Monday, 29 January 2018

IG Group (LON:IGG); Sold.

So early this year IG Group was one of the first stocks that went into the new portfolio. This past week I sold my holding in IGG for a tidy 51% gain including dividend. I sold at around £7.78 a share having bought at £5.25.

Why sell now?

The stock has almost completely retraced its catastrophic fall in Q4 2016 where regulatory enquiry into the sector sent it down from highs above £9 a share to new lows below £5. I felt at the time of purchasing that the margin of safety was fair and that things might not be so bad for IG Group. I set out several cases including my bull case;

'Bull Case; Revenue drops 12% in Europe and 10% in the UK. The company scales down costs in proportion. I make a valuation range of £9.00 - £5.75 - the upper being a DCF and DDM model where the low cost of equity flatters the share and the latter being a target 15x P/E.'

Now with the stock trading up at £8 a share I feel it has surpassed my expectations for returns and it also now trades at 15x P/E. To want to pay much more than 15x P/E I would want an earnings growth rate that is at least 10% if not 15%+.

Now I know the stock has seen a great run in Q4 2017 likely in no small part to the rise of leveraged Crypto-currency trading. However the proposals on a leverage cap from ESMA would I feel devastate the revenues of this business. This is because the initial margin requirements for stocks could rise to 20%, and currencies 3-4% meaning between 2 and 10 fold increases in initial margin requirements. No big deal for well capitalized traders but I suspect the 'punter' retail market would be decimated. 

Whilst I believe IG Group are a well run and responsible business the threat of losing clients to overseas unregulated brokers and the risk to overall revenue growth from clients abandoning trading is great. Therefore at this valuation I believe the risk/reward does not favour holding IG anymore. At the moment their stock brokering business is too small to make up the difference.

I still love the business model and free cash flow generation. I would look to buy back the stock for the long term once the ESMA rules are in place and we have some clarity on future revenues - because today the stock is pricing in almost zero impact. I think that's unlikely now.

Disclosure: I have n positions in LON:IGG. This analysis does not constitute investment advice. I also hold a trading account with IG Index. Read my disclaimer.

Monday, 1 January 2018

Portfolio Strategy: Annual Review!

So a portfolio update is in order for 2017 to look at my overall performance and current positioning and outlook since the inception of this portfolio in April 2017.

Amiable Minotaur Portfolio 


I will call this my first Annual review as the portfolio began on the 19th of April. How has performance been? Including all fees and costs I have returned 1.96% in GBP since inception and relative to FTSE AW which gained 9.36% in GBP. I have under performed by 7.4% in the period. So whilst I am lagging the benchmark I do have a positive absolute return.

I expect to continue to under perform for as long as the wider market and especially the S&P grinds higher. The stronger GBP also has a negative impact on performance in absolute but not relative terms due to around 50% of the portfolio being in FX (mostly USD) and another 17% in precious metals which act as a proxy currency. Even at year end holding 25% in cash equivalents is obviously a major drag against the AW Index.

Stocks: The Worst and Best

My worst positions have been in Acacia Mining, Klondex Mines, Short NASDAQ and Bed Bath & Beyond.

Acacia has continued to suffer with little positive news flow on resolving their dispute with the Tanzanian government. Given cash flow constraints they suspended production at 2 of their 3 mines. Barrick Gold executives negotiated what looks like a terrible deal with the government resulting in the resignation of the CEO and CFO. I feel captive here because either this stock takes another major hit from more bad news (already I have lost 30%) - or it rallies very strongly on a resolution/clarification around future profitability. I think it is worth north of £3 a share even discounting this debacle, assuming a resolution.

Shorting the NASDAQ x3 is obviously not working (-31%) as central bank flows keep this market grinding higher - however despite the all time highs momentum is broken and I foresee at least a modest pullback of 10% or so before renewed propping up of the market. This is a valuation call lacking an immediate catalyst. The Tech top is close or appears to be near at this point.

BBBY results were soft again this month and further declines followed. I am down 46% overall on the position. It feels like a value trap for a while but ultimately it will turn, and fast - when results stop declining. Just like we have seen in Next PLC. It's a hold for now - it feels like it is bottoming here and screens very cheap assuming it survives the next decade.

Klondex has been a poor performer in the fourth quarter and I am down 24% overall due to weaker than expected results. This miner is in transition consolidating several mines together in Nevada and seeking to turn around its Canadian acquisition. Whether they do this hangs in the balance, a stronger gold price should helps, but I have trimmed the position a little in recent weeks due to the weaker momentum and risks to the valuation case.

The best positions have been in Tullow Oil, IG Group, CF Industries and Kirkland Lake Gold

Tullow Oil (+32%) has been a good performer and is my largest energy position. With Brent breaking the $60 barrier in the past few months Tullow has slowly been ticking higher after its successful rights issue earlier this year. More FCF from firmer prices means they can accelerate debt reduction and increase equity value. I continue to like this low cost E&P company.

IG Group has shaken off recent regulatory problems that saw the stock dip 10% in a day this month. My position has returned 40% this year in IG. This has been a great example of a solid underlying business with incredible FCF and dividends and a low risk business model - except for major regulatory headaches caused by crackdowns on leveraged trading. I bought this early in the year after the stock lost nearly half its value and it is a classic value investment for me. I do not see much upside from here but the healthy dividend yield alone makes it well worth holding long term.

CF Industries
has been a beneficiary of better commodity prices and cheap gas in the US. The stock rose +40% since I bought it and I recently sold down half my holding due to the strong performance and the bottoming in natural gas prices (see SWN later).

Kirkland Lake Gold has had interstellar performance from its top quality assets and results. The stock rose 60%+ but I sold out following those gains at the end of August. I bought it back at $17 having sold at $16 which was unlucky as it fell back to around $15  a share for a time. Trading now above $18 this has been a major success in the portfolio due to its operational excellence. Watch out for insider buys - this was something that alerted me to the stock in the first place.


SWN - I have taken a position in Southwestern Energy in December. This is a major US E&P company focused in Natural Gas. The gas market in the US has not followed oil and SWN has been a real dog. I see value here - much like Tullow Oil they have been through a  major cycle of write offs and impairments and appear to have trimmed the fat for future success and raised the necessary capital. 

It now appears to me to be a good time to accumulate the shares. Substitution for fuels should mean Nat Gas cannot remain sub $3/mmbtu in the US in the medium term and at those prices the incentive to build LNG export infrastructure becomes strong. The stock is highly leveraged to gas prices and I feel could outperform strongly next year (this is also why I have reduced my CF long - CF uses Nat Gas to produce nitrogen ferts.)

Gazprom - Speaking of cheap gas companies - how about one that trades on 4x PE? This is a pure value play. Russia is a hated market, one of the worst performers of recent years and 2017 - and yet unlike Saudi the Russians have taken a massive hit to the Ruble which makes exports very competitive. I think the Russian market is attractive and have been eyeing up Norilsk for a dip to buy too. Very cheap stocks. Hated and cheap are often a good combination for gains (like Nigeria earlier this year.)

It is also noteworthy that Diamond Offshore may have bottomed here as an inflationary impulse in the commodities space looks likely. I may look to add to these in future on a pullback but the recent strong performance from the low at $10 a share to $18 has seen hardly a pause!

GE - I bought some GE in December, just a small position. The company has a major pensions headache and slashed the divided but the capitulation in the stock has been extraordinary. At $17 this looks very good value despite all the headwinds. GE is afterall a major producer of many everyday items like bulbs and also highly specialized products such as turbines used across the world and unlike 2008 they are not running a major credit business on the side.

EOCC - I added a little to EOCC in the quarter as I believe this Chilean utility has some of the best assets for electricity generation around and is attractively valued. The 10% boost in the stock following the Chilean election results was a welcome gift. EOCC remains a major position at 6.2% of the portfolio and has returned 9% this year.

I bought and sold Freeport stock in December playing a strong gold and copper price environment for a respectable 19% return. This was more a short term trade although I may buy it back on a dip as I think Copper could see good performance in 2018.

AZN - 
I bought some large cap Pharma in July with AstraZeneca which sold off strongly following a failed drug trial. Since buying that dip the stock was up 20% which is a nice move. With not strong view on the long term value I sold AZN in October.

Position Sizes

My biggest positions in terms of sectors are Gold Miners, Retail and Energy. 

My biggest single stock position is Next plc at 10.4% which I added to on recent weakness. I continue to love this stock but have reduced slightly following a strong pop.


Unchanged from last quarter! 

I remain bearish overall as regards the wider market. Volatility is very low, equity prices are very high, central bank liquidity is very high, interest rates are very low. Not exactly fertile conditions for findings assets at attractive prices. I remain long term bullish commodities and associated stocks and gold due to under valuation vs financial assets. The end game for this party is when inflation breaks out, reflected in commodities, and central banks lose control of financial markets because they are stuck trying to ease monetary conditions with an inflation spike.

I am looking for cyclical value plays in retail, energy, base metals and all other markets in general.

Disclaimer: I have an interest in all the securities mentioned in this article at present but i may change these in the future. These are opinions only, not investment advice. Construct your own portfolios with due care and attention.  If in doubt read my disclaimer.