Shares to buy, hold and sell: Paul Mumford
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Paul Mumford is the manager of the Cavendish Opportunities, AIM and UK Select funds. He tends to focus on the smaller and mid-cap end of the market. His Opportunities fund has delivered 15.4% over five years, against a fall of 19.5% in its benchmark FTSE Small Cap index. The fund focuses on small caps, recovery stocks and unloved sectors.
Here are the latest stocks he's bought and sold for the Opportunities fund, and the one he's holding on to.
"We like buying when things are unpopular, so I feel spoilt for choice at the moment, but one share I have been buying is Debenhams. It won’t race up 10 times, but it looks good for the short term. As a group, it has stopped prioritising volume sales in favour of margin, which is a good response to the current market climate. For example, it claims to be the UK’s biggest seller of perfume.
"While most of the store is run on concessions, in perfume it buys and manages the stock itself, generating a decent yield. Debenhams is on a very attractive rating, at just 6.7 times earnings.
"It has a market capitalisation of more than £700 million and is also building a decent online business. The group has suffered from the legacy of its private equity takeover – the owners milked it and loaded it up with debt. It has been getting itself straight ever since, but now it is well out of the woods and the current management are doing all the right things.
"The share price has moved from 72p to its current level of 50-55p. We believe it could easily move back up to 72p and beyond as the economy picks up. People often say that retail is a disaster, but these stocks have potential even though there is unlikely to be any immediate improvement in the high street. There will be a recovery in markets at some point and it doesn’t matter when, if there is value in the share price. A recovery would simply be the icing on the cake."
HOLD: NORTHERN PETROLEUM
"Northern Petroleum is an oil and gas exploration company with a market capitalisation of £85 million. It has operations in the Netherlands, Italy, the UK and Guyana, with its main speculative interest in the Adriatic. Northern Petroleum’s Adriatic reserves are valued at between £319 million and £638 million. They are still in the ground; however, the company has recently got permission from the Italian government to start exploiting these reserves, and has started a drilling programme.
"It has also done a deal with Shell whereby Shell pays for much of the exploration. The deal in itself is worth €100 million (£87 million) and could produce a substantial uplift in asset value. And it has production interests in the Netherlands that are worth the value put on the shares alone. It has a strong balance sheet, with around £24 million in cash. On any measure, it looks pretty cheap.
"But it is a share I hold with gritted teeth, because I know it’s going to be volatile. I have held this type of company before – we had Tullow Oil, which went up 10 times. Northern Petroleum could easily do the same thing, but I don’t know when. With stocks of this type, you just have to be patient."
SELL: WILLIAM HILL
"In the main, I sell something if it has gone up so much that it is looking expensive, or we have found something better to put in the portfolio. Many of the stocks that I hold tend to be recovery situations or shares in a sector that’s out of favour – so as they recover or come back into favour, we gradually sell out.
"With this in mind, one stock we’ve been reducing is William Hill. It’s performed exceptionally well. We bought it at 150p when people just didn’t like it. It was a classic recovery situation, and it’s now 220p. Profi ts are OK, but not great and there is less justifi cation to hold. The fundamentals are still good, but it doesn’t fulfil the requirements of the fund.
"It might go up 10 to 20p, but it is not like Lloyds or RBS – other stocks we favour at the moment – which could double from here."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.