...as I guess Companies want to get their announcements out ahead of the latest Bank Holiday weekend. Of note for the virtual Mechanical Compound Income Scores Portfolio there were updates from Character Group (CCT), Howden Joinery (HWDN) and Schroders (SDR & SDRC) which all seemed OK.
Meanwhile back in the real world we also had updates from Berendsen (BRSN) which also seemed fine on an underlying basis but continued to be hit by currency translation as they had previously flagged and as I highlighted recently when I reduced my position. In today's update they suggested on a reported basis, profit before tax for the quarter was lower than last year, again as a result of currency translation. This compares to some modest growth that is currently forecast so they have some work to do in the rest of the year to make this up or they may well see more downgrades. The market seems to be taking this on board now as the share are off 5% or so today and down by over 100p or more than 10% from where I sold them.
Finally from me today we also had a slightly disappointing trading update plus another acquisition from RPS Group (RPS). I say disappointing because having been more reassuring on the oil and gas sector back in February with the final results they now say that this market stabilisation proved to be "fragile". On the back of this they said the following:
"As a result our Energy business has had a slower than expected start to the year, although we have recently seen an encouraging increase in our asset valuation workload, related to transactions and financing. Our clients' E&P budgets for 2015 remain substantial and the cost of executing their projects has reduced significantly. We still anticipate an increased level of activity will develop during the course of the year once specific project costs and plans have been defined. We will also benefit from actions taken recently to reduce our cost base."
So a disappointing turnaround there, but I guess not wholly surprising or were the management being too optimistic back in February? They now also leave themselves anticipating increased levels of activity which could fail to develop if they prove to have been too optimistic again. However against that they do flag that National Oil Comapnies to which they are more exposed have been less effected than international players. They have also taken action to reduce the cost base and they have made several add on acquisitions, as they have tended to do over the years, to grow their business in other areas. These together should also help to offset some of the potential short fall in the oil & gas sector.
Talking of acquisitions they also announced today that they are acquiring the entire share capital of Metier for a maximum total consideration of NOK267 million (£22.3 million), all payable in cash. Consideration paid to the vendors at completion was NOK166.8 million (£14.0 million). Subject to certain operational conditions being met, two further sums of NOK49.2 million (£4.1 million) and NOK50.6 million (£4.2 million) will be paid to the vendors on the first and second anniversaries of the transaction respectively.
Metier Holding AS ("Metier"), a Norwegian based consultancy providing project management and training services, which operates across Norway from its headquarters in Oslo. The company, which employs approximately 160 staff, was founded in 1976 and works primarily on projects associated with delivering public and private sector infrastructure. In the year to 31 December 2014, Metier had revenues of NOK390 million (£32.6 million), and profit before tax of NOK35.3 million (£3.0 million), after adjustment for non-recurring items. Net assets at 31 December 2014 were NOK45.1 million (£3.8 million). Gross assets at 31 December 2014 were NOK159.1 million (£13.3 million). So it seems like the full price including earn outs will be about 7.4x the current PBT which seems a fair price. The Company says it will be earnings enhancing in the current year which is understandable when you are paying with cash / debt.
The shares have responded negatively to the announcement and are off by around 7% at the time of writing, leaving them in the middle of their recent price range. I guess it is understandable that the shares have fallen today given the turnaround in the commentary on the oil and gas sector. It does however leave them on sub 10x again and with a yield approaching 4.5% on the back of the expected 15% dividend growth which should provide some support.
However, it will be worth watching to see where the earnings forecasts go after today's update and the effects of the acquisition are factored in. Having taken some profits on this one recently in the 240's I'm inclined to run the rest for now but I continue to worry about the effects of the oil & gas sector problems on their business.
Some readers may be worried that I had lost my marbles yesterday when I wrote up an AIM listed Gold miner of all things.
Don't worry normal service is resumed today, so if you didn't like the quality and value of yesterdays post here is one featuring a high quality AIM stock which has great momentum, but as a result doesn't come cheap.
So I bring you EMIS, a stock that I introduced you to early last year when its share price was looking a lot sicker at around 600p than it is today at over 900p. You can read the original update at the highlighted link above and subsequent updates here in the categories menu or at the side of the blog on PC's or if you scroll to the bottom of the page on tablets and phones.
Today they have had an AGM statement and I noticed the price was quite volatile yesterday with a spike to 1000p so may be there was some activity ahead of this. In this the Chairman says that trading is in line with the Board's expectations. They also reiterated previous comments about the Group having strong revenue visibility and a robust order book and contract pipeline, which gives the Board considerable confidence in further sustained growth. In addition they flagged a fifth contract under something called the London and Southern Framework and extensive tendering in Child Community & Mental Health (CCMH) and Secondary & Specialist Care and that they confidently expects to secure further contracts in the near future.
So it all sounds pretty positive and I emphasised the considerable confidence part as this seems like director speak for we think we'll easily hit the current forecasts. Consequently I wouldn't be surprised to see further earnings and dividend upgrades in due course on this one to continue the nice upwards trend we have seen on this so far this year.
This is just as well though because with the shares now over 900 pence they are certainly not looking cheap. Based on current forecasts they are trading on 20x with a 2.26% Net Yield and sport an earnings yield of 5%. So for me it is getting close to my selling discipline 2% & 20x rule of thumb (see the link for older posts relating to this). With the shares making new 12 month highs recently and closing in on all time highs it is very tempting to say thank you and discharge this one from my portfolio as it is now has now fully recovered and has a healthy looking share price and rating to go with it.
However, I'm aware of momentum research and as Ed Croft at Stockopedia keeps saying these momentum indicators like 12 months highs etc. tend to lead to outperfromance because of investors behavioural bias / mistakes by using this a signal to sell when in fact it is a sign that better times / news are being discounted by the market.
Given the earnings upgrades and the positive sounding director speak and contract wins plus the yield still being just over 2%, although my natural inclination is to sell and move on, I think I'll keep this one for a bit longer although cognisant that I am now running it as a quality momentum play without much value support (CIS Value Score = 28 & Stockopedia Value Rank = 25).
..is not gold as the old saying goes and it may be appropriate to this post. First up a word of warning as this note is about a much smaller and probably more speculative type of share than I normally write about. So widows and orphans please click away now. Right so you agree you are not a widow or an orphan and that you will do your own research before you even consider buying this stock and not come back and blame me if it goes horribly wrong.
Right, with that out the way lets begin. So why am I looking at a smaller and more speculative stock than I do normally. Well as regular readers will know I have recently introduced the Compound income Scores (CIS) and this piece relates to a stock that has popped in towards the top of the list recently. It has a CIS of 100 and a Stockopedia StockRank of 98, a market cap. of about £22m but an enterprise value of just £8m due to plies of cash, it trades on a just under 5x with an indicated yield of 6.5% for the current year and trades on a price to book of 0.71, so as it has all the hall marks of a deep value investment what's not to like?
Well I bet you are thinking it must be pretty dodgy then - and you might well be right because it is wait for it....
a Canada-based exploration, development and mining corporation focused on Southern Africa (Zimbabwe) and listed on AIM! It is called Caledonia Mining (CMCL) and as I say is therefore definitely not for widows and orphans.
They have plans to ramp up production in Zimbabwe on the back of expanding existing mining operations. In a video interview their CFO explains all this is quite some detail and gives a good overview of the situation. He also suggested that he felt the dividend promised for this year could be maintained in 2016 if gold stayed above $1150, but of course quite sensibly, below that he gave no guarantees. So with this one trying to be a low cost producer (aren't they all) it all really hinges on the outlook for Gold price and their ability to ramp up production in the way they expect within the budget they expect. Lots of ifs and buts there potentially and as we all know mining projects often run into unforeseen difficulties so I wouldn't personally take their plans as read.
Any way that's enough from me already as this is quite a speculative play. But if you are that way inclined and want to find out more I suggest you visit their website or checkout a fairly detailed recent note from Edison which set out the background detail quite well, although you may have to sign up for free to access it if you are not already signed up to access their research.
Summary & Conclusion
Undoubtedly a speculative play and I guess you would also have to have a view on where you think the gold price might go from here (see chart above for the price over the last ten years. I know the Money week chartist has been bullish recently on a trading view and there are plenty of gold bugs out there would believe it will go to the moon if the financial system finally collapses under a mountain of debt - who knows I guess you pay your money a take your choice as I always say.
Technically for what that is worth the shares seem to have built something of a base just below the 40p level and having bounced recently look a bit overbought in the short term and 45p might offer some resistance. However, the 50 day has cut up through the 50 day which could be bullish. I guess if 45p can be cleared then it may open the way for a run up toward the gap on the chart and highs from last year between about 52p and 60p - but no guarantees obviously. I'm not sure I'm brave enough to buy it as it's not really my kind of thing.
...these days, It ain't easy as David Bowie once sang. Any way I digress but since the large majority of active fund manager tend to under perform the index in the medium term - this has led to the increasing popularity of low cost index funds and in some cases so called smart beta funds.
However as Status Quo sang - Is There a Better Way?
I believe Investment Trusts or IT's as they are sometimes known, can be a better way to get a diversified exposure to all kinds of markets. To summarise I believe their main advantages of IT's are as follows:
Now while it might have seemed easy for me to out perform the All Share Index by nearly 8% per annum over the last 6 years, believe me it take a lot of commitment, time and dedication to produce those kind of results. Now obviously that is what fund mangers are paid to do, but often they fail due to hugging the index too much and suffering from high charges attached to their open ended funds.
Well I have suggested that carefully selected IT's can be a better way of beating the market. What's the evidence for this? For example you could have achieved a similar level of outperformance to me over the last 5 years with just three trades, yes three purchases to be precise.
As the Eagles sang I call it my Take it easy FTSE All Share Beater Portfolio, which is simply constructed as follows:
60% Merchants Trust - MRCH - FTSE Benchmarked High Yielding Trust which has increased its dividend for the last 33 years. You can watch an interview with the Manager Simon Gergel at the trusts site. This is a fairly unique trust as I'm not aware of too many others which benchmark themselves against the FTSE 100 and offer a yield of close to 5%. As a result it has tended to trade close to or at a small premium to its Net Asset Value (NAV) in recent years. However it is worth noting that this one is quite highly geared at 18%.
30% JP Morgan Mid Cap - JMF - since 2012 it has been managed by run by Georgina Brittan who is doing a good job on improving the performance on this one, but despite this it trades on a 15% discount. You can read more about it and see video commentaries from Georgina at the trusts site. Alternatives there would be the larger and cheaper Mercantile Trust (MRC) run for years by JPM & Martin Hudson, although this one has lagged rather badly in the last 3 to 5 years. A much better and closer alternative in terms of size, cost and performance would be the Schroder UK Mid Cap Trust (SRC) run by the highly regarded Andy Brough and Rosemary Banyard.
10% Henderson Smaller Companies - HSL run by Neil Hermon since 2002, is one of the cheapest small cap. investment trusts (0.5%) and has seen a much improved performance in the last 5 years or so to make it one of the best performers in its sector. Despite this, in common with most small cap funds it also trades on a discount of around 15%. You can read all about it and see another video with another manger at this trusts site. Well regarded alternatives in this sector are from Black Rock (BRSC) and Standard Life (SLS) although the latter has also gone off the boil a bit in the last few years.
If you had bought these three trusts five years ago it would have theoretically delivered a Net Asset Value return of 95.8% compared to 47.9% total return from the All Share for a 47.9% outperformance or 8.14% per annum (Source: JPM & Compound Income.org calculations). This is about the same level of performance I have achieved but it would have been a lot less effort this way! See the chart below to see how each of them performed versus the index over the last 5 years. So if you are a busy person struggling to find the time to run your own portfolio then you could consider Investment trusts as an alternative for the reasons given above.
The rationale for the weights was to provide a broadly based UK portfolio but with a tilt towards Mid and Small Caps. which have tended to outperform over time in the past. Of course the key phrase here is in the past, as all the marketing material always says the past is not a guide to the future. Looking to the future I suspect the next five years will probably not be as lucrative as the last five and maybe buying geared funds and being overweight mid and small caps at this point may not prove to be such a good idea, I guess time will tell.
Talking of gearing and other stats this portfolio as of early April 2015 would have had weighted average gearing of 14.1%, a yield of 3.76% and a discount of 7.65%. For that you would be paying an average 0.7% in on going charges as calculated by the AIC (equivalent to total expense ratio TER's of old) - not too bad I would say. In addition you would also have / had the issue of reinvesting the dividends, although some ISA managers and Investment Trust Savings Schemes allow for dividend reinvestment if that is something you want / can afford to do & I would certainly recommend it. Alternatively dividends could possible be used to re-balancing the portfolio, perhaps annually, to try and keep the weightings closer to the starting percentages if that is something you wanted to do. You could of course just let the weighting go where they naturally end up if you wanted to keep it really simple.
Summary & Conclusion
Of course this is just a suggestion of how you could use some IT's to easily replicate / beat the market thanks to gearing and extra exposure to small and mid cap stocks in a diversified professionally managed way without it being too expensive. This would be without all the angst of picking stocks yourself so you can relax and enjoy yourself. Equally as the years go by you could add further trusts to add an international dimension if you wanted to or you could just buy an international generalist like Bankers (BNKR) or Scottish Mortgage (SMT) to make life even easier and cheaper with on going charges of just 0.5% each on these two.
Then the world could truly be your oyster ha ha ha ha ha...sorry that's another musical reference to finish. Click here if you are curious and don't know what I'm on about and have about 14 minutes to spare - must go now go to rock on.
Read some interesting research recently from Brandes Institute who are a well know US Value Manager. They have produced research on the performance of the well known value factor and the graphic above comes from a write up about this which appeared recently on Value Walk which I find to be a useful website.
They extended previous US based research to cover global markets and found the same positive results for Value versus glamour stocks. They did however point out that there can be extended period when value underperforms such as in the late 1990's tech boom, but overall it outperforms more often than not. Interestingly from the graphic above it seems that non- US developed market value stocks seem to perform slightly better than US ones and suffer fewer periods of under performance. If this is of interest to you then you can read more by clicking the image above or download the original Brandes report below.
Another interesting research document I cam across recently looked at a Consumption-Based Explanation of Expected Stock Returns. I cam across this thanks to the awesome Wes Gray, one of the the authors of Quantitative Value, at his website. In this recent post he looked at significant and robust out performing factors such as Value and momentum and these were matched by the aforementioned Consumption based model as researched by Motohiro Yogo.
It is quite a technical paper with lots of stats to wade through and I'm not sure how applicable it is to everyday investing other than as a guide to think about how you might allocated between value, growth, large and small cap given where you are in the economic / stock market cycle. The author's conclusions were as follows:
Regardless of whether one believes in the representative household model, this paper has
uncovered some intriguing facts about stock returns and the business cycle, which should
guide future research.
1. Small stocks and value stocks have higher non durable and durable consumption betas
than big stocks and growth stocks. The returns on small stocks and value stocks are
more pro-cyclical than those on big stocks and growth stocks.
2. The expected stock return is high (low) when non durable consumption growth is high
(low) relative to durable consumption growth. The equity premium is strongly counter-
3. The conditional covariance of stock returns with durable consumption growth is high
(low) when non durable consumption growth is high (low) relative to durable consumption growth.
Stock returns tend to be unexpectedly low (high) during recessions (booms).
The bottom line quite obviously is that stocks do well in booms and badly in busts, but intriguingly small cap and value stocks seem to be geared into this cycle which I guess makes intuitive sense. Any way as I say not sure how one can apply this other than maybe making sure that you are up to speed with how the economy is shaping up and if a recession looks like it is on the way then obviously invest accordingly. I guess one could track durable v non-durable consumption from economic data releases and maybe use this as a signal. You can get a copy of the whole 62 page paper from within Wes Gray's post above if that is of interest to you.
Next up if you are still with me is an oldie but goodie from Tweedy Browne, another well known US Value manger called
The High Dividend Yield Return Advantage.
I'll let that speak for itself if you haven't seen it before then I would highly recommend it. While on a similar track I attach below some interesting research on Dividends: A review of Historic Returns - which also makes interesting reading in my opinion.
Compound Income Scores Research
Finally, if you are still with me, hopefully I have saved the best until last. Please find attached below a short e-book I have written explaining the background to and the research underpinning the Compound Income Scores, enjoy and have a great weekend.