Fundamentally Furloughed

Given my situation, I have now found myself with some extra time on my hands. I’ve enjoyed reading some of the posts in the portfolio management section and figured I would throw my hat into the ring.

Plus it gives me something to do other than asking my girlfriend what’s for breakfast/lunch/dinner when I know full well I have to make it anyway.

Quick Links, jump to a write up

I’m looking forward to your feedback, and worst case you get to laugh at my mistakes.

As my girlfriend says about my investing ability.

It’s pretty strong

That is all the evidence I need to start sharing my views and fight off madness.

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J Sainsbury’s - SBRY (Buy)

With some extra time on my hands, I figured I’d do a quick write up on me analysing Sainsbury’s and why I think it’s an interesting short term purchase, with the potential to be a long term buy.

We’ll start off easy and have a quick look at the last three months of trading.

Trading View

We have seen growing volatility with COVID-19, you can see higher trading volumes and massive variation in price. However, we are only -1.9% compared to a month ago. The short term issues are now managed and expected, we can see the daily volatility is starting to return to normal once again.

The big unknown is this Thursday. It’s full-year report time. The analysts will see if they are right and we’ll get an official update on what’s next. Given the impact on deliveries and the sudden cash outflows looking after employees, hiring in distressing times, and refitting parts of their stores, I’m expecting weaker results. However, this is a temporary situation, and one they will recover from.

I’m going to use my GI app for my fundamental analysis, what I’m looking for here is outperforming the market. I’m trying to pick companies which look stronger on paper than their peers, rather than looking at an individual company in absolute terms.

This is always my starting point. The three key parts of fundamental analysis against all other stocks.

Normally I like a strong quality stock, but Sainsbury is a bit lacking, it looks pretty average, and the momentum isn’t any more exciting either. The value is why we are all here though. I think Sainsbury’s has been aggressively undervalued even with less than impressive full-year results incoming.

I’m actually surprised just how poor Sainsburys is when it comes to quality. They aren’t that profitable, with expensive ground rent and high operating costs compared to peers, plus the tough competition is keeping them from rising margins (0.20% is the margin to be spot on, pretty weak.) They aren’t Waitrose so they can’t just raise the price because there were too many Lidl folk milling around.

They also have some nasty debt to equity ratio. Sainsbury’s keep on paying out their dividend (ergo the high capital allocation score) but they really aren’t in a great position to be doing that. Really taking a moment to reduce their debt would take a load off their shoulders. But, the dividend is one of the most attractive bits of Sainsbury’s. An easy way to top up the investment without it haven’t to risk explosive growth (payout ratio of 647.06% )

This is the real money maker stuff I was interested in.

I wanted to see just how cheap Sainsburys was, not just concerning the whole market (even with the COVID-19 sell off it’s still very cheap!) but in absolute terms (just this once.) We have a trailing P/E of x111 (Yahoo Finance key stats for you to indulge.)

We have a super cheap price to sales, price to earnings, and a balance sheet which doesn’t make sense given the market cap. On paper, this should be worth more. What is very interesting to me is the cash low being so cheap as well. Sainsbury’s for all its fault has some amazing cash flow into the business. The margins are tight and they have some quality issues, but they have the cash coming into the business to maximise and improve upon.

With the full-year reports a few days away this is pretty interesting to look at. The future earnings are predicted to be strong but not the future revenue. It’s all coming down to that margin and how to cut their heavier costs. Even the sell-side analysts are shifting their sentiment to have a stronger outlook for Sainsbury’s that most of the market.

That could be in part to it being so very cheap right now. It’s worth more than the paper says, which would mean in a buy out we could expect the price to prop up (if the UK ever allows Sainsbury’s to sell! )

I’m always keen to see just how much the sentiment is changing and what else is happening.

It seems a switch from hold to buy for one analyst but everyone has largely stayed the same. It’s interesting for a hold analyst to move to a buy recommendation days away from a full-year report.

Looking at the price right now and having drunk the analysis the way only a bored investor can. I’ going to take the plunge and pick up a few shares ahead of the full-year results. Worst case it’ll be one I’ll hold onto until it’s no longer a value buy.

It still looks like a merger target than a long term buy and give to the kids, but some short term fun for me no matter what.

Let me know what you think. Do I need to add more, what bits do you like or don’t like? I’ll have a think about what I want to write about next.

Hope you are all staying safe and keeping well.

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Very insightful! Thanks for sharing

Are you thinking of continuing this with other UK companies? I’d be interested in that

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I do like UK companies, plus I find it easier to talk about. Though I have a few US holdings as well so I can talk about them.

I’ve invested in some funds but I doubt they are that interesting to talk about.

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Thank you for posting your thoughts here. I really enjoyed reading and thought it furloughed really well too. I look forward to the next one!

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What are the axis in the graphs? It looks good, but what’s the ranking based on?
0.2% margin is disastrous.

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True I didn’t think of that!

The axis on the Genuine Impact graphs are it’s past rank. I should say the high and low for the past 12 days to make it clearer the scale.

Just gave it a quick check now.

Quality low: #2,445 - Quality high: #2,401
Value low: #231 - Value high: #172
Momentum low: #2,125 - Momentum high #1,510

Maybe I’ll leave those graphs out unless they are interesting. Takes up less room too.

The ranks are fundamentals turned into ratios and then compared against 5,528 other stocks to see the ratios in relative terms.

Rather than this companies profit margin is 0.2%, it’s ranked #3,261 out of 5,528. The raw numbers I find useful before jumping into a trade but I find it’s a nice summary, which in this case is simply they are pretty bad at turning a profit compared to the rest of the market you could invest in.

It really is. However, they scale allows them to keep running, and the low debt means they can leverage up when needed. If they can optimise their margins (which I think COVID-19 will help them achieve that) then there is a lot of profit to be made.

All of that aside they are a “distressed” asset, who desperately need a new owner to take it to the next level. It wouldn’t be a massively under valued company unless something was going wrong with it!

The market has priced in a lot of risk, without a buyer or a meaningful plan to increase the margins this will be a dud investment. That’s what I’m betting on in the short term. COVID-19 forces optimisations which remain after the lockdown ends, resulting in a new plan to increase profitability. Option two is a new buying appears, but I’m not sure who that would be right now.

Some info here on grocery market share
https://www.kantarworldpanel.com/grocery-market-share/great-britain/range

And thoughts from their interim results:

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BooHoo - BOO (Hold)

Fashion isn’t my past time. I am a man of function not form, which means I buy clothes rarely and somehow always get it wrong.

I wanted to look at a slightly different company and I wanted to look into new areas myself. BooHoo is an interesting online clothing retailer for the younger crowd. They are also riding the wave of fast fashion, cheap items with a high margin which isn’t built to last.


From TradingView

While they have faced the typically COVID-19 dip they have made a steady recovery. This has been driven by the fact BooHoo and its other brands (boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap, Karen Millen, and coast) are all digital e-commerce stores. They have remained open through the lockdown.

https://www.cityam.com/uk-retail-sales-obliterated-in-fall-to-record-lows-over-coronavirus

On the surface, everything looks highly promising for BooHoo.


From Genuine Impact

The fundamentals are all extremely strong. One of the strongest quality companies, very high momentum, and extremely overpriced. Normally I would find this fairly attractive, but I have BooHoo down as a hold where I’m actively seeking an exit.

The profitability is extremely high, and this is no surprise. a 5.16% profit margin and low operating costs make this a robust business.

https://uk.finance.yahoo.com/quote/BOO.L/key-statistics?p=BOO.L

The debt is also very low, you’ll see this with a very strong financial strength. Looking at Yahoo we can see the hard numbers behind this, £20.92m of debt versus £245.45m of cash in the bank. Perfect for buying up competitors or building up a war chest for trying times (like right now.)

For all the profits, cash flow, and generally “rich” for BooHoo, they don’t like to pay it out to shareholders. This means as an investment it’s just the share price growth to look forward to.

In terms of value, BooHoo is extremely overvalued. It doesn’t matter what metric you are using here, price to sales, price to earnings or even price to book.

The bit I am most interested in is the future projections. BooHoo is a great momentum pick but I feel like there is more to uncover. Why are they building up cash, not paying it out to investors, no innovation other than a focus on new styles cheap and quick, and yet the future revenue and earnings seem strong?

A lot of analysts are on the side of picking up BooHoo, and it seems to hit their revenue and EPS targets are very achievable (plus the uptick in business due to COVID-19 closing down competitors.)

So why am I pessimistic?

Fast fashion is falling out of trend with its core audience. As laws changes and customers become more aware of the impact their purchases have on other lives and communities, then fast fashion will fall to up-cycling and “greenwashed” alternatives.

It also seems like the share price predictions are very low compared to the rest of the market.

With competitors coming back after the lockdown ends, a group made up of similar companies who are repeating the same strategy. The lack of diversity makes me concerned for their future.

In the short term, I’m sure they’ll continue to climb, but as a long term investment, I am not buying more and now considering when to exit.

As with any major decision I asked my girlfriend her view on BooHoo.

They are popular with the female 16-24 market, but it’s not an ethical company. Why and how are the clothes they make so cheap?

At least she’ll support my decision!

Let me know what you think of my write up, or what your view is on BooHoo.

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Sadly Sainsbury’s are under-performing, largely in part due to the discount retailers and largely due to Sainsbury’s being a costly supermarket to shop at, when compared against ASDA, Morrison’s and also Tesco. The closest supermarket to me is a Sainsbury’s but i’ll happily drive straight past and go to ASDA any-day of the week… and as long as that customer view point is in place they’ll continue to struggle.

Why should it be worth more? Its been under-performing for quite some now and those who are invested have clearly been making swift exists where they can… Will this continue? I expect so. if Sainsbury’s do not pull something out of the bag over the next 6 months? Perhaps taking advantage of the current situation with delieveries being hard to get hold of… perhaps getting in bed with Ocado ? or just improving their delivery service to squeeze in more deliveries than their direct competitors ?

For me; Sainsbury’s still represents a significant risk.

off-topic slightly… What will happen with ASDA? who knows… but if i were Walmart… i’d try to offload it and make a competitive effort to target Amazon… watch this space

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Some great insight and analysis here @jcksmith850, thank you for sharing :clap:

More of this sort of thing please!

Agreed they are in a very tough spot right now. This has been pushing down the share price because of the growing risks.

I’m hoping the cutback and adjustments they have made for COVID-19 will carry on after the lockdown ends, and they will look to make themselves a leaner business.

That said the ultimate goal is for someone to buy them up and merge them into their business. Sainsburys has the cashflow to survive and while they aren’t doing anything groundbreaking, they also aren’t growing.

I think your Ocado point is a good one. It’s this type of innovation which I’m taking the risk on. They have the money to survive for right now but it’s a company with issues that I’m taking a bet on.

We both agree on that, let’s hope it pays off! :smiley:

Apparently it’s now the cheapest of the big boys, when it comes to branded items. I guess Asda/Tesco may beat it when it comes to their own ranges, price wise.

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Not for my shop it’s not. not even close. The supermarkets know what stats they need to manipulate to ‘look good’ when these studies are being made and this is the outcome.

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“Which? only tracked stores that sell their full range online, so Lidl and Aldi were not included.”

That says everything.

Very interesting read!

Selfishly, I would love to see how you approach funds. I don’t yet invest in single stocks and have been more of a fund follower in recent years.

And how you apply the Genuine Impact rankings in your process is also very useful! I’d been using them as one of the research apps along with a few others, and I gradually find them more and more useful.

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Scottish Mortgage Investment Trust - SMT (Buy)

As requested by @piyushsg, some analysis and coverage on a fund. I decided to pick one of my personal favourite funds which I’m still invested in, and constantly topping up my position.

Scottish Mortgage is a fund, but not as you know it. This isn’t a mutual fund, it isn’t an ETF (exchange-traded fund,) it’s a completely different beast. Investment trusts work like equities (normal stocks like Apple,) are ran by a fund manager, but you are not investing in the pool of capital you are investing into the trust itself.

This has a few nice advantages, firstly no need to worry about liquidity because the share price is based on the trust, rather than what is held inside the fund. When you sell the fund manager doesn’t need to liquidate assets to meet your order. The downside is the price you pay is set on market demand, this is where you hear about people paying a premium for a trust (the cost of buying is more than the value of the assets held.)

Investment trusts do carry some additional risks, as they have a lot more freedom than your run of the mill fund. For instance, they are free to use gearing (leverage), and they can hold extremely illiquid investments as well. It’s important to understand how the trust is run before you invest as they are significantly more varied than an index tracker.

But what is Scottish Mortgage? And why am I such a huge fan of this trust?

Firstly, it has absolutely nothing to do with Scotland, nothing to do with mortgages, it invests in global equities, it’s all about high growth, and its owned by Baillie Gifford. Secondly, it’s one of the old running funds out there. Over 110 years old. Thirdly they are one of the biggest investment trusts in the UK, controlling over £8.2 billion.

All of that aside, I haven’t explained why this is my favourite investment trust. I am a simple man who loves returns.


From Scottish Mortgage Investor Information Website

In the past year Scottish Mortgage has returned 12.7% and in the past three years 59.7%.

The other two lines represent the “fair value” which is important to know if you are paying a premium or not, and the benchmark the FTSE All-World. Both graphs have been normalised to start at 100 to make it easier to see the change.

The point here being, this fund knows how to make money.

So what do they invest in? What does a global growth fund invest in? What is the secret sauce we mere mortals don’t know?


From Genuine Impact

It’s all the high growth companies you adore. The classics like Tesla, Amazon, Alibaba, Tencent, ASML, Netflix, and even Ferrari (not so sure about that last one.)

However, if you look at the complete list, while it is out of date you can see everything they invest in.

https://www.bailliegifford.com/en/uk/individual-investors/literature-library/funds/investment-trusts/portfolio-valuations/scottish-mortgage-valuation-29-february-2020/

They also have a very small selection of fixed interest, but a pretty broad range of unlisted equities too. Airbnb, Stripe, and TransferWise (to the pick on the interesting ones I know most about.)

This mix of unlisted and publically traded gives them a lot of room to find those explosive growth companies and just keep holding onto them.

High returns, focus on growth, beating its benchmark, what more do you need to know? Well, did you know it pays a tasty dividend as well?

scottish dividends
From Morningstar

Great returns, reliable dividends (mix of fixed income helps them maintain their payouts), and did you know it’s also super low cost? With an ongoing charge of only 0.37%, it’s cheaper than some index funds you can invest in!

#27 out of almost 8,000 funds for return, high-risk strategy to maximise the returns and very competitive fees for an actively managed fund!

I believe Scottish Mortgage should be a cornerstone in any portfolio. If you are looking for global equity exposure, with an aim to outperform the market, this should be the first fund you consider.

You do need to be aware of the added risks, while they have performed extremely well in the past, this is a high-risk portfolio, which uses a little gearing, invests in unlisted equities where the valuation is rarely updated, has funded debt for fixed income payouts, and is focused on high growth bets.

I hope you consider and give Scottish Mortgage Investment Trust a look, this is one of my constant buys where I regularly invest in it.

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Nice breakdown. SMIT is my biggest holding based on what I believe is exceptional management and a brilliant long-term growth strategy.

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Feels like every Brit has SMT in their holdings!

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Really great posts, @jcksmith850 — thanks for sharing them! :raised_hands:

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