We had quite a bit of activity in the markets – and across our portfolios – in October. New stock picker James Coffey joined us to focus on the FTSE 350 growth market. The Israeli war with Hamas kicked off, which had many traders worried about potential escalation between Iran and Israel in the Middle East.

On the upside, it began to look as if central banks had begun to assert some level of control over inflation, with inflation rates dropping significantly in the Eurozone in October in particular. This heralds the prospect of a freeze on further hikes.

A large number of big investors are still sitting on the side lines of the equities market. Feedback received by The Armchair Trader indicates that they are waiting on some signs of a return of confidence to begin picking up on some once in a generation value opportunities in the market. Value fund managers are sitting tight on their existing positions and will make big bucks once the market rallies, it just requires a modicum of patience.

Shin Maint Holdings

Japanese-listed Shin Maint Holdings popped up on our screens last month as a very high quality small cap opportunity, delivering maintenance services to retail companies like shops and restaurants. Founded in 1999, the stock is trading at close to a five year high, but has some solid value characteristics. It is also a continuous and stable dividend payer. It most recently reported FY 2023 sales up 18% with operating income rising 16%. Chairman Hideo Naito said he was targeting a big market for growth, and sales from the company are reflecting this. We added Shin Maint to our venture portfolio, largely due to its small size.

Barratt Developments (Short)

A short position was taken on Barratt Developments largely due to the tough trading environment for the entire UK property sector. Short term the sector is facing considerable headwinds. New buyers are shying away from the housing sector, largely due to the high borrowing rates. This in turn is forcing some mortgage lenders to consider cutting the rates on first time buyer mortgages, but they are finding few takers. The Bank of England is itself seemingly keeping rates on hold now, but we don’t foresee UK property emerging from this funk for several months yet. Barratt Developments as one of the leading UK housebuilders, will be feeling the pressure and we anticipate some more poor numbers out of the company.

Volution Group

James Coffey joins us on the stock picking panel with his first pick from the FTSE 350 universe, namely Volution, which he sees as sitting as the confluence of demands for more energy efficiency and safer workplaces. Volution was listed in the UK as a mid-sized manufacturer of ventilation systems, having previously spun off its cable division. It has acquired 21 businesses in the sector, including in Europe and Australia and has also started expanding into the heating systems area. In its last set of results Volution reported a 21.3% operating margin despite the supply chain disruptions it was facing. Volution investors also have the prospect of a Labour election win next year in the UK to look forward to, which in turn could lead to more government demand for better ventilation, including in social housing.

Skechers

Raine Lahtinen made his second US stock pick in October, and this time it is shoe maker Skechers, which he considers to still be relatively cheap for what you are getting. Skechers was trading at a PE of x16 times in October, against Nike which was trading at x27. Skechers’ gross profit margin has been 47% over the last five years. Raine reckons a PE of x20+ is a realistic ambition for Skechers stock. Skechers still enjoys solid brand recognition, especially in its core US market. It has a beta of 1.37 (at time of our report publication in October) with a daily share volume of around 1.7m shares changing hands.

Natural Gas

Approaching the colder weather in the northern hemisphere, we added a long natural gas trade. Gas has been looking relatively cheap, largely the result of governments stocking up in response to the disruption to gas exports from Russia caused by the Ukraine war. Gas has been starting to trade up again as consumption in Europe and North America has picked up. While prices remained low going into October, the market is looking tighter again, and we have been some short term spikes caused by news of relatively minor supply disruptions. Traders seem ready to push the buy button on any geopolitical news. I am anticipating quite a few hedge funds are also on the long side of this trade. We went with an ETF, the United States Natural Gas Fund, for our gas exposure this time around.

Long Bonds (US Treasuries – short term)

We took a long bonds position in our short term tactical trading portfolio in October, as the market began to anticipate that we are nearing peak US rates. The bond market looks as if it is anticipating some level of stagflation in the US – a combination of inflation and a potential recession. Thus far the US has managed to side step a recession and seems to be reigning in inflation gradually. Institutional money has been flowing steadily into ETFs based off US Treasuries. Fund managers we spoke to in October said they thought US government bond markets had reach some form of nadir. It will be interesting to see how this bet plays out. We used the iShares SGOV short term Treasury Bond ETF for this trade, which tracks the 0-3 month US Treasury market.

Sold: Sosander, Paragon Banking Group, Kenmare Resources

So how are our picks getting on?

James Coffey’s FTSE 350 portfolio

*Prices as of close of play on 31 October 2023

Raine Lahtinen’s US stocks portfolio

*Prices as of close of play on 31 October 2023

Tactical trading portfolio

These are shorter term equity and commodity trades which we can see playing out within one to three months. We will sometimes keep these on longer if the trade is still quite range bound but we are anticipating further upside. These trades have the tightest risk parameters.

*Prices as of close of play on 31 October 2023

Longer term buy and hold portfolio

These are positions where we see a longer term growth scenario, usually in the small to mid cap space, but sometimes larger companies. We will typically be keeping these stocks on the list for at least six months and often longer. Consequently our risk tolerance is higher for these positions than for the trading list.

*Prices as of close of play on 31 October 2023

Venture portfolio

These are companies which we see as having long term and considerable growth prospects. Due to their size and the nature of the business they are in, we feel that our normal risk management constraints should not be applied to these stocks.

*Prices as of close of play on 31 October 2023