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Should investors sell Sirtex Medical Limited and buy Tigers Realm Coal Ltd instead?

Investing successfully requires more than just an ability to accurately value a business; it also requires the skill set to actively manage a portfolio to maximise your returns.

While it can take years to truly become a master at portfolio management, a couple of good rules of thumb are:

1)      Let your profits run

2)      Re-buy your portfolio every year

The first rule is self-evident. Once you’re on a winner – stick with it! Enjoy the gains; don’t lock in a small profit.

The second rule is conceptual. The idea is that from time-to-time you reassess your portfolio by hypothetically selling all your stocks and asking yourself the question “would I re-buy the same stocks and in the same quantity?”

One stock which has been a superb performer in the past five years is Sirtex Medical Limited (ASX: SRX). The company has developed a liver cancer treatment and is growing sales rapidly. The revenue and earnings growth has propelled the share price 630% higher. In comparison the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 54% over the previous five years.

Gains such as these can lead to a small position in a portfolio becoming a large position – which is a “happy” problem to have but arguably still a problem from a portfolio management point of view. The outlook for Sirtex remains very good but with the stock trading on a very high multiple and massive capital gains already achieved, some investors perhaps face this “happy” problem of deciding if their portfolio needs to be rebalanced.

Which leads me to the small, relatively unknown coal mining hopeful Tigers Realm Coal Ltd (ASX: TIG)According to a report in The Australian, the founder and former Chairman of Sirtex, Dr Bruce Gray, who last year sold all of his remaining shares in Sirtex has been funnelling some of his cash into Tigers Realm where he sits on the board and controls around 20% of the stock.

It’s always interesting to see where successful entrepreneurs re-invest their money. Investing alongside a proven entrepreneur when they embark on a new venture or back someone else’s venture can be rewarding, although it must be said that many entrepreneurs are not successful serial entrepreneurs. Interestingly, also on the board of Tigers Realm is the former CEO of Oxiana which is now part of copper and gold miner OZ Minerals Limited (ASX: OZL), Mr Owen Hegarty.

So why has Tigers Realm attracted these high profile shareholders? The company owns two tenements in far eastern Russia. Interestingly, the Amaam North coal deposit was purchased from BHP Billiton Limited (ASX: BHP) after it withdrew to focus on projects closer to home. It’s a difficult operating environment but the quality of the coal assets and attractive economics of the project has the potential to be very rewarding if the company can pull it off.

Foolish takeaway

Sometimes investors can take their cues from major shareholders and successful entrepreneurs, however there can be dangers in this approach given often the full picture and reasoning behind their decisions may not be clear.

In the case of Dr Gray’s decision to sell his holding in Sirtex there is likely other factors involved, so the fact that the founder is selling should in this instance not be a sell signal for others.

Likewise given the undeveloped nature of Tigers Realm’s assets, the stock would generally suit an investor with a higher tolerance for risk.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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