A Legendary Foolish Investor's Current Portfolio

Published in Investing on 7 November 2011

Where is one of the Fool's best-known investors investing today?

One of the most popular posts of all time on The Motley Fool came in November 2005 when Foolish discussion board legend "Paulypilot" shared his portfolio details with us. "Why legend?" you may be wondering; but you'll only be doing so if you're relatively new to this website.

Paul's investing style can perhaps best be described as "swashbuckling", but don't take this as a criticism.

Taken as a whole, Paul's investing history has been successful. But his style also, inevitably, includes the odd spectacular failure here and there. 

He has been known to take huge positions, often leveraging via spread-betting and usually mixing a few shorts with his long positions. On occasion, Paul has taken a declarable ownership interest (over 3%) in small cap companies.

His major successes have come during bull markets. But his investments have suffered badly over the last four years or so. "My big mistake was to combine high gearing with illiquid small caps, in size, so therefore I was not able to cut the position sizes when the credit crunch happened" he says of his recent experience.

"That has been a huge learning curve, and is not a mistake I will make again. Therefore now I continuously monitor and control gearing, and ensure that I only use it sparingly, and in liquid stocks. Small caps and gearing simply don't mix, as I proved! But I'm always learning from my mistakes. That's the most exciting thing about the markets; you never stop learning."

Paul's approach is always a bit different from the mainstream as befits his personality. Anyway, I thought it was high time he shared his current investments with us.

1. IndigoVision

Paul's biggest single investment is a share in which he made a huge amount of money, then lost a lot; but thankfully, he didn't lose quite as much as he'd made.

Shares in the IP video security company, IndigoVision (LSE: IND), briefly touched £10 a few years ago have had a bumpy ride over last couple of years. The investment was first flagged up as a cash-rich play in early 2003, but quickly turned into a growth story.

Now 210p, the shares have rallied over the last couple of weeks, helped by an upbeat trading statement. Paul sees both profits and margins recovering sharply, and points out that net working capital (including over £5m in cash), isn't far short of the market capitalisation of £16m.

The yield is a reasonably healthy 3.6%. Paul expects a return to around £3m of pre-tax profit achieved a couple of years ago, which would place the shares on a P/E of around 5.5 against enterprise value (stripping out the cash).

If Indigo's problems are now behind it, and the company returns to the kind of growth rating it previously enjoyed as an expanding outfit selling into over 60 countries, then Paul could make another small fortune on the shares from here.

2. Begbies Traynor

Second on the list is AIM-listed corporate insolvency and recovery specialist Begbies Traynor (LSE: BEG). Paul reckons the current valuation of 28.4p to be "stupidly low" with a forward P/E of around four.

In the last full year, Begbies made a pre-tax profit from continuing operations of £5.2m, yet is currently valued at £26m.

Overall net asset value (NAV) is a healthy £66m, though this falls to £14m deducting intangibles. Net current assets amount to £39m, and there is an unsecured debt facility, in which Paul sees plenty of headroom in size and duration.

Begbies' shares suffered when accountancy firm Vantis (LSE: VTS) went into administration and RSM Tenon (LSE: TNO) was less than optimistic about its prospects and slashed its dividend. But Paul points out that these companies were or are more highly geared, whereas Begbies' balance sheet is far more robust.

In other words, there has been an unfair "read across" from the other companies in the sector, which presents an investment opportunity.

Begbies' expected yield is approaching 9%, implying it won't be maintained, but this is at odds with the recent "in-line" trading statement.

3. Google

At number three, we have the world's favourite search engine and biggest brand name, Google (NASDAQ: GOOG.US).

Paul sees Google as "probably the world's most exciting company" with too lowly a valuation, at somewhere around 13 or 14 times next year's earnings, a strong balance sheet and an "unassailable" market position.

With profits rising at around 25% a year, Paul tends to trade this share, buying on the dips and selling on the uplifts when possible.

4. Put option on FTSE 100

Understandably, Paul is concerned about Italy's sovereign debt, cuts in the country's debt rating, and rise in government bond yields.

He uses a put option on the FTSE 100 index as a hedge against the kind of economic meltdown the Eurozone crisis could still trigger, if the situation can't be contained.

5. French Connection

At number five, we get back to UK shares with fashion retailer French Connection (LSE: FCCN). Paul likes the balance sheet here. It's easy to see why. With its half-year results, the company had almost £31m in cash against a current market capitalisation of £71m, at the mid price of 74p.

The retailer's sales and profits have held up well in tough times and the founder retains a near 42% stake which Paul sees as a good sign.

If French Connection can crack the Chinese market as it is trying to via a joint venture, then it could become something of a "re-growth" story. If not, the cash offers a lot of downside protection. Take it out of the equation, and the company's P/E is 5.4 against its expected full-year earnings.

So what do you think? Is Paul on his way to more spectacular success, or is he doomed to failure with his current first team line-up? Let us know in the space below…

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Crawfish123 07 Nov 2011 , 10:08am

BEG is also one of my largest holdings for the reasons stated above, as well as some other great characteristics the business has. Although I’m currently sitting on a 33% loss for this holding, I’m still convinced that this company is significantly undervalued by the market. (Also large swings in price often occur with little trading activity and often conversely to the direction people are trading).
Latest statistics show a rise in insolvencies, which can only be good for this firm.
I agree with your comment on the div and would prefer to see it cut/halted to strengthen the balance sheet.

TMFFlaneur 07 Nov 2011 , 12:10pm

Bravo to Paulypilot for sharing, as ever.

I am curious as to why he choose to hedge European meltdown via the UK market, though. Would it not make more sense to focus on a European index -- say France's, given its financial exposure?

I guess it could be a relative valuation call, but I could see this whipsawing back to be honest whether Europe gets fixed (market rally) or goes down the tubes (UK safer haven).

shinygoldcar 07 Nov 2011 , 12:47pm

This is a good series of articles. I do hope more are on the way.

theRealGrinch 07 Nov 2011 , 4:44pm

I have worked in the same sector as Begbies (in fact I once interviewed with them in the 80s), The biggest concern is the dependence of these firms on the senior staff, which can easily walk. These smaller firms can be easily squeezed by the big 4 and a host of other smaller players.

The £51 million of intangibles £49 million under goodwill aka the amount overpaid and £26 million of borrowings is a serious concern given the market value. The debtors isnt broken down so its hard to know who owes what. Remember Vantis was sunk by placing too many eggs in one basket.

Also there are a few related transactions with Ric Traynor including some premise.

liesarenocomfort 08 Nov 2011 , 1:31pm

Yes, an interesting series.

A theme so far appears to be to

-largely ignore the FTSE
-run concentrated portfolios

This was also one of the tentative conclusions reached in Free Capital by Guy Thomas (well worth a read)in his study of isa millionaires.

Possibly also a recipe for losing a lot of money very fast though.

However, if you only have relatively small amounts to invest and a high risk tolerance....

David, for a bit of balance and to make us all feel less inadequate investing-wise, any chance you could find someone who was minted but lost it all on speculative stocks and is now really poor?

santori 08 Nov 2011 , 3:23pm

Pas impressione..but good luck PP.

globally 08 Nov 2011 , 9:54pm

Can't say Paulypilot's investments set the blood rushing through my veins. Probably I'm too conservative in my approach but I don't like companies such as Begbies with a large goodwill figure on the balance sheet and high borrowings. Not much in the way of defensive qualities in these very uncetain times. I prefer French Connection but, here again, the rag trade is extremely compitative and, like others in the retail sector, it will have to contend with the prospect of a world recession for some time to come. However, it does have good liquidity which should see it through the worst and might just attract a predator interested in expanding into that type of business. .Unfortunately, I have also had my share of bad investments based on supposedly low p/e's and high yields but happily a few winners which have more than made up for them so I've learnt my lesson the hard way, namely, if it looks too good to be true it often is and, secondly, don't be fooled by historical data. Even current trading can turn on a penny in today's volatile financial conditions as many well known companies have shown recently. And lastly, never overlook the lack of marketability particularly where small companies are concerned. Betting the house on them can leave you homeless in no time atall especially if you have gearing and the market turns unexpectedly. A few nasty calls and it's back to the Job Centre!.

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