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...which is XP Power, a stock I have written up a few times in the past year. They remain in the top decile of the Compound Income Scores with a score of 96. The results were in line to slightly ahead of expectations with earnings and dividends coming in at 101p (+6%) and 61p (+11%) versus forecasts of 100p and 60p. This was on the back of order intake which was up by 6%, in constant currencies, to a new record and they now design 66% of their products themselves. Their operating margins also increased from 23% to 24.2%, and they generated cash such that they had £1.3m net cash versus £3.5m of debt at the previous year end. On the outlook the chairman said: "While the global economic outlook again looks mixed in the year ahead, we believe we can grow our revenues as the new designs won in 2014 and prior years enter production. We also plan to invest in additional sales and engineering resources in North America during 2015 to help drive further growth. We enter 2015 with a strong balance sheet having closed 2014 in a debt free position. This places us in an excellent position to make bolt on acquisitions to further broaden our product offering and engineering capabilities." Summary & Conclusion: Another good set of numbers and steady delivery from this one which has under performed in share price terms over the last 12 months as it has de-rated from a fullish rating back then and as smaller companies in general have struggled. This has left it looking reasonable value on around 14x P/E but the dividend yield of 3.8% based on this years dividend just announced and a decent earnings yield of 8.5% gives it a value score of 84 in the Compound Income Scores, which remember mostly excludes zero yields and is based on those two metrics. As a result I'm happy to run with this one on value and yield grounds as they seem to be making good progress having invested in the business. They also seem confident about the future and their strong balance sheet gives them scope to invest or acquire for further growth, although of course nothing is guaranteed. Brokers seem to be forecasting some growth for the coming year of around 5%, so hopefully we'll see a continuation of their growth trend, albeit probably at a slower rate than in the last 5 years when they have achieved 20%+ growth in earnings and dividends. 
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Well it is Friday and a quiet news day otherwise apart from today supposedly being the latest deadline for an extension or otherwise to the Greek bailout or it could even run until the end of the month when their financing will run out. As a result markets seem to have become becalmed in some kind of lull before the storm perhaps. Coincidentally in the UK the FTSE 100 is hovering close to its resistance from the highs in 2000 and 2007 as you can see in the chart below.  So I guess as we wait and see who blinks first in Europe this will probably help to determine if we will breakdown again and remain trapped in the range that has applied since 2000 or if we will finally breakout? I'm hopeful that we might see the market progress this year as there are several reasons to be cheerful that have emerged in recent months both domestically and internationally such as:
So as we await The Final Countdown in Europe it put me in mind of that big haired bunch of Euro rockers and and their song, which if you change a few words can be spookily appropriate and see the accompanying videos at the end: We're leaving together But still it's farewell And maybe we'll come back To the table, who can tell? I guess there is no one to blame We're leaving the Euro Will things ever be the same again? It's the final countdown The final countdown Ohh We're heading for default and still we stand tall 'Cause maybe they've seen us and welcome us all, yea With so many tight years to go and things to be funded (To be funded) I'm sure that we all miss her so (Angela perhaps?) It's the final countdown The final countdown The final countdown (The final countdown) Ohh ho ohh The final countdown, oh ho It's the final countdown The final countdown The final countdown (The final countdown) Ohh It's the final countdown We're leaving together The final countdown We'll all miss her so It's the final countdown (The final countdown) Ohh, it's the final countdown Yea In case you're not familiar with it here's the video for The Final Countdown if you want to sing along to it or Reasons to be Fearful or Cheerful if you prefer? Cheers or prost as they say in Germany - have a great weekend. Further to my recent post on sell disciplines we have had a poor set of results from Centrica today. I'll not go into detail on the figures as I'm sure there will be metres of pixels written about it today.
The key disappointment for an income investor was the slightly unexpected, but not wholly surprising dividend cut of 30%, starting with the final dividend. This meant that the full year dividend was down by around 20% overall to 13.5 pence. This compared to forecasts of a small rise in the dividend for this year to 17.5 pence, although a small 3% or so cut was being forecast for 2015 to 17 pence. So the 30% reduction will take this number down from the forecast 17 pence and this years actual 13.5 pence to around 12 pence. At the pixel time price this morning of around 258 pence this will be a yield of 4.65%. Given the further fall of earnings that they are flagging for the current year I estimate this will leave the earnings cover at about 1.4 to 1.5x still only just about acceptable. So based on my sell disciplines I would sell it given the dividend cut and the poor outlook for this year plus the heightened political risk over the election. I am pleased to note that this one had a Compound Income Score of 20 (stocks are scored 100 to 0 with 100 being best) yesterday ahead of these numbers putting it just in in the bottom quintile showing that the Compound Income Scores can be a good guide to point you in the direction of better income stocks and away from the weaker ones. Talking of which I updated the Scores again yesterday and added one new column in response to a readers comment on Saturday's video post, where you can see the comment and my reply at the end by clicking comments if that is of interest to you. So the new column attempts to calculate a sustainable growth rate for each company to compare with their current growth rate and the 5 year compound dividend growth. This is based on the theory of the Plowback ratio which can be used to calculate the sustainable growth rate by multiplying the retention rate by the ROE. If a company is growing faster than this rate then they will need extra finance over and above the retained earnings. For this reason and because ROCE will tend to be lower than ROE I have chosen to use the 5 year average ROCE * retained earnings % to calculate this figure to be conservative and also so it takes into account the current financing arrangements, but you could obviously calculate the ROE based one if you prefer. After my post last week titled Market Ratings & Sell Discipline I thought I would add some further thoughts on this which can be one of the hardest things for an investor to get right. Certainly in my experience it is almost impossible to get it right all the time. I would just add that last time I was talking there about an upper limit on valuations that I use as a sell trigger.
As I mentioned in that post in passing, that on some stocks you will probably have a view of a full valuation for their type of business and financial metrics based on their past trading history which may well lead you to consider selling at lower valuation level than the 2% & 20x that I mentioned. However, it is important to try and stay disciplined which being a quantitatively driven income investor helps with, so what other factors does that lead me to look at for sell triggers?
Summary and Conclusion So all of this follows on from constantly monitoring your portfolio and potentially leads to turnover which is something that I have had varying views on over the years. In my early days I was much more active as I was building a portfolio from a low capital base and therefore I tended to trade more aggressively for quick gains and then repeat, although even back then I did run some positions for longer periods. As my portfolio grew and compliance regimes which I was subject to at the time became more onerous one had to be more investment rather than trading orientated. In recent years as I have become free to invest as I like, I have generally adhered to that longer term investing type philosophy allowing my dividends and gains to compound although with some trading around the edges too. However, more lately as the market has started to flatten out and returns have been harder to come by I have been trying to become more proactive again, despite my natural reservations about turnover and the potential costs involved as it always pays to keep a very close eye on the cost. However, with fixed price, low cost on line dealing, this really should not be a problem unless you are dealing in very small amounts, as a £5 commission is equivalent to 0.1% on a £5,000 transaction for example, although you do also have to factor in the spreads and the evil 0.5% stamp duty (but not on AIM stocks these days). Any way I'll leave it there as I have waffled on for ages already but if like me you are a bit worried about doing too much turnover then have a read of this piece titled Portfolio Turnover–A Vastly Misunderstood Concept by John Huber at Base Hit Investing - you may even have an epiphany, but still beware of over trading for the wrong reasons. ....as CAPE values (Cyclically Adjusted Price Earning ratios over 10 years) are suggesting that European equities are looking cheap. This is certainly the case versus US equities which closed at record highs recently and are trading in potentially expensive territory on the CAPE measure. Why this matters was explored by Meb Faber in his book Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market. In his current market outlook he is explains that the US is again looking stretched versus Overseas markets, although it did also look stretched last year and and went onto become one of the best performing markets in the last year. So it just goes to show that while these measures may make sense in the medium terms they are not necessarily a guide to shorter term movements. Meanwhile in Money week this week, there was an interview with the creator of the CAPE valuation indicator, Robert Shiller the professor and author of the book Irrational Exuberance which came out in 1999 and warned about equities, In its second edition it warned about a housing bubble in the mid 2000's. So I was not surprised to hear that the third edition which is just out is and has topically added a look at irrational exuberance in bonds. Now that is off topic for this note, but he did reference in his interview, the difference in CAPE valuations between the US and Europe where they are half the level of the US and also suggested that this might offer opportunities. So with all the travails in Greece and the showdown / compromise with the EU due maybe there could be some good potential if this gets resolved? Now while Greece along with Russia are, understandably, some of the cheapest markets in the world on CAPE, I'm not suggesting you rush out and buy those markets. Having said that though with a potential ceasefire in Ukraine and the possibility of a deal in Greece maybe they could do well from here if you were brave enough? A safer way to play the region if you don't want to hunt for individual equities throughout the European region is to buy a more broadly based fund. As I have mentioned in the past, I tend to prefer using Investment Trusts for gaining overseas exposure, so what are the options for gaining exposure to Europe. Probably the best and one of the larger ones is Jupiter European Opportunites Trust (JEO) which has been managed very successfully by Alex Darwall since November 2000. He has a sizeable personal stake in the fund and takes high conviction position in what he believes are quality Companies. His strategy seems to have paid off over the years as you can see from this analysis. The only down side is that is means it doesn't come cheap (in terms of rating) and often, as now, stands on a premium to NAV and also it offers less than 1% in yield. If yield is more your thing and you don't mind going down the size scale, then you could revisit a smaller cap. European Investment Trust which I wrote up back in January 2014 as offering a tasty yield. This is the European Assets Trust (EAT) which still offers a yield of 5.7% despite being up by nearly 10% in the last twelve months. This is because this one unusually pays out 6% of its capital each year as a dividend and this rises or falls with the asset value each year. Thus this years dividends, it pays three times a year, are up by 8.5% on last years payments. Its NAV performance has matched that of JEO over the last 3 years but trailed it by around 18% over 5 years, although I guess the extra yield would have made up most of the difference. Finally, you could consider a more broadly based fund which follows a quantitative approach to selecting European equities with yield. This is called the JP Morgan European Investment Trust - Income shares (JETI) which has been Co-managed by Alexander Fitzalan-Howard since August 2006. It has been a steady rather than spectacular performer lagging JEO & EAT over 3 & 5 years but it has I believe out performed its benchmark and it offers a yield of around 3%. So there you go three ways to potentially play a recovery in European equities which may be helped by low valuations, QE and perhaps a resolution to the Greek situation at some point in the near future. Of course I'm sure there might be some good open ended companies out there which one could use, so if any readers have any ideas in that space please feel free to add them in the comments section. Alternatively as I like to try and add value for you, please see the output from a quick screen I did on Quant-investing.com which is simply the 20% of highest yielders across Europe and which starts at 3.7% upwards. So not too bad a yield but I can't say if any of them are good buys, you'll have to do your own research for that so good bye or Αντίο as I believe they say in Greek. 
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