Page 31 - DIY Investor Magazine | Issue 32

‘WE EXPECT A FURTHER REBOUND IN THE ECONOMY THAT SHOULD BENEFIT THESE AND OTHER MID-CAP HOLDINGS IN OUR PORTFOLIO’
Miniature wargames maker Games Workshop, our second- largest holding at 4.0% (as of 31 October 2021), has also been growing rapidly, has strong margins (43% operating margin in 2021) and returns all surplus cash to shareholders.
Despite recent cost pressures, its top line has still been growing, thanks in part to the relaunch of the Warhammer 40,000 franchise (the most popular miniature wargame in the world). It also has huge intellectual property potential; Games Workshop IP features in major video game releases and it
is starting to produce and monetise its own animated video content.
Pets at Home (3.6% of the portfolio as of 31 October 2021) was originally a holding after delivering impressive like-for-like store sales growth, having reset prices to be competitive both offline and online. Other factors have since driven performance.
A data-led view of customer lifetime value is enabling the business to target a long duration of sales (food, accessories, vet services and even grooming) over the life of a pet. Its
Pets at Home Vet Group joint venture partnerships are set to become highly cash generative. Finally, an increase in the UK pet population during Covid-19 is providing a structurally larger market.
Plenty of uncertainty remains as to how the pandemic endgame will play out with Omicrom’s emergence as a ‘variant of concern’ impacting sentiment at the time of writing. Concerns over supply chains, inflation and the prospect of rising interest rates will no doubt continue to have an impact.
Our response is to seek out and hold companies that we believe can weather these issues more successfully than their peers, for example by being a key supplier (Watches of Switzerland and Rolex, or JD Sports and Nike, for example).
Despite the recent difficult backdrop such stocks have continued to see strong earnings upgrades, with scope for profit margin expansion ahead.
As the UK edges closer to normality post-pandemic and post- Brexit, we expect a further rebound in the economy that should benefit these and other mid-cap holdings in our portfolio. But active, high-conviction stock selection remains key.
1 Source: JPMorgan Mid Cap Annual report as at June 2021 annual report
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DIY Investor Magazine · Feb 2022