French Connection Group (FCCN)


Thinking the unthinkable #2: Holding French Connection

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This post on French Connection is a mirror image of my earlier post on Games Workshop. I probably have less confidence in French Connection than any other share in the Thrifty 30.Applying my newly transcribed guidelines for selling: 1. Give a company three years to prove itself French Connection has almost had three years. I added it to the portfolio in April 2010. I've been quite patient... 2. Resist selling a share until you have found a replacement for it No replacement lined up unfortunately, so the reason for ejecting it (3 or 4) is going to have to be compelling. 3. Sell if you were wrong about the company's asset value or earning power I was wrong about its asset value because I failed to consider the value of its leases, which blew apart my valuation. 4. Sell if you're confident it's expensive Although I'm no longer confident French Connection shares are cheap, I can't say with confidence they're expensive either. It's not cheap on a liquidation basis, but assuming the company recovers it might well be cheap on an earnings basis. Since I'm unimpressed by French Connection's recovery plan and my confidence in management is diminishing at about the same rate as its cash reserves, that's a big 'if'. I wouldn't add French Connection to the portfolio today, but now it's in I'm reluctant to eject it. Generally, I prefer to wait for the full year results to judge, and since I don't have another company lined up to replace it I have a second reason to wait. With Games Workshop I liked everything about the company apart from the price. With French Connection I like little about it, and can't judge the price. Near opposite scenarios, same conclusion. I have annotated the French Connection entry in my portfolio table with an ā€˜Sā€™ to indicate that next time I want to add a company to the portfolio, Games Workshop is one of the companies I should consider ejecting. I'm deferring a decision on Metalrax until the full year too. It's only been in the portfolio a year and a half.


Hi Richard

you say you have no shares to replace a sale, but are you ignoring those you already hold and are happy with. In other words shouldn't you sell and top up an existing holding.

I'm not sure selling GW would be a good idea, there's always a risk that you're cutting the flowers and watering the weeds when you sell the shares that have done really well.

It's good to see you talking about selling Richard. It's a subject that isn't covered nearly enough, and certainly not in the kind of in depth, real-world way that you're dealing with it here.

As a nerdy ex-computer guy I'm used to setting up complete systems, so quantifying and systemising the buy/hold/sell process was natural. But I know from many conversations that selling really is the hardest part, and the one in which many investors most stubbornly hold on to their existing beliefs!

Hi Trident, it's been a while :-) Great to hear from you. As always you've made me pause for thought.

On doubling up on existing holdings. Quite right. It's an option, and one I have used at times. At the moment I'd like to diversify though, which means finding new ideas. I should write a bit more about this because part of my thinking is to use my desire, say, to get rid of French Connection, to encourage me to find new companies. It's quite easy to sit on cash, or invest in an old favourite, but I really want a diversified portfolio and to do that I must keep turning over the rocks, which means fighting focus!

Regarding Games Workshop. I've very sceptical about sayings like "cutting the flowers and watering the weeds". I think sometimes flowers need to be cut before they die, and sometimes weeds flower. The skill is in finding the flowers that perennials (preferably ever-lasting) and the weeds that aren't actually weeds. It's very very tempting to put GW in the buy and hold forever category and maybe now it's on my sell list it will sit there forever. But now it's int he sell list I will keep challenging myself to justify its position in the portfolio versus new ideas.

Hi UKVI. Thanks for your comment. I'm working on the belief that I can add something to the systematic approach. It's a very dangerous thing to assume and the reason I'm so painfully documenting it is I want to avoid kidding myself! Having thought through the French Connection situation I realise that French Connection is a long way from the idealised turnaround I mentally size companies up against (i.e. a company selling below liquidation value, and with a plan that gives me confidence). That's partly my fault, as my initial analysis was flawed, and its partly the company's, it seems to be reacting very slowly to the fact that its retail stores have been loss-making or borderline profitable for some time. In those circumstances I've got to think about selling, but I don't want to react emotionally, or in haste, so my three year rule guideline and replacement guideline are acting as brakes that will hopefully prevent a rash decision, but not a considered one if its necessary.

one observation I have on managing portfolios, especially quite diversified ones, is the likelihood of having a couple of big losers in them. If the big winners are chopped too early that can lead to a self inflicted asymmetrical bias running against the holder.

GW is a niche business, practically a monopoly, well managed, and has great margins and ROCE and what looks like great potential in the US. Yes, the price is looking less attractive, but it is still likely to deliver a fabulous yield and that for me has become the reference point in sizing up whether to hold or sell it.

I guess given that you're writing publicly about your portfolio the readers' interest needs you to keep turning over the rocks.

Great article on scuttlebutt - any more on that subject would be fascinating.

Hi Trident. Well of course I don't want to chop GW too early! The question is, when is the right time? In my case that would be when a company with more potential comes along. The price is a factor, possibly the only one, weighing on GW's potential. I'm thinking of the portfolio members as footballers in a team, and as an Arsenal fan I'm thinking is this the right time to let Henri/Fabregas/Van Persie go? I'm in the fortunate position, that it doesn't really matter what Van Persie thinks about it!

I suppose my readers' interests need me to keep turning over the rocks but I think my own interests as an investor need me to as well. The famous investors I feel most affinity to are Graham and Lynch, both of whom ran big portfolios. It's just my style.

On Scuttlebutt, I do, as it happens have another example, and it also comes from red. It's worthy of a post, so I'll write it up soonish.

IMO, exiting GW would be like selling Van Persie for at fair value and getting Santi Cazorla on the cheap: good business. Not for nothing is Arsene an economist.

I didn't know Arsene has a degree in economics. Well, it makes sense!

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