5 Shares Held By A Top Fool.co.uk Investor

Published in Investing on 25 June 2012

Selections include French Connection and Trinity Mirror.

Paulypilot -- real name Paul Scott -- is one of the most popular 'Fools' of all time and the eponymous founder of Paulypilot's Pub -- Share Ideas discussion board on www.boards.fool.co.uk.

He has enjoyed spectacular successes and failures, though not in equal measure. Thankfully, Paul's big successes have enabled him to make a living for the past decade from the markets, but it's always been a roller-coaster ride.

Paul shared his portfolio details with us last November, since when he's decided to change his overall approach, saying:

"I'm focusing much more on pure value investing, with a long-term horizon these days. It's a painful time to be doing that, as many shares seem in permanent downtrends, but I believe their value will come through in the end. We've seen before how prices can move up very rapidly once they start an up-trend."

Paul added:

"And it can be impossible to buy in any size once the good news starts to flow, so I would rather buy when the tide is out, and potentially take some short-term losses. But this is mitigated by re-checking my analysis and then averaging down. Providing the balance sheet is strong, and there is no risk of insolvency, averaging down in the right shares can be a very good strategy. But it can also be lethal if you average down on stocks where your analysis is wrong, as I found to my cost with shares such as Invox and Accident Exchange in the past."

The macro view

Paul's macro view is reasonably sanguine. He believes the Euro crisis will be sorted out, because it has to -- and he sees a disorderly collapse as "unthinkable". Paul reckons: 

"The Germans only act when staring disaster in the face, due to domestic political considerations. The solution has to be some form of money printing, which is now the lesser of two evils, and slightly elevated inflation will erode excessive debt levels over time. The UK should be actively planning to leave the EU, because it is inexorably heading towards federalism, and this is not politically acceptable to the UK. As a large net importer (£4 billionn per month deficit with the rest of the EU), the UK is in a strong position to negotiate a largely free-trade deal outside of the EU."

"So the crisis is coming back in waves, but this is creating deep value in small caps, as it seems to have shattered investor confidence. I see that as an opportunity, and that purchases made at today's prices will look very cheap indeed once the economy is recovering, which it will."

So what are those purchases exactly? Well here's Paul's current line-up of investment favourites.

French Connection

Paul managed to side-step the recent profits warning at French Connection (LSE: FCCN), selling at 42p and buying back in at 22p. He acknowledges the retailer's trading is dire in the UK and Europe, but points out that other (highly profitable) parts of the business, such as the US, Asia, wholesale and the brand-licensing division, are trading well.

Mixing the latest information into the prior-year figures, Paul calculates a group loss this year of about £2 million -- despite the UK/Europe retail division likely to generate a loss of £17 million. In other words, a problem division making £17 million losses is hiding a successful, growing business making a £15 million profit. Paul adds:

"As the group's UK estate comprises of only 70 relatively small shop leases, this is a manageable problem, and over time the loss-making shops will be disposed of, while the company owns a wholesale debtor book that is roughly double the market cap, with no corresponding debt. So the current valuation of £22.3m at 23.25p per share is a tremendous opportunity in the longer term. But in the short term the next set of interims (to 31 July) are going to look grim, as it's a second-half seasonally weighted business -- so expect a thumping loss to be reported."

Begbies Traynor

Corporate insolvency and recovery specialist Begbies Traynor (LSE: BEG) is still second on Paul's list. With the shares at 28.4p, he likes the P/E of around 4.7 and yield of close to 8%, saying "the debt is unsecured and part of the normal way insolvency practices work. It's the only pure-play insolvency accountancy on the market."

Indigo Vision

Next up is Paul's long-time favourite, IP video security company Indigo Vision (LSE: IND). "It's a difficult one to value between results." he says. "A strong set of results could easily double the share price, and there's a highly-motivated new chief exec -- the former finance director. So I have high hopes, and am waiting for a trading statement due in early August and results due in early September." The shares are currently 287.5p.

Trinity Mirror

Paul sees newspaper group Trinity Mirror (LSE: TNI) as the cheapest share on the market, with a current year forecast P/E of just under one at 26.75p! 

"Yes it's a declining sector, but it's still hugely profitable; the Mirror newspaper makes an operating profit margin of 16%, and even the regionals achieve 10%-plus."

"The balance sheet isn't understood by the market. Net debt is reducing rapidly, should be fully repaid in 2-3 years -- and it is all unsecured, plus there is plenty headroom on the covenants. At that point, the company will be a cash cow able to pay potentially large dividends again."

"The costs are mainly variable, so it isn't operationally geared and the group has been able to maintain very high levels of profitability. The company has also confirmed profit guidance for 2012. The pension fund deficit is a problem, but is less than two years' EBITDA, so fears are exaggerated."

Paul thinks fears associated with the Leveson enquiry and phone-hacking are receding and that the market seems to be ignoring the company's £177 million of freehold property, which doesn't seem to have been re-valued. Paul says: "These are mainly town and city-centre printing sites, which will be redeveloped in time. Over time, Trinity will morph from a newspaper group into a property company."

Home Retail Group

Argos and Homebase owner Home Retail (LSE: HOME) is next. Paul says: 

"Trading has bottomed out; while Homebase sales were down 8%, this was clearly weather related, and about half the shortfall was recouped from a rise in gross margins, by my calculations."

"The excitement is not the P/E, which is around 13 on current year forecasts, it's the balance sheet. You effectively get the business itself for free, because Home Retail had an average cash balance throughout the year (lower at the year-end) of £320 million. It also had an in-house store-card operation with net debtors (after bad-debt provisions) of around £450 million, with no debt on the creditor side at all -- just trade creditors and provisions for onerous leases, for example."

"So the net cash and debtor book equals the entire market cap of £674 million at a 82.8p share price. Should Home Retail wish to do so, there is an opportunity to monetise the debtor book."

"The pension fund was in balance, but a deficit of around £100 million arose in 2011 due again to the lower discount rate. However, this is offset by roughly the same amount of freehold property owned, so doesn't worry me."

"Argos is the UK's second largest internet retailer, and 41% of its sales are now via the internet. It has also seen threefold growth in sales via mobile phones, so it is rapidly becoming an internet retailer that also happens to have some shops The USP is that you can 'click and collect' the same day, which can often be a godsend when you need something quickly. It is also a big advantage over other internet retailers at Christmas, avoiding postal delays."

"Meanwhile, Homebase is benefiting from the failure of Focus DIY, so now only has two main rivals -- B&Q and Wickes."

Paul has shared his thoughts regarding Home Retail in detail on his blog site; a discussion that is continuing Paulypilot's Pub.

Your comments, please

So what do you think of Paul's current line-up? Please let me know in the comment box below.

(By the way, if you harbour ambitions to join Paul among the ranks of legendary Fool private investors, this special free report -- "Ten Steps To Making A Million In The Market" -- may well help you on your way! The report is for ambitious investors only.)

He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

Further Motley Fool investment opportunities:

> David owns shares in French Connection.

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Comments

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QuantumDealer 27 Jun 2012 , 12:00am

How does one become "A Top Fool.co.uk Investor'? What are the criteria? Surely holding French Connection would disqualify him?!!

Dozey1 28 Jun 2012 , 6:16pm

Wow! So Paul Scott "...managed to side-step the recent profits warning at French Connection (LSE: FCCN), selling at 42p and buying back in at 22p". What a brilliant coup. Oh, by the way, what did he pay for them in the first place? You forgot to say. I managed to avoid the fall as well, by steering clear of them entirely.
Did get caught by Trinity Mirror but baled out earlier this year at 50% above the current price.
Made a good turn on Indigovision some years ago, since when it's been the proverbial dog, but you never know I suppose.
Thanks for the article.

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