5 Tips to Protect Your Portfolio Against the Tech Wreck

Our Portfolio Manager - The Idle Speculator, has a famously conservative approach to managing our Small Cap Portfolio, which has fortunately left us in a very good position. The portfolio has performed significantly better than the market, the S&P/ASX Small Ordinaries Index and now we’re in a position to deploy our hefty 27% of cash over the next few months. Today, we're giving you 5 top tips to improve your portfolio.

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Picking Winners

The ability to select winners, and to cull your losers, will critically determine the returns you can hope for over the next two years or so.

Overall, our portfolio is down just under 11% already this calendar year, which is superior to the benchmark, the S&P/ ASX Small Ords Index, down 14%, The chart shows how flat the Index was for years at the beginning of the last decade.

Stock picking matters more when the market is not going in one direction. Don’t forget, it has already been more than a year since the US meme stock frenzy in early 2021, so the speculative unwind might be closer to the end than the beginning. It’s time to go hunting!

But how do we manage this portfolio?

1. Diversification Works!

Our Portfolio is diversified across industries, customers, balance sheet strengths and dividends (which half pay). Importantly, most companies we own are profitable.

Some of our larger positions, namely ship builder Austal (ASB), aluminium products producer Capral (CAA) and the gold miner Evolution Mining (EVN) have held up reasonably well, being just off their 2021 highs, reflecting the quality of their businesses, and strength of their balance sheets. While the stocks have not fallen, they have not gone up, and have been cheap relative to earnings and their strategic position. EVN is the largest domestic gold miner, ASB is a significant defence shipbuilder in the US and Australia at a time of rising tensions in the South Pacific, and CAA has a substantial market share in aluminium end markets, a solid balance sheet, and customers across industrial and commercial markets. Boom Logistics (BOL) should benefit from the healthy cash flow from commercial and government customers.

All these companies should have pricing power to pass on inflation.

Some of our bigger positions are not performing thus far, but we remain optimistic. Patience gets rewarded when companies generate consistent growth over long periods of time. Shade cloth manufacturer Gale Pacific (GAP) fell before the beginning of 2022, but remains cheap relative to earnings, with a dividend yield of over 5%. Two telecommunications stocks have delivered about half the portfolio losses in the year to date. One is Symbio (SYM), previously MNF, where a growth valuation has been slashed, but forecasts remain intact, with potential FY23 upside from Asian market expansion. The other, fibre optic specialist, Superloop (SLC) has also drifted with little news since selling its HK and Singapore assets, but its strong balance sheet should be an advantage.

2. Tech Wreck Provides Opportunities For The Brave

We were early nibbling away at some higher risk technology stocks, but the key is that we haven’t gone in too hard, so we have firepower to invest and reduce our average entry price.

Market valuations have fallen substantially. But one stock in the pack, is in the black and is a good example of averaging your entry price.

While we are down more than 60% on our first purchase at 73 cents, topping up at around 20 cents and below has left us with an average price of 26 cents against the current stock price of just under 30 cents, valuing the company with a global presence at less than $200m.

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3. Don't Go In Hard!

Two lessons for managing your portfolio:

1. As it was very speculative, SPT was the second smallest of the five investments, although it is now a bigger holding than any of the others in the group! This highlights that the amount we have invested in four other tech stocks we own does not currently reflect our view of the levels of risk in each, and new transactions will be weighted to address this.

2. The only reason we have seen a positive outcome (at the moment) from SPT is because we bought more stock for lower prices.

4. Utilising Dollar Cost Averaging

Dollar cost averaging works best when you keep the dollars constant, and the number of shares you buy increases. SPT fell almost continuously through $0.20 and into the teens without giving any indication when it would stop. Once it reached the bottom of its range, it hung around for a few days and then bounced back with a ferocity that could not have been easily predicted, and once a move starts, it is hard to know when to jump on.

5. The Slowly-Slowly Approach is Best

While both KGN and DTC have disappointed operationally, in both cases the business performance has not been unforseeable, but the valuation implications in this market have been dramatic.

We prefer to slowly step into a falling stock, leaving us with some skin in the game, with the aim of being positioned before a recovery hopefully appears. Having established our position on the way down, slowly and gently, the Portfolio enjoyed a sharp upward price movement when we get it right, in SPT’s case almost a hundred percent over a few days, without needing to decide in a moment whether such price movements should be chased, or missed and regretted. In the main, we have avoided buying at the peaky tops, but there is always one, and DTC has been our nemesis this time.

You'll also be interested in our research on ASX Gold stocks:

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Learn more about the mining sector and how to invest in this area:

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Richard Hemming

Richard Hemming

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Richard is a leading market commentator and expert on ASX Small Caps

www.undertheradarreport.com.au provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

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