When it’s time to take a profit

We take another look at seven stocks that have previously featured in this column, after reporting season revealed the winners and losers

The profit reporting season is behind us, so now is a good time to check in on some of the key stocks that have featured in this column over time. Regular readers may recall (or even own shares in) online lottery seller Jumbo Interactive (ASX: JIN). It first featured in October 2012 and has made several repeat appearances in this column since. It’s been a terrific winner, producing a capital gain of more than 400% plus a growing stream of fully franked dividends.

It’s been the largest or second largest holding in the portfolios I manage for the past five years or so. But after a 50%-plus surge in recent months, the risk/reward trade-off is no longer as favourable as it once was.

Since first mentioning the company, I’ve highlighted the key weakness in its business model. And that is that Jumbo is simply a reseller of lottery tickets. It relies on a reseller agreement with Tabcorp to make its money. That agreement ends in 2022 and while it is likely to be renewed, it’s not guaranteed.

At lower share prices, I was comfortable that the potential returns compensated for that risk. But Jumbo is now trading at more than 20 times what I expect it to earn next year. That’s a hefty price for a business with an Achilles heel that could flare up in four years.

I’ve been selling down holdings in the stock recently and expect to continue to do so. I’ll likely hold on to a position of about 2% or 3% of the portfolios I manage, to retain some upside if things continue without a hiccup from Tabcorp. But the days of it representing a large percentage of my portfolios are over.

Pinnacle keeps climbing

Another stock to feature several times in these pages is Pinnacle (PNI), which supports and has ownership in a growing stable of funds management companies. I first highlighted it in June 2015 (when it was called Wilson HTM). Back then the share price was less than $1.20 and I wrote that it was feasible that “in three years’ time, Pinnacle’s total funds under management could exceed $22 billion and its net profit more than $20 million per year”. Let’s check in and see how clear my crystal ball was.

As at June 30, 2018 the total funds under management of all the companies in Pinnacle’s stable was $38 billion, an incredible $16 billion more than I anticipated and more than double the figure of three years ago.

And the $20 million of profit I hoped for turned out to be $23.4 million, or almost three times 2015’s figure. It’s been a stunning success and, as I mentioned in my August column, there’s every chance that Pinnacle can continue to grow at a healthy pace over the coming decade. I’m holding onto this one, though it’s quite possible the stock could fall by 50% or more in a bear market.

Platinum and Magellan

In August I argued that, along with Pinnacle, Platinum Asset Management (PTM) and Magellan Financial Group (MFG) are likely to benefit from the trend towards Australians investing more in international shares.

I’ve been buying more shares in Platinum lately and remain happy to take a long-term view. Magellan, meanwhile, reported an impressive profit result a couple of weeks after the column was published. Its shares surged and I missed out on picking any up closer to the $20 mark, as I’d hoped.

Smart Parking in reverse

Smart Parking (SPZ), a manager of car parks and purveyor of related technology, featured in April and July this year. It’s been a thorn in my side, with a few questions opening up over the company’s ability to deliver on its potential, offset by a lower share price.

For the year to June 30, revenue rose by 25% to $31 million and the bottom line swung from last year’s $1.4 million loss to a profit of almost $1.7 million. But investor confidence was hurt by operational problems this year (see my July column), and I also noted that management said it is having to cut better deals for new clients, leading to lower profit margins.

You can’t win ’em all in the stockmarket and I’ve developed a niggling bad feeling on this one. That said, if the company is on the growth path that management says it is, then today’s price will prove attractive. I continue

to hold the shares at the time of writing, with the annual general meeting in November the next check-in point. Hopefully things will remain on track.

Matrix and Swick

The main products produced by Matrix Composites & Engineering (MCE) are for the offshore oil industry. The company’s share price is roughly where it was in August last year when it appeared in this column but it’s been a rollercoaster ride in between, with the stock shooting up and then falling back.

The 2018 result was horrible (a loss of $15.4 million), but with the oil price rising 30% or so over the past year activity is picking up for Matrix’s clients. The coming year should show an improvement but it’ll need to.

Swick Mining Services (SWK) is a drilling contractor with the bulk of its work in the gold mining industry. Its share price is down almost 25% since September last year when I made a case for it. Back then I hoped that the 2019 financial year might see the company get close to its all-time record profit (of $11.3 million in 2013). At this point it looks as if Swick will fall well short of that and my current expectations are more in the $3 million to $5 million range.

But there’s some good news with the company’s Orexplore technology, which offers geologists and metallurgists important information by looking inside core samples from mines. Swick recently signed its first commercial contracts for this technology and interest appears to be picking up.

Both Matrix and Swick are speculative situations. Their clients are exposed to fluctuations in commodities markets. But I’m happy to stay aboard and see what the next few years bring.

Overall, it’s been a good reporting season for many of the stocks that have appeared in this column. Not 100% success, with a few companies missing the mark, but no investor gets it right every time. A few scars are inevitable in the cut and thrust of the sharemarket.

I’m also conscious that we’re in our 10th year of the bull market, which began in March 2009. Overconfidence would be an easy trap to fall into but we should all fight hard against it. At some point, conditions will change and share prices will head south. That’s why it’s important to take profits off the table in stocks like Jumbo Interactive that have run hard and offer greater risk at this point in the sharemarket cycle.

Greg Hoffman is an independent financial educator, commentator and investor. He is also non-executive chairman of Forager Funds Management (not involved in Forager’s investment process).

Disclosure: Private portfolios managed by Greg Hoffman own shares in JIN, PNI, PTM, SPZ, MCE and SWK.

A few scars are inevitable in the cut and thrust of the sharemarket