Given the recent recovery in markets these have now moved back into positive territory by around 1% for the headline FTSE 100 , FTSE 350 & FTSE All Share Indices. While down the size scale it is a more mixed picture with the FTSE Small Cap being about 2% above its 10 month moving average but the normally strong FTSE Mid 250 Index remains just below its moving average.
It remains to be seen if this is another false positive which leads to a whipsaw or if the more positive recent trend can be sustained. I have to say things feel pretty choppy out there with seemingly an increased number of profits warnings and downgraded expectations. However, the other measure I have started using in conjunction with these indicators, the US unemployment rate, remain just below its moving average, which is supportive in this case and would suggest remaining invested for now.
So make of that what you will but I would suggest being careful out there as it feels a bit dangerous right now, although there are always opportunities nevertheless in individual stocks. On the technical front for FTSE it seems like it is evenly poised tug of war between bulls and bears right now. As you can see in the price chart below there seems to be some support and the moving averages at around 6200 and resistance at around 6400. It will therefore be interesting to watch for a decisive break of either of those levels to tell which way the short term trend may take us next, but it is nearly May when the old saying says you should sell and go away - which sounds quite tempting to me this year.
Good looking interim results to 31st January 2016 from Utilitywise (UTW) the independent utility cost management consultancy today. These showed revenues up 36%, diluted earnings up by 21% and the dividend by 29% which is ahead of the 21% or so growth that is currently forecast by the consensus. They have swung from cash to around £10m of debt, but separately they did announce another positive renegotiation of terms with an existing supplier which they say will give rise to a cash inflow of £2.25m by the year end, which may help to bring the debt back down again somewhat. This will be important to watch as some have questioned the cash flow on this one in the past and this together with other similar agreements with suppliers should help to address these concerns. Plus they highlighted the acquisition of t-mac technologies which occurred in the second half of 2015 and the cash of £6.4m was spent on this. Eliminating this from the movement between the two periods isolates the trading flows which overall equated to a £5.4m outflow of cash. The cash was apparently in line with their expectations and the second half is they say supposed to be a stronger cash period for them.
They also highlighted future secured revenues being up by 5% to £24.7m at the period end and up to £26.6m at the 31st March 2017. Total customer numbers were also up by 33% to just over 29,000. They also continued to expand their headcount to fill their new offices with Energy consultants increased by 39% to 625 (H1 2015: 449) and 630 since the period end. This large increase in the headcount might help to explain some of the big increase in turnover.
Aside from the numbers they also announced a board shake up with the existing CEO (and founder I think) stepping up to be Executive Chairman with a planned recruitment of a new CEO. They also added some other operational director appointments.
It all reads quite well and they finished by saying "We are confident about the future prospects of the business. The productivity measures in our Enterprise division, with a lower attrition rate in the second half, will see an improved second half performance against the first half. Overall we remain on track to deliver revenue and EBITDA margins in line with market expectations." So the shares have responded well this morning being up by nearly 5% to around 190p at the time of writing. Assuming no changes to forecasts on the in line outlook this leaves them on a rating of 10x with a 3.2% yield for the year to July 2017, which may fall to around 8x with a 4% yield if they hit forecasts for next year too. This seems attractive given the growth they seem to be producing but the market has be distrustful of this one in the past and therefore may still be wary of re-rating it. This is especially so at they commented that the net accrued revenue balance increased from £18.7m to £34.9m.
Thus the shares seem to be at an interesting juncture as they approach strong resistance at around 200p (see chart at the end). This could well mean the shares continue to track sideways from here if the market remains sceptical. It may however be worth watching to see if the 200p level can be convincingly breached, in which case a breakout might presage a re-rating on the back of improving sentiment towards the Company and their continued delivery, despite the markets scepticism. As ever I guess time will tell on this one.
Matchtec (MTEC) - the £142m recruitment business has announced in line interim results in which they reported further progress in integrating the Networkers acquisition which they now expect to largely complete by the summer of this year, with the full synergy benefits realised by mid 2017. Demand remained strong in engineering and telecoms but the IT area was weak, although improving in the second half. Energy was also a weak spot on the lower oil price, but they have reduced their exposure to oil and gas to just a third of the energy business with their recent diversification. They also continued to invest to expand their overseas operations to further this diversification. Despite this investment the cash conversion was strong and this saw net debt (which some have worried about) reduce in the period by £8.8m to £24.8m (31 July 2015: £33.6m).
Overall they reported some modest 6 to 7% growth on the back of this and this was matched by a 6% increase in the interim dividend to 6p which suggests to me they will probably pay 23p for the year rather than the current 22.8p consensus. At the current 470p this morning they trade on around 10x with a near 5% yield which still seems cheap, although this seems like another one that the market is reluctant to re-rate. If they do continue to successfully integrate Networkers and expand there operations internationally while producing some modest growth then the shares should be able to make some progress in the medium term, but I suspect continued patience will be required.
Norcros (NXR) - the £106m bathroom fittings and tiles group has announced a year end trading update today. While not showering the market with good news they did at least say that Group underlying operating profit for the year is expected to be marginally ahead of market expectations. Aside from that their suggestion for turnover looks a little light versus forecasts, so given their comments on operating profits presumably this means margins might be slightly better than expected.
They alluded to tougher conditions in the UK market and strong growth in South Africa was negated by movements in the Rand. They did however get a boost from their acquisitions last year and this is part of their plan to double revenue to £420m by 2018. Which seems ambitious and I hope they don't go all out to get the turnover but at the expense of profits because as Warren Buffet said "turnover is vanity and profits are sanity."
The spending on acquisitions meant a cash outflow for the year and leaves them with £33m of debt versus £14.2m last year, so they may still have a bit of headroom on the borrowing front for more acquisitions. Having said that though the other liability they have is a large Pension fund which saw an increase in the deficit to £73.5m (2012: £61.9m) representing an 84% funding level (2012: 85%) in the latest triennial review. The increased deficit was driven predominantly by historically low gilt yields. A revised deficit recovery plan has been agreed with the Scheme Trustee, with a cash contribution of £2.5m per annum starting in April 2016, and increasing with CPI, payable over the next 10 years. This compares to a deficit recovery payment of £2.1m in the year to 31 March 2016 under the previous plan. So an extra £0.4m per annum hit to the bottom line.
The shares continue to look good value at 170p which puts them on around 7.5x with a 3.5% yield for the coming year assuming no changes to forecasts on the back of these numbers based on forecast eps of 23.5p to 24p. So it is on a zero growth type of rating so if they can deliver growth in their turnover, profits, earnings and dividends over the next few years then they could well be cheap and one could argue for a re-rating to say 10x which would give a price target of around 22 to23p which is close to the highs they reached last year. It may however continue to be one of those frustrating value stocks that just sit there on a low rating if the market continues to ignore it on the basis of its chequered history, pension deficit and South African exposure.
The Compound Income Scores portfolio had a poor month in March as it took a few big hits on some stocks with the gainers being insufficient to offset this. As a result the portfolio finished the month down by 0.76% which compared to the FTSE All Share which was up by 1.94%, both in total return terms. The other factor in this was the sharp recovery in the more commodity related sectors during March where the portfolio still has no exposure having previously benefited from this positioning.
This is reflected in the roughly twelve month returns (3/04/15 - 31/03/16) since inception, with the portfolio producing a total return of 10.5% which compares with -4.8% from the FTSE All Share on the same basis for an outperformance of 15.3% since inception. Those of you with good memories may recall that I also did an annually re-balanced version of the original portfolio in addition to the quarterly re-balanced version discussed above. This had lagged the quarterly version during the year but made this up in the last quarter to end with a very slightly higher return of around 10.7%. I guess this may not be that surprising as they shared quite a few stock positions and I only changed about a third of the holdings along the way in the quarterly version. It does however make me wonder though if all the bother of re-screening quarterly was actually worth it?
Having said that I also feel that perhaps the quarterly screening was missing some alpha signals from the scores along the way and perhaps these could be better captured with a monthly re-balancing schedule, although this may well incur extra costs which could offset some or all of the benefit. So for this year I'm going to try monthly screening and allow changes where news flow dictates and compare it again with a re-balanced selection which is left unchanged with a year of masterly inactivity. To help on the cost front I've assumed another years contributions so as to reduce the impact of commissions to 0.2% on the increased unit size, although the cost of smaller top ups to most of the other existing holdings will cost more like 0.5%. Originally the Scores portfolio was designed to compare how it performed against my own selections in my Man versus Machine post and to provide a portfolio for the site. By way of summary this was to test the theory that computer models or algorithms can be more effective in selecting stocks as they are not subject to human biases and will tend to buy unpalatable stocks which then go onto perform.
So it is now that time of year when I update the performance of my main portfolio on the site too, so how did I do against the machine and the Scores portfolio? My portfolio had a strong calender year performance of around +15% total return, but it did underperform the CIS portfolio in the 9 months to the end of 2015. I also had a poor first quarter and dropped of a strong Q1 from 2015 so my portfolio continued to trail the CIS and was actually down by 2.5% for the year although this was still slightly ahead of the -3.9% produced by the FTSE All Share Index for another year of outperformance of 1.4% this year. That makes it seven years of outperformance in a row now, but as this is the first year I have lost money in absolute terms I guess it could be a portend of things to come as no process can outperform every year and perhaps my type of income growth stocks have been bid up to such an extent that they may underperform more generally from here if they get de-rated. As ever I guess time will tell but given the tricky and volatile market it would not surprise me if I do underperform as some point and it still feels like returns will be hard to come by this year.
To try and counter that going forward I will be trying to follow and investigate the more unpalatable stocks coming out of the Scores more fully and try to implement my own portfolio more effectively this year. Please note however, that I will only be providing updates on the Compound Income Scores portfolio to subscribers, so this will be my final update on this here, although I might see if I can put a performance table up on the site in due course for the record. So if you are interested in following it yourself and gaining access to the Compound Income Scores and the attractive income stock ideas they can provide, then please get in touch via the contact page for details of how you can subscribe.
Right that's it for now as I going to finish my Easter break with a long weekend in Paris, back next week - au revoir.
With March continuing the rally in equity markets which started in February on the back of further central bank support operations, we saw these indicators recover some more ground this month.
All the main indices such as FTSE 100 , 250, 350 and All share still remain in bear trends some 0.2% below their respective moving averages. The one outlier is the FTSE Small Cap index which after producing the strongest returns of over 4% this month, has managed to push 0.7% above the moving average, suggesting a more bullish trend is underway again in small cap land, perhaps.
However looking at the FTSE price chart (see chart at the end) I note that it has been struggling to get through the 6200 resistance level which I highlighted last month and it remains below the falling 200 day moving average too. This leaves the market at something of a crossroads. On the one hand, after such a strong bounce and given the resistance, it would not be that surprising to see a reaction. So we may well see a bit of relapse which may then keep the main indices in their current bearish trends for now. Of course if investors do get over their recent concerns about global growth and sluggish corporate profits growth then equally the market could push onwards and upwards and restore a more bullish trend.
Talking of economic concerns I also mentioned last month that the US Unemployment numbers are apparently a good leading indicator of forthcoming recession, despite them generally being perceived as a lagging indicator. Combining this with the moving averages on equity indices discussed above can apparently improve the returns from this trend following strategy by reducing whipsaws (selling and buying back in shortly afterwards) and keeping you in the market for more of the time until a recession looms on the horizon. Therefore it was encouraging that the US Non-Farm Payrolls were stronger again yesterday and that the trend in this remains below its moving average, which is positive in this case.
In addition more doveish comments from Janet Yellen recently, have led investors to push back rate rise expectations to the second half of this year at the earliest as it looks like the Fed wants to continue to support growth rather than fight nascent inflation aggressively with rate rises. Thus on balance, after a short term relapse maybe, I suspect Investors may continue to regain their mojo and be prepared to put some risk back on and drive markets higher again in the belief that they still enjoy the support of the Central bankers. How long this can go on for and where it all ends is any ones guess and I'm starting to think that the Central Bankers don't know either and they are just making it up and reacting to events as they go along in the absence of help on the fiscal side of things from governments generally. Still don't worry, be happy and have a great weekend.