Hargreaves Lansdown: The FTSE 250 stock we’re buying more, despite the 20 per cent share price dive HL: The UK mid-cap we are buying more of, despite fall

Steve Clayton, who runs the Hargreaves Lansdown Select UK Shares Fund, has revealed the FTSE 250 stock he has been buying more of, despite the stark share price fall.

 HL: The UK mid-cap we are buying more of, despite fall

Wells sees a rising income from Lloyds Bank shares

He commented that, {over the past month} Our weakest performer was Domino’s Pizza, where recent like for like sales were revealed to have slowed somewhat. The shares fell sharply, losing almost 20 per cent in the month, neatly illustrating the benefits of not having all the eggs in one basket. We have added to the Domino’s Pizza position, because we believe the price drop is not matched by any underlying deterioration in the prospects for the business.’

Clayton continued, ‘The fund holds no bank shares and this proved a good decision in March as Banking names came under some pressure. Burford Capital, the litigation funder we wrote about recently, had an excellent month, registering a double-digit increase after issuing excellent financial results. Just Eat too delivered a double-digit increase, offsetting some earlier weakness. It too had released well received financial results. Intertek, our quality assurance specialist also performed strongly in March.’

Read more: The FTSE 250 shares that I’m buying more of, by top investor

Clayton added that the travails of tech stock Imagination Technologies are a ‘lesson’ for the market.

Imagination Technology shares dropped more than 60 per cent in one day after it released a statement saying that Apple, it’s largest customer, intended to stop using its products in the years ahead.

Clayton commented that this, ‘perfectly illustrated the dangers of having too much reliance on a single customer. Lest anyone get alarmed by what follows, neither of the HL Select funds has ever had any exposure to Imagination Technologies shares.’

He added, ‘Customer concentration is something we always monitor, for even the best of customers can be lost. For many years, Apple had used the Graphics Processor Unit designs that Imagination Technologies create to power everything from iPods to iPhones. Revenues from Apple were about half of the group’s total and so close was the relationship, Apple even had a large stake in Imagination.’

‘But money talks. Apple clearly now believes it has a better option, for it has informed Imagination that it intends to drop them in the next couple of years, using an in-house design instead. To make matters worse, because Imagination designs chips then sells licences to use the designs and earns royalties each time their designs are used, once a new customer is signed up, virtually all of the revenue is profit, for nothing extra has to be made by Imagination.’

Imagination’s future profit forecasts were a lot lower than the revenues Apple were paying them. In other words, not only was Apple far and away the largest customer, their income was needed to offset substantial losses made elsewhere in the group. No surprise then that Imagination’s shares promptly fell as much as 70 per cent on the news.’

He continued, ‘We prefer businesses without this sort of dependency. The answer to the question “Will your largest customer still be with you in two years’ time?” is ideally “Doesn’t really matter, we’ve got lots more to trade with”. Our holdings in names like Unilever, Diageo, British American Tobacco, or even Domino’s Pizza and Auto Trader all have thousands or millions of customers, making them far more resilient over the long run. No business is immune to everything, but we try to find those with better than average protections in place. Our most exposed investment is Playtech, which provides systems and services to gaming companies around the world. Their top five customers account for 36 per cent of sales.’

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