2018 Q4 Performance: -1.89%

total investments

I started this quarter with £7,232.96 in my ISA, of which £7,050 were contributions and £182.96 were profit. I put in £3,200 more, bringing my total contributions to £10,250, and ended the quarter with £10,266.24, a profit of £16.24 from my investments (down £166.72 since the previous quarter).

Q4 performance

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 -1.89%. If my investments performed like this every quarter, my yearly return would be -7.34%.

transactions

Transactions

The only transaction I did in Q4 was buying 302 additional shares of Provident Financial PLC when its price dropped to £5.50 on October 18, after ending Q3 at £6.04. I now have 600 shares of PFG at an average price of £5.49. It traded as low as £5 during the quarter, rising to £6.25 after its trading update was published on October 19 (showing progress in the credit card and home credit divisions), and ended Q4 at £5.75, giving me a profit of £154.79, a 4.70% return over my total cost basis.

Besides trading commissions, the only expense I had was £3.43 for a Q3 shares custody charge on October 19. I also received a very small dividend of £0.63 from Shire PLC.

And I now have £1,550.78 in cash since I contributed £1,450 more on December 20 to have more liquidity in my ISA. I want to be able to take advantage of this big stock market decline this quarter and make an investment as soon as I find another company I like trading for less than half its worth.

portfolio

Dixons Carphone

Retail shares have not been very nice to me this quarter. From £1.6965 at the beginning of Q4, DC continued to slide to £1.201 per share, giving me a loss of £135.02 (a -21.94% return) whereas before I had a profit of £63.18. Most of the decline happened in December, with the share crashing from £1.50 to £1.35 on the 12th, when the latest trading update was published.

DC reported a half-year loss of £440m, which was largely the result of a £490m accounting charge (meaning no cash outflows) due to a huge writedown in the value of the Carphone Warehouse division. It has also cut its half-year dividend 36% to 2.25p from 3.5p per share in 2017/2018 (there goes my nice 7% yield over my cost basis).

Due to the poor performance of the mobile business (which has faced reduced demand for new handsets, is loss making and is losing market share), DC has launched a plan to revive its fortunes by focusing on improving its online presence and customer service, and slashing £200m in costs.

In spite of all this, the company reaffirmed its 2018/2019 goal of achieving £300m in profit before tax, which doesn’t sound credible since it only achieved £50m this last semester (not counting the writedown), down 31.5% from £73m in H1 2017/2018.

Francesca’s Holdings

Francesca has continued to disappoint and dropped further to $0.9622 from $3.71 at the start of the quarter. This share is now down 85.4% from my average purchase price.

FRAN published its latest trading update on December 11 saying it had a net loss of $16.2m compared to a $0.2m net profit for the same period last year, sales fell 10% to $95.4m from $105.8m, and same-store sales fell 14%.

I did consider selling it during the quarter since I no longer believe the company will be able to recover and turn around its operations, but I decided against it because:

  1. Selling it now would not make a huge difference to my portfolio, since this position is now worth less than 2% of its total value, so even if they go to $0 it won’t make an impact;
  2. There is still a chance that the company might do better in Q4 due to the Christmas period, which might cause its share price to increase;
  3. The share price is extremely low now and might have found support at the current level;
  4. If the company does go under, I’m thinking of leaving these shares in my portfolio forever, as a reminder of my mistake in analysing this company, by only looking at its financial statements and failing to consider its likely future performance in the face of intense competition and changing consumer buying trends;
  5. I hate selling and don’t want to be trading all the time. I want to be an owner and build up my asset column (this is a bias that I will have to address, since selling faster would have been more beneficial to my pocket and my investment performance in this particular case; I also realize this last paragraph is highly ironic…).

Just Group

This company was my only riser in Q4, mainly because on December 10 the Prudential Regulation Authority (PRA) issued a policy statement that showed fears of a regulatory clampdown on the equity release market were greatly exaggerated (as I wrote in this article at the time of my investment).

The share rose 22% that day to 100p but has since dropped back to 91.75p, still higher than its 88.4p price at the end of Q3, giving me a return of about 16% over my cost basis.

Given these news, I can only assume that the only reason the share price hasn’t recovered to its previous level of 140p in July is the general stock market weakness this quarter, but I think it’s only a matter of time. The company’s performance is excellent, it has a PE ratio of less than 6, a dividend yield of about 4.3%, and I believe it’s worth more than 180p per share.

Shire

As I expected, Takeda’s acquisition of Shire was approved at the Court and General Meetings held on December 5, and it will take effect on 8 January 2019. At that time I will receive $30.33 per Shire share in cash (about £357) and 1.678 Takeda Pharmaceutical company ADSs (American Depositary Shares) per Shire share, trading on the New York Stock Exchange, with each ADS representing 0.5 New Takeda Shares (meaning I will receive 25 Takeda ADSs, representing 12.5 New Takeda Shares, and these last ones will be trading on the Tokyo Stock Exchange).

I considered selling the shares for a profit, but decided against it because I was curious about the merger procedure and how it would affect my investment ISA. I also think Takeda’s shares have been unduly punished, and think there’s a very high possibility that they will recover in the future.

Right now I am a bit confused because in the last few days my Shire position was split, and there are now two entries for Shire in my portfolio: one for ‘Shire PLC Assented Cash Line’, which I assume will be used to pay me the cash portion of the acquisition deal; and the other for ‘Shire PLC Provisional ADS Shares’, which I think will be used to place the 25 Takeda ADSs.

My confusion here is that this last entry is valued at £1,125 and the first entry is valued at £0. My cost basis for this investment was £609.88, meaning that right now I have a profit of £515.12 on the full position, and this seems high. If I were to use Shire’s closing price of £45.70 on December 31, my 15 shares would be worth only £685.50, my portfolio would actually be worth £9,826.74, which translates to a worse performance than indicated by my Excel calculations, and I would have a loss instead of a £16.24 profit.

I don’t know where that £1,125 value comes from, but hopefully I will get full clarification as the acquisition is processed…

Summary

I have mixed feelings about this last quarter. On one hand, I don’t like losing money, and having a second consecutive losing quarter definitely sucks (even though I did better than the general stock market, with the FTSE 100 dropping about 10% and the FTSE 250 dropping about 14% since October 1). On the other hand, I love seeing share prices go down, because that might give me a chance to invest in good companies at much higher discounts to their estimated value.

FRAN’s performance has definitely left a bitter taste in my mouth, and I have become very wary of retail companies. As a Portuguese saying goes: “Gato escaldado, de água fria tem medo.” (something like ‘A scalded cat is afraid of cold water’). Hopefully I’ll be able to learn from this investing mistake and never repeat it again, but also not let this experience influence me so much that I will pass over great retail companies. The main takeaway is: sell as soon as you realize you made a mistake (the problem is actually realizing you’ve made a mistake!).

Happy new year!

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