A change to the holding pattern

A performance of 1.5 per cent halfway through 2011 may not seem too impressive, even though the broad market is down. However, I am less worried about the price performance of my portfolio than of the operational performance of the companies within it. Here I remain sanguine, because across my holdings and indeed much of the market, there is a compression of price-earnings (PE) ratios. The lower the prospective PE for a stock, the more comfortable I am about long-term good value, especially if there is a good dividend yield to keep returns bubbling along in the meantime. The overall yield on my portfolio is 4.25 per cent.

There are all sorts of reasons why the market may not grace a growing and profitable company with a better share price. Take Indian film company Eros, part of my portfolio since March 2009, but which has fallen 30 per cent since October. This company is highly profitable and sitting on a gold mine of content. Upbeat preliminary results at the end of May showed a 12 per cent rise in pre-tax profits and a 30 per cent fall in debt. This was followed by news last week that the film Ready had taken $26m (£16m) worldwide in its first week, which is quite significant compared to the company’s overall annual revenues of $165m. Upgraded forecasts put Eros on a tiny 2012 PE of 7.

AIM-traded Eros seems to be suffering from the investment doubts about India as a whole, because of poor inflows of investment since 2008, bureacracy holding up major infrastructure projects, and difficulties in the Indian mutual fund industry. None of this, however, has any bearing on a booming film industry.

The same thing seems to be happening to Apple in the US. While investors seem to be happy to pay astronomical amounts at IPO for unprofitable social networking ideas, one company really is making a vast amount from devices and apps that speed the social networking revolution. But Apple has seen its share price fall by 12 per cent since February, despite average earnings per share (EPS) growth over the last five years of almost 60 per cent. The firm is now trading on a forward PE of 10.6 times 2012 estimates, and that’s before you factor in the $51 billion of cash, $55 per share, growing by $3 billion per quarter. Good news will out, of course, and I’m patient enough to stay the course.

One of the great things about investing is that when you find a series of holdings that you are comfortable with, the rate of turnover in the portfolio falls. That allows you to question the idea that the grass is always greener with another share, and saves transaction charges too. The average weighted holding period of my own shares is now getting on for 18 months, compared to less than a year back in 2006.

Earlier this month, I was invited to review a portfolio for a local share club. This club had produced an excellent performance over the last six years, and the holding turnover had fallen. There had been some good stockpicking, particularly by the women who made up half the club membership. The male stockpickers had tended to be more speculative, and though some were good, there were still plenty of failed investments that were worth just a few hundred pounds after falls of 50-90 per cent. Their drop in turnover, it seemed, had been as manifest in failing to remove losing stocks as in being less frenetic in buying. There’s a lesson in there somewhere.

Nick Louth is an active private investor, writing about his own investments. He may have a financial interest in any of companies, securities and trading strategies mentioned. For portfolio reviews visit www.nicklouth.com.