We sold three of our portfolio holdings today, each involved in a different sector, including Real Estate, Communications and Consumer Discretionary. We sold each stock at a profit and have redeployed the cash realised from these sales into two companies – one in the industrial sector and one in the Materials sector.
Following these transactions, we’re invested in a total of 18 individual positions.
- Dexus (DXS) – 11% profit
- Chorus (CNU) – 6% profit
- Breville (BRG) – 1% profit
We bought the stock as it emerged from a 20-month trading range having shown strong momentum along with the rest of the Real Estate sector for most of 2018. The Real Estate sector has benefited from tightening capitalisation rates as interest rates have continued to fall and continued investment demand for office and industrial property.
While this thematic is likely to continue for some time, less defensive stocks have been in strong demand, and as a result, the relative strength ranking of Real Estate stocks, in general, have declined, and this includes Dexus.
Similar to Dexus, Chorus spent 2018 making its way from the bottom of a long trading range that lasted 30 months in total, to the top. The stock showed considerable strength during the October – December period, while the rest of the market was floundering, and was able to break out of the rang in January when the market began its recovery.
We initiated our position in the stock soon after the breakout. However, the new uptrend appears to have been short-lived with the stock showing signs of entering another trading range, which was catalysed by the change of character that occurred during the week of the 21st of May. As a result, we have closed our position and rotated into stocks showing signs of being in stronger uptrends.
Breville Group (BRG)
Breville Group had been in a shorter 15-month trading range before emerging in mid-February with an 18% gap-up day. We initiated our position on the first pullback following the breakout.
As we’ve said before, the story on this one is simple — more products sold directly into more markets that are more expensive and therefore higher margin.
The company launched into Germany and Austria in HY19, Benelux and Switzerland will be next, followed by Spain in HY20. German/ Austrian market entry seems to be so far working well with sales in the first six months after entry 42% higher than they were in the UK market.
However, it’s become unclear at this point whether this is the beginning of a new uptrend for the stock or whether the shares will need to spend some time moving sideways, while the company gains traction in these new markets.
Entering new markets can take time and can be expensive, and the market might need to see tangible proof that the growth strategy is working before beginning the mark-up process that would result in a prolonged uptrend in the stock price. For the time being, we’ve moved to the sideline.
- Alacer Gold (AQG)
- People Infrastructure (PPE)
Alacer Gold (AQG)
Gold has broken through key technical levels and along with it have many of the gold stocks listed on the ASX. Alacer has seen the double benefit of an improving gold price coupled with the risks associated with its Copler project substantially moderating and the stock, which was trading at a discount to peers, has rerated accordingly. Anecdotally, investors are still underweight gold stocks, having been caught by surprise by the strength in the gold price, and Alacer remains under-owned by passive gold funds (ETFs) which could see further buying.
People Infrastructure (PPE)
PPE listed in late 2017 and has delivered strong growth both organically and via acquisition since then. The company is exposed to strong industry tailwinds, especially in its health and community care business. This sector is projected to make a considerable contribution to employment growth in the coming years underpinned by the aging population and a significant increase in disability funding with the implementation of the NDIS.
The company is also attempting to act as a consolidator in what is a highly fragmented industry. We are sceptical of these types of listed roll-up stories as the consolidators mostly tend to overpay for assets, chasing top line revenue growth without regard for sustainable returns on capital. At this stage, the market is buying the story, as evidenced by the strong share price appreciation since listing and its willingness to fund the acquisition strategy with new capital.
Technically it looks like we’re entering on the third base since the beginning of the uptrend which kicked off at the IPO, which could turn out to be late in the piece. At this stage, the stock might need some time to consolidate the gains made since the IPO and to prove its business model. Up until recently, the company did not pass our screens due to liquidity.
For the momentum to be maintained, PPE will need to continue to deliver strong top-line revenue growth as well as continued growth in margins and returns on capital. Our inclination is that the market will not tolerate deterioration in any of these metrics.