Watchlist Strategy & Examples

A balanced blend of fundamental metrics and market insights to trigger alerts, emphasizing prudent risk management and avoiding overpriced investments

Best practices for better investing.

A substantial part of my endeavors centers on the judicious stewardship of my portfolio, where the art of selecting equities, managing risks, and crafting an astute sales strategy is paramount. The careful curation of market opportunities lies at the heart of my investment philosophy. While diligent research into emerging trends and identifying promising outperformers is an ongoing pursuit, the opportune moment to seize such investments is seldom found with perfect precision – a challenge I continue to grapple with.

My watchlist, a reflection of disciplined patience, comprises three distinct categories: emerging enterprises with untapped potential, market leaders awaiting a more attractive entry point, and special situations warranting close observation.

Through the prudent use of market intelligence and company updates, I employ a series of meticulously defined metrics that trigger alerts when certain thresholds are met. These triggers may stem from shifts in price, fundamental performance, or significant developments within regulatory filings and corporate announcements.

Over time, this watchlist, once a modest collection of opportunities, has grown into a comprehensive assembly of over 60 names, each strategically positioned within its respective ‘camp’. It is this disciplined approach that has allowed my portfolio to evolve with patience and foresight, remaining steadfast in pursuit of enduring value.

Early-Stage Equities

Early-stage Equities are businesses that are low revenue, small/micro-cap, and/or pre-profit, but which present an interesting ‘story’ which I wish to monitor. I usually find these opportunities through networking events and am impressed by the potential but am uncomfortable taking a risk on such an unproven name. Such businesses can include early-stage mining companies, bio-tech firms, technology companies and smaller companies with potential for growth.

In addition, I also group ‘pre-profit’ businesses into this camp – companies such as Ocado and Palantir, which have significant revenues but no profit.

My usual approach with these businesses is to add them to my watch list with an ‘alert’ if the company hits certain revenue or EPS targets, and to monitor their RNS updates for positive developments.

The decision to add these companies to my portfolio is much closer to the ‘art’ side of investing than the ‘science’ side. Examples include:

  • Only invest in companies with an appropriate margin of safety.
  • Only invest in companies with a good track record of growing earnings per share and net asset value.
  • Ensure all investments have a suitable potential return for the risk I will assume.
  • Ensure inflation and interest rates will not destroy the value of my investment.
  • Avoid like the plague, all companies who are likely to permanently destroy capital.

Market Leaders

Market Leaders are established and profitable businesses that are undisputed ‘leaders’ in their field. They have significant market capitalisation, well-established earnings, healthy returns on capital employed, and usually pay dividends.Identifying these companies is a case of looking at the ‘benchmark’ indexes and top fund managers holdings and selecting the most profitable in various sectors. In theory, these businesses are the easiest to identify, but their ‘fair value’ is as open to interpretation.These companies typically fall into the camp of ‘great business but too expensive to buy’ and are added to the watch list with the primary trigger being a drop in share price. This approach is closely tailored to my belief that even the ‘best’ investments can give a bad result if purchased at the wrong price. They are the foundation of my portfolio and are based on my ‘index but focus on the best’ strategy.Examples include:
  • Understand the sector and the business as well as you can
  • Consider the possibility of being incorrect and how this will affect my investment hypothesis.
  • Don’t fall foul of false certainty and overconfidence. You don’t know everything.
  • Consider value – not just price. Size is no guarantee of anything.
  • Be a business analyst; not a macroeconomist.

Special Situations

Special Situations are companies that are facing unusual disruption. These are the rarest businesses on my watch list and are based on event-driven trading and arbitrage opportunities.

These events are difficult to identify and utilise disparities in price occurring from mergers, tender offers, spin-offs, liquidations, and rights offerings. These differences occur as a result of market uncertainty about outcomes.

For example, if a company makes a tender offer for a business, the deal is subject to various hurdles such as board, shareholder and regulatory approval. Until cash changes hands the deal is not ‘done’, and so market usually price in a discount that reduces until a deal is concluded. This discount can widen or fall depending on how the market perceives that the deal is progressing.

An investor can benefit from this uncertainty by buying at a discount and waiting for the deal with conclude, at which point the discount closes to zero, generating a profit. If the deal fails to conclude or the terms are changed, the investor will be left ‘holding the bag’ with a potentially distressed or overvalued asset.

A good example of a deal with significant uncertainty was the 2023 deal between Activision and Microsoft, which was originally account in January 2022 when Microsoft announced their intention to acquire Activision for $68bn in cash. The deal came under significant regulatory scrutiny and faced heavy opposition from Sony Entertainment, a competitor to Activision and Microsoft’s gaming interests.

The share price traded at up to a 20% discount to the deal strike price (the price at which Activision would be acquired by Microsoft), enabling patient investors to purchase shares and wait for the deal to close.

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