The STRIDE Blog

#20 Little Acorns: Portfolio 70% Up and Tops $200K

stride-little-acorns-blog-sep-17.jpgMy Little Acorns are 70% bigger than they were when I ‘planted’ them and overall portfolio value has risen above $200,000. I’ve also sold another stock with 180% returns, after STRIDE spotted potential financial weakness in this long-term winner that I would have missed.

Portfolio update

Any value investor surely sets themselves little milestones. One of mine was reaching $200k and I’m very happy that Little Acorns is, today, worth $201,248, having started out at $118,000 less than three years ago. I already have the next milestone set in my mind but I’ll keep it to myself for now.

Thanks to my sale of Photon Control, I have a cash pile of over $40,000 and I’m looking for my next two purchases. I haven’t given this as much attention as I should have done but I’m on the case now. My portfolio currently has 32 slices and I’m looking to buy two more at $6,000 each, bringing it up to 34.

I’m kicking myself for being slack with asset management because last week, when I should have been selecting new stocks, the markets were far weaker than they are now. Once more, I’ve missed some great opportunities. It’s annoying to think my 70% gains could be higher if I was more on the ball. Diversification has proved itself repeatedly - more slices are better because the risk is spread.

The last four I bought: Chew’s Group, Shinnihon Corporation, Natural Health Trends and Zenkoku Hosho, have already made me around $1,600 without dividends, despite two being up and two being down. They are, overall, more up than down and that, in a nutshell, is the power of diversification.

I’m feeling twitchy that I have so much cash lying there doing nothing. The more slices my portfolio has, the more diversified it is and the more risk resilient. I know all this and yet I’ve still been slow to prioritise reinvestment. Is it too early to think about new year’s resolutions?

Photon Control

When Photon Control came up as a ‘consider sell’ I was surprised. It had always been a strong performer. This company was one of my original buys when I first started value investing and had made me 180% returns.

On August 5th, Photon Control was still a hold with a STRIDE score of 47. It was trading at $1.46 with a STRIDE fair value of $0.96 and a way off its consider sell price of $1.69. Then, on August 19th, Photon Control suddenly turned red and its score went down to 38.

Its price was still a healthy $1.39 (I’d bought it for $0.50 back in November 2014) but its fair value had plummeted to $0.49 and its consider sell, to $0.78. It was this shift in STRIDE’s valuation of the stock, pushing its fair value and consider sell prices so far below its current trading price, that had flagged it as overvalued and a sell.

It was such a change in STRIDE’s valuations that before selling, I decided to check the business out. Its S-for-Strength score was still 100: doesn’t get any higher than that. Its T-for-Timing score was still good too at 62, reflecting its stable trading price.

But R-for-returns was now 41 as was I-for-Intrinsic Value. E-for-Earnings Predictability was low too at 47. This company had never paid a dividend so it’s D score was still 0 (STRIDE doesn’t include D scores in its overall rating so this wouldn’t have affected its overall score anyway.)

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Looking at the other metrics, the Beneish M-Score for potential Earnings Manipulation stood out.

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What STRIDE sees

A healthy-looking share price is only part of the picture, yet many investors I speak to only concern themselves with this. If the price is stable, everything must be good, right? Not necessarily. STRIDE is not suggesting that Photon Control is about to go out of business but it is highlighting that all might not be as rosy as it seems.

I’ve always known that STRIDE sees what goes on beneath the surface of a business but this was a very interesting opportunity to see its in-depth analysis of financial health in action.

Photon’s balance sheet has seen some radical changes since late 2016. It has acquired ‘Photon Control R&D’, incurring substantial costs which saw the business take on long-term financing of $2.68M for the first time. It also shows ‘Total Goodwill and Intangible Assets’ of $4.32M, up from $0.08M last year.

Photon Control issued a statement on August 17th, 2017 that starts off with very positive news about increased revenue. Further down, however, they report a net loss – another first for this business. They also report costs incurred through their acquisition, plus litigation fees and further expenses relating to the settlement of changes to the Board of Directors, CEO and leadership team of the acquired business.

These costs come to around $5M, which is roughly the same as the increase in assets. I think it is these shenanigans on the balance sheet that STRIDE spotted and this is why the valuations changed, prompting me to sell it. If I’d only been looking at the share price and revenue, I would never have spotted this increased level of risk.

Portfolio overview

Total value: $201,248

Cash pile: $40,974

 

Biggest Winners

ATOSS Software AG: +138%

Micro-Mechanics (Holdings) Ltd: +124%

Svolder AB: 121%

 

Biggest Losers

FT Group: -59%

Formosan Rubber Group Inc: -56%

Manning & Napier: -55%

My latest Little Acorns update email below. Check out my last post here

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Topics: 3D Value Investing, Little Acorns Portfolio

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