Just a quick note after my last blog about the Compound Income Scores portfolio monthly screening and the challenges of the decision making process. Having given it some thought I've added a couple more columns of data related to price movements which were in the background calculations. In addition to this towards the far right hand side of the Scores and the Portfolio sheets I have added what I describe as Triple Trend Momentum suggestions or TTM for short with Buy, Hold, Avoid and Sell suggestions. These are based on estimate revision data (which is already reflected in the Scores) as well as relative and absolute price momentum measures, hence Triple Trend Momentum or TTM. Price momentum is not reflected in the Scores although relative price momentum has been available as a data point for comparison and to help with decision making if one wished to factor that into your decisions. This addition hopefully helps to improve on that and make helpful suggestions as to which stocks you should be focussing on and also help to avoid value traps etc. with poor momentum.
The reason for these suggestions is that you would probably want to be trying to buy stocks that are seeing earnings estimate upgrades (or at least not getting downgrades) as stocks with these characteristics have been shown to outperform generally while the converse has also tended to be true. In addition the relative price momentum is also a well known contributor to the powerful and outperforming Momentum factor. While less well known is the absolute price momentum factor, which, when combined with relative price momentum can produce better performance and less in the way of draw downs when things cut up rough in the market.
This was described in the following research paper by Gary Antonacci called Risk Premia Harvesting Through Dual Momentum. He also wrote a book called Dual Momentum Investing if you are interested in reading more about it and the graph below details some of his finding from this post on his website.
Final Thoughts & Conclusion
Hopefully subscribers might find this useful as a guide to which stocks to focus on from the top two quintiles of the Scores say, as well as those that might have some positive momentum even if they do not score that well.
So in summary the suggestions are based on the three momentum factors discussed above, earnings revisions (1 & 3 Months), relative price momentum (12 Months) and absolute price momentum (based on the share price being above or below the 200 day moving average) thus:
BUY = EPS Estimates unchanged or positive, 12 month price momentum positive and the share price being above the 200 day moving average.
HOLD = Only 2 out of 3 of the above is true.
AVOID = Only 1 out of the 3 above is true.
SELL = All 3 of the above are negative.
I have labelled them as suggestions as you would probably not want to follow them blindly, but they should hopefully help us with the decision making process when picking which stocks to buy, hold or sell based on their Scores, other fundamental and technical factors. These changes will be live from todays update to the Scores. Any feedback or questions from subscribers is welcome or if you would like to sign up to access the Scores, you can do so by following this link or those in the site menus.
Compound income Scores Portfolio Performance
April proved to be another positive month for the UK stock market and also the Compound Income Scores Portfolio (CISP) which continued it out performing streak again this month with a total return of 7.53% versus the 4.29% from the FTSE All share. This leaves the portfolio with a total return of 18.18% , 8.5% ahead of the index in the year to date.
As you can see in the table above the current / on going bull market in pretty much everything has helped the CISP to produce positive returns and be in the blue over every period shown & it has outperformed in all the periods shown too. Indeed after we saw a Pink moon last month seeing something like that in performance numbers is probably as rare as a blue moon. Since inception the CISP has now beaten the return from the FTSE All Share by over 100% and has delivered annualized returns of around 15% versus the 5% per annum from the index for 10% per annum outperformance. Not bad for a low stress once a month screened portfolio I'd say.
It is quite pleasing to see such a positive outcome / picture I'm not getting carried away with the success as pride often comes before a fall. In a bull market like this it is important to keep your feet on the ground as it is easy to get carried away and think you are an investing genius as the rising tide lifts all boats. Having said that though I'm pretty happy that the Compound Income Scores are a good way of identifying potentially interesting quality, income growth stocks which have the potential to outperform the market.
There were 3 potential candidates considered for sale based on their Scores with a couple of these having been considered and given the benefit of the doubt in the past. In the end I decided to just sell the one, Sage (SGE), that had fallen out of the top quartile of Scores, as it had recovered in price a little since I gave it the benefit of the doubt, but it has continued to see some earnings downgrades. While the valuation doesn't look that attractive with the PE of over 25x albeit with a yield of 2.8% but this is not that well covered. They have results due later this month so it remains to be seen if that was the right call or if I should have continued to hold while they struggle to grow as they transition to more of a cloud based subscription model.
To replace that there were 3 candidates that I considered from the top decile of the Scores. Firstly was Morgan Sindall (MGNS) which I could have / should have bought last month based on a similar score, but dismissed it given it is a low margin contractor and therefore has a lower than average quality score in the Scores. So I skipped buying it again this month after a strong performance last month post their positive trading update left it looking it over bought from where it might be vulnerable to some mean reversion in the short term.
The second candidate I seriously considered but passed on in the end was Kingfisher( KGF). Again perhaps I'll live to regret skipping it as they are trading well, have good momentum and continue to see upgrades as they benefit from the lock down buying as householders look to do up their homes and gardens as a result. As ever with such stocks the question is over the sustainability of that trend, although in this case they have some help measures in progress and the currently active housing market should also be good for their business. It trades on around 14x with a similar yield to that of Sage at 2.8% but again like Morgan Sindall it scores below average on quality given their relative low margins and return on capital employed. So on that basis I decided to pass on that opportunity too.
So the one I decided to add in the end was a higher quality stock (based on its operating metrics) Paypoint (PAY) which has been in the portfolio in the past but was sold based on its Score back in November 2016 at 1075p. It is struggling with a similar transition phase to Sage as they migrate their business away from serving cash customers and towards more card based, on line payments and a parcel delivery & collection network . Again this was a slightly tricky decision as it has quite poor price momentum and has seen fairly steady downgrades, although these may have just stopped in the last month. They also have results this month so it will be interesting to see how those come out, but last time they spoke on trading they implied they were pretty confident of hitting their numbers.
The valuation though was much better value than Sage with a PE of under 12x for March 2022 year end and a yield approaching 6% on the rebased dividend although again that is also not that well covered. They also offer a double digit EBIT / EV yield more than twice that of Sage. Thus the quality and value scores are both in the top decile as is the overall Score and it is looking oversold on the overbought / oversold indicator which is also included in the Scores data.
So on that basis I took the decision to add it to the portfolio as it plays into the current expensive growth into value trend that seems to be underway and both the businesses seem to be struggling with transitioning their business which both have some good quality metrics. The difference is that Paypoint is rated much lower and closer to a no growth type of rating and arguably maybe has less competition to its payment network in convenience stores than Sage has in its accounting software area.
Other things to note are that they have recently completed the sale of their Romanian business and are now UK focussed and are bedding in some recent card payment acquisitions. They may also have to pay a regulatory fine as part of an on going investigation which probably adds to the low rating / out of favour nature of the stock - so definitely a bit of a contrarian value idea too on that basis. I was also reasonably impressed by the names on the largest holders list shown below, although the one at the top, Astericos Group, who have 15% was not one I am familiar with. On checking though it seems they are absolute return investors with a value / quality approach which chimes with the Scores.
Summary & Conclusion
Another positive month for UK equities and also the Compound Income Scores portfolio which continued the outperforming streak it has been on this year and indeed over the last 1, 3, 5 years and since inception too. However, in a bull market such as this it pays not to get too carried away and indeed such a positive performance it probably as rare as a blue moon but the Scores do seem to be a good way of identifying suitable candidates for a successful quality, income growth portfolio.
As for the screening, while the Scores can direct one, you still need to implement decisions based on them which as ever may add or detract from performance but then that is always the case in any event. This month it was Sage into Paypoint rather than Kingfisher or Morgan Sindall but as ever time will tell on the success or otherwise of that.
Any way I'll leave it there as this has already taken me a while and having mentioned blue moons I'll leave you with some music this month based on that. It's a tricky decision so I'll put up three versions and leave you to decide which one you prefer. Personally, I prefer the one by the Marcels that featured in one of my favourite horror films - An American Werewolf in London.