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If you're similar to myself, in that you're forced to watch or hear about daily share price movements, then you'll be no doubt aware of the short-term "success" of the Qualiport's latest investment decisions.
True to form, the very short term has gone against us. With only a few days passing since the decisions, Unilever has sparked into life and risen to 455p, while PizzaExpress has continued its decline to 629p.
Switching
TMFTiger perceptively comments on the "switch" phenomenon in this feature, ironically remarking on our proposed decision back in January. Tiger prophesises:
"Whenever I've 'switched' in the past I always seem to pick the worst time possible. On more than one occasion the share I've sold leaps in the most vulgar fashion and my new purchase slumps in despair. We've always said it is impossible to time the market. So to time it twice at the same time has to be... well, even more impossible."
So, was this a switch? It looks like it. I would call the buying and selling more of an "unfortunate coincidence". Bruce and myself were unimpressed with Unilever and the Bestfoods (NYSE: BFO) deal was the final straw. And so we sold. But it just so happened that at the same time, after waiting months in what seemed a forlorn hope, PizzaExpress finally managed to duck under our pre-determined "buy price". And so we bought.
The subsequent share price decline at PizzaExpress has caused a little angst over on the company's discussion board. But, very Foolishly, they all take a long-term investment view. PizzaExpress does have a history of unwarranted optimism and pessimism. Rumours of a deterioration in trade caused the shares to plummet last summer. And then there was unprovoked excitement as the shares raced ahead prior to this February's interim results announcement.
All the short-term stock market ups and downs go with the territory. Perhaps there's a whisper doing the rounds that sales are dropping off. Maybe it's due to Euro 2000? I mean, there were a few members in the pubs and restaurant sector who blamed the last World Cup for disappointing profits. Who knows?
With the potential to double their UK restaurant estate alongside the first signs of the embryonic international venture bearing fruit, the above-average long-term future at PizzaExpress looks reasonably assured. Of course, if the fundamental attractions start to change, then we will reassess the situation. As far as I'm aware, nothing fundamentally has changed.
Thoughts for the future
Here are some thoughts for the future of the Qualiport.
Starting with the number of constituents within the portfolio. There's two issues here. Too many companies can mean some members take a back seat in terms of their coverage. In the past, we've missed a few results and perhaps a few opportunities. For instance, after Independent Insurance Group (LSE: IIG) published their annual results in March, their shares dipped to 190p on the "disappointing" figures. The shares have since risen to over 275p, or 45%, in the subsequent three months. The other issue concerning the Qualiport quota concerns the impact and quality of our investment decisions. A greater number of companies will obviously dilute the overall impact of the portfolio's returns
In terms of numbers, I'm comfortable with seven and we'll squeeze in an eighth should a suitable company fall into view. Overall, I think any more than eight and we'll begin to lose our investment focus.
Fresh blood
In terms of bringing fresh blood into the portfolio, we're not in too much of a hurry at the moment. After the recent PizzaExpress purchase, there's now only £1,600 in the kitty, a sum not really enough to justify any new Qualiport entrant. With that amount of cash available, I'd prefer just to top up on some of the Qualiport's existing holdings. If we're looking to hold any additional company for a few years or so, then waiting for the October £2,000 cash injection to fatten our wallet shouldn't prove too harmful to our long-term returns. Investing relatively large amounts of cash does sharpen the investment mind. I don't want to fall into the trap of the "interesting side bet" through investing small amounts.
Of course, before new companies come into view, we need to get a grip on the performance and valuation of our existing companies first. And this is where we've fallen down in the past. Lloyds TSB (LSE: LLOY), Dell Computer Corporation (Nasdaq: DELL), Misys (LSE: MSY) and Independent Insurance are companies that have had little attention placed upon them in recent months. This will change. There will be increasing coverage of these companies throughout the summer. Misys announce their annual results in July, while Lloyds, Dell and Independent publish their interims during the upcoming months too. We want to be on the ball should the unexpected, good or bad, happen.
Diversity
And finally, a point on industry diversification. At the moment, the portfolio consists of a computer manufacturer, a magazine publisher, an insurer, a bank, a restaurateur and two totally different IT companies. In days gone by, we've also held a food manufacturer, a retailer and a rat catcher. A varied bunch.
I'm all for the "circle of competence" principle and to sticking to favourable industries. The charge here is that we've been guilty of spreading ourselves too thinly across many different sectors, knowing a little about several, rather an a lot about a few. Has that thin spread led to our poor performance? Instead, when searching for new opportunities, maybe we should remain in industries that have superior prospects and economics. The media and IT sectors instantly spring to mind. If we concentrate on a few preferable sectors, we could enhance our returns through the specialist knowledge gained.
This feature, again composed by TMFTiger, touches upon the problems when considering companies without bearing in mind the industries they operate in. The salient comment for "bottom-up" investors being:
"It is a bit like buying a house without checking out the local neighbourhood."
I guess, sooner or later, the poor neighbourhood will eventually rub off on to the mansion. It happened at Marks & Spencer (LSE: MKS). Will it happen in banking too, with loss-making Internet startups moving next door to Lloyds? And what about Independent Insurance? Is it acceptable to concentrate on the insurance sector when there is just one suitable player within it?
Cast your votes
So, a poll for the weekend.
Should the Qualiport consider concentrating on specific sectors in order to increase its investment performance?
a. Yes -- You need to focus on a reduced number of favourable sectors.
b. No -- The balance at the moment is suitable.
c. No -- You need to diversify to include a greater number of sectors.
d. No -- Don't bother about sectors, just focus on the companies.
e. Don't know / care
Click here to vote.
Your comments to the Qualiport discussion board, please. Have a great weekend and enjoy the match.
Related Links
• Bye Bye Unilever
• PizzaExpress Top-up
• The Value of Pizza
• The Switch
• PizzaExpress discussion board
• Sky High Software