Introduction
Another positive month for equity markets around the world as investors seem keen to look over the valley of the Covid-19 lock downs and towards the sunny lit uplands of the re-opening of economies. Consequently there continues to be something of a dichotomy between this performance and the numbers coming out of the economy in the short term, although as we all know the markets tend to look ahead and are a discounting mechanism.

Aside from that there have been a few signs of further outbreaks which could bring on further localised shut downs and the threat of second waves etc. but again investors seem quite relaxed about that too. As ever all the liquidity provided by Central Banks around the world is no doubt helping to keep markets / investors afloat despite the on going virus / economic storm.

Market Timing Indicators
Regular readers will know that I have been producing these moving average based indicators for the UK Market for a while now and that they triggered as a sell at the end of March, since when the UK equity market and other equity markets around the world have staged recoveries to varying degrees with some such as the tech heavy Nasdaq Index actually achieving new all time highs. No such tech excitement in the UK and as a result the recovery in the Indices here has lagged that seen in the US in particular.

As a result all the UK indices remain below their moving average trends by around 4% to 8% with the Small Cap index being the strongest and the Mid 250 the weakest or furthest below its trend. So these together with rising unemployment claims in the US still suggest that one should be out of / cautious on the markets based on these technical timing indicators, although thus far it would only have cost you from missing out on the subsequent rally that we have seen since they triggered aided and abetted by the Central Banks largess as mentioned above.
​
Compound Income Portfolio
Again regular readers may re-call that I decided to ignore the market timing indicators as I'm more of a fan of time in the market that trying to time the market. See also Terry Smith in the FT today. I also felt that it would be more useful for subscribers to see how the Scores performed over this challenging period and what stocks the portfolio ended up trading. 

Thus the portfolio was able to participate in and indeed enjoy a decent recovery in April and May when it recouped about 80% of its losses from March and outperformed the FTSE All Share, which I use as a benchmark, by 9.4% in the process. This recovery however came to an end in June as the portfolio returned -2% versus the +1.5% total return for the Index. This leaves the portfolio with a negative total return of 15.2% for the year to date which is some 2.3% ahead of the -17.5% total return from the FTSE All Share. 

This was largely explained by only a handful of stock managing a positive return and despite last months value pick, City of London Investment Group (CLIG) soaring by 20% on the back of their deal. Against this the rest of the portfolio fell and a handful of stocks by a double digit percentage. Most of this was on little or no news and therefore probably reflects a bit of selling in not so liquid stocks in the main and perhaps a dash for trash as investors try to anticipate a recovery from re-opening perhaps?

In terms of this months screening there were five stocks, three expensive winners and a couple of more neglected value rated stocks which came up with Scores in or around the zone where I normally think about selling. On this occasion, given the market conditions, I decided to give most of them the benefit of the doubt for now. However, given the recovery we have seen, I did let one position go which had seen downgrades and some uncertainty to the effects of the virus on its operations. Despite this it had recovered to trade on around 30x and had a fairly low yield as they had also passed on paying their latest interim dividend. They have also been quite reliant on acquisitions to boost their growth in the past and I guess it remains to be seen if the fall out from the virus / recession makes that harder or easier for them to achieve going forwards.

In place of this I added what might still be described as a relatively expensive quality play which trades on a little of 20x, but does offer a yield of over 3% which is nearly twice that of the stock it was replacing. They have recently paid an increased dividend and seem likely to again in the current year as they benefit from 78% recurring revenues and operate in a fairly defensive area which is probably benefiting from the virus in terms of new business opportunities going forwards.

Any way I'll leave it there but subscribers will be able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs. If you are not a subscriber then please see the Portfolio tab in the menu and the Scores tab in the menu for more details about them and how you can gain access or click the highlighted text above. Finally you can see a table of the full 5 year+ performance history here and this is presented in the graph below at the end of this post. 

In the meantime have a great summer where ever you are able to enjoy it if you can and good luck with the return to the new normal and whatever that turns out to be - cheers.

Further to my last update I felt it would be remiss of me if I didn't provide another update, as somewhat unexpectedly City Of London Group (CLIG) have entered into a merger with a similar US outfit today. I say unexpected because they have not made a habit of this, although apparently they have been open to the idea and also a bit surprising that it didn't come with their year end trading update perhaps? 

Any way it comes as part of a trend of Asset managers merging to cut costs etc. as they struggle against the rising tide of passive investment management. In this case it is not so much about cost cutting and more about putting together two similar businesses in terms of the way some of their portfolios are managed to include closed end funds, but brings diversification in terms of client type and geography and thereby will help to dilute their current bias towards more volatile emerging markets. 

You can read the full announcement and details of the price they are paying (in shares) from this announcement on their website. While there is a useful sponsored note from Hardman & Co. here - which give more details on the Company Karpus that they are buying and also includes some upwardly revised forecasts reflecting the potential from this acquisition and the recent market recovery. 

This seems to suggest that it could be on a prospective 6 to 7x earnings with a 9 to 10% yield assuming the deal is consummated in the third quarter of this year, that markets remain OK and that they do not see too much in the way of outflows from the target. They do apparently have some limited protection in the terms to allow for this though apparently. It won't help the liquidity much as they have now also acquired a (retiring) founder shareholder with a large stake in the business having just seen their own founder sell out in recent years.

Thus assuming that they haven't dealt at the top of the recovery and we are about to be hit with the rest of the bear market, then it doesn't look like a bad deal. Indeed if the market does remain benign going forward then it might be possible for the shares, over time to return towards their previous peak around 470p or so which would still only leave them on around 10x with a 6% yield which is levels they have attained in the past. As ever I guess time will tell on which way that pans out from here.

Just a quick flag up for non-subscribers that this months purchase might be due a catch up. This is especially so given the on going re-bound in markets and the fact that this Company has continued to operate and actually benefits from stronger markets, but hasn't actually responded to them yet. Since it has a June year end there should be a trading update next month so there should be catalyst too.

So the stock in question is the small fund manager which specialises in funds based on investment trusts and with a bias towards emerging markets called City of London Group (CLIG). It is pretty conservatively run and the earnings estimates seem to be realistic after their trading update on the 21st April, although I suspect they could even beat those given the bounce back we have seen in markets since then. They also said they would review the dividend but were aware of the importance of this to shareholders - so i think there is quite a good chance they may maintain that too. 

Based on those estimates and that assumption on the dividend it is trading on around 9x with a 9% yield and has cash on the balance sheet. So on that basis it entered the Compound Income Scores Portfolio this month to reinvest the top sliced money which came from a stock on over 30x and on yield of less than 1%. So although I'm going against the old adage of running your winners there as per the title of the monthly update I'm going for Value instead.

Finally looking at the chart is looks to have been making a base but has thus far refused to participate in the rally part from a brief burst of strength in April prior to the trading update.
I note the gap on the chart at about 367p and these usually get closed along the way. The only other thing to note is that it is not that large with a market cap of around £80m so towards the bottom end of the range in terms of size of Company that I normally invest in but in this case I know this one quite well. It does mean that it is not that liquid and the spread can be quite wide, 311- 324p or 4% or so currently although you might be able to get inside that. 

Any way I'll leave it there and we'll see how it goes when they update the market next month. Have a great weekend, stay safe and well and mind how you go. 

Market Background
May saw another positive month for markets on top of the recovery seen in April. This comes as quite a relief given the nervousness that was around and as it turned out, unfounded fears of a relapse and rapid re-test of the March lows, so far. 

Indeed with the ongoing Central Bank support and some evidence that the worst of the virus effects may be behind us as some economies start to unlock, investors seem to be betting on a V shaped recovery. Indeed market action, in the US in particular, has stayed above the long term trend and with the S&P 500 recently recovering above its 200 day moving average it could even go onto to test recent highs potentially. (See Chart above).

Within all this after early narrow breadth with the FANG technology type stock leading the way, more recently there has been something of a broadening out and even a small rotation into value stocks. This came as some pointed out that the value versus growth performance and valuation comparisons had reached extremes last seen in the dot com era, although it remains to be seen if this will be a lasting shift and indeed if the rally will last or continue. 

Market Timing Indicators
These which are based on the trend in UK Equity markets remain in negative territory about 10% below their trend, as the FTSE UK Indices largely lagged the recovery (as usual these days it seems) in other global markets. Thus this would suggest remaining cautious or out of the market if you are trying to time it. This would be reinforced by the large spike upwards in US unemployment that we have seen which has taken that indicator above its trend. 

Thus even if markets should carry on rallying and turn the market indicators positive, the theory underlying this model would require the US Unemployment to come back below its trend and this seems some way off. Thus if you are in cash / market timing this would suggest that you will need nerves of steel and the patience of a saint to wait this one out while the markets continue to confound the bears and wait for them to come out of hibernation.

Compound Income Scores Portfolio
Having ignored the timing indicators and kept this pretty much fully invested this continued to benefit from the positive market background. Thus in May it produced a positive total return of 4.2% which leaves it with a negative return of 13.5% for the year to date. This compares to +3.4% and -18.8% for the FTSE All Share Index over the same time frames. Since inception just over 5 years ago the comparison is +75.2% v 10.6% or 11.5% per annum versus 2% per annum from the Index. 

Not too many trades this month as few if any of the Scores justified action and one needs to be a little cautious of most figures these days any way given that Companies are reluctant to forecast and predicting outcomes is largely guesswork educated or otherwise.

I did however top slice one of the big winners in the portfolio, breaking the old adage of running your winners. This did however reflect a deterioration in its score, large driven by its valuation moving up toward the top decile as it hit new all time highs. The proceeds were reinvested into a much better value play, which remained oversold having lagged the market recovery despite being sensitive to it. This move therefore played rightly or wrongly to my natural value tendencies. 

Summary & Conclusion
So another positive month for markets confounding hopes and fears of a further bout of weakness to potentially re-test the March lows. This was driven by on going support from Central Banks around the world and perhaps better than expected or not as bad as feared outcomes on the Virus front as some economies started to reverse their lock downs. 

Consequently investors seem to have bought the dip and be anticipating a V shaped recovery and as such the longer term bullish trend still just about remains intact for now. Of course it remains to be seen if investors current expectations are realised or if something less positive comes to pass which might force a reassessment on markets. Aside from the the timing indicators for the lagging UK market still suggest that one should remain cautious but you might need to be patient to reap the benefit of that as thus far the markets seem to be remarkably chipper despite all the bad news that has been thrown at them recently. 

Avoiding all that angst the Compound Income Portfolio continues to, well Compound away quietly in the background, albeit in a losing fashion this year so far, but at a slower rate than the overall market. Time will tell if those loses will continue to shrink or expand again from here. To be honest I really don't know having been surprised by the robustness of the rally, but personally I still wouldn't rule out some more volatility as we go through the rest of this year and get a clearer view of the impact of the virus shut down and subsequent new normal on the economy and the Corporate sector. 

Whatever you do, mind how you go, stay alert and safe or whatever the latest sage advice is from the government and enjoy the hot / fine weather while it lasts. I hear that apparently there is a nice Castle in Durham which is worth a look if you fancy a drive and are feeling up to it!

I thought I'd share a stock idea with you that Scores well in the Compound Income Scores and currently sits in the portfolio based on these. I think it looks quite good in these unprecedented times, although as the title suggests I'm sure it may not be to everyone's taste. So with that in mind I'll flag up front that it is a well known FTSE stock called British American Tobacco (BATS) the well known cigarette manufacturer which is currently trading at around £31 per share.

So if that hasn't put you off what's the Score on this one? Well using the Scores as my prompt I'll take you through it. So first of all how does it stack up on value? Well on this front it ranks in the top quartile of the Scores at 78 as it has a decent dividend yield of 6 to 7% & an earnings yield in excess of 8%. While on more conventional value metrics it is on a PE of 9 to 10x. 

While on the dividend cover it Scores at just 38 as they are distributing about 65% of their net income or about 1.5x earnings cover. It is similar on cash flow cover too which is OK. So not brilliant on this front, but acceptable I would say, particularly at a time when many others are passing or scrapping their dividends. Plus it seems to be a pretty steady business which is still in the main operating at the time of writing.

On the growth front at their recent virtual AGM they did confirm their full year dividend for 2019 would rise by 3.6% based on the 65% pay out ratio. While for the coming year they suggested that they expect to see high single digit growth in earnings and therefore analysts seem to be expecting a similar rate of increase in the dividend. Thus with this and their 5 year historic growth rate of 6.5% per annum in the dividend means they Score 69 on the dividend growth factor. In reality it may well end up being better than this as more eventually cut and don't grow their dividends this year. On the back of that they have seen some upgrades in the last month which means that their Estimate revision Score is also in the top 10% of Companies, as most have been seeing downgrades recently. 

On the balance sheet or financial security they do have quite a bit of debt but its cost is well covered by their profits and cash flow, while their balance sheet has improved in the last year so it Scores in the top 20% here with a Score of 80. While in terms of the quality of the business it also Scores well here with a 91 as it has made decent operating margins of over 50% and a Return on Capital Employed of nearly 15% in the last 5 year. It is worth noting though that these figures have come down a bit in recent years as they have invested in their new generation of safer vaping / heating type products.

Putting that altogether that puts it on a Compound Income Score of 98 one of the highest Scoring, as 100 is good and 0 is bad. As such it remains in the Compound Income Scores portfolio and I've used some of the cash in my ISA to add it to that too as it looks like a pretty good steady income / growth stock to me in the current unprecedented environment. While looking at the rating and thinking about the dearth of income opportunities  I think there could also be scope for the market to have a re-think on this one and possibly re-rate it back up again a bit. Indeed just valuing it on this years forecast dividend of 220p at a 6% yield could equate to a price target in excess of £36 for example. 

Any way that is probably enough on such a big boring stock but you can learn more about it and their ESG credentials which they are trying to push with their new Better Tomorrow strategy at their Corporate website and do further research if you are not put off by what they do.

Finally I think this helps to show the value of watching out for Company announcements in the current environment. I would also say it also highlights the strength of the Compound Income Scores in quickly helping one to identify attractively valued, quality companies with which to grow and compound your income over time, although I'm biased, but that's the point of them. If you'd like to learn more about the Compound income Scores and how you can gain access to them then please click here or watch the video below. Thanks for reading if you got this far, take care, stay alert, get more exercise and stay well.