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Trading Diary

Trading Diary – 5 June 2019

We exited two positions today, both at marginal profits. The sales have reduced our exposure to the Information Technology sector and the Industrial sector. We’ve purchased two new stocks in the Specialty Retail industry to make use of the cash that has been released by the sales.

Following these transactions, we will be holding a total of 19 stocks in our portfolios.

Sells

  1. IPH Limited (IPH) – 7.8% profit
  2. Bravura Solutions (BVs) – 3.4% profit  

IPH Limited (IPH)

The stock has been forming a base for the last 12 weeks; however, this week appears to have violated support levels. The trend, as indicated by the 100 DMA crossover also seems to have turned negative (although at the time of writing, the stock has bounced back above the 100 DMA).

Fundamentally the stock looks okay. Asset turnover, return on assets, and free cash flow to total assets have all been improving, and earnings per share have been growing. The stock currently trades on what could be considered high multiples, however with revenue growth slowly accruing and coupled with margin improvement; these will compress over time.

The thesis is reliant on revenue growth and continued margin improvement coming to fruition, and we’ve seen what the market does to this stock when it disappoints as it did in February 2018.

For the time being, we’ve decided to step aside until we have further evidence of the company’s progress.  

Bravura Solutions (BVS)

Bravura had been in an uptrend since January 2018, punctuated by two significant bases. The latest sell-off looks more significant than anything previously occurring in the uptrend and could potentially represent a stopping action. High volume coupled with a considerable range expansion to the downside, that took the stock through the 100 DMA is not consistent with a leading share in a continued uptrend.

The stock is fundamentally expensive, ranking in the 88th percentile for valuation, with a PE ratio in the 40’s for example. Growth has been high for some time with both revenue growth, margin expansion, and improving asset turnover all resulting in improving return on assets and more importantly, free cash flow return on asset.

For this position to continue to work we need the market to continue to believe in the growth story (and for the company to continue to deliver), however, with what we have seen over the last couple of days, the market might need more evidence of continued fundamental momentum in order for the uptrend to remain intact.

We expect that the stock will trade sideways for the foreseeable future until the growth outlook is clarified.    Also, important to note that the company’s competitor GBST for whom BVS has recently made a takeover offer seems to be improving their offering and making headway in the market, and is now trading above the offer price making completion of the takeover unlikely at this stage.

Buys

  1. Lovisa (LOV)
  2. Nick Scalie (NCK)

Lovisa (LOV)

We’ve owned this company before, however, sold out as the previous uptrend came to an end in August 2018. The stock spent some months consolidating but now appears to be set up to resume the primary uptrend.

The 50 DMA is back above the 100 DMA, which has just crossed above the 200 DMA. Also, the 200 DMA appears to have flattened out and is now turning back up. The stock is back within 15% of its 52-week high and is back above the prior support level, which temporarily became resistance. These are all very positive indicators of the health of the stock.

The company has a very long growth pipeline ahead of it and has expanded into several countries globally. The US is a significant opportunity for the company, as is the UK and other countries in Europe. The company can reinvest its steady free cash flow in the global expansion at potentially very high incremental returns.

The model has been proven in Australia and is ready to be tested in the UK and the US. The long-term thesis is reliant on the business model holding up in those markets.    

Nick Scali (NCK)

The stock has been in a long trading range, which began in early 2017. The sideways action followed a solid uptrend that lasted more than two years. During the years in which the stock was trending up, revenue grew 10%, 30% and 14% respectively. EBIT margins followed a similar trajectory, expanding from 14% in 2014 to 15% in 2015, 17% in 2016 and 22% in 2017.

Since 2017 growth has slowed to high single digits, and margins have stabilised around the 22/23% level. During this period since 2017, the stock has moved sideways, and as a result, the earnings multiple has compressed from 14 to back below 10.

Source: S&P Capital IQ

The expectation is that high single-digit growth and stable margins will continue for the foreseeable future as the company expands its store network from 55 to 80 stores over the next few years.

Technically the stock looks to have digested the gains of the 2014-2017 period by maintaining a steady trading range, with a shakeout during the third quarter of 2018. Further progress from here will be dependent on the company executing on its current growth plans and potentially outlining a vision beyond these.

By Danny Sandler

Founder of Ocean Asset Management.