Recent news from our holdings

Steve Clayton - Fund Manager

17 March 2017

We are now three months into the fund's life and so far, we have sold none of our original holdings, instead focusing on winding down the ETF we bought as a liquidity hedge on day 1 and applying new monies to topping up positions opportunistically.

Share prices in the long term depend on the underlying performance of a company and the cash it can pay back to investors. In the short term there can be wide variations between where a stock is trading and where hindsight will eventually show that it should have been.

Company results can be a catalyst for the market to reset a share price back toward its underlying course, by proving or disproving some of the emotion and expectations built into a share price.

But, as in life, it isn't always what you say that has the most impact, it can be how and when you say it, or even the mood of who you say it to. The stock market is famously moody and sometimes one particular detail will be seized upon and over-stressed, sending a share price up on otherwise downbeat news, or vice versa. We've seen a few of these swings and roundabouts already in March with some of our holdings.

WPP - Robust profit growth but shares fall so we added to our holding

WPP announced full year results that at first glance were very strong. But the shares tumbled on the day, because amongst all the news of robust profit growth, there were some downbeat words on the state of near-term sales growth, which was looking pretty pedestrian. At the same time though, the company reiterated their medium term expectation of growing earnings per share at a pace of 10-15% per annum.

The boost to earnings from lower sterling, along with decent underlying growth led the board to hike the annual dividend on the stock by over 25%. That to us was the real news in the numbers. WPP has not cut its dividend in over twenty years, and in fact has raised it each time, bar 2009. The board hope and expect to be able to pay it in future. But, that dividend decision is not a commitment per se, for dividends and yields are variable and not guaranteed and are not a reliable indicator of future income.

In the long run, the value of a share is the current value of all the income it will pay back to its owners in the future. On that basis, a share in WPP would appear to be more valuable today than it was before the dividend hike was announced, yet in practice, the opposite is true. So we have been adding to our holdings in the fund.

Domino’s Pizza - double digit growth but share price suffers so another opportunity to buy more stock

A similar argument applies to Domino’s Pizza, which announced double digit growth in pretty much everything, bar the last few weeks’ like for like sales, which only rose modestly. The combination of a dividend increase of 15% and a share price fall of about the same proportion means that the ongoing yield is about 30% greater than it was (no a reliable indicator of future income). Domino’s stores are franchises, so like for like sales are not that important to the group, which worries more about total sales. This includes the contribution from new stores, of which there were about eighty last year with a similar number expected this year.

Domino’s look to have made a schoolboy error with their Winter Survival Deal, omitting to include free cookies, just as Pizza Hut tried to relaunch themselves with a large scale advertising campaign. We doubt anyone is paying for their cookies next winter, nor can Pizza Hut easily sustain their marketing blitz, given their smaller scale. So again, we have purchased additional stock.

Just Eat - Strong results and share price recovery

Investors who have visited our blog page may have already seen our earlier brief comments about adding to Just Eat, which had fallen on a couple of occasions, once when their full year order update was taken badly by some commentators, and again when the CEO announced he was stepping down due to urgent family matters. Just Eat had become the weakest holding in the fund, so we were very encouraged when they released full year results which showed continuing strong growth in earnings and cash flows that lay behind our original decision to own the stock. The market, doing one of its regular volte faces, agreed and the stock has recouped almost all of its earlier losses, rising over 15% in just a few days. Our earlier purchases look much healthier now. However please remember that past performance is not a guide to the future.

It’s important to stress we are not buying just because the share prices are down. The market, the chat rooms and the tip sheets always have a “trade that must be done”, for without the trading activity, many market players would be out of a job. Much of our time is spent trying to identify what that trade is at any one time and making sure we don’t do it.

We are simply trying to stand back, focus on the long term fundamentals of the businesses we hold, and buy more shares at lower prices when opportunities arise. We may not get it right every time but so far this approach is serving us well.

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