As a great fan of spaghetti westerns, with Clint Eastwood on screen, Sergio Leone behind the camera and Ennio Morricone providing the music score, this column is quite happy – and honest enough – to look back on its endeavours for 2021 and classify its stock ideas as good, bad or just plain ugly.
Looking back on new selections made in Questor’s Tuesday column in 2021, the striking thing is how few there were: just eight in fact. Of those, four – Clinigen, i3 Energy, Fuller, Smith & Turner and Essentra – are in the black, even if it is very early days for the latter three.
The others – Smith & Nephew, Ricardo, Lancashire and PZ Cussons – are not.
The lessons here are three-fold. First, the small number of new selections made suggests it has been hard to track down value – and since the valuation, or price paid, is the ultimate determinant of investment return, patient inaction seemed the best policy to this writer.
The recent shakedown provoked by the latest viral variant may be presenting some fresh opportunities, however, so watch this space.
Second, the outlook has been clouded by the pandemic, increased government and central bank intervention in markets and inflation. If in doubt, do nowt, as any good Yorkshireman would say. There is, after all, no obligation to buy or sell anything and sometimes action for action’s sake can be costly, as our gormless decision to cut loose bid target Morrisons in 2020 proved in 2021.
Third, stick with what you know. This column really isn’t an expert on industries such as insurance, oil exploration or metal prospecting and generally just avoids those sectors, even if they look interesting. Attempts to get involved – Lancashire this year and positions in gold miners Centamin and Resolute Mining from 2019 – have generally led to book losses, so more fool Questor for trying.
The year’s biggest successes have often been takeover situations, despite Morrisons, where impatience proved expensive. St Modwen Properties, Gamesys and William Hill fell to bids and Clinigen received one, adding to earlier picks that went on to be acquired, notably Sky and Cobham.
This seems to be the ultimate confirmation that seeking out value is the way to go. It is best done by looking at firms whose business model is sound and balance sheet strong enough to see it through any near-term buffeting, unexpected mishap or macroeconomic headwind.
Time is then on the buyer’s side and it may not take much for operational performance to improve, sentiment to change and the share price to start rising. As Jim Grant observed: “Successful investing is about having everyone agree with you – later.”
A patient, contrarian stance is also paying off at uranium storage specialist Yellow Cake and oil giant Shell, where sentiment could hardly have been more negative coming into the year of the Cop 26 summit.
Investors who run strict environmental, social and governance screens will be less than impressed but the cold hard facts are that global energy demand continues to rise and these firms provide working options now, whether we like it or not. From the perspective of investment, sometimes you have to trade the market you have, not the one that you want.
That deals with the good. The bad include undersea cable protection specialist Tekmar, where evasive action spared us from further losses, the gold miners mentioned and Serco, which is doing everything right operationally and strategically but not delivering in terms of its share price.
The blame lies with this column, not Serco, for overpaying in terms of share price and valuation, a problem that continues to dog us with regard to Nichols and Coats. Again, valuation is everything and overpaying, even for good companies, can lead to poor returns.
As for the ugly, thankfully there have been few real accidents this year and this column’s preference for sound balance sheets helps here. However, the decisions to sell Croda, B&M European Value Retail and Halma, as well as Morrisons, far too early in previous years continue to grate. Huge further gains have been forsaken.
“Run your winners and cut your losers” remains a key investment discipline and is one that this column has yet to master, even after more than 30 years in the markets.
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