Market Bouncing Up or Down – Sophos, Greggs, Apple and Fundsmith

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

After a dire market performance before Xmas, we seem to be back to the good times in the last 3 days. Is it time to get back into the market for those who moved into cash as the market fell down and down and down in the autumn? Rather early to generalise I suggest although I have been picking up some shares recently.

One which I purchased a small holding in was Softcat (SCT). Yesterday it issued a trading update simply saying that trading was strong and they are materially ahead of where they expected to be at this stage in the year. The share price promptly jumped by 20%. I no doubt should have bought more. But there was a wider rise, no doubt driven by a rise in US markets and effectively ignoring the political turmoil in the UK.

Another company issuing a trading update yesterday was Greggs (GRG). They reported total sales up by 7.2% in the year and like-for-like sales up by 4.2% in the second half. The share price rose over 6% yesterday and it rose again this morning. CEO Roger Whiteside has done a remarkable job of turning around this company from being a rather old-fashioned bakery chain to a fast “food-on-the-go” business. New products have been introduced and new locations opened. The latest product initiative which got a lot of media coverage was vegan sausage rolls, now combined with “vegan-friendly” soup in a meal deal for just £2.25! A good example of how new management with new ideas can turn a boring and financially under-performing one into a growth story. But this comment of Lex in the FT is worth noting: “The positives, like the mycoprotein, are baked in. At almost 20 times forward earnings, the stock rating is well above the long-term average. Investors should wait for this dish to cool before taking a bite”. I remain a holder.

There have been lots of media comment on the profit warning from Apple with questions about whether we have hit “peak i-Phone”. Sales in China are slowing it seems and folks everywhere are not upgrading as frequently as before. Apple phone users may be loyal but they are now tending to upgrade after 3 years rather than 2.

Having just recently upgraded from a Model 6 to an 8, I can see why. The new phone is slightly faster but battery life has not significantly changed. Phone prices have gone up and I could not justify the even higher priced models. Software functionality is of course identical anyway.

Apple is the sort of company I do not invest directly in for two reasons. Firstly it’s very dependent on one product – iPhones are more than 50% of sales revenue. Secondly, all electronic hardware is vulnerable to being leapfrogged by competitors with newer, better products. With growing price competition in smartphones, particularly from low-cost Chinese producers, the world is surely going to get tougher for Apple.

Hargreaves Lansdown have reduced their recommended fund list down from 85 funds to 61 and it’s now called the Wealth 50, but Fundsmith Equity Fund is still not included even though it was one of the best performing funds last year. But they have kept faith in the Woodford Equity Income Fund which is most peculiar given its recent performance. It seems they think the big bets that Neil Woodford has been making on companies and sectors will come good in the long term, as they have in the past. We will see in due course no doubt.

But their reluctance to recommend Fundsmith seems to be more about the discounts on charges that some fund managers give them, which they do pass onto customers of course. It’s worth pointing out that the lowest cost way to invest in the Fundsmith Equity Fund can be to do it directly with Fundsmith rather than via a stockbroker or platform. That’s in the “T” class with an on-going charge of 1.05% which achieved an accumulated total return of 2.2% last year, beating most global indices and my own portfolio performance.

Indeed one commentator on my fund performance reported in a previous blog post suggested that an alternative to individual stock picking was just to pick the best performing fund. Certainly if all of my portfolio had been in Fundsmith last year rather than just a part then I would have done better. But that ignores the fact that my prior year performance was comparable and having a mix of smaller UK companies helped to diversify while Fundsmith is subject to currency risk as it is mainly invested in large US stocks. Backing one horse, or one fund manager, is almost as bad as buying only one share. Fund managers can lose their touch, or have poor short-term performance, as we have seen with Neil Woodford. Incidentally the Fundsmith Annual Meeting for investors is on the 26th February if you wish to learn more. Terry Smith is always an interesting speaker.

Stockopedia have just published an interesting analysis of how their “Guru” screens performed last year. Very mixed results with an overall figure worse than my portfolio. For example “Quality Composite” was down 19.7% and Income Composite was down 13.9%, with only “Bargain” screens doing well. It seems to me that screens can be helpful but relying on them alone to pick a few winning stocks which you hold on for months is not a recipe for assured success. It ignores the need to do some short-term trading as news flow appears, or to manage cash and market exposure based on market trends. As ever it’s worth reiterating that there is no one simplistic solution to achieve good long-term investment performance without too much risk taking.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

Post Date: January 10, 2019

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