As the world becomes increasingly dangerous, we must adjust our investment to suit the prevailing circumstances. Where to invest as Trump defends fortress America, new penal tariffs disturb the order of world trade, oil prices rise, political instability prevails in the UK, Europe’s older economies look seriously stressed, continual turmoil and threats of war in the Middle East persist and cyber attacks loom?
My current answer is to buy stocks which have good international exposure, growth, underpinned by technology, and oils. I am avoiding utilities, high street retailers and anything without either strong overseas markets or powerful developing technology. This makes my stop loss rule of paramount importance - we are at a potentially very dangerous point in the record 10-year bull market.
Last week I attended a monthly stock pickers’ lunch and came away with a few ideas which I immediately bought.
I bought SimplyBiz (SBIZ), the largest provider of outsourced regulatory and business support services to the financial services market, supporting over 25% of UK financial advisers. Floated last April, with a projected revenue of £51 million, profits of £10 million, a price-earning to growth ratio of 0.7, a price-earnings (PE) ratio of 15.6 and yielding 2.1%. Monthly subscriptions are 90% recurring revenue, operating from seven UK locations with 440 employees.
Sumo (SUMO) is an independent developer of video games, providing both turnkey and co-development solutions from initial concept to production and development. It floated last December with a projected revenue of £36 million, profits of £9 million and a PE ratio of 35. High debt detracts a bit, but they are actively earnings enhancing, acquisitive and organic sales are up 36%. It’s in a strong growth sector with around 50% revenue from outside UK.
In the booming video games market, I also like Team17 (TM17), floated six months ago, trading strongly with revenues up 50% and £7 million in cash. It has launched eight new games, but a current PE ratio of 70 leaves a bit to prove. I will hold back on that for now but well worth watching.
I’ve been buying more oil stocks in the belief that the price will continue to rise. From a peak of $141 per barrel in June 2008, it fell to $27 in 2016, but now back at over $80 and looking strong. The world consumes about 100 million barrels a day of which OPEC (did) produce around 25 to 30 and the US, Saudi and Russia between nine and 11 each. Major consumers are the US at 18 million, the European Union and China both about 15. From these statistics the US embargo on Iran has taken out 2.5 million (or are they still exporting to China?), Middle East wars have much reduced Iraq’s previous four million and Libya and Venezuela are much diminished.
Meanwhile the global economy is strong, with the International Monetary Fund forecasting 3.7% growth this year, and an extraordinary alliance between Russian president Vladimir Putin and Saudi Arabia’s crown prince Mohamed bin Salman looks set to keep the price up at current levels and above.
So I’ve bought more oils, adding to those already in my portfolio. I admit some bias here following my eight years with North Sea rigs and nine years with the Saudis – inevitably it is a sector that I follow closely.
Soco (SIA) has not enjoyed good times in the last three years but now looks to becoming a useful producer in Vietnam. Brokers forecast revenue of $188 million in 2018 for a profit of $57 million giving a PE ratio of seven and a predicted yield of 6%. Last week it announced the sale of Angolan assets for $5 million cash – not much, but it does discard an unwanted distraction from the main operations in Asia and the Middle East.
Rockrose (RRE), is an acquirer of UK onshore and offshore oil and gas assets. The rationale of consolidating ‘small’ proven assets that may be ignored by the giants of the sector is their relevance to a small company For example, BP (BP) has a market cap £119 billion so would need a very large field to have any interest compared to a company less than one thousandth of its size, like Rockrose.
It has useful cash and forecasts for 2018 revenues of £120 million and profits of £27 million, giving a PE ratio of 5.1.
Diversified Gas & Oil (DGOC) has amassed an impressive portfolio of gas and oil assets; all low-cost, conventional production from a long-life proven reserve base, becoming the largest producer on the Alternative Investment Market after its purchase of Alliance Petroleum.
The company's operations are based in Pennsylvania, Ohio and West Virginia (the Appalachian Basin) and cover part of the largest and oldest hydrocarbon producing field in the US.
Projected numbers for 2018/19 are revenues of $159 million and $276 million, profits of $24 million and $86 million, a PE ratio 18/10 and of yield 6.5% and 7.2%. Impressive growth, but the company has a good history of achieving with its growing regional footprint, economies of scale and operating efficiencies.
All the stocks mentioned here are not without risk, especially in this dangerous world. Cut losses at 20% and run profits. If you’d followed this rule through my years of contributing to these columns, some stocks would be long gone but others are up multiples of the original investment.
Beware, the era of easy money is ending and the upshot will be nasty. If you hold any stock which you doubt, sell it. Keep your core money with a proven manager to watch it 24/7, but have some satisfaction and fun with these smaller volatile shares.
David Kempton is non-executive chairman of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.