UKValueInvestor

Selling JD Sports: This investment returned 33% annualised over almost 5 years

JD Sports was the third holding to join my defensive value model portfolio way back in March 2011. Little did I know then that this small-cap retailer of trainers and all things “sports fashion” would turn out to be by far the best investment over the following five years.

Things were not always so rosy though. The company went through a difficult period between 2002 and 2005 following a major acquisition where it purchased 209 First Sports stores for £53m. This was at a time when JD sports had just 166 stores of its own and profits of around £10m.

It was a debt-fuelled acquisition and, as if often the case, the combination of large interest payments and distracting acquisition integration efforts proved to be more difficult to cope with than was expected.

However, by the time I added the company to the model portfolio in 2011 it had successfully integrated those stores and paid down its debts.

The investment got off to a slow start in 2011 and 2012 – due to a weak UK economy and losses from another acquisition – but rapid growth eventually returned and the share price increased dramatically. As a consequence of those gains the valuation is now a little too high for my liking.

From the vault: A review of the December 2013 issue of UK Value Investor

Each month I like to review what I was thinking and doing two years ago so that I can spot holes in my approach, with the benefit of hindsight.

There won’t always be any dazzling insights to be gleaned from the past, but often there will be so it’s a useful activity.

You can download the December 2013 issue of UK Value Investor here (as a PDF) to get the full picture.

Having reviewed that issue again I would say there are three main lessons, or at least reminders of important points:

Mean reversion can take a long time
Temper your enthusiasm, even if your portfolio gains 25% in a year
Be flexible in your holding period and don’t always expect to hold “forever”

How to cope with the surge in profit warnings

This guest post comes from occasional contributor, Rob Davies. Rob manages the Smart Dividend Fund.

Autumn is traditionally the season for profit warnings but this year is bringing a more bountiful crop than usual. According to Ernst & Young, there was a 40% increase to 79 in the third quarter. And there have been more since.

Some of these have surprised the market while others have merely confirmed suspicions that not everything is rosy. No one likes to deliver bad news so it is human nature, even for Chief Executives, to delay giving it out for as long as possible.

By the time companies have reached the start of the fourth quarter of the year, it will be pretty obvious what the overall result for the year is going to be within a reasonable margin of error. Whatever happens in the fourth quarter it is unlikely to alter the final outcome that much.

Clearly, this year, with its spate of profit warnings, is not going as well as most bosses had hoped. What is surprising is the range of industries that are telling us how tough life is.

Maximising shareholder value has nothing to do with maximising the share price

The idea that directors should seek to maximise shareholder value has come in for a lot of flak in recent years. James Montier of GMO even wrote a piece on it called “The World’s Dumbest Idea” (PDF).

One of the most prominent criticisms of maximising shareholder value is that it causes directors to focus too much on their company’s share price, which leads them to underinvest in its long-term future in order to boost short-term profits (and therefore, the share price).

This is not so much a failing of the concept of shareholder value maximisation as it is a failure to understand what shareholder value is and what directors can do in their attempts to maximise it.

10 things I found interesting this week

The title says it all so I’ll just jump right into the list:

From the vault – The November 2013 issue of UK Value Investor

Recently I decided to make most of the back issues of my investment newsletter freely available. On top of that, at the start of each month, I’ll release the next back issue from two years ago.

This month it’s the turn of the November 2013 issue, which you can download from the back issue archive.

For those who don’t want to read the whole thing, here’s a summary of what was going on at the tail-end of 2013.

UK stock market forecast – Q3 2015

I’ll start this UK stock market forecast with the FTSE 100 as that’s the index most people think of when they think of the UK stock market.

But before I begin – a couple of points:

I only make long-term forecasts, so I’ll be talking about what the market might return over the next ten years rather than the next year or two.
By “forecast” I mean the Expected Value of the market’s total return. In other words, an estimate of the average return the market would produce if we could run through the next ten years multiple times (which, according to the known laws of physics, we can’t).

Model portfolio update: Beating the market by 14% year to date

My defensive value model portfolio is ahead of the market by just under 14% so far this year. The reasons are 1) a sensible strategy and 2) some luck.

Selling Cranswick PLC for a 135 percent return in 3 years

Cranswick plc was added to the UK Value Investor Model Portfolio back in November 2012. Over the last three years, it has been a far more successful investment than I ever could have expected.

22 tools, guides and other resources for active investors

Here’s a list of useful tools and other resources I use in my day-to-day investment activities, plus a few interesting and educational bits and bobs.

This stock market correction is good news for long-term investors

The media sure do love a stock market correction and this one has been labelled “Black Monday”. But while it was definitely on a Monday, was it really all that black?

Selling RSA Insurance Group: A lucky escape from this value trap

RSA Insurance Group was the first insurance company to join the UKVI Portfolio back in 2012 and it has been a mostly disappointing – although not catastrophically bad – investment.

In short, it was a value trap and the most important thing to do if you’re stuck in a value trap is:

Get out profitably and
Learn the right lessons so that you can hopefully avoid similar value traps in future

This investment review covers why RSA was added to the UKVI Portfolio, what went wrong, why it’s being sold now and how this investment has helped improve the underlying investment methodology.