Share Sleuth: why I took profits from an AI winner

Last month I liquidated some of the portfolio’s holding in Bloomsbury Publishing (LSE:BMY) to add Keystone Law Group  Ordinary Shares (LSE:KEYS) to Share Sleuth.

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This month, my trading day was Tuesday 28 July. The portfolio’s cash balance was just shy of £5,000 but the minimum trade size set at 2.5% of the portfolio’s total value was £5,800.

Technically, I needed to raise cash by reducing or eliminating a holding to add a new holding or add to an existing one. 

Reductions: AI boomers

These are the trades the Decision Engine was offering me:

Click on a share’s score to see a breakdown (scores may have changed due to movements in share price). Key: qual is the share’s score out of 9 for the three quality factors (capabilities, risks, and strategy), price is the price score from -3 to +1, ih% is the suggested ideal holding size as a percentage of the total value of a diversified portfolio, ss% is the actual size of Share Sleuth’s holding, and ih%-% is the difference between ideal and actual sizes.

Based on my scores, two companies were over-represented in the portfolio. I reckoned both are decent quality businesses. They scored 7 out of 9 for quality, when I scored them last July and last April respectively.

I routinely check the regulatory news for each share in the Decision Engine and there had been none that would encourage me to rescore either share. Happily, both companies’ share prices had risen faster than the portfolio average, which is why they overrepresented.

They are beneficiaries of the artificial intelligence (AI) boom. Softcat (LSE:SCT) is an IT reseller helping to equip the data centres being built to do all the computing required. Oxford Instruments (LSE:OXIG) makes some of the equipment.

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Not having insight into how long the AI boom will last, or how severe the potential hangover will be, I was not inclined to raise their scores. However, it would not punish the two firms’ scores for receiving a windfall since their scores already incorporate the risk that the boom may not be long-lasting.

The easy decision was to reduce the portfolio’s holding in Softcat, which had a higher price score and a lower Decision Engine score.

Additions

A disposal would have raised the portfolio’s cash balance well above the level required to add a new holding, or add to an existing holding.

My options were:

Click on a share's score to see a breakdown (scores may have changed due to movements in share price). Key: qual is the share’s score out of 9 for the three quality factors (capabilities, risks, and strategy), price is the price score from -3 to +1, ih% is the suggested ideal holding size as a percentage of the total value of a diversified portfolio, ss% is the actual size of Share Sleuth’s holding, and ih%-% is the difference between ideal and actual sizes.

In fact, the choice was much more limited than the five shares listed in the table.

The bottom four would have been new additions to the portfolio. Normally the opportunity to diversify would be welcome but last week’s article explained why I do not consider three of them to be serious candidates.

Judges Scientific (LSE:JDG), Autotrader Group (LSE:AUTO), and YouGov (LSE:YOU) all have quality scores below the median quality of score of 7. I would rather add stocks at or above the median.

Cake Box Holdings  Ordinary Shares (LSE:CBOX) is in the frame, but the egg-free cake shop franchise has already published its full-year results and I am about to re-score it.

I wanted to read more about the integration of Ambala, a manufacturer and retailer of South Asian sweets that Cake Box acquired near the end of the previous financial year, and see what the company’s financials look like after the acquisition.

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That left commercial lighting system manufacturer Thorpe (F W) (LSE:TFW) as the highest-ranked share in the Decision Engine. It already accounted for 7.1% of the portfolio’s total value, but the Decision Engine algorithm said the ideal holding size was 9.8%, 2.7% of the portfolio’s total value more.

Since the minimum trade size is 2.5% of the portfolio’s value, the trade was on, just. Holding me back was the fact that I have already added to the holding once this year, in April, after I scored FW Thorpe last November.

The company published half-year results for the six months to December last March. Revenue fell 2.5% compared to the previous half-year and operating profit was flat. The outlook statement for the full year was characteristically realistic.

The company said investments in its factories in the UK and Europe might marginally suppress profitability, and while all its subsidiaries are targeted to grow, markets are challenging. Each “has its own slightly different set of circumstances to manage”.

FW Thorpe revenue and profit to December 2025. Data: ShareScope and annual reports.

If growth is elusive in 2026, it will be the third consecutive year that revenue has not progressed, and the second consecutive year for profit. I do not think this is surprising given prior strong years and the flat economy.

Traders, though, follow the earnings, so flat profits probably explain their profound indifference to a company that has cash oozing out of its pores and a great long-term track record. The shares trade on an enterprise multiple of just 10 times adjusted profit after tax, and 13 times normalised profit.

I like a company that has the firepower and appetite to keep investing through tougher times, but I am also conscious that FW Thorpe’s revenue and profit growth rates of 10% CAGR (Compound Annual Growth Rate) are right on the cusp of single figures.

It seems likely the long-term growth rate will be in single figures at my next evaluation, which would trigger a slight downrating. That would bring FW Thorpe’s ideal holding size closer to 7.1% of the total value of the portfolio, the current holding size.

Adding more to the holding may not have been a good idea, but only because the portfolio already owns so many FW Thorpe shares already.

Trade

I slept on these thoughts. Then, on Wednesday 29 July, I reduced Share Sleuth’s holding in Softcat.

The actual price, quoted by a broker, was a fraction below 19.80p, which raised £5,791 after deducting £10 in lieu of fees.

I chose to procrastinate over FW Thorpe. I suspect I will wait until after I have re-scored it.

Share Sleuth performance

At the close on Tuesday 11 August, Share Sleuth was worth £237,003, 690% more than the £30,000 of pretend money we started with in September 2009.

The same amount invested in accumulation units of a FTSE All-Share index tracking fund would be worth £120,005, an increase of 300%.

Past performance is not a guide to future performance.

After dividends paid during the month from Anpario (LSE:ANP), Focusrite (LSE:TUNE), Games Workshop Group (LSE:GAW) and Hollywood Bowl Group (LSE:BOWL), the portfolio’s cash balance is £10,919.

The minimum trade size, 2.5% of the portfolio’s value, is £5,925.

Notes
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
Objective: To beat the index tracking fund handsomely over five year periods
Source: ShareScope.

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

Richard owns all the shares in the Share Sleuth portfolio.

For more on the Decision Engine and Share Sleuth, please see Richard’s explainer.

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