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Trading Diary

Trading Diary – 17 July 2019

We’ve made two new purchases for our portfolios today. Both stocks are mid-capitalisation companies, one of which is in the Information Technology sector and the other in the Consumer Discretionary sector. 

We’re now holding a total of 18 stocks in our portfolios.

Buys

  1. Dicker Data (DDR)
  2. Breville Group (BRG)

Dicker Data (DDR)

DDR is a leading distributor of IT and software products to Australian and New Zealand markets. Revenue growth has accelerated in the most recent quarter (Q1 19) and is tracking ahead of guidance. Gross margins have held firm at ~9.1%. However, operating margins are expanding as operating costs are falling as a proportion of revenue. Profit before tax margin has increased to 3.5% during this latest quarter from 2.9%, having held steady for some time. 

Accelerating revenue growth, coupled with margin accretion, is a very positive dynamic, and the market has begun to take notice. The stock is up ~100% in the last six months after having spent more than a year moving sideways. Stocks often spend time in long trading ranges, consolidating previous gains while market expectations for the future performance of the company stabilise and homogenise. The best trends often emerge after these extended trading ranges if precipitated by a change in the fundamentals of the business, such as an acceleration in the revenue growth curve or expansion in margins. 

This potential step-change in fundamentals is what appears to be driving the new uptrend in the DDR stock price. 

As well as that, the industry in which the company operates is undergoing a significant transformation. Emerging enterprise technologies and software, the company’s principal growth areas, is injecting an added element of uncertainty into the potential valuation of the stock.

Breville Group (BRG)

We’ve re-initiated our position in BRG having exited the stock only two weeks ago. Nothing has changed in the stocks investment thesis. As we noted at the time of selling, the story on this one is simple. However, the market appears to be undecided at this point as to how successful the growth strategy will be. 

You can read our last post on the stock in the Trading Diary. Our thinking in this situation has not changed. 

Our objective is to get the timing and direction of stock price moves correct. We’re looking to invest in the direction of the trend and participate in the stock’s price accretion. 

As a result, we’re often forced by our risk management process to exit a stock, only to re-enter again later, sometimes at a higher price. We exit when we think that the price trend might be over or the timing might not be correct. We understand that this is part of the business. Ultimately we only want to hold stocks that are in a continued uptrend and appreciating. 

We prefer to move to the sideline if a stock moves against us in a fashion that indicates that its uptrend might be coming to an end.  Only when we have confirmation that a trend is still intact and that the stock is likely to continue appreciating will we buy back in. Our rebuy of BRG is an example of this situation. We have no way of knowing if this time will be the right time, only that our odds appear to be better now than they were at the time when we sold. Time will tell. 

By Danny Sandler

Founder of Ocean Asset Management.