‘Millions saw the apple fall, but Newton was the one who asked why’ – Bernard Baruch

Financial markets have been very busy over the last couple of weeks but one of the biggest stories has been the fall in the value of the shares of Apple (APPL) – the world’s largest company by market capitalisation.

At a certain level Apple’s recent results appeared fine, with revenues up 20% year-on-year, earnings per share up even more than this and over US$23 billion returned to shareholders during the three months ending 30th September.  However – as we have talked about many times – the key to success in the stock market is usually not to be enthusiastic about a company which is already highly loved.  There were enough hints in the numbers – including a poor decision to halt updates on unit sales and average selling price information on products such as the iPhone and iMac – which disappointed investors.  Our target levels where Apple shares become more interesting to us remains the current share price…hence we are not buying yet.

This is typical of the way we undertake the management of the Dynamic Opportunities Fund.  No company – no matter how large – is a ‘must own’.  Any stock must go through our various processes including original work company qualitative and quantitative analysis, an understanding of how the macroeconomic backdrop may impact, stress test work to appraise if there is a good probability we can make a double-digit gain and – very importantly – a final check where we invest only when perception and reality are differentiated i.e. a gap has opened up between market perception and valuation reality.  Recent market movements have identified a number of interesting new purchase candidates and analytical appraisal work is continuing on these, as well as continuing to review information from the ongoing global corporate earnings season.

By contrast we have actually sold shares in a couple of positions in recent days.  Dunelm (DNLM) may dominate the home furnishings market but being a UK retailer with significant physical store sales and space, it had fallen markedly out-of-favour in recent years.  We noted a 5%+ dividend yield covered by free cash flow, a lowly indebted balance sheet and a strong market position and bought stock earlier this year.  The recent bounce back of the shares following a couple of solid trading updates led to an opportunity to take some solid profits. This is now the twenty-fifth position that has been sold either fully or partially since the inception of the Dynamic Opportunities Fund.  The average gain from these realisations still rests at around 10%.

We also took the opportunity to top-slice the portfolio’s position in the UK telecommunications company BT Group (BT/A) during the last week, following a sharp bounce after their latest quarterly numbers.