Compound Income

Why I don't hold Vodafone.

9/11/2018

On the face of it Vodafone is a large well known business with a decent position in the mobile phone market & has been building up an offering in broadband etc. too. On the back of this it pays a dividend of around 13p per share which at the current share price of 144p means it yields an amazing 9%.

Sounds great, what's not to like? Well quite a bit actually which is why I've not held it for a while now having sold out at prices over 200p between 2014 & 2017. The reasons for this were:

I'm more of an income growth investor and Vodafone wasn't really growing the dividend, plus the yield was not as high as it is today, which I take as a danger sign at these levels rather than an attraction.
I was moving towards following my own Compound Income Scores & this one did not Score well back then and there were more attractive alternatives.

So as the latest Scores are out today I thought I'd revisit this one and let you see why I still don't hold it and I'm not tempted to buy down here.

As I mentioned I think the big yield is more of a danger signal and this can be assessed by looking at the dividend cover by earnings and cashflow and on this measure Vodafone scroes in the bottom quartile i.e. the lowest 25% of the nearly 600 companies that are included in the Scores. To be fair it does have some positive attributes like the value it is offering thanks to the yield and an EBIT/EV yield of nearly 6% which puts it in the top quartile on that measure, as it is for financial security too, so it is not all bad.

Having said that though whatever you might think about mobile phones and telecoms as a business it does not score well in quality terms as they make low returns on all that capital they have to plough into buying mobile licences and investing in towers and fixed networks etc. While the margin they make is OK rather than spectacular as mobile is quite a competitive business these days rather than a licence to print money. So again it scores in the bottom quartile on that measure too. Added to that it has also been seeing downgrades to their earnings forecasts since the summer which are much worse than the average stock so it is also you guessed it bottom quartile on that measure too, in fact it is worse than that it is in the bottom decile or lowest 10%.

Now while the shares do look oversold and offer the high yield I'm still not tempted to buy back into this one given the above puts it on an overall Compound Income Score of 19, where 100 is the best, so once again it is bottom quartile overall despite the value and financial security. If that wasn't enough the other thing I monitor with the Scores, although it is not in the overall score, is the price momentum as winners tend to carry on perfroming and losers tend to carry on underperforming. Hence the investing axiom that you should run your winners and cut your losers. I suspect the risk here is that they will continue to drift and the risk is that at some point they may be forced to cut the dividend, given the cover and on going capital expenditure requirements, which doesn't usually go down well with investors who are mainly in it for the yield.

So there you go a quick example of how you could use the Compound Income Scores to quickly assess a company and see how it compares with hundreds of others and then potentially find more attractive candidates. I hope you might have found this post useful if you do hold Vodafone shares and if you would like to learn more about the Compound income Scores and see how you could see how your stock holdings measure up, then please see the link in the navigation menu on the site or click here if that's easier for you. mind how you go and safe investing.

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October was indeed a dangerous month!

3/11/2018

2 Comments

"Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest."

A quote from my September catch up last month and October 2018 did indeed prove to be a dangerous month to invest in, although given the volatility it also threw up some opportunities too I guess for nimble traders who had the stomach for it. Talking of traders I think many newer investors who have started out during this prolonged bull market are discovering this year that having highly focussed concentrated portfolios is great when things are going well, but can be very painful when things cut up rough like they did this month. This should be a good learning point for all investors both new and old as you never stop learning in the investing game.

Talking of which as an aside on that subject, I've been reading the latest book from Anthony Bolton, the former Fidelity Special Situation Manager, which I happened across recently on a trip to my local library. Along with many quotes from other famous investors one of his own struck me as being quite relevant to today's markets which he suggests have become more short term due to the growing influence of hedge funds as follows:

"I do think this has increased the opportunities for professional investors prepared to take the one to two year view rather than a time period measured in months or weeks. Often there is so much analysis of the branch or even the leaves on the branch, there are fewer people taking a view on the tree, let alone a view of the forest."

His advice for private investors is to take a three to five year view and not to put money in the stock market if you are likely to need it in the next three years, which to be honest is fairly standard advice. Otherwise it has some useful tips on what it takes to be a fund manger and what you should look for in Companies plus plenty of reminiscing.

Any way back to October and the CIS Portfolio. This fared badly again in October as I suspect many concentrated portfolios will have done. It produced a negative return of 7.87% which was 1.47% behind the 6.4% loss from the FTSE All Share which I use as a benchmark. This leaves it down 3.73% year to date which at least is still 1.86% ahead of or down by less than the -5.59% from the FTSE All Share. I'll not go into details of the individual stocks as for example there were 10 that fell by more than 10% and only two that managed a positive return. If you want to see the full history of the performance which has taken the portfolio up by 62.46% since inception in March 2015 then please click here to see that or see the table at the end of this piece. If you are interested in learning more about the process used to highlight potential candidates for the portfolio, then please see the Scores link in the menu at the top of the page or in the three bars menu if you are on a hand held device.

So on to this months screening, which I promised to get back to having ducked out of placing trades for the last couple of months. Interestingly a couple of those that I refused to sell last month because they looked oversold actually saw their scores improve sufficiently to stay in the portfolio this month with Alliance Pharma (APH) outperforming substantially & Spectris (SXS) underperforming slightly. The third one though went on to underperform badly and still ranked as a sell this month so out went Forterra (FORT), although I'd still be tempted to run it short term personally as their update seemed fine apart from some unexpected downtime for one of their kilns and as the budget extended help to buy for first time buyers of new homes. Aside from that two long standing holdings XPP & Zytronic (ZYT) also came up as sells on the scores so out they went, although here personally I'd be more inclined to run with XPP for the long term.

Against this the Portfolio purchased some Page Group (PAGE) which replaced some Hays (HAS) that was sold higher up prior to this sell off, Moneysupermarket (MONY) & Cohort (CHRT) which may also be a beneficiary of the budget with extra spending on defence / cyber security. All these bring something different to the portfolio compared to the existing holdings, although they were not all as over sold as some of the stock they replaced.

Monthly Timing Indicators
Unsurprisingly these all turned negative given the big drop in the market this month with all the indices falling to between 3.9% and 6.5% below their trailing 10 month moving average. You have to go back to March this year and January 2016 for the last time these indicators were this negative. I would not however take this as a signal to sell everything as for one we have seen a decent sell off already and the market has found some support in the short term. In addition the economic statistic that I use in conjunction with these to indicate when you should take them seriously as a recession in the US may be imminent are still not flagging. See this post for the explanation of and rational for this & also see the other links in that piece too. So in the absence of a US / Global recession, it seems we may be into a more normal 10 to 20% correction or mini bear market for now, rather than a really painful recession induced 40 to 50%+ decline.

So given that and the fact that we have seen a big sell off already plus some support holding recently, as we are coming into a seasonally stronger period and a typically positive phase of the US presidential cycle I would be a bit more optimistic in the short term. In addition with the UK market being unloved and under owned by institutions and is not as stretched in valuation terms as some other markets like the US. I therefore reckon we could see a sharp rally if we get an unexpected BREXIT deal in the next few weeks as the Chancellor seemed to be hinting at in his budget statement and as was suggested in the press over the weekend. The budget also highlighted steady, if low growth expectations, rising real incomes and continued low inflation and interest rates plus tax cuts which all seems quite a supportive background to me.

Having said that though, I was somewhat spooked (given it's been Halloween) or discombobulated (if you prefer fancy English) by a recent piece I read and a chart that it included (which I reproduce below) which included an indicator which suggests a global recession could in the offing and which has a 90%+ hit rate when this indicator has flagged in the past!

So with that in mind I wouldn't get too carried away in any rally that we might see. Especially as we see Central Banks withdrawing liquidity, while valuation are high elsewhere, bond yields rising and economic growth may be slowing. If anything I'd suggest maybe using rallies as opportunities to sell into rather than looking to buy the dips as we have got used to over the last 10 years or so. Though that does depend on your age / stage of life and your resultant time horizon. If you are a younger person with many years to invest then obviously set backs should be welcomed and utilized as long as you are expecting to continue to feeding money into investing over the years.

Nevertheless however old you are and in whatever situation you find yourself in, I'd suggest being careful out there.

Let's Be Careful Out There GIF from Letsbecarefuloutthere GIFs

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September catch up.

4/10/2018

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Market Timing Indicators
Given the positive returns from headline UK indices like FTSE in September, these remained positive, although with the Mid 250 & Small Cap indices showing lower returns in September these are now less bullish than the larger / broader indices like FTSE 100 & 350.

Elsewhere all the economic indicators are still in positive / bullish territory with the US Unemployment rate for example hitting a near 50 year low yesterday at 3.7%. Which all suggests that one should continue to remain fully invested.

I note that the US bond market continues to sell off as the economic strength means bond investors are discounting further rises from the Fed ahead in the near term, but at least the yield curve has not inverted yet (see graph at the start) which also still suggests no reason to take evasive action just yet.

I do however stand by the note of caution I struck last month with the snippet about Warren Buffet's cash levels. Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest. So with that in mind I'll end this section with a link to the latest memo from another famous investor, Howard Marks - who is cautioning about the potential for fall out from bonds and debt this time around.

CIS Portfolio
September proved to be another disappointing month for the CIS Portfolio as it produced another negative return of -0.9%. Unlike August this represented an underperformance of 1.6% versus the FTSE All Share Index, which I use as a benchmark, produced a positive return of 0.7% in September.

The main damage was done by Alliance Pharma (APH) which reported interim results which on the face of it seemed fine if a little dull. They did however include a small write off of £2.5m non-cash impairment charge on its investment in Synthasia International Co., an infant milk formula business in which it has a 20% stake. Consequently reported earnings fell by 35%, but underlying they edged ahead. This write off and consequent fall in the earnings, plus the high valuation they were sitting on, may have prompted some to sell and the price therefore took a hell of a beating and ended the month down by 30.5% - which seems a bit over done to me. Aside from that the other less extreme fallers in September were Zytronic (ZYT) - 9.3% - on no news apart from a long serving non executive leaving. While Avon Rubber (AVON) fell 7.2% as it's in line trading update presumably disappointed some investors who may have been hoping for a better outcome.

On the positive side the main winners were a mixed bag of Ferrexpo (FER) +22.7% on no news as it recovered somewhat from a long losing streak. While Taptica International (TAP) +14.3% & Churchill China (CHH) +14% both responded positively to their results statements reported in the last month.

In this months screening three shares came up as potential sales, although in each case their Scores were only just below the 75 cut off that I use. The three candidates were the aforementioned Alliance Pharma (APH), Forterra (FORT) and Spectris (SXS). In the end I decided to give them all the benefit of the doubt given they were all closed to the threshold and not therefore obvious sales. In addition I felt disinclined to sell APH down here given it looked oversold and was now offering more reasonable value, which in the week since has been vindicated by a small rally in the share price.

Forterra, despite some very modest downgrades, still seems cheap and all the talk is still of trying to build more houses. So one would think that demand for their product should still have solid foundations for now. It was also close to what could be a support level.

Finally Spectris also had very modest downgrades but also seemed to be offering reasonable value, although in the week since then it has come off a bit more. So overall my override of the mechanical sale process has probably just about broken even on a very short term view ex of any trading costs and opportunity cost of not buying potential alternatives.

Any way I'll see how they come out in next month screening & get back with the programme then.

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End of Summer Update

4/9/2018

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CIS Portfolio Update
So summer is over and markets will perhaps make more meaningful moves as traders return from the beaches. The last three months were not that special, with August being the worst of the three with a -2.76% return from the FTSE All Share. The CISP did better than this by falling less, although this was offsetting a smaller lag behind which it saw in July. This now leaves the Portfolio up by just over 5% YTD versus a flat market, so OK but no cigar.

As far as the monthly screening goes, quite a few potential trades came up, however with it being based on limited news flow in August I decided to skip doing any trades this month to save on unnecessary turnover as a number of them seemed quite marginal.

Monthly Timing Indicators for UK Markets & general comments.
On the Monthly timing indicators that I produce for the UK market, these all remained in positive territory, albeit less positive now after the falls in August. Similarly the economic indicators also still suggest a positive outlook is appropriate, although there too there are just a few signs of things may be coming off the top in the short term.

So it would seem, despite the wobbles in the market over the summer and the on going worries about BREXIT & trade wars that it is probably still worth remaining invested in equities. I have to admit though that it is all starting to feel a bit late cycle given how long this recovery has been going on and given the fact that the bull market from March 2009 is now reaching a record duration too, although there is some debate about this depending on how you measure it & corrections that have occurred along the way in various past bull markets. It has to be said though that bull markets don't just die from old age it is usually caused by the Fed tightening monetary policy, which is exactly the phase we are in, although thus far they don't seem to have slammed the breaks on sufficiently to stop the market in its tracks. Indeed sometimes you do get a final euphoric run up which then sets the market up for a fall when the good times end. With all global central banks now moving to a tightening bias & starting to withdraw the stimulus that was put in place post the global financial crisis, it remains to see how markets will cope with that.

A couple of other things that made me think about this recently was firstly a snippet in Money Week about Warren Buffet and also the stats on the amount US investors have in equities versus cash (see pictures below). Neither of which are particularly bullish, but equally not a reason to rush out and sell all your equities either. Just pointing out that things have been good for a long time and at some point, may be in the not too distant future , things may cut up rough so just be careful out there and don't get carried away.

Click Image to read post at CMGWealth.com

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Trades for CISP from July '18 Screening.

6/8/2018

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Here is a quick update on the trades that resulted from the latest monthly screening on the Compound Income Scores Portfolio (CISP) which is based off of the Compound Income Scores. For a reminder this generally tries to pick new holdings from the top Decile & hold positions which at least rank in the top quartile.

First up on the sale candidates was Amino Technologies (AMO) the Software provider to network TV operators, which had reported disappointing half year results as expected earlier in the month. The conundrum with this one is that they say this is due to a major customer order scheduling, but they say they expect to make up the shortfall in the second half. This does however leave them as a hostage to fortune and potentially an accident waiting to happen, so I let it go. The only thing that gave me pause for thought was that the forecasts had jumped after the figures, so maybe an analyst is confident they will bounce back or more likely just following the company line, as ever time will tell, but I'll be watching from the sidelines.

The second sale was VP the tool hire & services company which had done well since entering the portfolio at the turn of the year. The score had therefore deteriorated & the shares looked overbought so I didn't argue with it.

Those together with the cash that was retained last month & from 3 dividends this month gave room for three new positions, based on their Scores and factoring exposure the portfolio already has in place. Thus to replace VP, Somero (SOM) another cyclical construction related service provider seemed like a natural replacement as it scored better than VP.

Next up was a slightly strange one called Chruchill China (CHH) - which is quite similar to Portmeirion (PMP) which the portfolio has traded successfully in the past. In this case it looks as though it is being well managed as it increases the proportion of sales it gets from international catering markets and by increasing value added offerings thereby helping to shrink the contribution from the UK consumer business where conditions remain difficult.
Apart from it scoring well i notice that despite the recent upgrades after their trading update, the price has not really responded. So given the numbers I reckon the market might wake up to it and respond positively when they actually deliver their final results at the end of August., assuming of course that the outlook then still remains positive.

Finally the last new holding which brings something different to the portfolio was the recently listed legal services group Gateley (GTLY). This one scores well and looks reasonable value having come back from highs recently, despite earnings upgrades and the fact that it is still come the final dividend of 4.8p which is worth about 3% at recent prices.