Blue sky machines
I’ve sold Seeing Machines out of the stamp collection because it doesn’t pass the profitability (net income > £1m) and is a bit too blue sky for my current taste. It is progressing, I like their strategy of making the product — driver attention monitoring through eye movement detection — a reliable discrete chip, but it’s on a pretty dear valuation and break-even still seems some years away. It could be bought by a larger auto component maker, but it’s on a pretty full valuation so probably not at a large premium. On the downside the market may lose patience waiting for break-even in a downturn. I definitely wouldn’t buy now at this price, so I can’t justify keeping it — only very illiquid cases can justify breaking the “sell what you wouldn’t buy” rule.
I probably invested too early here which is something that happens several times during the early years of the portfolio. There was a fear of missing out that the price would immediately catch up whenever improved prospects would be announced. In practice, for both blue sky stocks becoming successful and turnaround situations the market seems to be usually slow to take in a new situation. Even if the stock jumps 10-20% on a good announcement, it usually takes longer to catch up to a normal valuation. It makes sense behaviourally: a low valuation and some bad years means a lot of disillusioned investors, who may not be keen to change their mind, and you’d need a lot of new blood to overcome them. The profitability rule is a simple way to catch that effect, as stocks become investable on the way up, as well as avoiding all the perennial losers that never make a profit. It will miss some who re-rate early.
Also sold Scientific Digital Imaging as I’m not that keen on the current strategy of aggregating vaguely related small companies without integrating them (same as Judge Scientific). In the long term this rarely seem to do very well, as the acquired companies sometimes lose focus with their founder(s) replaced by financial engineers. Not sure why I missed this when I bought, which is an error of sorts, if a profitable one in that particular case, which has done pretty well since being acquired.
As the small cap strategy matures, I’ve decided to increase the position target size. This is done by not trimming or selling stocks that have done well, and increasing positions in stocks that are lagging and that I still like to bring them to the new target: so I added to Touchstar, Low & Bonar, Walker Greenbank, and Aukett Swanke. In the large cap portfolio I added to Pearson for similar reasons.
Last action was the acquisition of Cerillion, an old Logica spin-off which seems to have a decent strategy and down to earth management. Another of these entries on which there’s little to say, and that is good.