Trading Diary

Trading Diary – 4 September 2019

We’ve made one sale this week in the Real Estate sector. We’ve redeployed the capital released from this sale into the Industrials sector.

Following these trades, the Model Portfolio continues to hold 18 stocks.


Goodman Group (GMG)  

+18% profit

Goodman was part of the initial portfolio after having re-entered the market in February 2019. Real Estate was the best performing sector of the calendar year 2018. GMG was one of the best-performing stocks in this category. 

The stock tracked sideways from August to December 2018. GMG showed its strength during these months as many other leading shares declined significantly. The stock emerged from a short trading range at the beginning of 2019. We initiated our position on the first basing point before the uptrend continued until late June, early July. 

Since then the stock appears to have run out of upward momentum and is now tracking sideways once more. For this reason, we’ve decided to exit and reallocate our capital elsewhere. 


Electro Optic Systems (EOS)

EOS primary business is the sale of defence systems, including vehicle turrets and remote weapons systems. EOS is also in the early stages of commercialising owned technology in the space systems sector. This technology includes EOS-developed optical sensors to detect, track, classify and characterise objects in space.

The defence systems business is growing very strongly. According to the company it has secured sufficient orders to maintain a compounding growth rate of over 45% beyond 2020. The company has also indicated that there is potential for growth to be even stronger than indicated. Success in securing contracts in the space sector and new defence contract awards over the next few years could result in sales growth beyond these projections. 

This type of uncertainty has the potential to create an ideal environment for an uptrend in the stock price to emerge. Indeed the stock has just recently broken out from a more than 2-year trading range. The break-out occurred after announcing full-year results at the end of May. Revenue had been mostly flat, hovering between $20-30m for the last seven years. In 2018 revenue grew by more than 200% to $87m and this growth is expected to continue into the foreseeable future. 

The company ranks highly on all growth metrics. Gross margins, EBIT margins, asset turnover and returns on assets have all improved during the last 12 months. These metrics are expected to continue to grow as the company scales its operations. 

From a valuation perspective, the company ranks towards the higher end of our acceptable range, currently trading at ~4x sales and ~28x EV/ EBIT. These metrics, although high, are not outlandish in the current market environment. Given the potential for upside uncertainty, these multiples could trade higher, especially if the company can realise or exceed growth targets. However, the thesis is not necessarily reliant on multiple expansion. 

By Danny Sandler

Founder of Ocean Asset Management.