A quick month end round up of recent results from companies held in the Compound Income Scores Portfolio (CISP). Last week we had interim results from Hays (HAS) which showed strong growth and material investment in their growth markets with 22 countries growing net fees by more than 10%. These are overseas as the UK continued to lag so they are investing and increasing their International consultant headcount by 18% to reflect this.
Looking at the numbers which showed 18% profits and earnings growth and a 10% increase in the dividend leaves them well placed to hit and probably exceed full year forecasts in my view. I say this as even if they were flat in H2 I calculate they would exceed current forecasts and given the momentum and investment they are putting in I'd bee surprised if they were flat in h2, although I guess they will be up against tough comparatives.
Thus I was surprised that the shares came off after the numbers despite on going upgrades. Perhaps this was a behavioural bias coming into play as they were trading around 12 month highs and looked like breaking into new high ground. They have however found support above the previous 12 month high so personally I think this may be a good buying opportunity as they still score reasonably well too.
This week we have had more good results from Croda (CRDA) the high quality chemical company which is therefore relatively expensive on about 24x this coming years earnings and a yield of barely 2%. The results were there or there about but probably not sufficient to push it ahead from here given the rating and especially in the absence of a special dividend which some nay have been looking for.
While Jupiter Asset Management (JUP) the high performing fund manager which has 81% of mutual fund AUM with investment performance above median over three years also came in around forecasts as the earnings level although the dividend in total up 20% was better than expected thanks to the (usual) special dividend. This leaves them on a reasonable looking 14x with a 6%+ dividend yield, assuming markets continue to progress allowing them to pay another special dividend next year. If you are still bullish on markets then it could be of interest down here as it has come back sharply in the recent correction.
That's it for now but back soon with a month end update on the portfolio and the UK market timing indicators.
... results today from Jarvis Investment Management (JIM) the small (£60m Market Cap.) stock broking outfit. The results were excellent, as expected, with the headlines of a 22% increase in profits and earnings together with a 34% increase in the dividend, although the Chairman's statement rather managed to snatch defeat from the jaws of victory. This was quite downbeat in tone given the increased regulatory requirements that their industry is facing. He said that considerable time and resources have been, and continue to be, spent preparing and satisfying the requirements of MIFID II and GDPR (General Data Protection Regulation). He went onto say:
"That these all come at a commercial cost for the firms' required to implement and enforce them. In the latter half of the year, and going forward, we will be incurring higher costs on software, data feeds and higher staff numbers to ensure policies are correctly implemented and monitored."
He then went onto talk about the growth the business has seen over the last few years and how it has now represents the maturing of Jarvis from small company beginnings. He finished off by saying:
"With that in mind I am urging investors to be realistic about near term results. As highlighted above our cost base has increased, so revenues will need to increase at a higher rate to maintain the growth of the past. That is not to say it cannot be done, especially if interest rates increase."
So he seems to be trying to dampen expectations after such a stellar year and suggesting that some growth will be required just to cover the extra costs and I guess if it doesn't materialise this year then the profits could even go backwards given the higher cost base.
It is however worth bearing in mind his comment about interest rates as they can and do earn quite a bit from cash on deposit with them and you never know the B of E might one day raise base rates from their emergency level of 0.5% given the inflation & employment situation.
So a bit disappointing to say the least and to see the shares off first thing, but probably not surprising given the statement, although the initial fall seemed a bit over done to me. We will have to wait and see where the forecasts come out given these figures probably beat expectation but the statement has probably tempered the potential for any upgrades or could even lead to downgrades. This should be clearer by the time of the next monthly re-screening of the CISP so will have to see how it looks then once the dust has settled.
...from XP Power (XPP) which is a long standing member of the CISP. I say surprising as it is not one I would have naturally had down as being a beneficiary of the US tax cut. However it is a pleasant surprise as they say it will reduce last years tax rate of around 22% to between 16 & 17% so a nice boost to earnings there.
They are also going to book some one off non cash deferred tax gains in the US and Singapore totalling £6.5m. Overall looks like this should lead to upgrades of 5 to 7% which seems to be partially reflected in the 2 to 3% rise in the share price this morning.
On balance with the shares having come back from their highs with the market recently, they look better if not very good value on around 20x this years expected earnings before any upgrades and comes with a 2.5% yield. This rating does however probably reflect the quality of their operations and the steady growth they have delivered in recent years.
Jarvis (JIM) has announced a Q1 dividend of 5p per share , which is up by 17.9% on last year.
I would expect they have continued to trade well in light of this and if anything the recent volatility may have meant they saw more trading activity too. This plus their previous positive updates leads me to suspect they will beat market forecasts for this year as these do not seem to have been updated. Just talking next years numbers as currently forecast leaves it on a reasonable looking 16x with a yield of likely over 4% as they have come back recently with the market.
There was also a trading update from Bellway (BWY) a long standing member of the CISP. This was for their first half which appears to suggest revenue growth in excess of 13%, which is roughly in line with rates of growth factored into current forecasts for the year as a whole. This came from a combination of 6.3% higher completions and increased selling prices of 7.8%, while they say the outlook is still positive despite the rise in interest rates in November. They also say they expect margins just above 22% for H1 and at that level for the full year if the market conditions remain the same.
In this positive trading environment, they say "interest from customers remains high, with website traffic and visitors to sales outlets both ahead of last year. Reservations have followed their usual seasonal trend, with the quieter, albeit positive, summer period followed by an increase in activity over the autumn months. The Group has taken 178 reservations per week (2017 – 166), an increase of 7.2% compared to the same period last year and the cancellation rate, a barometer of customer confidence, remains low at under 11% (2017 – under 12%)."
So overall sounds like a steady as she goes kind of update which probably won't lead to many changes in forecasts. The shares, as ever, look excellent value on around 8x with a 4% yield having come back £3 or so from their 12 month high recently which has left them looking a bit oversold.
Now that the dust has settled on the recent bout of volatility, just thought I'd put a few thought down and provide an update on the January screening of the Compound Income Scores Portfolio (CISP). So taking the market first as I suspect that will be of more interest, it has obviously come as a bit of a shock to many that share prices can go down as well as up! This is because we had been lulled into a false sense of security by the seemingly never ending story of Central Bank Quantitative Easing or QE as it is known. This led to an extraordinary period of smoothly rising asset prices, or a bull market in everything as one wag called it.
This period seems to be coming to a close as the US Federal Reserve had already started raising rates from the emergency levels which had endured for years and had quite clearly sign posted a route to the withdrawal or reversal of QE over the coming quarters a kind of Quantitative tightening or QT as it were. Stock markets had ignored these signals, even as bonds started to sell off, causing some famous bond investors to call the end of the long bond bull market. Equity investors were aided in this myopia by stronger economic statistics and the US government passing some hefty corporate tax cuts which further boosted animal spirits & hopes of stronger growth. These moves in bond yields were accelerated and brought into sharper focus after the US Non Farm Payrolls and Unemployment data last Friday came in with another strong reading and showed unemployment sticking at 4.1%. The fly in the ointment was however a pick up in wage growth, which in turn fed into fears of rising inflation and hence the knock onto bond yields and ultimately equity markets.
Now I'm not saying that this divergence originally was irrational as earnings, share buy backs and dividends tend to drive stock market returns along with expansion and contraction of the multiple that investors are prepared to pay for those earnings. Given the benign background on the back of QE and recent signs of accelerating growth investors chose to focus on that and bid up stock prices in an exponential fashion, rather than worrying about the build up of debt, rising bond yields and the probable prospect of at least three interest rate rises from the Fed this year. Last weeks events seem to have brought about a reassessment and a quick bought of profit taking which has then led to more volatility as some automated algorithms probably kicked in too. Thus equity investor may now reconsider how much they are prepared to pay.
Any way enough of the rationalizing already, what to make of it all? Personally I wouldn't be too concerned just yet, given the stronger economic background discussed above. Thus this is probably just one of those normal periodic corrections of up to 10 to 20% that you quite often get in stock markets. Quite frankly if you are not prepared for that, which is the price you pay for investing in volatile equities then you should probably not be investing in the stock market at all. In addition to that you also need to be prepared to see the value of your equity portfolio potentially cut in half, when a really bad bear market rolls around, usually on the back of a recession or more recently the financial crisis. Now that is relevant here as I don't see a risk of recession in the statistics that are coming our from the US and elsewhere at the moment and that's why I say this is probably just one of those normal periodic corrections. Going forward I will however continue to watch the US unemployment & ISM numbers as well as the shape of the yield curve which has proved to be one of the best advanced indicators of a coming recession.
So no great change to my strategy as I want to remain invested in real assets and to benefit from the power of Compounding, but I will look to reduce risk when and if a recession seems to be on the horizon. On which the only thing I can add is that in recent decades we usually seem to have had either events like recessions, the dot com crash in 1999 and the early 2000's and the financial crisis in 2007-9 starting or having their effect late in each decade with the effects extending into the early part of the next decade. Earlier back in time I'm thinking of the late 1970's peak and early eighties recession, the late eighties peak and early 1990's recession etc. As the old saying goes history doesn't repeat itself, but it rhymes so as we approach the end of this decade it seems we may well be overdue another recession or event but as ever I guess time will tell.
Update on the CIS Portfolio
So if you are still with me I'll finish up with a quick review of this months CISP Screening. There were three potential sale candidates that came up this month, Wynstay (WYN) which was a clear sell on the scores and two which were much more marginal - Bloomsbury Publishing (BMY) and Unilever (ULVR). On balance I decide to give the latter two the benefit of the doubt. In the case of Bloomsbury I was tempted as it was a the top of its trading range and looked as though it could be breaking out of what has been a fairly well defined trading range, plus there had not really been any news flow recently which is why the score had moved down on unchanged earnings. I must admit I was tempted to let it go though because of the trading range. Sadly I didn't, as when the volatility hit it promptly collapsed back toward the bottom of its range where it is now looking over sold, so maybe there's a buying opportunity there again now?
On Unilever they had just reported results and having come back from their highs it was starting to look better value and a tad oversold. Thus I thought I'd leave that for another month and see how the market digests the figures, although I note that the earnings have been downgraded since - knocking the Score further. So we shall probably have to bite the bullet and sell it at next months screening, but we will at least pick up the dividend this month.
The replacement for Wynstay was Portmeirion (PMP) - the exciting (OK I made that up) ceramic tableware, cookware, gift ware and tabletop accessories provider. Not that being dull is a bad thing in the stock market it can mean that an attractive business is overlooked. In this case that is what the Scores are saying as it had upgrades after its recent trading update and looks reasonable value if not an outright bargain on around 13x with a 3.75% yield for the coming year. My only doubt is that it has been flat lining for the last 18 months or so after a sell of in mid 2016 on a trading disappointment I seem to remember, although it had done pretty well in the years prior to that. Since then the market has been strong and maybe enough time has now elapsed since the trading problem which may mean it's not such a bad time to get into it - I guess time will tell?
Finally I've been updating the Scores daily this week for subscribers so they can keep up to date with the moves in Scores on the back of the price moves and search for good value over sold stock. So if you would like to be able to do that too do check out the Scores page for details.