Paul's 2023 watchlist - half-year update

Paul’s 2023 Watchlist - half year update

I came up with a watchlist for 2023 in Jan 2023, which I posted here. The idea was this list was to highlight my best small cap share ideas which had come up in the SCVRs during late 2022. My original selection criteria in Jan 2023 were simple -

• Good business model, as far as I can tell,

• Trading well, with positive outlook comments,

• Sound balance sheet, hence little to no insolvency/dilution risk, and

• Modest valuation with clear upside.

It was obvious early in 2023 that this would be a difficult year for macro, so I knew that some of the shares I picked would issue profit warnings, but not which ones! Hence the importance of balance sheet strength, which would allow any under-performers to recover in time.

Wasn’t it crazy to create a top 20 when markets looked so wobbly? Not really - there’s more upside on shares when valuations are cheap, and confidence is low, so weak markets are often a good time to buy, if you're patient.

Results so far - my top 20 list of shares are up 7% at the half year stage (plus divis on top). You can track performance live on this public spreadsheet.

This compares with the AIM All-Share, the relevant benchmark, which is down -10% YTD. So that’s a very good out-performance of +17% in just 6 months, of 2023 to date. Clearly value/GARP has been a safe space in a troubled market, so far this year.

Here are the shares again below, with the year-to-date (YTD) share price performance (per Googlefinance), and my updated view, in descending order of price up/(down) year to date -

Angling Direct (LON:ANG) - up 34% to 33.5p (£25m) - AIM - StockRank: 82

Omnichannel retailer of fishing gear - originally put on this list due to being valued at par with net cash. In line updates this year, but trading barely above breakeven. So business itself looks unimpressive, but big cash pile remains the main attraction. A weak hold at best for me - tempting to recycle the gain into something else.

Rotala (LON:ROL) - up 31% to 46p (£14m) - AIM - StockRank: 94

Bus operator. A special situation which I flagged in 28 Dec 2022’s SCVR, and was mystery share in the podcast that week. Buying opportunity was due to a large property disposal, announced when nobody was watching! (contracts exchanged recently on 1 June 2023). Then a tender offer for 36% of shares, at a nice premium on 26 Jan 2023. No forecasts, so difficult to predict the outlook. Hence speculative, but still looks cheap, so I’ll hold for the purposes of this list.

Renold (LON:RNO) (Paul holds) - up 31% to 28p (£63m) - AIM - StockRank: 89

Industrial chains manufacturer/distributor. Ahead expectations update in April, forecasts raised. Very cheap (low PER), but has large pension deficit. Bank facilities increased in May. Making bolt-on acquisitions. Has proven recurring demand and strong pricing power in recent years. An impressive turnaround that not (yet) been rewarded by the market. I see good continued upside here, so a strong hold for me. Bid target maybe?

Goodwin (LON:GDWN) - up 30% to 4330p (£326m) - Main Market - StockRank: 56

Niche engineering group. Did £8.6m share tender offer in May.

No trading updates this year at all - ridiculous, the company should update on a much more regular basis! No forecasts I can see. Goodwin family have dominant shareholdings, and seem to be regular sellers in the market (EDIT: although see reader comment below from rhomboid1, which explains that there's more complexity to the family share dealings) . So I’m not able to update on this, it’s guesswork at this stage. Main attraction last time was strong order book, so fingers crossed.

EDIT: Many thanks to GavSmith01 for pointing out that Goodwin (LON:GDWN) did include a trading update within its tender offer (180k shares at 4800p, a 25% premium) announcement on 5 May 2023.  This sounds a bit mixed, but says a "modest increase" in profit is expected for FY 4/2024. Order book of £286m is impressive, some multi-year.  However, my point about the company giving inadequate trading updates stands, because if you look back to 2022, there was no news on trading between 15 Dec 2021 (Interims) and 3 Aug 2022 (Finals). That's far too long to leave shareholders with no information at all. 

Best Of The Best (LON:BOTB) (Paul holds) - up 30% to 525p (£44m) - AIM - StockRank: 79

Takeover bid at 535p from Tedi Sagi’s Globe Investments, undervalues the company (supercar competitions). But management effectively cashed out at 2400p in the pandemic, so they’ve clearly decided to do something else in future with their big cash piles. Outside shareholders arguably sold down the river, but still a nice 30% gain this year for this list (and Paul personally).

Portmeirion (LON:PMP) (Paul holds) - up 28% to 388p (£54m) - AIM - StockRank: 90

Decorative/household pottery maker. Several in line exps updates this year. But 23 May update rattled the market, mentioning recent slowdown in US orders - profit warning coming? Maybe, maybe not, as it did say key Xmas period is lined up well, with good orders. Looks very cheap now, PER 6.8x, c.5% divi yield, and sound bal sht. Obvious risk of a profit warning, but I’d argue that would be a buying opportunity, and of course it may not happen. So a hold for me, with some powder kept dry to enable a top up if it does warn on profit. Hit 500p earlier this year.

Sosandar (LON:SOS) (Paul holds) - up 19% to 24p (£61m) - AIM - StockRank: 33

Successful growth company in online fashion, now profitable. Very strong recent growth, through third party marketplace websites (esp.Next). International expansion (via partners, so low risk) is next stage, starting up soon. Slight profit miss for FY 3/2023 due to increased overheads. Forecasts have been eased down in recent months. I see this as an international brand in the making. It has defied the sceptics so far, and achieved scale. International growth could be a gamechanger. So a strong hold for me.

Volex (LON:VLX) (Paul holds) - up 13% to 284p (£513m) - AIM - StockRank: 89

Electrical cabling group. The story here gets better and better, yet the share price has gone nowhere. Good results published 22 June, and another quite big Turkish acquisition looks attractively priced, part-funded with £60m placing (Chmn Nat Rothschild took £15m of it). Looks priced too low at PER 11.5x, very attractive GARP share, a strong hold for me (I’ll probably buy more when funds permit).

Belvoir (LON:BLV) - up 10% to 215p (£78m) - AIM - StockRank: 93

Franchised lettings & estate agents. Trading in line (last update 18 May), but expectations were lowered. Very nice business, making good acquisitions, self-funded, and paying decent divis of 4.6% as well. A nice long-term hold in my view. Won’t shoot the lights out, but has demonstrated a good long-term track record of growth in earnings. So I remain positive on this share.

MJ GLEESON (LON:GLE) - up 9% to 374p (£218m) - Main Market - StockRank: 78

Entry-level housebuilder in Midlands/North. Valuation is now well below NAV, and healthy financial position (as with all housebuilders). Obvious macro risks, but 30 June announcement of a block sale of new houses to major institution for rent, looks a game-changer to me, and could offset softer demand from households struggling with higher mortgage rates. Looks a potentially attractive entry point to me, but a big downturn in housing market is the obvious macro risk, if interest rates remain elevated for a long time. I remain positive, taking a medium term view, and am particularly enthused by this recent institutional build-to-rent deal.

Cerillion (LON:CER) - up 7% to 1300p (£383m) - AIM - StockRank: 74

We’ve reported positively 3 times this year so far, for this remarkable cloud-based software company mainly serving telecoms companies. It has sticky recurring revenues, high margins, and a rapidly growing cash pile. Every time we flag up the high valuation as being the only negative. If you’re prepared to pay up for growth companies, then this is one of the best I’ve come across. A strong hold for the purposes of this list, in my opinion.

Macfarlane (LON:MACF) - up 4% to 108p (£173m) - Main Market - StockRank: 93

An acquisitive Scottish-based packaging company. Shares have remained quite solid in a nasty bear market so far this year. Valuation is attractive, PER of 9.1x. Strong (ahead exps) FY 11/2022 results announced in Feb 2023. In line exps update in May 2023, 2 more acquisitions, and negligible net debt. A decent value/GARP share I think, so a strong hold for this watchlist.

Hargreaves Services (LON:HSP) - up 1% to 397p (£129m) - AIM - StockRank: 68

We flagged this as cheap at 347p in Dec 2022. Value metrics still look great - below NTAV, fwd PER 6.3x, and 5.4% yield. Reassuring (“at least in line”) TU on 8 June. Still looks good.

Sanderson Design (LON:SDG) - down 3% to 112p (£82m) - AIM - StockRank: 91

Luxury fabric/wallpaper/design group, with a huge historic archive that it licences. Underappreciated turnaround under dynamic CEO Lisa Montague. FY 1/2023 results were in line, and recent (22 June) in line TU. Fwd PER only 10x, and market seems worried about macro factors, which might cause a PW at some point, who knows. So I’m prepared (and ready to buy!) if it does dip on a PW. Licensing has been strong, supporting softer demand in other activities.

Zotefoams (LON:ZTF) - down 1% to 340p (£164m) - Main Market - StockRank: 91

In line update in late May. Largest customer NIKE extends exclusive contract to 2029 - could be a bid target for NIKE perhaps? Paul still likes this company, and valuation seems reasonable at fwd PER 16.1x. Although recent webinar sounded cooler on the prospects for the blue sky Re-Zorce project - seemed to move from: this could be huge, to if it works. So I’m not quite as excited about the potential here as I was.

SThree (LON:STEM) - down 15% to 341p (£457m) - Main Market - StockRank: 88

Contract staffing group, international. Updates have been fairly solid this year so far, but forecast profit reduced about 5% - hardly a disaster. Shares have dropped a lot from peak in March 2023 - buying opportunity, or anticipating a profit warning? Lovely cash-rich balance sheet, and a good, well-run business I think. So I’d be inclined to hold for the long-term, but be prepared for shorter term turbulence if macro deteriorates, which it might (or might not).

Wickes (LON:WIX) - down 16% to 123p (£318m) - Main Market - StockRank: 72

DIY superstores - shares drifting down this year. Early May TU looked quite good - in line, and reasonable outlook. Valuation metrics look crazily cheap: fwd PER 5.2x, and yield 8.8%, with a sound balance sheet too. So this suggests the market is expecting a profit warning I’d say. Not helped by a loose-lipped, over-zealous diversity manager, whose comments were taken out of context (arguably) and caused a social media backlash. Shares look very tempting now, but whether to buy and risk a possible PW, or wait? Tricky one, I’m not sure.

Wincanton (LON:WIN) - down 25% to 253p (£318m) - Main Market - StockRank: 75

This logistics company had a strong track record, until March 7th, when it warned on profits - mainly due to the loss of a single, lucrative, contract with HMRC. This was a hidden risk, as many companies in the B2B space could have one, or a few, key contracts that make a lot of their profits - this isn’t disclosed anywhere (and isn’t necessarily linked to revenues). WIN shares bottomed at 192p, and have been gradually recovering to 253p now. I’m happy to stick with it - as a PER of 8.1x and yield of 5.3% (on lowered forecasts) are attractive.

Quiz (LON:QUIZ) - down 27% to 10.7p (£13m) - AIM - StockRank: 87

Profit warning on 17 April unfortunately, from this low price special occasion ladieswear retailer (online and shops). It’s a robust business, with flexible overheads (shops are on short, turnover rent leases), and an established online operation. Very strong balance sheet for size. Family-controlled, so delisting risk? No divis. My interest is waning a bit.

Watkin Jones (LON:WJG) - down 26% to 74p (£190m) - AIM - StockRank: 70

Profit warning in May 2023, and forecasts reduced a lot. Specialist build-to-rent and student housing contractor, with large, lumpy contracts forward-sold. Some disruption to projects from large hike in interest rates. Very solid balance sheet, so no solvency risk, but timing of deals is uncertain. Paul sees good long-term upside from recovery, and higher infrastructure spending from relaxed rules on institutions imminent. But I have sold my personal shares (probably near the low!) to invest in something else.

What conclusions to draw from the above?

• It has been possible to produce a positive return in small caps this year, even though it has felt like a terrible year so far.

• A few profit warnings can be absorbed by some decent winners, hence the benefit of diversification.

• Unexpected things can happen at any company, often from risks that investors are not aware of (e.g. contract loss at WIN)

• Speculative shares often keep going down when they disappoint, whereas good solid value/GARP shares tend to gradually recover.

• My selection also mostly have high StockRanks, which is an excellent sense-checking system for me, so I try to mostly hold higher StockRank shares.

Am I going to make any changes to the list? I’ve decided not to, as leaving it intact for the whole year will be a better gauge of how good the stock picks were.

Will there be any more profit warnings? Probably, yes, but I don’t know which shares! And it’s normal to get a few profit warnings each year, especially in bad macro. This is normal for small caps, and can be absorbed with just one or two strong out-performers, so isn’t something to fear, in my view.

New ideas for H2 2023 - I’ve got lots of new ideas too, so will do a separate article about those at some stage.

In the meantime you can track performance of all 3 of my watchlists for 2023 on this public spreadsheet (note it has 3 tabs, with 3 lists - main, runners up, and speculative).

Overall then, so far, so good, but let's not tempt fate!

Regards, Paul.