Time to cash in some chips?

I chose the title for today's blog as it relates to 32Red (TTR) the on line gaming company which is held in the Compound Income Scores portfolio and has been a stunning success since it was put into the portfolio on 1st October 2015 at 74p. Now regular readers may recall that I set this portfolio up to test the efficacy of the scores and also to test a more mechanical or automatic process against my own decisions and to overcome typical behavioural biases. Fighting these biases at the year end I resisted the temptation to implement some sales on valuation grounds to facilitate the running of winners and also given the fact that there were potentially quite a large number of trades on the scores themselves.

32 Red was therefore retained in the portfolio, despite starting to look somewhat expensive on some metrics, after it had risen to 117p at the year end. So yesterday I was sorely tempted to trade the shares for the portfolio as it hit 148p bid and therefore achieved a doubling in the share price since purchase in just over three months. This meant that it had grown to be over 9% of the portfolio which seems like a rather outsized position for such a small and relatively expensive stock. I say expensive as at that level it trades on over 33x historic earnings and dividend yield of just 1.6%. This does however drop on the back of strong forecast growth for the year to 31st December 2015 to a still full looking 22.8x and a yield of 1.8% and it also has an earnings yield of less than 5% so certainly expensive and in sell territory as far as my own book is concerned. However their broker Numis, who make the only forecasts out there, see their earnings progressing from this years 6.5p to 10.5p in 2016 and 13.2p in 2017 with the dividend seen rising from 2.6p to 2.9p followed by 3.2p. I note Numis had a price target of 160p and that the all time high was just above 170p way back in 2006 so I guess these levels could provide some technical resistance if it should carry on rising from here. If we accept the current year forecast for now and assume that they meet them, this would bring the rating (at 148p) down to a more reasonable 14x and bring the yield up to a just about acceptable 2% in my book. I also note that the directors hold fairly large stakes in this one and consequently the free float is only around 50%, which might help to explain the volatile share price. Obviously given the high historic rating, the strong forecast growth and the illiquid nature of the shares any disappointment or surprise on this front could lead to a sharp move in the price.

Thus having resisted the natural human urge to book profits early on this winner at the turn of the year, I now find myself sorely tempted to do the same again just 12 days later with the shares up another 31p or 26.5% and with the share price looking over bought again and the chart looking like it has gone exponential (see chart at the end). I therefore thought about halving this one and recycling the profits into rebalancing the portfolio by adding to the losers and now lower weighted stocks, Renishaw (RSW) 1777p, Schroders (SDR) 2648p and Utilitywise (UTW) 177p or a new holding of high scoring Qinetiq (QQ.) at 255p. However as this is supposed to be a largely mechanical quarterly process, interfering like this would go completely against that philosophy and also go against the old adage of running your winners and cutting your losers, although if I had added another name that might have helped with diversification.

So for now 32Red remains in the portfolio, but it will again be interesting to see how this pans out. However, it does highlight the fact that so far I have not articulated any risk / portfolio controls in terms of maximum position size etc. So with that in mind I shall hereby declare an upside limit of 10% for an individual stock which ordinarily would allow for the doubling of a share if the rest of the portfolio remained unchanged. Thus if this one or any other stock should cross that threshold then I reserve the right to do an intra quarter re-balancing.