Commentary

The strategy’s UK stocks performed particularly well in December following a landslide victory for the Conservative party in the General Election. Stagecoach (+17%) and Frasers (formerly Sports Direct (+36%)) were the best performers because they were considered most at risk from a Jeremy Corbyn-led Labour government. The good December helped produce an excellent year for the strategy with a total return of 36%, boosting the eight-year annualised return under the management of Harry Fraser to 11% in USD and 13% in GBP.

Oslo Bors and KAS Bank were acquired in the year. KAS Bank was bought for less than book value and Oslo Bors at a large discount to peers. While it is frustrating that both companies were acquired for less than we think was merited, we replaced these with positions in Trigano, the leader in European motor homes, and Warsaw Stock Exchange. We think both companies have excellent long-term prospects and were bought at attractive valuations. The investment logic for these two holdings can be found in the June newsletter.

Dart Group, the owner of Jet2 Holidays, was the standout performer in the year rising 122%. We have halved the position in the strategy, yet it is still one of the largest holdings due to its performance. The main driver of the stock’s performance was the collapse of Thomas Cook which in the short-term boosts pricing and profits; and in the long run will allow room for the company to grow. Dart Group is still attractively valued at 15x earnings with a large net cash position and great potential for growth.

The three worst performers in the year were Hallador Energy, Spirit Airlines and Zooplus. We expect Hallador Energy to generate more than its market capitalisation in free cash flow over the next three years. The position has fallen to 1.4% of the strategy so any further disappointment from here has limited impact on the overall strategy. Spirit Airlines remains the lowest cost airline in the highly concentrated US market and trades on just eight times earnings. The valuation of Zooplus, the online pet food and accessory retailer, is at an all-time low in relation to its sales despite continuing to grow sales by 14% and take market share.

The strategy started the year with average upside to our target prices of 85% which was the highest since we started tracking it. This has fallen to 57% following a strong year but remains relatively high compared to history. We believe it is well positioned for the year ahead with expected underlying revenue growth of over 10% and even faster earnings growth resulting in a valuation of just 12x earnings.