Performance

I've been monitoring roughly how my portfolio has been doing for a few years, but as the amount of money I've got has become more meaningful I've decided to try and track it more accurately, properly accounting for dividends etc. starting from the beginning of 2012.  Choosing a benchmark is always difficult but I've opted for the FTSE 100, for ease of measurement more than anything else.

My goal is to outperform by 5%+ a year.  The FTSE is a relatively unvolatile index compared to most country indices and AIM shares (of which I own a lot) generally move in and out of favour in dramatic fashion.  As such I expect to underperform markedly when markets fall, but hopefully outperform by a greater amount when they rise.

I've umm'ed and err'ed on whether to include cash in my return figures.  I generally view holding cash as an investment decision rather than being constrained by liquidity requirements for daily living, so really it should be included in my results.  The argument in favour of leaving it out is that I'd probably have to hold cash anyway if I was invested in an index fund.  I think the arguments in favour are stronger, so I'll be including the cash weighting in my performance figures.

Anyway, here's the performance through to the end of February.  As you can see, I've had a reasonably nice run, helped by an immediate gain of 20% on my United Carpets position.  Game Group has all but gone into administration but I've already felt the pain from that one.  But then again, markets have generally risen since the start of the year so perhaps all I've got is some leveraged beta...

United Carpets

One of the benefits of keeping some cash on hand is that you're able to take advantage of opportunities to buy businesses that have seen their share price depressed by irrational selling.  United Carpets looks like one of those opportunities. 

United Carpets is a company that popped up on a few screens I've been doing over the past year.  It has a healthy dividend yield, net cash, not obvisouly distressed trading, yet its P/E multiple was around 6-7x trailing earnings.  This is cheap, but in the darkest corners of the AIM market not ridiculously so for a small cap, so I added it to my watchlist rather than buy it outright.  Since then, I've watched it fall from 8p to 5p over the course of a few months, but on Tuesday it fell from 5p to 3.1p on heavy volume.  Normally this means something like a set of bad results, but there was no published news either from the company or from Bloomberg.  It's main listed competitor, Carpetright, has also not published any negative news.  Getting interesting...

UC only owns a few retail outlets outright, most of its revenue is derrived from franchise fees.  A quick browse of the web suggests this amounts to 10% of sales plus a fixed fee for advertising.  In other words, its not dependent on the profits of its franchises, and this has helped it maintain profitability throughtout the downturn, unlike larger rival Carpetright.  There are a couple of downsides to this arrangement.  First, it's not as exposed to any pick up in the housing market (and we're surely closer to the bottom than the top).  Second, its continued profitability is partly down to its franchises, who might be loss making themselves ( anyone who's look at the Coke bottlers or McDonald's in any detail will understand the importance of system-wide profitability).  However, according to the interim report it appears as though only one of UC's 82 stores closed in the last 12 months, so clearly the owners aren't struggling so much they are forced to close.

Valuation
Trailing 12m profits are around 580k, but as results in the 1H of this year were weaker we could be looking at full year profits of 500k.  The market cap at the price I managed to buy was £2.9m, implying a P/E around 6x earnings.  Current trading is said to be a little better (SSS up 4.4% in past 11 weeks) so its likely full year profits will be higher than this.  600k doesn't feel unreasonable, still below the 800k achieved last year.  This would put the business on 4.8x earnings.

This is cheap, but the strength of the balance sheet suggests we should also be willing to strip out the cash from the market cap.  Current assets are higher than current liabilities even excluding £1.7m of cash, bringing down the price we are paying for the 'earnings side' of the business to just 1.2m.  Now the P/E looks a fairly ridiculous 2x! 

I'm normally happy to strip the cash out of a business when you've got a sensible management team in place who are aligned with shareholders, and the high insider ownership gives me some comfort with this.  Up till this year UC were paying a 0.75p dividend (a 21% yield!) and I expect they will be keen to resume this once trading picks up a little.


Summary
This looked too good an opportunity to pass up and I purchased £2900 worth of shares, a fairly comical 70,000.   This makes it a fairly large percentage of the portfolio, but then again you don't often get a chance to buy a solid business on 2x! 

UV

New start

Hello all,

This is my second attempt at an investment blog, unfortunately life got in the way last time.  I'm intending this largely as a way to try and clarify my own ideas, as I often find that once something is written down they become clearer (and hopefully learn from my mistakes). 

Anyway, here's my current portfolio:

Best,

UV