As an investor, I am constantly assessing whether the companies I own align with my financial objectives and investment principles. Although I consider myself a long-term investor, I will consider letting go of an investment if the business begins to face significant headwinds or persistent operational issues. Today, I’d like to share a little about why I’ve decided to sell two long-term holdings, S4 Capital and NCC Group, two businesses which I once believed showed promise but which I now consider to present significantly more potential risk than reward.
S4 Capital: A Growth Story Losing Its Spark
When Sir Martin Sorrell launched S4 Capital in 2016, his ambition was clear: to build a digital-first advertising empire. His aggressive acquisition strategy, rapid expansion, and bold promises of disrupting the traditional advertising model captured the attention of many investors and the share price climbed over 350% from 173p to 880p between the end of 2016 and late 2021.
I originally bought into the company in early 2022 at £5.18, expecting profitability to grow as the company’s multiple acquisitions were integrated and expanded. Unfortunately, that hope was dashed, as the company struggled to deliver consistent results, issuing multiple profit warnings and signalling underlying challenges in achieving its ambitious growth targets, with top-line revenue peaking at a little over £1bn in 2022 and then falling consistently ever since.
The hoped-for profitability on which I based my original investment remained elusive, with the company booking a small pre-tax profit of £3m in 2020 before proceeding to lose money every year after. In addition, earnings per share have been wildly erratic and the company’s share count has exploded as the business opened a veritable firehose of equity options to fund their acquisition spree.
Multiple profit warnings (or worsening loss expectations) compounded these issues, eroding investor confidence and reflecting deeper operational issues including difficulty integrating acquired businesses and escalating costs that have outpaced revenue growth. The company’s aggressive acquisition strategy seemed to add complexity without yielding the expected synergies, reflected in the company’s increasingly impenetrable trading updates that were always packed full of complicated account adjustments.
Additionally, S4’s balance sheet was showing increasing signs of strain, with rising debt levels to fund its acquisitions and inconsistent cash flow. While the advertising industry remains dynamic, S4 was underperforming relative to competitors like WPP and Publicis, which managed to adapt to the digital shift while maintaining profitability.
The lack of a dividend policy further diminishes its appeal to my portfolio. For income-focused investors, a company that reinvests all earnings into uncertain growth projects offers little in the way of tangible returns. This is particularly disappointing in an environment where reliable dividend-paying stocks are increasingly valuable.
Ultimately, by the time 2024 arrived, I had largely lost confidence in the investment, but decided to make a small top up investment at 52p last June, thinking that the business was simply too cheap and that most of the bad news was now factored in. Unfortunately, S4 decided that my humiliation was not yet complete, issuing further profit warnings and a further devaluation of the share price to just 31p a share.
NCC Group: Missed Potential in a Promising Sector
NCC Group started life in June 1999, when the National Computing Centre sold its commercial divisions to its existing management team. It operates in the cybersecurity sector – a field with undeniable long-term potential as businesses and governments alike ramp up spending to combat ever-evolving digital threats.
I originally invested in the business at £2.55 a share back in October 2021 after growing interest in the cyber security industry. The company advised global technology, manufacturers, financial institutions, critical national infrastructure providers, retailers and governments on the best way to keep businesses, software and personal data safe and had an interesting portfolio of services which I wanted exposure to.
Unfortunately, the business has struggled with declining profitability and seems to be undergoing a permanent restructuring effort, which has yet to deliver meaningful improvements. Recent leadership changes and an increased focus on cost-cutting highlight management’s difficulty in steering the company toward sustainable growth, and their overreliance on cyclical contracts has introduced volatility to its revenue streams, leaving it exposed to economic downturns.
In comparison to its peers, such as Palo Alto Networks and CrowdStrike, NCC lacks both scale and innovation. These competitors have managed to dominate their respective markets while delivering consistent returns to shareholders. NCC’s modest dividend yield, currently around 2%, does little to compensate for the inherent risks of holding a company with such operational inefficiencies and limited market influence, and as such I decided to exit my position for a loss of 36% including dividends.
Key Lessons and Next Steps
Both S4 Capital and NCC Group have proven painful reminders of the importance of maintaining high standards when selecting investments. Ambitious growth stories may be enticing, but without a track record of delivering shareholder value, they risk becoming costly distractions. One of the key lessons from holding S4 Capital and NCC Group has been the importance of recognising warning signs early. Profit warnings and declining margins were red flags that required careful attention and were characteristics totally at odds with my desire to hold stable and profitable businesses. Additionally, these company’s inability to deliver consistent shareholder returns – either through dividends or earnings growth should perhaps have prompted an earlier re-evaluation of their place in a long-term portfolio.
In both instances, the management’s inability to execute on strategic goals became the criteria that convinced me to divest my holdings. My ability to trust a management team is not infinite and is, in large part, based on their capability to do what they promise. When that trust is broken and the business consistently misses or underperforms, I consider it better to exit my investment reinvest elsewhere rather than hoping for a turnaround ad infinitum.
As custodians of capital, we must remember that no holding, however promising its past, deserves a permanent place in the portfolio. Both S4 Capital and NCC Group have failed to meet the high standards I demand of my holdings. Divesting from these positions frees capital to be redeployed into sturdier enterprises that embody the virtues of consistency and enduring growth.
In the timeless words of John Maynard Keynes, “When the facts change, I change my mind.” With my sale of S4 Capital and NCC Group, I have decided to heed this wisdom and part ways with both companies, hopefully charting a course toward more promising opportunities.