Share Sleuth: why this share keeps its place in the portfolio

Richard Beddard is short of cash, so cannot add more shares in a company he wants to buy. As he looks to raise readies, he weighs up selling a company that’s changing strategy.

In the last Share Sleuth portfolio update in early November, I made a rookie error.

The Share Sleuth portfolio is a model portfolio started with an imaginary £30,000 over 13 years ago, and to keep the measurement of its performance simple I do not add new pretend money to it.

This means additions can only be financed with cash from notional dividends paid by the constituents of the portfolio or from cash liberated when I reduce or liquidate a holding.

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Last month, there was not enough money in the pot to fund a purchase, yet I wasted the time I allocate to thinking about trades each month deciding that I would like to add more shares in Focusrite (LSE:TUNE). The firm makes recording equipment, loudspeakers, and instruments such as synthesisers and grooveboxes for making electronic music.

It seems ridiculous now, especially as Focusrite shares have risen nearly 30%, and with that rise, some of my enthusiasm for adding more shares has waned.

A new policy should encourage me to do things in the right order. From now on, if the portfolio does not have enough money to finance a new purchase, I will make sure I re-evaluate its holdings until I find one I want to reduce or liquidate.

First holding on the block is D4t4 Solutions (LSE:D4T4).

Should D4t4 go?

My lack of confidence in D4t4 stems in part from my ignorance about the software industry, and in part from changes within the industry.

D4t4 still is a data consultancy that knits together and resells third -party software and hardware.

Not too many years ago, though, it acquired Celebrus, a Customer Data Platform (CDP). Selling this software, derivations of it, and related cloud-based hosting has become its strategic focus.

Celebrus’ CDP does something D4t4’s chief executive Bill Bruno says is unusual in the CDP world, it collects information about customers as they interact with commercial websites and apps. 

It does this in a unique way, capturing first-party information about customers as they navigate websites and apps, rather than relying on third-party cookies.

This gives it a big advantage as sharing personal information in cookies is ever more tightly regulated by laws and by the policies of companies such as Apple Inc (NASDAQ:AAPL) and Google.

Like all CDP’s, Celebrus also marshals information from a company’s disparate software systems so that it can personalise websites and apps, and target us with email campaigns.

From Celebrus CDP, D4t4 developed Celebrus FDP (Fraud Data Platform), which like CDP captures and marshals customer data, but with the intention of detecting fraud.

One of its customers is online retailer Very, which, among other things, uses Celebrus CDP to trigger an email if we put things in our shopping baskets but fail to check them out.

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It also uses Celebrus FDP to detect bots, fake shoppers that distort the data it provides its marketing teams.

Historically, D4t4 has marketed itself through partners, themselves larger software ecosystems that incorporate Celebrus as an option.

Although partners have won D4t4 many profitable sales, it says it can be very inefficient. There has been too much toing and froing between D4t4 and the partner, the company says, and maybe not enough between partner and end-customer.

Now it is taking the lead by approaching customers directly, which has required a reorientation of D4t4’s sales and partnership teams.

The sales team is focusing on selling particular “use cases” instead of the whole platform, as it tries to break down customers’ doors. When they experience the product, D4t4 expects them to find other uses for it, as Very has.

Since Celebrus can connect so many systems, a decision to adopt the platform used to involve many decision makers, which makes selling the platform difficult. Even when D4T4 succeeded, the process typically took more than a year.

Now the company has adopted an initially less ambitious sales approach, it says it has reduced the sales cycle down to six to eight months.

One way to reduce it further is to integrate Celebrus more tightly into platforms, so it works out of the box. A recent integration with Salesforce, the Customer Relationship Management (CRM) giant, may reduce the time it takes to make a sale to weeks.

D4t4 believes it is selling a unique product in an almost limitless market, if only the market knew about it. And it is finding more ways to tell them.

One possibility, mooted in a recent presentation to investors, is to advertise on billboards opposite the offices of prospective customers.

I like D4t4’s focus on its own intellectual property, and selling direct, but change is unsettling.

Normally when a company changes strategy, I would look at its financial performance for reassurance that things are working out, but D4t4 has also changed the terms under which it sells software and services.

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Like many software companies, instead of collecting all the money up front through perpetual licences like it used to, it contracts for annual payments, sacrificing money now for regular streams of it in the future.

This transition has depressed revenue and profit in recent years, although perhaps the worm is turning. D4T4 believes it should make at least £4.2 million adjusted pre-tax profit in the year to March 2023, an increase of 27% over 2022.

It seems to me that life for small software companies is precarious. They live with the danger that the capability they provide could be replicated by a rival or developed as a feature by one of the platforms they facilitate.

That said, D4t4 appears to have a good patent protected product, and it is shouting about it in an intelligent way.

The rewards could be high, but the risks mean D4t4 is ranked relatively lowly by my Decision Engine, and the portfolio’s holding is correspondingly small. It is 2.1% of the portfolio’s total value.

I think that is appropriate, and I am not inclined to liquidate D4t4.

Santa rally

It is not just Focusrite that has enjoyed a recovery in its share price. The  portfolio has rallied since I last updated you in early November.

Past performance is not a guide to future performance.

At the close on Monday 5 December, the Share Sleuth portfolio was worth £174,808, 483% more than the £30,000 of pretend money I started with in September 2009.

In comparison, the same amount invested in accumulation units of a FTSE All-Share index tracking fund would be worth £74,886, an increase of 150%.

After dividends paid by Anpario (LSE:ANP), Bloomsbury Publishing (LSE:BMY), Thorpe (F W) (LSE:TFW), Games Workshop Group (LSE:GAW), Howden Joinery Group (LSE:HWDN), PZ Cussons (LSE:PZC) and Renishaw (LSE:RSW), the cash balance is £2,833.

That is insufficient to fund a purchase at my minimum trade size of 2.5% of the portfolio’s total value (about £4,400).

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

Richard owns shares in all the shares in the Share Sleuth portfolio

For more information about Richard’s scoring and ranking system (the Decision Engine) and the Share Sleuth portfolio powered by this research, please read the FAQ.

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