2018 Q2 Performance: 7.43%

Total investments

I started this quarter with £3,705.42 in my ISA, of which £3,550 were contributions and £155.42 were profit. I put in £500 more, bringing my total contributions to £4,050, and ended the quarter with £4,512.28, a £462.28 profit from my investments (up £306.86 since the previous quarter).

XIRR

Inputting all the above details into excel and using XIRR to determine my performance, with expenses included, gives me a quarterly rate of return of 7.43%. If my investments performed like this every quarter, my yearly return would be 33.21%.

Transactions

Transactions

The only transaction I did this quarter was purchasing 15 shares of Shire PLC on April 24, following the announcement that it had reached an agreement with Takeda to be acquired for about £49 per share ($30.66 in cash, and either 0.839 New Takeda Shares or 1.678 Takeda American Depositary Shares). At the time of my investment the shares were trading at just £40, despite Takeda’s offer, most likely because the market didn’t believe it would go through, due to opposition by some Takeda shareholders. Their arguments were that the japanese company was too small to buy a company the size of Shire, and that the amount of debt it would have to take on was too much. Soon after I bought, the share price went down to about £38.

In my previous post I estimated that the chances of the takeover going ahead were 90%, and last Thursday, at Takeda’s Annual General Meeting, only 10% of shareholders were in favour of a proposal to require advance shareholder approval for large acquisitions. In effect, this anti-Shire proposal was rejected by 90% of the shareholders (who knew my estimate would be so exact?). Shire shares are now trading at £42.65, giving me a profit of £29.87 (4.90% over my cost basis of £609.88 in a little over two months, as shown in the image below, or a return of about 30% on an annualized basis).

Provident Financial‘s Rights Issue was finalized on April 5, and so £387.45 were taken from my ISA to buy 123 more shares at £3.15. I now own 298 PFG shares at a cost basis of £5.38 each.

Besides trading commissions, the only expense I had this quarter was £1.63 for a Q1 shares custody charge on May 2.

Portfolio

Francesca’s Holdings

My best performer this quarter was Francesca’s Holdings (FRAN). It started Q2 trading at $4.80 and is now at $7.55, a 57.3% rise (it went further down to about $4.60 in April and reached a high of $8.09 in June). I now have a profit of £126.16 on this position (a 10.61% return over my cost basis of £1,188.77) whereas at the start of the quarter I had a loss of £401.44. So, in total, FRAN went £527.6 in my direction.

FRAN started to recover at the beginning of May. On June 5 the company published its Q1 trading update and the shares went down 11% pre-market because sales and Q2 guidance fell short, reporting a net loss of $3.9m compared to earnings of $4.3m for the same period last year. However, whoever sold regretted it at the end of the day, because the shares closed at $6.59, up 8.2% from $6.09 the day prior. Sellers failed to dig deeper into the trading update and didn’t note that FRAN was estimating earnings per share between $0.53 and $0.60 cents for 2018, showing an improvement between 23.3% and 40% compared to 2017 diluted EPS of $0.43.

The share repurchase programme is also ongoing, with the company buying 659,000 shares for $3.5m (average price was $5.31 per share), practically all of the operating cash flow it generated in Q1. And it still has $40.2m remaining under its current authorised repurchase programme. It also plans to open new boutiques, close down old or unprofitable ones, and refresh 80 to 90 boutiques in fiscal year 2018.

When I first bought FRAN at $7.50 I was aware of the continuing comparable sales decline, but I still thought the company was worth twice what it was selling for due to other qualities, such as having no long-term debt and its share repurchase programme. When it fell below $6 I bought more, but failed to do so again when it fell below $5, mainly because I was looking at PFG and its Rights Issue but also because I was a bit uncomfortable. I was not expecting the price to drop almost 40% from my initial purchase price since it was already selling so cheaply. I didn’t know when the share price would start to recover, and at the time I had already invested about half of my portfolio into it. It could have been a value trap lingering in the doldrums for years.

I still don’t know if I made the right decision by not buying more at $5 (this will depend on how PFG performs compared to FRAN) but I learned several lessons and other lessons were reinforced from this experience:

  • I can’t guess the future and have no idea where share prices will go next, so don’t even think about it. No one has a crystal ball. Just focus on determining a company’s value and buy if the discount is big enough;
  • If the share price goes down further, buy more (assuming you have spare cash). Trust that the company’s value will be reflected in the stock market eventually, even though you have no idea when that will happen;
  • Even if a company is trading cheaply, it can get even cheaper. Control your emotions, analyze the company again, and take advantage of the situation if you confirm your original findings, instead of panicking and selling out;
  • Do not make rash decisions based on a single quarter’s performance. Read the entire trading update and think long-term (years, not quarters or months).

Dixons Carphone

Dixons Carphone (DC) is practically unchanged since the end of the last quarter (my return is still 21.28% on this position) although it ran up to £2.35 in May (giving me a total 50% return at the time), only to drop 23% back to £1.80 after DC published their Q1 trading update and revised outlook on May 29, estimating profit before tax for 2018/2019 of £300m, down from £380m for 2017/2018.

On June 13 it came out that DC had suffered a cyber attack where hackers might have gained access to 5.9 million credit card details in one of its processing systems. Of these, 5.9 million had chip and pin protection, but 105,000 non-EU issued payment cards had been compromised. The share price went down a bit but then recovered within two days.

On June 21 it published the preliminary results for 2017/2018, which brought no major surprises compared to the previous trading update, and the share price rose to £2. Last week it fell about 7% to its current level at £1.87.

Since I bought in at £1.50 and the recent stream of bad news didn’t knock the price down below £1.80, I’m very comfortable holding this position. When good news start to come, the share price should rocket up.

Provident Financial

The worst performer this quarter was PFG, with its share price falling down to about £6 from £6.82 at the end of last quarter, a 12% drop. The company published their trading update on May 9 stating that operations should be back to normal in the first half of 2019, causing their share price to rise about 8% to almost £7, but it has been falling since. I still have a profit of £185.40 (11.52% return over my cost basis), down £249.18 from a profit of £434.58 at the start of the quarter.

For now all four holdings are in profit, and I’m not at all too unhappy with my performance! I believe these four companies are great investments and, in time, their share price will reflect their true worth.

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