One fund manager reveals he has more sell ideas than buys, as the value of certain holdings have soared.
David Osfield, manager of the Edentree Amity International Fund, says he is not falling over himself with strong UK stock ideas at the moment despite being happy with his fund’s overweight to the region. “I am looking for stock ideas, but I’ve got more sell ideas in the portfolio at the moment than outright screaming buys,” he explains.
He believes markets are looking pretty fully valued at present, with stock markets reaching record new highs and bitcoin euphoria suggesting there’s “an element of excess capital in the system”. “Some of the valuations are quite hard to justify,” he says.
James Baker, manager of the Chelverton UK Equity Growth Fund, has also questioned certain stocks' valuations, though is more positive.
Certain parts of the UK stock market have performed strongly of late; Osfield and Baker discuss whether their valuations have become too high.
Victrex (VCT)
Osfield bought Victrex in August 2016 for around £16. It’s now up to £27. It’s nearly doubled since 24 June 2016. “That valuation is just incredible,” says Osfield.
The manager points out this stock is not a call on the UK economy. Around 97% of its business – supplying PEEK, a high-performance plastic, for use in smartphones, airplanes and cars – comes from overseas.
“It’s been on an absolute tear,” Osfield continues, “largely because it’s seen as a great company but also as a beneficiary of weak sterling. I can’t add to it at that level.”
However, he stops short of suggesting it is a sell just yet. “I have a three-year price target for most things, which triggers a review and we start the conversation and question is this justified, are we seeing upgrades, do we need to run our numbers again?” he says.
Morningstar analyst Rob Hales rates Victrex two stars, meaning it looks overvalued, with a fair value estimate of £21.
As at the end of November, Osfield’s fund had a 1% weighting, or 92,000 shares, in Victrex.
Blue Prism (PRSM)
Blue Prism is one of the UK’s leading tech stocks. It supplies robotics software to big businesses that allows them to automate menial back-office tasks and frees up employees to focus on more important duties.
The firm came to market at £1 in March 2016 and has grown tenfold to sit at over £11 today – a phenomenal return for those who invested at IPO. Baker was one of those.
Baker describes Blue Prism as one of his four or five “sprinkles of fairy dust” that can deliver great rewards.
He says Blue Prism was a great example of a company people get excited about and push to a valuation where everything’s got to go perfectly to justify. He exited his position mid 2017 at about £8 – a bit premature but still eight times what he paid for it. In the end, Baker says, “its market capitalisation to sales ratio was becoming unsustainable fast”.
Games Workshop (GAW)
One that Baker still likes despite a similarly meteoric share price rise is Games Workshop. He started buying the firm, which markets and sells Warhammer games, in early 2016 for £5. Since then, it’s up fivefold at just shy of £25.
However, Baker says it’s still not looking “ludicrously expensive, which you’d expect it to be”, trading on a price/earnings multiple of around 15.5 times. That’s because it’s growing its top line at around 20%, has a return on sales of around 24% and a working capital intensity in the low single digits.
“All of that means that as it’s growing at that rapid rate, it’s throwing off masses of spare cash," he says. "Games Workshop doesn’t want to buy anything with that – it’s a pure organic growth story – so all that spare cash is returned as special dividends alongside that amazing capital growth.”
Again, around 70% of its sales are outside the UK, with Asia growing particularly fast but also the US becoming more of a contributor.
One niggle for Baker is whether the stock is just going through a “bit of a fad”. “Is it having a particularly dynamic period because of the number of games launches it’s had? I don’t know.”
However, he admits considering buying more when it was just under £20, so he obviously feels there’s some juice left in the price still.
