or a nightmare maybe given how markets are performing at the moment. I'm conscious that I didn't provide much of an update last month as I was away on holiday. So having caught up with a few things after that, I thought I'd share a mid summer update of those as we had the longest day yesterday and hopefully you had some good dreams rather than nightmares last night.
It seems we are now officially in a bear market as various indices have now fallen by more than 20% for what that it worth - tell me something I don't know I can hear you thinking. Well one thing I missed while I was away was a terrific memo from Howard Marks of Oaktree capital which touches on the subject of bull and bear markets and the psychology behind them. While it doesn't provide any forecasts I thought it was a brilliant discussion of the recent period and previous episodes or bull & bear events that we have been through. If you haven't seen it I'd highly recommend getting a cup of tea, coffee or cold beverage of your choice and give it a read here: Bull Market Rhymes.
Aside from that Ray Dalio put out another piece the other day about the outlook and he seems to be suggesting that people are being too complacent and that the outlook is for a period of stagflation as the Fed struggles to fight inflation and avoid a recession. Again you can read that here if you want and you haven't seen it already. While I'll add a couple of videos featuring him at the end if you want to explore his thinking in more detail in an audio visual way.
Finally I saw an interesting article in the FT today which ties into the bear market psychology and the economic outlook. The crux of the authors (Ian Hartnett) argument seems to be depressingly that we maybe half way through the bear market which thus far has been driven by a large de-rating which rhymes with the experience so far.
Beyond that he seems to suggest that analysts are being over optimistic given the economic indicators and that wouldn't be the first time that has been the case! Indeed looking at those indicators he suggests that top down overall US earning could fall by 10 to 15% versus the consistent growth pencilled in by analysts. While in Europe he sees earnings top down being vulnerable to a 20% decline at the headline index level. At the stock and sector level he naturally suggests cyclical sectors such as industrials, tech hardware and oils may be the main drivers of that. While he goes onto point out that analysts seem to have downgraded growth expectations for growth sectors more quickly than for value sectors so that perhaps growth sectors may be less vulnerable to downgrades from here. While I guess that growth could be seen as more valuable in a low / slow stagflation environment .
Any way food for thought and of course he may not be right and the analysts may be for once, but as Howard Marks pointed out it doesn't pay to believe in it being different this time generally. With that in mind I'll try to remember that when I do this months screening as I have a couple of more cyclical names that have seen their Scores decline, while their estimates have held up ok albeit with some downgrades. One might think given economic condition that they might trade their way through it but maybe I'm falling into the same trap as the analysts there, so food for thought for sure.
So depressingly, if Mr. Hartnett is right, we may only be about half way through the bear market, with the earnings downgrades potentially triggering the next and hopefully final leg down before people capitulate and then start to look through that. Well it is a theory at least, so I'd still say mind how you go out there for now and I'll try and do a fuller half year review next month. Rather than inflicting some music on you this time I'll leave you as promised above with a couple of videos featuring more from Ray Dalio (on his inflation outlook etc) & one he did with Jeremy Grantham last month, in case you haven't seen that.
It was another poor month for the Compound Income Scores Portfolio as it delivered negative returns close to -2% again to leave it down by 11% year to date. This leaves it well behind the FTSE All Share which saw another small positive return this month and has managed positive total returns of 1.5% so far this year. If you want to see a more detailed performance breakdown, then please see the full table available under the Portfolio menu section.
No monthly screening this month as I carried out one during the month having skipped it last month & ahead of my current holiday. Given that and the fact that the performance is not much to write home about as it were and I'm supposed to be on holiday, I'll leave it there. May I wish you improved returns on your investments and for those in the UK a super long Jubilee holiday. Have a good one wherever and whatever you are up to, cheers.
Further to my note at the start of the week, decided to do a few trades today in the end, although maybe not the best day to do it. There was however some news flow from a stock that I have been tracking for a while which has de-rated quite a bit, so that prompted me into action.
The sales were of stocks which may be more vulnerable to a slow down / recession in economies - so decided to exit those as the Scores had been suggesting that for little while so getting back with the programme as it were.
Against that the buys seem to be in a position to cope with the economic climate, based on the news flow mentioned above and the nature of their operations. Subscribers will be able to see details of these in their sheets with brief comments alongside.
Cheers, mind how you go and be careful out there.
Thought I would try something different and write up an individual stock based on how it looks in the Scores to see if that appeals to anyone.
The stock I have chosen for this is perhaps a slightly contrarian opportunity as it is a seller of upmarket branded clothing and accessories, Burberry (BRBY - see fact sheet via the link highlighted name). Consequently it might seem like a strange one to investigate when there is a cost of living crisis brewing up a potential recession and problems in China due to the latest Covid related lock downs.
All of which might put a dampener on sales of their famous check gaberdine raincoats and related checked accessories. Then again those who are prepared to splash out thousands on such items probably won't be too troubled by filling up their gas guzzling Range Rovers & Bentleys, the cost of groceries going up or heating their draughty mansions or swanky Penthouses I guess.
So enough rambling lets take a walk through the financials etc:
CI Score = 65/ 100 against other UK dividend paying stocks in the Compound Income Scores universe, based on an EBIT/ Enterprise Value Yield of just under 10%. It also offers a forward dividend yield of 3.4% which is predicated on these growing at around a double digit rate - which should take care of inflation and maintain the value of that yield at least in real terms for now - so not too bad I'd say. While on the our more broadly based value score across a broader universe of some 1500+ UK stocks used in our VQM model it Scores 61/100 and 61 overall in terms of VQM, dragged down by the poor price momentum.
So overall it is offering slightly better than average value at the moment. It is also worth noting that the current prospective PE of around 15-16x is somewhat below average for the last 5 to 10 years which has usually been close to 20x or above probably reflecting the quality and growth that this one has demonstrated over the years. It is a bit lower right now given rising bond yields and the sell off in higher rated growth stocks recently & perhaps the concerns about recession etc. on retailers.
On the dividend, which has generally grown steadily over the years, apart from the recent pandemic, although they have suggested they will return to pre-covid levels going forwards. So it is yielding an above average 3.4% against the historic average of around 2.5%. On dividend safety (as measured by cover ratios) and dividend growth it also scores slightly better than average with scores of 58/100 & 68/100.
Thus if they can achieve the forecasts which those ratings are based on and get back to their average historic rating of around 20x with a 2.5% yield then this could suggest potential upside of around 25 to 35%. We can gain some reassurance on that as their recent update suggested they were confident of hitting their numbers for this year and their comments on the dividend, they have also seen earnings upgrades where they Score 84/100 and helps to support this view.
Obviously it is too early to say for the year to March 2023 given the concerns outlined at the start, so if one if cautious it might be best to wait to see what they have to say when they report full year numbers tomorrow. However, having come through a bit of a restructuring in the last couple of years and with a new CEO having just arrived it seems they are confident of making progress if their Factsheet (linked to above) is to be believed.
Operating Metrics & Financial Security or Quality
They Score well on this front with a mid teens operating margin and around a 20% ROCE over the last 5 years along with limited borrowings and an improving balance sheet. So on these metric they Score 92 & 80. While it is worth noting that they are looking to get debt to EBITDA in the range of 0.5-1.0x and they have been undertaking share buy backs too in an attempt to achieve this and as part of their capital allocation policy. On the back of this they Score 81 (100 is best) on our SHY score.
Summary & Conclusion
Based on the factors in the Scores covered above Burberry comes out in the top decile in the Compound Income Scores and was purchased for the portfolio after their update and upgrades earlier in the year. Since then it has drifted off with the market and on the back of a sell off in higher rated stocks due to rising bond yields and in this case perhaps their exposure to Chinese consumers too, given the lock downs over there as well as cost of living / recessionary worries.
On valuation grounds it would appear that there might be some upside of around 25-35% (£20 to £21) if they can deliver the currently forecast earnings and dividends and make it back towards their historic average rating. Thus it seems the market might be offering an opportunity to buy a quality branded company at a reasonable price given the current market and economic uncertainties.
On that basis it will remain in the Compound Income Scores portfolio and I think it might be a good opportunity to pick some up for the longer term on even better terms now. If you are a cautious investor then I'd suggest adding it to your watch list and wait for further updates with their final results tomorrow. For traders, looking at the graph below it looks like it could be a potential trade ahead of tomorrows figures with recent support just below 1500p which would be 100p of downside, versus potential towards around 1800p and a recent gap on the chart for a 2:1 reward to risk if that's enough for you. Longer term I've suggested it could get back to around 2000p plus which would be a more generous 4:1 reward to risk.
Of course nobody knows what the future holds and it is possible that they might be hit more than currently forecast by the economic difficulties around the world and that markets might sell off more this summer. So mind how you go and don't forget to take a (Burberry) umbrella with you in case of summer showers.
If you have enjoyed this post and would like to find other similar ideas and opportunities across the UK market, then do check out our Scores and how you can gain access to them by clicking here.
A note for subscribers about a further enhancement to the recently added expanded All Scores Section, although it may also be of interest to others & potential subscribers too.
In addition to the Haugen QVM, SHY and Conservative formula Scores across some 1600 UK stocks, we have added some new absolute & relative price momentum indicators. These are available for all these stocks in addition to the Triple Trend Momentum indicators on the 500 or so original Compound Income Scores stocks. They are designed as a quick way to identify stocks with the strongest and weakest trends based on the absolute total returns over 12 months and their relative performance over the last 12 months too less the latest month to make allowance for short term mean reversion.
Those with positive trends on both of these measures (those with the strongest momentum trend) will be flagged as Buy, while those positive in just one of those are suggested as Hold. Finally those with negative trends on both of these (the weakest momentum stocks) are suggested as Sells. Now these should probably not be followed blindly, but I hope that subscribers will find them useful in quickly identifying if a stock that Scores well and they are researching is in a strong upward or downward trend and being aware of that before taking further action.
The thinking behind this is based on the Dual Momentum research popularized by Gary Antonacci in his various research papers and his book called Dual Momentum Investing which all suggests that this can help to deliver higher returns at lower risk. He did mostly suggested applying this to sectors or as an overlay to index asset allocation as a way of reducing turnover and downside in more negative market periods. Nevertheless I think it could be helpful at the stock level too which is why I have added it to the All Scores as a quick guide to the strongest and weakest stocks in terms of momentum, particularly as we are currently going through one of those periodic more difficult times in the market. If subscribers do have any questions or feedback then do please get in touch. Or if you'd like to become a subscriber then please see here for details of how to sign up for access to the Scores and these momentum indicators plus the associated portfolio.
Further note for subscribers.
Footnote on next scheduled update & Monthly Screening. Having avoided extra turnover last month and as I will be holidaying abroad for the first time in a few years around the end of the month, I will probably bring forward this months screening to next week & I will endeavour to keep the Scores updated assuming the hotel wi-fi is up to the job. Not sure if I will have the time or inclination to do a detailed performance update this month though, but lets see, adios Amigos for now.