October passed off positively for investors in the UK despite hurricane force winds and the 30th anniversary of the Black Monday Stock Market crash in 1987. The positive total return of 1.9% for the FTSE All Share on the month & slightly higher returns for the Mid and Small cap indices has left them all still 4 to 5% above their 10 month moving averages. This plus the fact that the economic indicators are still sending out positive signals, although it will interesting to see today if the US Non Farm Payrolls can bounce back from their hurricane driven decline last month. This all suggests that one should continue to ride this extended bull market despite its age and the stretched valuations in some cases, especially with the usual seasonally strong period to come too.
It was also another excellent month for the Compound income Scores Portfolio (CISP) which saw a total return of 4.8% on the month. This leaves the CISP up by 33.1% year to date and by 61.1% since inception in April 2015 compared to 9.8% & 22.5% from the FTSE All Share over the same time periods. This months performance was driven by 5 stocks which produced double digit gains with XL Media & XP Power both up over 20% on the month. At the other end of the scale there were fewer losers with just two stocks, Ferrexpro and Character Group down by double digits amounts. Somewhat surprisingly Character Group still scores well, despite the recent profits warning, as this years numbers were maintained and it was only next years numbers that were reduced, it therefore remains in the portfolio.
In light of the strong performance this year, some stocks had got rather large and meant a concentration risk in one sector, so breaking all the old adages about running winners, in addition to the regular sales based on a CIS score of less than 75, I also trimmed some of the winners like XP Power & XL Media on valuation grounds and sector concentration risk respectively. The proceeds of this re-balancing and the regular sales were then used to add five new holdings to take the total number up to 25 from 24 previously. You can see the full performance statistics and further details of the portfolio by clicking the highlighted link above.
A quick update on the two growing small cap stocks I featured recently. Firstly on Taptica (TAP), where I was wrong to say that there probably wasn't enough in the numbers for the shares to challenge their previous high in the short term. Well they have only gone and done it just to prove me wrong. I don't think however it would be a good idea to chase them up here as I note that the finance director sold 200,000 shares on 5th October 2017 at 445p & now holds only only 94,572, although I suspect he's probably got a few options no doubt. Of course I could be wrong again as stocks around 12 month highs can go onto perform well as investors (and maybe even the FD here) make behavioural mistakes by anchoring on the previous high price, although the shares are off this morning. It does however continue to score well in the Compound Income Scores (CIS) and as such is probably still worth sticking with despite the directors sale as these tend not to be as instructive as directors purchases.
Meanwhile on S & U (SUS) I note that the shares have managed to sneak up into their previous range between about 2000p and 2500p and sustained it for now. So some modest encouragement there despite the on going weaker new car sales, although that is not so relevant to them as they deal in loans for second hand cars. I note too that there have been some modest upgrades to forecast post the results which is a good sign, so some encouragement there too. Talking of upgrades there was also a good, detailed, sponsored (?) note from Edison which also included some upgrades and in which they maintained a valuation at 2,700p per share suggesting significant upside from the current share price.
If that is of interest to you I attach a copy below. On that basis and given my long standing holdings in this one I'm happy to continue holding it even though the CIS is only average on this one right now.
That just leaves me to wish you happy and safe investing and hope you have a great weekend whatever you are up to.
Just a brief update on the Monthly timing indicators for the UK markets which I have been producing for a while now, plus a few other things. If you are a new reader or not familiar with these timing indicators and the background to them then please see the archive of articles by clicking here or in the list of categories on the right of the website or at the bottom of the page if you are on a mobile or tablet.
Now you may be worried about this as we saw negative returns from FTSE 100 & FTSE 350 in September, although Mid Cap and Smaller Companies continued to provide positive returns. This trend was probably helped by the continued recovery in the pound from its BREXIT induced collapse which at the time was a bigger benefit to the more international larger companies. These returns leave the various indexes 2.5% to 2.9% above their respective moving averages in the case of the larger focused indices like FTSE 100, 350 & All Share, while the Mid 250 & Small cap indices are 4.5% & 5% above respectively.
Meanwhile the other economic indicators that I follow to enhance the signal from the equity indices are still looking robust, although US Unemployment has ticked up recently and could soon threaten its moving average if that trend is maintained. So it will be important to watch this weeks non farm payrolls on Friday, although the forecasts are for reasonable numbers and an unchanged unemployment rate.
So overall noting too much to worry about on this front, aside from the continued high valuations on Wall Street, although this is not a good indicator for timing the market short term it does suggest that returns going forward from this point are likely to be low. Apart from that it is October, Donald Trump is President of the US & the Federal reserve and maybe one day the Bank of England are talking about raising rates & withdrawing QE. So this bull market could be on borrowed time as well as money so maybe we could even end up with another crash as the 30th Anniversary of the 1987 crash is coming up. If any of you are too young to remember that it is otherwise known as Black Monday.
Talking of crashes and market corrections there was a good interview over at PIWorld (who do some investing & corporate video aimed at Private investors) with my former colleague John Rosier talking about market corrections etc. if that is of interest and you haven't seen it already, then you can watch it below or at the PI World site via the link above.
Otherwise I hope you continue to enjoy the ride in this on going bull market which seems to have been especially kind to small investors in the last year or so. I know as I have seen quite a few fellow investors posting their year to date returns and talking about 20%+ and in some cases 30%+ returns in the year to date. Thus I guess it is not that unique that the Compound income Scores Portfolio was up again last month by 1% and has now produced a total return of 27% year to date too. So as everyone is probably feeling like an investing genius this year I'll not go into the detail as no one will be interested any way. Just don't forget pride comes before a fall and markets are no always this easy.
Finally, as you know I like my music, so I'll leave you with an updated Wall Street Shuffle, which seems appropriate music for markets in recent years. Plus I was saddened to hear about the untimely death of Tom Petty last night, so I also provide one of his classic tracks below which hopefully as investors we won't be doing any time soon - enjoy and happy safe investing.
We have interim results from a couple of small cap growth stocks today. First was a long time favourite of mine S&U plc (SUS) the £237m market cap. motor finance group. Despite all the talk recently of potential problems in the car finance area and in particular the PCP area, they point out that they have no exposure to that type of lending. In addition the 20% or so growth that they reported today is a continuation of the growth trend they have seen for the last 17 years in this business. See the full RNS announcement for more detail on this in the commentary from the Chairman Anthony Coombs.
Talking of the Chairman's statement there were a couple of things in there that did give me some cause for concern, although on balance I'll give them the benefit of the doubt given their track record up to now. For the record though these were the fact that bad debt provisions were up sharply despite the strong employment background that was referenced in the statement. This was explained by Mr. Coombs as follows:
"Although a return, for competition reasons, to Advantage's traditional customer mix has seen an increase in impairment to revenue, risk adjusted yield has been protected by good interest rates. Indeed, current levels of impairment are significantly below those experienced just five years ago following the financial crisis, when the business continued to increase profits and maintained very good returns on capital employed."
Not quite sure what they mean by for competition reasons, may be they had tried to go up market & found more competition and so had to return to lower scoring higher risk customers to maintain the growth perhaps? The other thing that bothered me in this part of the statement and allied to that was mention of the fact that a refined Delphi 10 based scorecard system had been introduced. This might be a better explanation for the sharp jump in bad debts perhaps? I think this will need watching after the Provident Financial debacle recently where they messed up by changing a long standing way of doing business, although in this case the change does not seem as dramatic as in that case.
Aside from that the dividend was up by a pleasant 16.7% but the debt continues to rise to fund the growth, but remains relatively low for a finance business. Meanwhile the nascent Bridging Loan business is looking like it will be second half weighted after a slower start than expected. Assuming there is nothing in these numbers to change the forecasts dramatically this should therefore leave it on a reasonable looking sub 10x PE with a 5%+ yield with strong growth. The shares are up this morning back into the 2000 - 2600p range that they had been trading in, so it will be interesting to see if they can sustain a move back into this range in the short term. Or if they will be sold off again this might confirm the recent break down into a new lower range of 1500 -2000p perhaps, although be aware I don't claim to be a chartist.
Second up today, in brief was another Small Cap growth stock, the £213m Market Cap. Taptica (TAP) which is Israeli based and provides mobile advertising and has recently made an acquisition to move into the Video area too. In addition to this recent acquisition they have in the past made some other smaller acquisitions in their core area of mobile advertising to expand their geographic reach into Japan in addition to the UK, China, US & South Korea. In the statement they say they have ambitions beyond these areas to expand into ten hubs worldwide in the next three years to make it Russia, China, Germany, San Francisco, New York, Korea, Japan, India, South America and the UK. Thus it seems there should still be plenty of growth potential from geographic expansion in addition to their move into video advertising more recently & growth in advertising moving more onto mobile channels from more traditional areas like print and broadcast media.
Any way if it is of any interest I suggest you read the RNS and visit their website for more details and there was a conference call this morning too. The shares also look cheap for the growth they are delivering trading on about 12x falling to 10x for 2018, although the yield is lower than I normally like to see at just 1.7%.
The only other reason I mention it is that this is another example of one of those potentially unpalatable looking stocks which therefore trades cheaply and therefore scores well on quantitative systems like Stockopedia where it has a StockRank of 88 and on our own Compound Income Scores where is scores a maximum 100. So if you can get your head around the business and are not put off by it being a foreign company then it might be worth a look, but there's probably not enough in these numbers for it to challenge recent highs I suspect, although the shares are up this morning after recent weakness prior to the figures.
XL Media (XLM) - the Israeli, Aim Listed on line performance marketing company has announced interim results today. These look pretty strong with revenues up by 33% driven by a similar level of organic growth in their highly profitable publishing division which makes up 44% of their business. This helped to make up for slower organic growth and lower margins in their media business & a fall of 25% in turnover from their partner networks operations which make up the remaining 56% (50% & 6% respectively) of the business. They also completed some acquisitions in financial & cyber security verticals in the US and in the mobile gaming area which helped to boost revenues in the media business.
The dividend was increased by 5%, which is a bit better than the marginal growth that is reflected in current consensus forecasts, so these could be upgraded if analysts bother to note that. More interestingly in the Outlook and headlines where they said: "The Board is therefore confident of comfortably meeting profit expectations for the full year..." which I take to mean they think they will probably easily beat current forecasts of 14c per share. This looks likely as even if the 2nd half was flat, then by my calculations, they would still come close to 14c. Thus there may be scope for some upgrades here if analysts share my opinion, but maybe the Company will steer them to keeping unchanged numbers so they can beat them later in the year? There will be a webcast of the results presentation which will be available on their website later today at: http://www.xlmedia.com/media/.
So overall a decent looking set of numbers which leaves the potential for some upgrades or a beat of full year numbers if upgrades don't come through in the short term. Of course being an Israeli company listed on AIM with a somewhat opaque business model, this is not one for everyone and indeed maybe one that the market loves to hate. Despite that it does have good financial metrics and has delivered growth of over 20% per annum in eps since 2011, although this may not be sustainable at this rate as they seem to be needing to make acquisitions now to keep the growth going which is potentially more risky. This new phase may well have been highlighted by big holders selling down in the last year or so, although I note the CEO still has a decent stake in the business. Given all that the quantitative scoring systems such as Stockopedia & our own Compound Income Scores continue to rate it highly at 97 & 98 respectively. So on about 12x with a 4.5% growing yield it will remain the CIS Portfolio and might be worthy of further investigation if you are not put off by the nature of it or think that the market will continue to love to hate it.