Share Sleuth: the share I passed up on in 2009, but have now bought

When the opportunity to buy the shares at a reasonable valuation presented itself, Richard Beddard took it.

This month’s trade has perhaps been the longest in the making of any Share Sleuth holding. I have been following Porvair (LSE:PRV) since 2009, and hindsight tells us it would have been a good investment then, but I thought it was borderline and I passed up on the opportunity. It has been the same story ever since.

Porvair felt borderline again when I scored it 7 out of 9 in April, but it was on the right side of the border, and on Thursday 29 April I added 906 shares at a price of just under £5.48. This was the actual price quoted by a broker. After deducting £10 in lieu of broker fees and nearly £25 for stamp duty, the entire transaction cost £4,999.25, which was just over 2.5% of the value of the portfolio.

My reluctance revolves around a nagging feeling that there may be limits to the growth of a subset of the companies in the portfolio that includes Porvair now. So far, this subset has proved me wrong.

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Between the financial crisis of 2008 and the pandemic, which has, temporarily I think, ended Porvair’s growth run, the company has prospered in part by acquiring other companies.

It joins six other shares that could be labelled serial acquirers: Bloomsbury Publishing (LSE:BMY), Bunzl (LSE:BNZL), Cohort (LSE:CHRT), Judges Scientific (LSE:JDG), Solid State (LSE:SOLI), and Trifast (LSE:TRI). There are four more that are occasional acquirers: Dewhurst (LSE:DWHT), FW Thorpe (LSE:TFW), RM (LSE:RM.), and XP Power (LSE:XPP). That, of course, means the majority of shares (15 of them) are not keen acquirers, although any one of them could surprise us.

Although most of the portfolio's acquirers have been profitable investments so far, the portfolio’s three biggest successes, Games Workshop (LSE:GAW), Jet2 (LSE:JET2), and Tristel (LSE:TSTL), have not made an acquisition between them this millennium.

Acquisitions complicate things. They complicate the accounting of businesses, they complicate the management of them, and they make it more difficult for investors to understand them.

I avoid companies that make big, often heralded as transformational, acquisitions because the acquisitions change the nature of the business I thought I understood too radically, and they require copious amounts of financing. They are too risky for me.

All of Share Sleuth’s acquirers make modest-sized acquisitions, and fund them using their own cash flow and, sometimes, a modest amount of debt.

For some of Share Sleuth’s acquirers, like Bunzl, the risks are low because they are straightforward businesses acquiring much smaller versions of themselves.

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Bunzl is a distributor of everyday consumables, and it can slot distributors into its vast sourcing network easily to extend its geographical reach. The economies of scale make Bunzl more efficient. These acquisitions are low risk, which is probably why Bunzl has been able to grow so big and remain so profitable.

Others, and Porvair may be in this category, are not so simple. Porvair has three divisions connected by a common capability in filtration, but each market has its own requirements and the products are often bespoke.

The most profitable of the divisions, which grew out of Porvair’s microfiltration capability, makes laboratory equipment for water analysis, but it has also diversified into the allied niche of sample preparation and the robotic handling of samples.

The Laboratory division is a big asset, but to my feeble mind greater complexity puts a greater burden on management. Instinctively I heel to companies that are making themselves simpler, which is why buying Porvair chafes.

That said, I think Porvair’s management can handle complexity better than I can, and when the opportunity to buy the shares at a reasonable valuation presented itself, I took it.

Trades I did not make

I could have done nothing this month, that is my default setting, or I could have done something else. The “max trade” column in this table shows the trades I considered (trades in brackets are sells), all suggested by my Decision Engine:

Click on the company names to see how I scored them The Decision Engine suggested I add more shares in top-ranked Goodwin (LSE:GDWN), but I am reluctant to do that. I have invested three times in Goodwin but the returns have been slight and I will need to do some soul-searching before investing any more.

I may add more shares in PZ Cussons (LSE:PZC), ranked twelve. In March, the company unveiled its new strategy, which promises more focus.

Solid State (LSE:SOLI) has grown too big for its score of 6 according to the Decision Engine. It wants me to sell half the holding to reduce the portfolio’s 7% exposure. While I am unlikely to be as savage as that, I might reduce the holding by less, particularly if I want to fund a new addition.

Hollywood Bowl (LSE:BOWL) is the lowest-ranked share in the Decision Engine, and its bowling alleys and indoor crazy golf centres are still not open. Call me stubborn. Call me sentimental. But I am clinging on to it for now even though it may well lead a hand-to-mouth existence until the pandemic properly abates.

Share Sleuth performance

At last Friday’s close (immediately before the bank holiday), the Share Sleuth portfolio was valued at £198,105, 560% more than the notional £30,000 invested over the course of its first year starting in September 2009.

In comparison, the same amount invested in accumulation units of a FTSE All-Share Index tracking fund would be worth £68,241, a return of 127%.

The cash balance is only £1,291, so I will need to reduce or eliminate a holding to fund new purchases or wait until dividends accrue to nearly £5,000, which is 2.5% of the portfolio’s total value and my minimum trade size.

Table notes: Added more shares in Porvair
Costs include £10 broker fee, and 0.5% stamp duty where appropriate
Cash earns no interest
Dividends and sale proceeds are credited to the cash balance
£30,000 invested on 9 September 2009 would be worth £198,105 today £30,000 invested in FTSE All-Share index tracker accumulation units would be worth £68,241 today
Objective: to beat the index tracker handsomely over five-year periods
Source: SharePad, 30 April 2021.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.

Richard owns shares in all of the constituents of the Share Sleuth portfolio.

For more on how Share Sleuth and Decision Engine work, please read the FAQ.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard