UK Edition
Diversification is a crucial part of investing. After all, no investor can realistically expect to enjoy success with every purchase.
However, it is even more important for a portfolio that comprises smaller companies such as those quoted on Aim. Their lack of size and scale can mean they are more susceptible to economic headwinds and this is often reflected in greater share price volatility than is seen with larger stocks.
This column’s Inheritance Tax Portfolio is testament to the value provided by diversification. While we have selected some stocks that have surged higher and generated large profits for the portfolio, others have fallen heavily since purchase.
Volex is among the former. It has generated a capital return of 198pc since it was added to our portfolio in August 2018. The company, a manufacturer of cable assemblies for applications including electric vehicles and medical equipment, has improved its financial performance over recent years.
Indeed, its latest trading update for the 2022 financial year stated that it now expected sales and profits to be ahead of investors’ previous expectations.
Encouragingly, the company has been able to pass rising input costs through to customers during this era of high inflation. It has also overcome supply chain challenges in recent months, while making four acquisitions during its latest financial year to improve its long-term growth prospects.
These acquisitions were made possible by its sound financial position (net gearing was just 20pc in October 2021), which enabled the company to enlarge its debt facilities in February.
Volex’s latest trading update highlighted the growth potential of the EV sector, where its revenues almost doubled relative to the previous year. The global take-up of EVs, widely expected to continue for many years, could act as a major catalyst for its financial performance.
Despite this, its valuation suggests that a margin of safety is still on offer. The shares currently trade at an adjusted price-to-earnings ratio of just 10.1, which indicates that investors have adequately factored in the threat posed by an increasingly likely global economic slowdown. Clearly, a weakening economic outlook could hold back the shares in the short run.
However, Volex’s sound financial position, solid strategy and long-term growth potential mean it retains its place in our IHT Portfolio. Hold.
Questor says: hold
Ticker: VLX
Share price at close: 246.5p
Update: Naked Wines
Unfortunately, our holding in Naked Wines has proved far less successful. Shares in the online wine subscription business have recorded a 21pc decline since their addition to our portfolio in June 2018. The company experienced disappointing sales growth in the first half of the 2022 financial year, which led to a downgrade in its sales expectations for the full year.
According to its latest trading update, the revised revenue figure has been met. However, the company now faces increasingly difficult operating conditions as high inflation prompts a cost-of-living crisis. As wine purchases are viewed by many consumers as discretionary spending, retention rates among existing customers and new customer acquisition numbers could decline.
Naked Wines does have the financial means to survive a period of financial difficulty. It has net cash of £54m, while many of its costs are focused on acquiring new customers and can temporarily be reduced if required.
In the long run, the company’s growth potential remains significant. Its digital focus means it is well placed to benefit from long-standing retail trends towards those online avenues accelerated by the pandemic.
It also has a large total addressable market thanks to its US focus, while its success in growing market share and a 25pc increase in member numbers in the first half of the 2022 financial year highlight the appeal of its business model to consumers.
In Questor’s view, Naked Wines is unlikely to enjoy a major share price recovery in the short run as a result of the economic backdrop. However, its long-term investment potential qualifies it for a place in a diversified inheritance tax portfolio.
Questor says: hold
Ticker: WINE
Share price at close: 362.6p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.