Back on 5th May I commented on two of my special situation holdings; Hurricane Energy (HUR) and IQE (IQE). I doubt I could have picked two holdings with more diverse fortunes in the weeks that have followed.

Hurricane Energy (HUR)
Previously I wrote, “Shareholders continue to wait for the promised Competent Persons Report (CPR) and/or a farm-in partner and/or debt/equity fund raising and/or a takeover of their oil field licenses in the North Sea that could contain over a billion barrels of recoverable oil. Yesterday saw the HUR share price rise around 12% with over 12 million shares being traded. Something could be brewing me thinks.” Well, something was certainly brewing – a botched (minor) fund raising, seemingly rescued by a white knight in the form of activist fund manager Crystal Amber. Meanwhile, the share price has lost c50%. Sometimes real life simply cannot be parodied!

As the price began to fall, I reduced my HUR holding by around 75%. My selling prices ranged between 40p and 51p compared to a share price of 36.5p today. I still think the potential here is staggering but the botched fund raising has made wonder about management’s ability to handle the larger fund raising that will be required this year as well as the quality of any farm-in deal they negotiate. These are quite major known unknowns, so my plan is to increase my holding as and when there is more certainty IF I can do so at a reasonable price.

Meanwhile, IQE has gone from strength to strength and it now seems a racing certainty that their VCSEL wafers will be included in the iPhone 8, due for launch in September. IQE will never be allowed to confirm publicly that this is the case because Apple insist on NDAs throughout their supply chain, especially for new product releases. However, the smoke signals have become significantly stronger since I last wrote about the potential inclusion of VCSEL wafers in the iPhone 8, namely; an updated note from house broker Peel Hunt on the day of IQE’s AGM, additional noise (company updates and numerous articles) around other members of the supply chain (IQE’s customers who in turn would be supplying direct to Apple), application by IQE to expand production capacity at a new site in Newport and the issue has even been discussed in the Welsh Assembly this week.

As the likelihood of the initial rumours being true have risen, so has the share price, from 60p+ to 80p+. During this time I have added four times to my holding at prices ranging from 68p to 75p and IQE is now the largest holding in my portfolio by some margin at around 14% weighting. This is a far larger weighting than I would normally allow in my portfolio (10% is normally my maximum) but I have made an exception. Why?

Sometimes, the opportunity presented is just too good to ignore. Sure, there is always the risk of a black swan event – an unknown unknown (e.g. The Galaxy 7 having to be withdrawn due to fire risk).  There is also the risk of known unknowns – e.g. how many VCSEL wafers will be in each phone, how much will IQE earn per unit, how much of the market will IQE win? However, IQE is not a one trick pony. It is already supplying many industries with its wafer technology and has the potential for supplying other high value applications such as data centres, 5G, self-driving cars and of course, other smartphone and tablet manufacturers. While I accept that the iPhone 8 launch will be a major short-term driver for the IQE share price (including a sell off if anything goes wrong on that front), the medium term potential remains significant. And if all goes according to plan with the iPhone 8 sales, then the near-term potential is also very exciting. In round numbers, Apple tend to sell over 200 million iPhones per year. If IQE earn $1 per unit that would more than double their sales revenue over the next 12 months. Moreover, that rate of growth would likely command a higher PE ratio than the current x25 2017 forecast earnings.

In short, I believe there is a situation with IQE where the risk/reward is heavily in the investors’ favour at the current price and accordingly, I have taken an overweight position to benefit from the opportunity. I’m sure readers will have their own view of the risk/reward at play here and perhaps I am being overly optimistic – it would not be the first time! As you would expect, I am watching IQE like a hawk and will review my position regularly. As things stand, my intended time frame for remaining overweight in IQE is 6-12 months but as ever, I reserve the right to change my mind.

Risk Mitigation
To add some further context, the total value of my IQE holding is around two thirds of the portfolio gain for the year so far. All other things being equal, if my IQE holding went to zero, I would still be in profit for the year. To protect those profits and offset the increased risk of being overweight IQE, I have begun flattening and broadening my portfolio. I have reduced weightings in some smallcap growth stocks such as Somero (SOM) and System 1 (SYS1) and added some heavyweight ballast such as Lloyds Bank (LLOY) and Aviva (AV.). I will be doing more of this rebalancing throughout the summer, with the intention of adding more diversity to the portfolio, especially large caps and low volatility holdings.

I will be updating the portfolio holdings next weekend when I provide a Q2 update and will do so again during Q3 when the rebalancing process is completed.

Happy investing folks!
Simon (Twitter: @BrilliantLeader)


Disclosure – at the time of writing I own shares in HUR, IQE, SOM, SYS1, LLOY and AV., which were mentioned in this article.