They say that every cloud has a silver lining and the death of my great-aunt Prudence was no different.
Her passing was a harrowing time for the family, but as her favourite family member there was most definitely a silver lining for me. Fifty two thousand of them to be precise.
That’s the number of pounds she left me in her will, with the explicit direction not to waste them. Had it not have been for that disclaimer, a fair few quid would’ve been earmarked for Bristol de Mai running in the Cheltenham Gold Cup this week.
With her wishes in mind, I started to ponder what to do with the cash. Holidays? No. A new car? No. Every idea that came to my head seemed to be the definition of ‘waste’.
But then it hit me. ‘I’m a financial journalist,’ I thought to myself. ‘Why not put some money into a few stocks?’
It seemed a sensible idea. When you tell people you’ve got tens of thousands tied up in equities, it sounds very sophisticated and, if you do some research and get a bit lucky, you can actually make money from it.
So that’s where the idea began. I’ve been investing for around six months now but the idea to blog about my first steps into the wide world of trading took a little while to hit me.
Yes, I am a bit slow on the uptake.
I quickly decided I was going to adopt the ‘value’ approach to investing. Side note, this always makes me laugh; has anybody ever ploughed their life savings into a company they don’t think is good value?
Anyway, the theory behind my strategy was to look for companies that were fundamentally sound but perhaps overlooked and/ or undervalued by the markets.
‘It worked for Warren Buffet, so it’ll work for me’ I confidently told myself as I opened up my first trading account.
Armed with Aunt Prudence’s (R.I.P.) cash, a limited knowledge of trading and Buffet’s mantra of ‘it’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price’, I decided I was ready.
That was the plan, but as famed military strategist Helmuth von Moltke (the elder) noted, no battle plan survives contact with the enemy and my very first investment went against every one of my founding principles.
I plumped for Fevertree Drinks PLC (LON:FEVR). As a quick disclaimer, another investment guru, Peter Lynch, also said “invest in what you know” and I have done a fair bit of research on FEVR’s products…
I’d never heard of the company until last summer when my boss told me how good their tonics were. He wasn’t wrong either; the Sicilian Lemonade is my favourite although I am partial to a Madagascan Cola every now and then as well.
After conversing with my mum (the ultimate vodka and tonic connoisseur), she gave the brand her firm approval and that was good enough for me really. Like a true businessman, I proclaimed: “A good product sells itself”.
The stock is massively overvalued based on current earnings, trading on a price-to-earnings (P/E) ratio of 99. To put that into perspective, others in Fevertree’s field, such as Diageo plc (LON:DGE) and Britvic PLC (LON:BVIC) trade at 24 and 15, respectively.
Essentially, the P/E ratio works out how many years it will take, based on current earnings per share, for a stock to repay itself. That means that, based on its current EPS, it will take 99 years for Fevertree to generate a total profit equal to my investment.
Obviously then, the market is baking in a lot of future growth in the company and so far (touch wood) it hasn’t disappointed.
On top of that, it’s listed on the volatile AIM market, which I swore I’d stay away from for a little while given its notoriety of losing (and, to be fair, making) people a lot of money.
There were some other factors that piqued my interest in Fevertree besides the fact it makes damned good mixers, though.
For a start, it’s still mainly UK-focused and the markets abroad represent a significant opportunity for the company, particularly the relatively untapped American market.
Secondly, Fevertree’s ascent has come at the right time when ‘craft’ drinks – alcoholic or otherwise – are all the rage and it’s a sector that’s really taking off. You can’t go to a pub in central London without some twenty-year-old with a terrible beard offering you ‘craft this’ or ‘craft that’.
Bloody crafty Cockneys.
After considering investing in Fevertree when the price was nearer to £7, I eventually took the plunge and put in £2,000 at £9.50 last September.
It’s now topped the £15 mark, meaning I’ve made a tidy £1,000 or so on my first ever foray into the markets. I’ve not taken any profits yet even though it’s gone past the point I was originally going to sell at.
It’s showing no signs of stopping and every statement seems to better the last, so I’ll hang on until the fizz starts to go flat.
I waited for six weeks or so to get a feel for how everything worked before I ploughed the next chunk of aunt Prudence’s money into my next company, AstraZeneca PLC (LON:AZN).
Astra had been struggling with its pipeline development over the past couple of years and a few of its bigger earning drugs had, or were about to, come off patent. Pfizer also made an offer of £55 per share back in 2014, which briefly served to inflate the company’s value, but Astra almost immediately knocked that offer back.
All three of those things worked together over the following months to suppress the share price, meaning that come November when I decided to put in £2,000, Astra was trading well below what I (and a few others) considered it to be worth.
One broker note stood out in particular to me. The analyst – who I won’t name – had for a long time been bearish on the company but even they admitted the price was too good to miss out on.
“With the stock down around 20% and at lows not seen since late 2013 in dollar terms, we can’t ignore that the risk/ reward going into a rich seam of catalysts in now strongly to the upside,” the analyst wrote.
One of those catalysts includes the MYSTIC phase III lung cancer trials which, according to the unnamed analyst, is far from likely to be successful but the share price back at the end of last year had essentially priced in a 0% chance of success.
That was the main reason I decided to go with Astra. If this trial pays off, I could be looking at another 50% payday for a few months’ “work”.
It’s done pretty well since then and is up 10% without too much happening as the market starts to correct its valuation.
Given that it has done so well and that MYSTIC is far from a certain success, I might take my profits from this before the results are in and not risk the money made so far. Keep an eye out in future columns for news on what I end up doing with AZN.
The final company I’ve put some of dear old Pru’s money into so far is the unloved telecoms giant BT Group PLC (LON:BT.A).
This was a bit of a risk given that the corruption in its Italian business could well have been the tip of the iceberg, although thankfully it seems it was an isolated incident.
I bought my shares the day after the news came out about the hit the company was having to take from the goings on in Italy. When the price slumped more than 20% to the £3 level, my initial reaction was, ‘this is a bit overdone, isn’t it?’
I drew that conclusion from the fact that the total write-down on the Italian business was £530mln but the best part of £7bn had been wiped from BT’s value.
This seemed a riskier investment to me than the other two given the uncertainty as to how widespread the accounting issues were, so I only invested £1,000.
The share price has recovered since I invested, albeit more slowly than I had originally anticipated and I’m currently up 10% or so.
This was only supposed to be a quick buy and sell and I’ve set a stop order for 355p, which is about 25p away.
Should it reach 355p by the middle of, say, April, I will have netted a tidy profit over a fairly short period of time.
So, that’s us all up to date on where how Operation: Investment Prudence is going so far. Over the coming weeks and months, you’ll come on board the trading train with myself and track my progress (or lack of) up the investment ladder.
We’ll explore everything from why I’ve bought a particular stock to what a stop loss is and any other issues or lessons I encounter along the way.
If nothing else, it should be good fun to watch me splash Prudence’s cash and, who knows, we all might learn something because of it.
Disclaimer: While persons living or dead in this article may or may not be entirely fictitious, the author has actually purchased shares in all three stocks mentioned – but not necessarily in the quantities indicated.