Disclosure: I have no financial interest in companies mentioned in this article.
In June 2014, I bought shares in interdealer broker Tullett Prebon Plc (LON:TLPR).
At the time, the firm’s stock was languishing well below 300p — I paid 282p for my shares. This put the stock on a forecast P/E of around 8, from memory, with a prospective yield of about 6%.
These seemed attractive value credentials, and a closer look at the firm did not reveal any major problems, other than somewhat languid performance. This appeared to be caused by two factors:
- A lack of market volatility (which stimulates trading)
- A technological shift away from voice broking and towards electronic trading in many of the firm’s markets
I was also encouraged by the acquisition of oil broker PVM, which was announced shortly before I made my purchase. All in all, it seemed like a good company suffering from poor sentiment, which was made worse by the impending departure of its charismatic CEO, Terry Smith.
That’s the buy, what about the sell?
Tullett shares now change hands for around 400p, having risen strongly over the last six months.
Earlier this week I decided to sell my holding, for a net gain of 42% in one year. The question is whether I sold too soon.
Tullett is still exhibiting strong momentum, and you could argue that it may have further to run. However, I’m a value investor, and my purchase was based on the firm’s shares being unwarrantedly cheap. That’s no longer the case.
While its current P/E of about 12 is hardly overpriced, the yield has dropped to 4.2%. Tullett no longer looks all that much cheaper than peer ICAP, when that firm’s superior operating margin (9.3% vs 6.8% for Tullett) and stronger forecast growth are taken into account.
It’s entirely possible that I sold my Tullett shares too soon — it’s a classic problem for value investors, who tend to buy too soon and sell too soon.
However, I’m happy to lock in a 42% gain in one year and perhaps leave something on the table for the next person. Tullett is only expected to deliver earnings per share growth of about 5% this year and in 2016, which doesn’t seem likely to prompt a further re-rating of the shares, in my view.
Taking a wider view, it seems inevitable to me that all but the most specialist voice broking services will gradually be replaced by electronic trading. There is a useful slide in the 2014 analysts’ presentation which illustrates how Tullett sees the market changing in this direction.
Although Tullett’s yield remains attractive, I’m running this portfolio to try and maximise total returns, with a bias towards capital gains. So I sold.
Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.