Intelligent Investor Portfolio Update for April

The say you should buy straw hats in winter, and we were off to the milliner in April as a weaker sharemarket threw up several opportunities.

First off the rank was Trade Me, with both our Equity Growth and Equity Income portfolios increasing their weightings to 7%, with the stock down at $4.09. That puts it on a price-earnings ratio of 18, which we consider attractive given Trade Me's high quality and long-term growth prospects.

Performance to 30 April
  1m
(%)
3m
(%)
6m
(%)
1yr
(%)
2yr
(%)
SI*
(%pa)
Equity Growth 1.2 –2.4 3.6 8.4 9.3 11.0
Equity Income 2.1 –2.1 1.3 5.2 10.3 11.5
S&P/ASX 200 Acc. Index 3.9 0.3 3.4 5.5 11.4 7.9
Performance is stated after costs.
*Inception date was 1 July 2015.

We also increased our position in Scentre Group in the Equity Income Portfolio – taking it from 3.5% to 4.5% at a price of $3.88. As the owner of Westfield shopping centres in Australia and New Zealand, Scentre's stock price has been weak due to pressure on its retail tenants from online alternative – most notably Amazon. However, we think its premium locations should mean it is able to shift its tenant mix towards food, entertainment and other services that can't be provided online. With a forward distribution yield of 5.7% the stock enhances the portfolio's income credentials, but we also expect it to increase distributions in line with economic growth over the long term.

Some new stocks were also added to the portfolios. Weightings of 4.5% were added in Wesfarmers were added to both, at $41.26, following our upgrade to Buy. In Bunnings and Coles, Wesfarmers owns two of the best businesses in the land. Between them they probably account 75% of the group's value – although there will be some shuffling of assets over the next year or two, with Coles to be demerged and a large acquisition or two likely to be made. We have confidence in Wesfarmers' management to ensure that shareholders come out on the right side of these deals.

In the Growth Portfolio, we also bought a 2.5% weighting in Thorn Group at an average price of 61.7 cents. The company's net profit is expected to almost halve in the year to March due to reduced lease originations. But that's more than accounted for by a share price that sits at around half its net tangible assets – most of which are in the form of receivables that will convert into cash within the next four years.

These transactions were funded with the cash resources we'd built up over the previous few months, with the disposals of stocks like South32,Computershare and Macquarie Group, which we judged to no longer offer sufficient value to continue holding.

Transactions in April
  Details Date
comp-
leted
Old
weight.
(%)
New
weight.
(%)
Avg.
price
($)
II Equity Growth
Trade Me Buy 5 Apr 5.6 7.0 4.09
Wesfarmers Buy 17 Apr 4.5 41.26
Thorn Group Buy 19 Apr 2.5 0.617
II Equity Income
Scentre Gp Buy 4 Apr 3.5 4.5 3.88
Trade Me Buy 5 Apr 5.3 7.0 4.09
Carsales.com Buy 17 Apr 3.2 13.35
Wesfarmers Buy 17 Apr 4.5 41.26

Additionally we sold our remaining stake in Carsales in Equity Income Portfolio to provide some of the funds for the purchase of Wesfarmers. We continue to rate Carsales a Hold, but it's probably our least favoured among the online classifieds and the portfolio also has holdings in Trade MeSeek and News Corp (much of whose value is from property classifieds, including REA Group and US-based Move). Carsales also only yields about 3.1% in annual dividends, compared to 5.4% for Wesfarmers (although this may fall a little around the demerger of Coles). So the switch should enhance the portfolio's value (replacing a Hold with a Buy), while also adding to its income generation and slightly improving its balance.

The best performers in April were our resources stocks – Woodside Petroleum and BHP Billiton – which each returned 10%, while Wesfarmers got off to a good start with a gain of 6%.

Fallers included Navitas, which dropped 14% due to a slowdown in enrolments growth, and IOOF and Perpetual, which have been under pressure due to the Royal Commission and fell 12% and 13% respectively.

Beyond the media fenzy around the Commission, though, IOOF has been enjoying fund inflows, while Perpetual has been seeing outflows. That largely explains why IOOF has been upgraded to Buy, while Perpetual remains a Hold. We remain comfortable with our weightings in both, with Perpetual at just over 3% and IOOF at about 4% in both portfolios.

However, cheaper prices could tempt us to buy more, particularly with IOOF. With cash holdings of around 3% in each portfolio, following all the activity, we're well placed for incremental purchases should opportunities appear.

To find out more about our Equity Growth and Equity Income portfolios, please visit their respective fund information pages.

Note: Our Equity Growth and Equity Income portfolios own many of the stocks mentioned.

Disclosure: The author owns many of the stocks mentioned due to his investment in the Equity Growth Portfolio.

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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