Thursday, 3 July 2014

Mechanical Bull Portfolio - June Review

Down 3.7 over the month


There is no disguising it. June was a dire month for the MB portfolio. It was down 3.7 per cent over the month. This compares with a 1.7 drop for the FTSE 100 and a 2.2 per cent decline for the FTSE 250.

Dart Group mainly to blame


The biggest loser was Dart Group. It was down by more than a quarter over the month. At one point it was below 180p although it bounced back to 205p by the end of June.

This fall was triggered by a rather downbeat trading update. What was interesting for me was the widely different reactions from different quarters. Comments on Stockopedia were mostly (although not entirely) negative. A number of comments focused on concerns not at all linked to the update, such as the age of their fleet or just general negative sentiment around the airline sector.

Meanwhile, punters on Interactive Investor were more sanguine. The consensus here seemed to be that the size of the drop was unwarranted and that the drop presented a good buying opportunity.

I broke my own investment rules by impulsively stocking up my real life portfolio at 187p. The size of the drop seemed out of all proportion to the seriousness of the news. I reckon a lot of stops got hit, triggering a mini-collapse. I sniffed a buying opportunity and since I had a bit of cash sitting in my SIPP and so I thought, what the hell...

My Take on Dart Group


Although I don’t usually follow the stories behind individual stocks too closely, Dart has been an exception. This is possibly because it piqued my interest well before I adopted my current position of strategic ignorance. So here is my take on Dart.

Having old, cheap planes is actually central to Dart’s business strategy. Since their business is very seasonal, they wouldn’t be able to generate a sufficient return on capital from new planes. However, older planes don’t need to be constantly in the air to be profitable and it is easy to schedule maintenance during the off-season. It seems to me a business model that is fundamentally sound and the number of comments about the age of their fleet probably explains why Dart’s value rank is so high.

Lackluster performance across the board


Anyway, I digress. Five other stocks dropped by more than 5 per cent (Matchtech, Lookers, Fairpoint, Pace, Harvey Nash). Indeed, only 3 out of 15 stocks actually rose (RM, Cohort and VP). Ouch!

However, I maintain that this is a blip and that the portfolio has just been a little unlucky. I say this because my real life portfolio held up fairly well during June and was down by less than half a per cent. This was mainly because I hold a good chunk of Kentz, which surged almost 30 per cent during June. Slight differences in timing meant that it never made it into the MB portfolio even though the selection criteria were exactly the same. I also hold Trifast for similar reasons, which was up about 10 per cent over the month.

So it seems that luck can have quite an impact on the short term. The MB portfolio probably had a run of good luck last year and is having a run of bad luck now. However, luck is not a significant factor over the long term and a sound investment strategy should always outperform.

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