Over the past week I have published various portfolios; Focused Income, Compound Growth and Special Situations which combined, make up my overall equity portfolio. I have also launched an ISA portfolio to reflect and track how I invested this years’ allowance. The main reasons for dividing my overall holdings into different strategies were outlined in my recent article Towards a Balanced Portfolio but in short, it helps me to clarify my thinking around each investment, focus on realistic goals, monitor the level of success and refine my investment approach, as appropriate.

In this series of follow-on articles, I provide a commentary on each of my portfolio holdings, this one being those that form the Compound Growth Strategy. This is predominantly a metrics based, smallcap strategy. I do research the companies beyond the metrics and based on this, I discard many companies in between the mechanical screen and the buy decision. I’m also pretty mechanical in my sell decisions with these companies, using a stop loss for company specific price moves (I am a little more thoughtful when price moves are part of a wider market sell-off). And, I plan to average up when they are on a roll (still working on if/how the rising Momentum Rank can help me with this as I am not a great chartist or momentum trader) while reinvesting the income (paying a dividend, even if only a small one, is a non-negotiable criterion) for the compound effect.

My favourite metric is a PEG of between 0 and 1, although in isolation, it is not reliable. The PER, EV/EBITDA, P/B, cash generation and revenue/profit growth are all additional factors I consider along with the StockRanks which do a great job of identifying what type of growth play I am investing in; Quality (long-term), Value (cheap), Momentum (timing and expectations) or a combination.

Air Partner (AIR.L)
Market Cap: £40.1m
PER 12.6
Yield 5.81%
PEG Rolling 0.67
EV/EBITDA 6.62
P/B 3
StockRank 98 (QM)

Alumasc (ALU.L)
Market Cap: £62m
PER 10.6
Yield 3.62%
PEG Rolling 1.01
EV/EBITDA 6.68
P/B 3.59
StockRank 99 (QM with some V)

Bioventix (BVXP.L)
This is a second year holding and it nearly fell through my stop loss this week. I’ve decided to stick with it but not buy more at this stage. I am looking to hold BVXP for many years if the business remains on track (I missed the boat with Abcam even though they were a client of mine at the time of their IPO and I think BVXP have similar potential). I love the long-term nature of their contracts and the current share price lull is due to one of those contracts coming to an end in 2017 while the market waits to see what that income will be replaced by. Still, the metrics are not dreadful; PER 18.4, Yield 3.69%, Quality Rank 97.

Character (CCT.L)
Market Cap: £108.7m
PER 11.1
Yield 2.17%
PEG Rolling 2.18 (not ideal)
EV/EBITDA 7.51
P/B 7.13
StockRank 98 (QM)

Empresaria (EMR.L)
Market Cap: £42.9m
PER 9.15
Yield 1.14%
PEG Rolling 0.82
EV/EBITDA 6.10
P/B 1.39
StockRank 99 (QM with some V)

Hydro International (HYD.L)
Market Cap: £24.2m
PER 18.5 (but forward PER of 11.9 – am I joining the party a little late?)
Yield 2.27%
PEG Rolling 0.43
EV/EBITDA 7.74
P/B 1.47
StockRank 95 (M only, so I might be out of this one sharpish if the tide turns)

Interquest (ITQ.L)
Market Cap: £32.2m
PER 9.55
Yield 3.37%
PEG Rolling 0.40
EV/EBITDA 7.15
P/B 1.38
StockRank 97 (QV)

Lighthouse (LGT.L)
Market Cap: £15.6m
PER 18.1 (forward 13.2)
Yield 1.31% (forward 2.7%)
PEG Rolling 0.62
EV/EBITDA 4.78
P/B 2.38
StockRank 95 (QM)

Newmark Security (NWT.L)
Market Cap: £13.8m
PER 10.5
Yield 3.39%
PEG Rolling 0.17
EV/EBITDA 3.12
P/B 2.69
StockRank 87 (V with a bit of Q)

Norcros (NXR.L)
Market Cap: £108.6m
PER 6.94
Yield 3.34%
PEG Rolling 0.85
EV/EBITDA 7.25
P/B 2.08
StockRank 83 (V only)

This is a potential value trap as the share price has been stuck for a while and there is no clear outer. I’m hoping that might be the acquisition of Croydex over the next year or so. I’m not sure how patient I’ll be with this holding though.

NWF Group (NWF.L)
Market Cap: £80.6m
PER 13.5
Yield 3.25%
PEG Rolling 2.14 (pink flag)
EV/EBITDA 7.16
P/B 2.20
StockRank 97 (QVM)

Waterman (WTM.L)
Market Cap: £28.1m
PER 13.6
Yield 2.62%
PEG Rolling 0.41
EV/EBITDA 5.80
P/B 1.01
StockRank 99 (QVM)

Zytronic (ZYT.L)
Market Cap: £57.2m
PER 15.2 (top end)
Yield 3.24%
PEG Rolling 3.89 (pink flag)
EV/EBITDA 8.71 (top end)
P/B 2.76
StockRank 96 (QM)

I think there is a high degree of consistency from a metrics perspective among these holdings. I have applied a couple of overrides based on deeper company research, especially with ZYT where I am overweight. I am also overweight WTM, NWT, AIR and CCT, all of which creates additional risk. I am very happy with the sector diversification, although I am mindful that I have two recruitment firms in the mix. Of course, these holdings will not all pay off. There will be a profit warning, a change of market conditions or some other company specific event. However, I do believe there will be a couple of gems among them and a couple where I will have to be patient – that’s why I have the dividend rule.

If it weren’t for that rule, I would have included Petards (PEG.L) in this strategy because it has a strong case based on other metrics.

Market cap is tiny at £4.59m
PER 9.65
PEG Rolling 0.39
EV/EBITDA 2.9
P/B 1.44
StockRank 100 (QVM)

However, because they are a microcap (anything can go wrong with a microcap) and they are not yet paying a dividend I have included this relatively small punt in the Special Situations category.

 

Disclosure – At the time of writing, I hold long positions in all of the shares discussed in this article (except Abcam). Please DYOR