Performance  Review
July proved to be a better month for investors generally as the FTSE All Share managed a positive total return of 4.4%. It was an even better month for the Compound Income Portfolio with a second month in a row of outperformance versus the FTSE All Share with a positive total return of 7.9%.  Please see the table above for details of the returns YTD and over longer time periods and since inception in April 2015.

Commentary
So some sort of corner has been turned and small run upwards has ensued in the short term, but it remains to be seen if we have passed the foot of the valley in this bear market or if another downhill section lies ahead. The debate is on  the likelihood of recession and the actions of the US Federal Reserve as a result. Some see a likely pivot point ahead as a result. The main problem with that is the on going inflation and whether that has or will peak soon and then rapidly decline, while the bringing forward of rate cuts could presumably on the back of a more serious economic downturn than currently indicated by lagging indicators.

My own view would remain that it seems likely that there may be worse to come in this bear market as recessionary impacts finally hit corporate earnings which could then prompt the next leg down and shake the complacency demonstrated in the current rally. I could of course be wrong if the Fed come riding to the rescue in double quick time again & manage to engineer a rare soft landing. The dog days of summer can sometimes surprise when the main actors are away on the beach and news flow slows to a trickle. So bigger problems usually surface in the Autumn - so I'd say enjoy the summer while it lasts but be prepared for a more volatility ahead.

Portfolio Review
Trialling a new format this month with a fact sheet on the Portfolio provided at the end of this piece. This covers last months Top & Bottom 3 contributors, transactions (previously covered on Blogs here),  a breakdown of the Portfolio's Sector & Index exposures together with details of the Top 10 holdings, I hope readers find this useful.

This also includes Scores, dividend growth forecasts and some traditional valuation statistics  (PE & Dividend Yield ) for the Top 10 holdings and the overall portfolio. It is encouraging to see that the CI Scores Portfolio is forecast to trade on around 11x PE with a 4.3% Yield which is predicated on the forecast 11.3% dividend growth overall for the Portfolio. On that basis I'm quite happy the Scores are helping to deliver a Portfolio of good value / quality dividend growth stocks. It would also suggest that if those forecasts are anywhere near the mark in terms of what actually gets delivered, then assuming that prices reflect the increased dividends, then the portfolio should be well placed to continue delivering the 14 to 15% or so it has delivered since inception. Of course those estimates may be downgraded along the way and share prices can go down as well as up as the marketing disclaimers always say. 

Summary & Conclusion
A better month for markets and the CI Scores Portfolio as we enjoyed another bear market rally or a bottom if some who see a quick US Fed pivot are proved correct. However with Yield curves inverted and many other recessionary indicators flashing red, this suggests to me that we may have to go through some more difficult months beyond the dog days of summer before this is all over, although I could be wrong - which in this case would be good.

Any way I'll leave it there and suggest you enjoy the rest of the summer while it lasts, whatever you are up to wherever you find yourself. But do watch out for some potential Autumn storms ahead perhaps. ​

Just a quick note for subscribers (or anyone else who might be interested) to expand on a couple of post results transactions (one sale and a replacement purchase) which I have put through outside of the normal monthly schedule which subscribers will have seen on their Scores file in the transactions tab.

The sale involved a fairly recent purchase Argentex (AGFX) which I felt was slightly marginal  / contrarian at the time given their track record. Their results came in shy of forecasts, which had been downgraded along the way, continuing a long line of disappointments from this Company.

It not this however that prompted me to push the sell button. It was their decision to change brokers and their year end. As part of this on the results call they kept referring to the Singers numbers (the new broker). It turns out that these numbers to the new year ends of December 2022 & 2023 were substantially below the existing forecast to March 2023, with those numbers only recovering towards the previous March 2023 number by the end of 2024. 

This struck me as the latest in a long line of disappointments and it seemed to me that they were trying to disguise what was, effectively a profits warning, by changing their year end. Now this is probably on the back of the investment they are making in people, IT and new countries for their operations which may of course lead to more success for them in future. It is also possible I suppose that they are trying to get forecasts down to a level that they think they can beat, so they can over deliver for a change in the future.

So I guess if you trust them to deliver on their promises by making a success of these investments then I guess it could still do well in the long run for the patient contrarian. I was not prepared to take that risk & I had sold my own personal holding too. So as I would expect the Score to fall as and when the downgrades get reflected in the consensus I felt it only right to sell it for the Scores portfolio and another family account which mirrors the Scores trades. 

To replace that I added a stock Appreciate (APP) which I bought personally earlier in the year as a value/ recovery/ growth play. It has popped up in the top decile of the Scores post their own final results and some upgrades that they have seen since then. It has performed relatively well this year in a difficult market but still looks pretty good value. So despite it being somewhat overbought in the short term, again as I hold it personally I was  happy to add it to the Scores portfolio and another of our portfolios.

Appreciate is quite a strange / small Corporate gift & Christmas saving company and as such is probably not to everyone's taste or a marmite stock. It is however under new management and also recovering post pandemic and as they look to reap the rewards of their own IT investments and a move to more digital offering.

Please see the attached note for more details of the business and the outlook etc. I note from this that the estimates that are included in this Company sponsored research of 4.56p & 5.92p for March 2023 & 2024 respectively are some way ahead of the current consensus forecasts of 4.2p & 5.4p. This suggests that there could be scope for further upgrades on top of the 4 to 5% upgrades that we have seen already. 

This of course assumes that they can hit those forecasts, but again one would think that they would be happy with them, although this one has disappointed in the past, it does seem to be on a recovery track. Annoyingly they have today put out an announcement that the CEO is leaving abruptly at the end of July 2022, although he will remain available to advise the Group until January 2023 apparently. This comes shortly after the CFO stepped down and seems quite short notice for a CEO to be going, although they go onto thank him & say they are confident of performance going forward.

Which at least might suggest nothing untoward operationally, but begs questions about what has really gone on here or if it is the new Chairman seeking to make an impact on the Group as they move onto the next stage of their Growth strategy. I guess only time will tell on that but the shares have consequently been marked down by 10% or so this morning on the back of it. It doesn't seem to change the story, although we'll obviously have to wait and see what calibre of people they get to replace those executives who have left recently.

So I'm certainly not going to panic out on the back of this & the falls today could be a good buying opportunity as the shares are still cum their 1.2p interim which is worth a useful 4.4% on todays lower price. While the full year yield could be a useful 7.5%, although obviously you'd have to do your own research and make your own assessment of how much the management change bothers you or if you'd prefer to wait and see who they get. For what it is worth, technically they have now come down to a decent looking support level - if only I'd waited a day or to the end of the month to push the button!

Introduction
We have reached the half way point in the year & perhaps in the bear market as I speculated in my last post. It was apparently one of the worst six months in markets for the last 50 years. We might see another bear market rally in the next few months if all the pessimism has been over done in the short term and as we enter the summer doldrums, but of course it could still get worse before it get better too as we see more rate rises & a potential recession become a reality perhaps.

Forecasting the market though is quite frankly a bit of a mugs game, but for now at least the bear trend seems firmly in tact and spreading further, the headline indices look to have rolled over gently in a top formation, while there could well be worse to come in the next earnings reporting season, but as ever time will tell.

Market timing Indicators
Having said that, the Market timing indicators that I maintain (another mugs game perhaps) have all now turned negative, with this months falls finally dragging the larger headline indices such as FTSE 100, FTSE 350 & FTSE All Share into bear territory below their moving averages. In the past research had found that it was worth ignoring this signal and only selling out when and if other indicators turned negative or indicated a likely recession. So while the ISM indices in the US remain above 50 & US unemployment has not yet turned up this suggests it may still be ok to remain invested for now. 

Nevertheless with recession widely anticipated it seems likely that these indicators will turn negative before too long, by which time the market may well have discounted all that and be going up again as by then, it will be discounting a recovery, once again demonstrating the futility of trying to time the market perhaps? Indeed this is what we saw in the Covid sell off as these indicators turned negative near the lows, but then that was in unusual circumstances and the authorities stepped in with support in double quick time, whereas this time around they have limited flexibility.

Portfolio & Market Returns
June was pretty poor month with the FTSE All Share providing -5.98% total return and  hence -4.57% year to date. Against that the Compound Income Scores portfolio also fell but for the first time this year did actually manage to outperform the index by falling less and providing a total return of -5.59%. So a small glimmer of hope there, but one swallow does not a summer make, as this was largely down to the unexpected bid for EMIS (EMIS) which soared by nearly 50% on the back of it. 

Longer term this leaves the portfolio with -16% returns year to date & now lagging the index YTD and over 1 and 2 years. So quite a lot of damage in the short term, but given the bias it has towards mid, smaller cap & AIM names which currently make up roughly 80% of the portfolio, this is perhaps not so surprising as Mid 250 is -19.4% TR & Small Cap Index -15.1%  TR YTD. While the All AIM index is down by 28% in capital terms this year. So they have all seen much greater falls than the FTSE 100's -1% TR thanks to its higher exposure to more resilient oil and mining names this year. By the same token the portfolio benefitted from that tilt in prior years and thus the longer term track record is still looking good with total returns of 14% per annum since inception in April 2015 versus the 5% or so from the Index.

Over that time period it is interesting to note in the chart at the top that the Mid 250 has now underperformed the All Share Index in total returns terms. That is certainly a turnaround from previous experience, but probably reflects the greater domestic exposure of Mid cap names and possibly a BREXIT effect? Small Caps remain well ahead, but I guess they could still play catch up to the downside perhaps if the bear market continues and broadens out, although there have been some pretty painful losses in some Small cap and Aim names already as seen in the index returns mentioned above and as I'm sure some readers may already be painfully aware. Of course some of the worst pain has been felt in previously excessively exuberant areas such as meme stocks, tech stocks and dare I say Crypto, but then I don't do crypto!

I am however happy to stick with good value quality income stocks which are forecast to increase their dividends. The current Compound Income Portfolio of 29 stocks currently trades on a weighted average year one forecast PE of 10.6x with a net yield of 4.45% assuming they deliver the forecast 10% dividend growth, which should just about keep up with the rampant inflation we are seeing this year. Looking at the income ledger the portfolio has earned  about half of the forecast income for the year at the end of June so seems on track to deliver the expected income, although the running yield is now higher due to the fall in capital values in the first half. 

On a personal note my net worth has held up a little better, being down by 11.5%, although it is notable that this translates to a fall of 16.5% in real terms once you factor in the effects of the current rampant inflation. While the income from my portfolios is up by 3.3% in the half. So I can live with that even if the current inflationary episode is detracting from my efforts to grow my capital and income in real terms this year at least, although it comes after many years when that was the case. 

Monthly Screening
Having minimized turnover recently by giving some stocks where their Scores had slipped the benefit of the doubt, I decide to try and get back with the process and put through a few more trades this month. Having said that I still gave the benefit of the doubt to a few names where  based on the Scores it looked quite marginal and also where they had news flow due in then next month or so.

One example of this was the recruiter Robert Walters (RWA) which has de-rated significantly to historically low levels compared to their history. While in their last update they were still trading well & I'm conscious that a more specialised competitor of theirs S-Three upgraded their full year outlook recently. On that basis I've held onto it as the market seems to have moved to discount a downturn which may not yet have appeared in their business, but I guess it could down the line when and if unemployment turns up in a recession presumably. Having said that it is also possible that they could still do ok form the on going labour shortages and rising wage pressures coming from the inflation problem we have at the moment.

Of those that I did sell one for me was a more straight forward call - B & M European Value (BME) which had a Score of just 42. I say easier because despite their recent update maintaining their Ebitda guidance, I still suspect that they may have a profits warning in them as their sales and margins seem likely to come under pressure as the boom from Covid that they enjoyed seems to be unwinding. On top of that it is often a bad sign when a founder either chooses to or is forced to step back from the business. Superdry (SDRY) and Ted Baker (TED) spring to mind as recent examples of that. We have also seen problems for US retailers having to de-stock, but maybe B & M are a bit smarter with their buying perhaps.

In addition to that looking at their margins & rating versus other retailers like Tesco, JS, Kingfisher & Halfords covering the same kind of categories they are involved in, it seems their margins are out of line and their rating, even though it has come down, still looks rich compared to those competitors unless they can maintain their margin premium, which I have doubts about, as discussed above . To replace that I bought some M. P. Evans (MPE) which I had ducked previously but which was now again a top scoring stock and offering better value than B&M as they benefit from the firmer pricing for their Palm Oil production, although the price of that has come off recently & some government interference, hence the set back in the price presumably. 
​
Another sale that I struggled with a bit more was in Ashtead (AHT) where I had top sliced successfully earlier in the year and given the benefit of the doubt to previously ahead of their finals. These were fine and they had a pretty confident outlook statement and suggested further progress this year as their business is now more diversified than it was the last time they saw a recession and less geared too, although still with a fair bit of debt. Thus with the de-rating that had already occurred I was tempted to try and look through that & sweat it out. In the end as they had still seen some downgrades I let the Score of 70 guide me & switched in to a more UK cyclical name which Scores better and offers better value.

That was brick maker Forterra (FORT) which has already demonstrated pricing power this year, has some self help and organic growth investments and where the outlook for demand and supply still seems fine for now as house builders still seem to pumping out houses for now. They also seem to be coping ok with energy prices too, but I guess that could still become a bigger problem in the future perhaps & a big recession could also clobber them down the line too I guess. 

Aside from that I made another less straight forward relative value switch. In this case I decided to take profits in Cerillion (CER) which I had also acquired as a relative value switch out of Dot Digital (DOTD) before it collapsed last year. My thinking here was although it seems to be trading well it has seen some downgrades after the interims as they warned about the possibility of potential timing delays in their lumpy contracts. If that comes to pass I feel it could be vulnerable to a sharp correction given the relatively high 28x rating as we have seen many other highly rated stocks under the cosh this year, which this one seems to have escaped for now given their expected growth. Against that I switched into a former holding Auto Trader (AUTO) which had drifted back recently after decent results & a positive outlook statement . This had left it with a better Score & value than Cerillion with a  sub 20x PE and around twice the yield. Again time will tell if that was wise or not.

Summary & Conclusion
So we have had a very poor first half to the year with very few places for investors to hide as bonds joined in the falls along with equities. So even the traditional 60:40 balanced fund has suffered this year. Only players majoring in oil stocks and commodities or successful traders / macro investors are likely to have seen much in the way of gains this year. While I get the impression most smaller investors have suffered similar or worse falls as their focussed portfolios skewed towards small caps have been hit hard by the developing bear market. 

It remains to be seen if we will see another bear market rally or indeed if we may have seen the worst already. As per my last post it looks like we might have further to fall or another leg down if earnings start to disappoint and a recession is confirmed. That could set us up for the market to bottom at some point in the second half if investors have capitulated and Central Banks led by the US federal reserve stop raising rates or even start cutting again as a recession takes hold. 

Indeed bond markets have staged a rally recently as they have started to try and anticipate that kind of outcome. Of course it remains to be seen if any of that comes to pass or if the Central Banks have to keep on going if inflation refuses to peak out. I think the best I can say is to borrow the phrase from J.P. Morgan I think it was, that prices will fluctuate. Mind how you go, good luck with your investing in current markets and here's to hoping for a better outcome in the second half of 2022 and beyond. 

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.