co.uk/broadcast/6598387d860b8247708a9a6d/65c4df7215c8e5d0dc392991

One great point I’d make – these are a true defence company.  BAE and Babcock make products that can be used for aggressive actions or use to kill people which many find morally difficult to invest in – Avon products are 100% defensive, for saving lives. By the way, 12p of the fall in Avon on the Capital day was the 12p+ divi going xd. But for that, Avon would have been up on the Capital Day.  Still at over £1 off the recent high though.  Jos Sclater and Rich Cashin look so in control and know what they are doing with all the restructuring, the Kaizens (yeah, new one on me too until recently too, I watched their last presentation, it’s “Change for Good”, gong to each department, getting them all to work together to reduce work-time, waste and gain efficiency) it is a must watch imo, incredibly impressive day.

AVON

After buying CMCX a couple of weeks ago, on Monday they announced a cost saving plan.  They expected to incur a one off, non-recurring cost of circa £2.5 million in FY24 with estimated annualised savings of £21 million to be realised in FY25, representing an 18% reduction against consensus staff costs.   £21m savings will go right to the bottom line. With £40m pbt this year giving 10p eps forecasts, adding £21m to it should mean 15p eps+ going forward, excluding organic growth imo, Forecasts only showing 13p at the moment so I think there is more upside than expected. I think these are becoming a long term buy and hold. A fabulous bowl. IGG saw director buying this week to so it looks like the sector may be firming.

CMCX

LUCE has bounced well this week and at the end of the week a director bought 50k shares which is always nice to see. EAAS AGM seems to have gone well and they are trading at recent highs. The tie up between these two has me watching closely. I’m more interested in LUCE’s benefits as they are a stock that make up 10%+ of my holdings and one where it’s easier to hold a larger position.  EAAS are interesting in their own right tho, and up nearly 30% in little over a week since I bought in.  LUCE bowl broke out then retreated a bit but when it clears 160p I think it likely motors.

LUCE

KIE – Berenberg came out with a 210p target on Friday. This is another onebagability stock that makes up 10% of my portfolio that looks very cheap on yield. Growth and falling debt just isn’t being fully appreciated imo.  At 133p, KIE near to rally 60% nearly to hit that 210p target. Close to multi year break outs. The sector is starting to get attention.  I also hold a decent position in GFRD which has come off a bit over the last few weeks but this is vey normal as it is pretty illiquid.  On a PE of 11 or less here and  with a market cap of £244m they have £140m net cash and pay a 5.6% yield.  The recent trading update said they were 5% ahead. What I really like about these two is they get a lot of government contracts and in the event of Labour getting in they will have to put their wallet where their mouth is and start improving infrastructure. In particular, GFRD do a lot of drainage and water co work. Everything I watch on TV seems to show the drainage and sewerage systems in a mess. Labour will be on their back if they get it, they have been banging on about the government not having been tough enough – that all plays into GFRDs favour.  KIE and GFRD have results around March 7^th, so less than 4 weeks away – I expect them to get bought up in advance. Both co’s have webcasts on their investor sites which are definitely worth watching:

Kier https://www.kier.co.uk/investors/

Galiford Try https://www.gallifordtry.co.uk/investors/

KIE

GFRD

Keyword Studios - KWS is one I took a position in this week.  A director bought 3.4k shares. £55k worth.  The chart is making a really deep bowl which I like but more importantly, these do translation services for the gaming industry. I find it interesting that there are director buys here and in TM17. I wonder if the sector is seeing increased business so I’ve bought a starter position.  It may become a longer term holding when I’ve done more research, as with TM17

KWS

I added more MKS again this week to buy back some of what were sold.  I hold just over half of what I was holding now. Now 20% off that high, typical traders getting over excited and then pessimistic – I prefer to do my research and be better informed than most traders.

Lastly, something to think about.  I was requested by the surgery to do my annual blood pressure test which I do at home on my own machine.  I had to do 7 days, morning and evening. While my B/P was below 120/80 each morning, at the close each day it was 145/90+.  If you are a full time trader/investor, make time to get away from the screen and relax.  I don’t feel I get stressed by shares but I probably get frustrated.  I used to just go away from the screen and do some oil painting for a break, particularly in the autumn/winter – I get out and away a bit in the summer more easily.  I busted my shoulder 10 years ago and haven’t been able to paint since then but finally, after all that time, it is now better enough to paint again – has come along just at the right time so hopefully a bit mor R&R away from the screen going fwd while I paint again and we start seeing the finer weather.  Take time to smell the flowers.

Here’s the last two paintings I  did over 10 years ago, hope you can recognise them!  One’s sold, the other isn’t for sale sorry.

Time to try to do Jeff Lynne of ELO I think and get away from the screen a bit now and get the old B/P down – if I can still paint and haven’t forgot how to do it  😊

Enjoy your weekend

Rebel