Compound Income Scores Portfolio Performance
Further to the Mid Month Update - some masterly inactivity proved to be profitable again in August as the Compound Income Scores Portfolio outperformed again. This month it was by a more modest 0.72% versus the FTSE All Share Index which I use as a benchmark to measure the the performance against. This continues a run of monthly out performance since last November - so nine months in a row. So it is good to see the Portfolio delivering a scorching performance & plenty of blue even if summer in the UK has rather disappointing visage and tended to Fade to Grey.
Of the top contributors two of the three that were mentioned in the last post on here namely: Strix Group (KETL) and Paypoint (PAY). While Luceco (LUCE) the LED lighting and electrical accessories provider continued its strong run and re-rating on the back of their strong operating performance and financial targets.
On the downside the three largest detractors included a couple of mining stocks Sylvania Platinum (SLP) and Rio Tinto (RIO) on the back of mixed results in the case of the former and weaker metals prices which hit sentiment & triggered profit taking on both of them. While Jarvis Securities (JIM) also suffered some price weakness after going XD two dividends totalling 12p in late July & during August & probably saw some profit taking after a very strong share price response to their recent trading update.
In terms of activity, looking back it is pleasing to note that the reduction to SLP at 131p on risk control grounds given the size the position had got to back in June worked well given it is now trading at just under 100p. This is especially so when one of the trades at that time included the initial purchase of LUCE at 344p vs the current 480p.
Looking at the longer term, aside from the recent monthly run of out performance it is good to see a sea of blue in the returns bar chart shown towards the top of the page, but that's a bull market for you as a rising tide generally lifts all boats. Nevertheless it is encouraging as an indicator of the power of the Scores to help with selecting decent income growth stocks. As evidenced by the fact that assuming the portfolio doesn't have a massive under performance in the next four months, then it should have outperformed the FTSE All Share for five years running too. While since inception in April 2015 it has compounded at 16.4% per annum versus the 5.5% from the Index over the same time period.
Finally on this I came across this graph which I think is quite useful in putting the above performance in context and probably helps to explain why the portfolio struggled from March to November last year during the inflection point / recovery phase, but has done better as we have moved into the expansion phase & they seem to have done OK in the other phases too.
This month I continued to await results on three stocks with second quintile scores - EMIS (mentioned last month), Renew Holdings (RNWH ) & Sureserve (SUR) whose scores this month had also drifted down on no news but have results shortly. I also exercised some judgement on one stock Paypoint (PAY) which again featured in the Scoring zone where I consider its position in the portfolio.
Having given it the benefit of the doubt last month this had paid off as detailed in the Mid Month Update post thanks to the OFGEM situation and the subsequent multiple director purchases which led to a strong share price performance last month. Thus it was a closer call as they have re-rated more towards the sort of initial rating and levels that I outline when I presented it in the Stockslam back in May this year. If that event looks like something you'd be interested in there is another one due next week which you can sign up for here but I am not be presenting in this one.
Thus it was a closer call as to whether to retain it this month after such a strong run had left the shares which had gone XD another 8.3p dividend too, looking overbought and vulnerable to some mean reversion potentially in the month ahead. On balance though I decided to keep given the directors buying & the proximity to the end of their latest interim period at the end of September. They do not normally put out an update on that but I'm gambling that given the directors buying, re-opening benefits and the pick up in card based transactions & imminent energy price hikes might force them to put out a positive trading update if they are trading more than 10% ahead of expectations. Technically they also seemed to have broken out of a tight range which could also target higher levels around 750p - 780p and previous rally highs in that range. So we will have to wait and see if that was some more masterly inactivity or if I have pushed my luck too far and get whacked by mean reversion & no positive update being forthcoming.
I did however break my run of masterly inactivity when I decided to lock in profits on the Ultra Electronics (ULE) bid situation which is not due to complete until Q1 2022. Now while there is still a fairly attractive return of around 9% or so available assuming the bid goes through at £35, there is also a small risk that it could be referred on national interest grounds etc. In that case I'd think the price could sink back towards £20 so the risk reward didn't look that favourable even if the risk is low. So on balance I took profits and reinvested in a similar space as Qinetiq (QQ.) made a return to the portfolio ahead of their September period end.
Summary & Conclusion.
So another positive month, helped by last months inactivity and some trades from earlier in the year & despite the summer doldrums in markets & on going concerns about inflation and the likely actions of the US Federal Reserve. This continues the run since last November and the vaccine led expansion phase in the economy which has suited the Scores more than the recovery phase from the initial inflection point from all the Central bank & government support.
As a result the Portfolio is, barring a disaster in the next few months closing in on five straight years of out performance, which in the investing world is quite rare I believe. Any way if you'd like to access the Scores to help you with your stock selection then don't forget you can sign up via in the menu section titled Scores. If that's of any interest you'll be able to subscribe for a years access for the equivalent of just £1 a week - about the price of a single cup of coffee in McDonald's these days!
There is also a short presentation about them in the sub menu of the Scores section there too, as well as the new feature for Subscribers to view the Scores in google sheets directly from the site if they wish. If any Dropbox subscribers would like to be able to access the Scores directly from the site like this then please get in touch via e-mail or the contact box on the site and I'll sort that for you.
Any way that's all for now thanks for reading if you got this far and here's to hoping the promised Indian summer this weekend last more than a few days here in the UK.
In the last monthly update I highlighted four positions that had flagged up as potential sales based on their Scores. Nevertheless I decided to hold onto them all based on awaiting forthcoming news flow on three of them and on the basis that nothing had really changed on the other.
We have had news flow on two of those so here is a brief update on that:
S & U (SUS) had a trading update rather than results that I had expected, although those will be published on 28th September. The update was positive in the main with all the right metrics like profitability, collections and debt quality all moving in the right direction. Within that Advantage, the main car finance business, was likely to see profits ahead of budget and was seen as being on track to return to previous ROCE levels, despite a bit of a shortage of second had cars. While at Aspen the bridging loan business showed strong growth despite the limited supply of second hand properties too. On the back of this there have been 16% or so upgrades to this years forecasts which has catapulted the Score back into the top decile again.
Paypoint (PAY) - where I hadn't expected any news put out an update on their outstanding OFGEM investigation. In this it seems that OFGEM are minded to accept Paypoint's suggested remedies and payment of compensation that they have already largely provided for. The price seems to have responded positively to this news rising by about 7% since then and a couple of directors have since purchased some shares. So again so profitable masterly inactivity there although slightly more fortuitous is this case.
On Strix Group (KETL) - while there has been no news as such the shares continued to steam ahead another 5% or so on the back of a bullish initiation by Liberum in which they suggested substantial upside on a further re-rating on the increasing growth prospects here apparently.
Finally, even dull old EMIS has managed to move up about 4% while we await their results in September. So here's to the success of masterly inactivity and long may it continue!
Compound Income Scores Portfolio Performance
After nothing much in way of returns last month, July proved to be more productive in terms of investment returns for the Compound Income Scores Portfolio as shown in the table & graph above. This extends the out performing streak to eight months in a row since the end of November last year and leaves the portfolio up by a stonking 27.74% YTD compared to the still good 11.68% total return from the FTSE All Share which I use as a benchmark.
The highlights behind this stonking performance in July were as follows:
Ultra Electronics (ULE) - soared over 40% on the back of a possible VC bid.
Jarvis Securities (JIM) - up around 30% after positive trading update led to upgrades.
EMIS (EMIS) - up over 10% on a positive H1 update suggesting they were slightly ahead.
On the downside the main laggards were as follows:
Sylvania Platinum (SLP) - suffered profit taking as PGM fell & on mixed looking results.
Wincanton (WIN) - No news, so maybe profit taking after strong run & stories about driver shortages and their wages being bid up perhaps?
City Of London Group (CLIG) - fell H1 update saw outflows & volatility in Emerging markets probably didn't help either.
On the income / dividend front it was notable that Rio Tinto (RIO) which is held in the portfolio announced a stonking dividend increase plus special which means they are yielding over 6% on these interim payments alone. It is interesting to note that even before those have gone XD / been paid the income in the year to date from the Compound Income Portfolio is already 18% higher than it received in the whole of last year. Looking at the latest Link Asset Services Dividend Monitor this seems like a stronger bounce back than the overall market as they suggest:
On an underlying basis in Q2 2021 (ie excluding special dividends), pay outs rose 43.8% to £24.3bn, recovering to one sixth below the pre-pandemic Q2 2019.
While in their outlook they suggest the following:
• Stronger-than-expected Q2 and the removal of constraints on banking dividends mean an upgrade for 2021, more than offsetting negative second-half timing factors
• Net effect is to upgrade 2021 headline forecast by £2.5bn to £79.5bn, up 24.4% year-on-year
• Underlying dividends (ie excluding special dividends), upgraded by 3.9 percentage points or £2.7bn to £71.2bn, an increase of 13.4% year-on-year
After giving three stocks the benefit of the doubt last month as they were quite close to the cut off line it was good to see them all go onto outperform in July, although maybe I could have picked even bigger winners? Anyway one of them has seen its Score recover into the top quartile again while the other two Paypoint (PAY) and Strix Group (KETL, that ticker makes me smile) remain up for consideration as potential sales as their Scores of 60 & 67 respectively are outside the top quartile of the Scores and therefore in the zone where I consider if I should sell them if the fundamentals justify it or if they still have investment merit or the Score has just drifted due to lack of news.
In the case of Paypoint, where the Score had slipped a bit further from last month, it is clearly trying my patience. The Q1 update that I waited for last month looked fine to me and showed some growth at the net revenue level as I had expected. They reported £28.1m v £23.2m in Q1 last year for growth of over 20% aided by last years acquisitions. This compares with £97.1m of net revenue at the full year stage. Thus with more to come from the acquisitions and re-opening benefits too and higher energy prices on the billing side it looks like they are well placed to show decent growth for the full year and they did see some modest upgrades post these figures.
That picture is obscured by the financial websites etc showing the historic figures with the gross revenues and the forecasts, which I assume are based on the net numbers, making it look like they will see a fall in sales - when the opposite is true on the underlying net basis.
So the investment case and indeed the price and rating have not changed much in the last few months since it was purchased for the portfolio. I therefore decided to give it the benefit of the doubt again and show some patience with this one while enjoying the 6% yield, although it is obviously not the most exciting situation in the short term.
The other seemingly dull stock Strix Group, which mostly makes switches for kettles and has good quality metrics like Paypoint, has shown the potential benefits of steady growth and a re-rating if you have a little patience. This one was purchased for the portfolio in February 2020 at 181p when it was on around 14x with a 4% yield as it seemed likely that it would probably cope ok with the brewing Covid crisis at the time. Fast forward to today and it has reached 334p and trades on nearly 21x with a 2.5% yield. They had a positive update which I had held on for last month, but strangely some small downgrades but the price steamed away to a new high break out. They did promise more updates on the growth outlook with the results in September. So on that basis I decided to hang on again and run this winner and hope that it doesn't boil over, although I was also tempted to top slice and add another, albeit lower quality holding to the portfolio but I resisted the temptation on this occasion.
The other two potential sale candidates also had Scores in the 60's with EMIS being very similar to Strix Group in so far as they had a positive update accompanied by some small downgrades and it is now trading above 20x too so not that cheap. I gave this the benefit of the doubt as a classic compounder & potential beneficiary of more NHS digitization etc. ahead of the actual results in September. Finally S&U (SUS) had seen its Score drift on little news so I decided to await the results from them in August to get a better picture.
Summary & Conclusion.
So a stonking July for the Compound Income Portfolio after a nothing month in June and some masterly inactivity. Dividends continue to recover well and probably more quickly than expected and the Portfolio is already ahead of last year on that front and its only July.
While on the trading front I decided to be patient / lazy again as the silly season holiday month of August approaches and hope that some more masterly inactivity might add some more value again this month. Any way that's it for now thanks for reading if you got this far and have a great August and a good staycation or an overseas holiday if you are lucky enough to be able to get away with all the Covid traffic light lottery nonsense.
Compound Income Scores Portfolio Performance
The Portfolio just about managed to keep up its record of out performing the FTSE All Share this month, although in all honestly both of them returned little more than nothing.
It does however leave the portfolio with a total return of +21.5% in the year to date which is more than 10% ahead of the FTSE All Share which I use as a benchmark. This and other performance statistics over longer time periods and since inception can be seen in the table above. This is also shown in the graph with comparisons against various Indices.
There were three candidates to be considered for action / sale this month based on where their Scores had moved down to. Two of these have trading updates due in July and one was still flagged as a buy on momentum grounds, so I decided to give them the benefit of the doubt. I also did this with the third candidate as it was a recent addition to the portfolio and despite some post results downgrades it still looks good value and appears oversold while the momentum indicator suggest holding. So after last months splurge of activity in terms of transactions I made this a nothing month on that front as we approach the quieter summer months and the silly season as it is known.
Summary & Conclusion
Sorry not much to summarise as the returns were nothing to write home about and there was nothing to report on the trade front. In conclusion after a nothing month at the end of a robust first half in markets it does leave one wondering if markets might be losing some momentum perhaps? This is especially so as we move toward the traditionally quieter summer months and investors continue to fret about inflation and whether it will be transitory (consensus I think) or more long lasting (potential for a negative surprise).
While strong growth and upgrades are being seen currently and are probably expected to continue, again there is a risk I'd say that these hopes could be dashed if re-opening is disappointing or delayed again or, heaven forbid, the virus should somehow get more troublesome again.
Any way I'll not spend too much time worrying about that this Summer as hopefully we can all get back out there are enjoy ourselves properly assuming all the remaining restrictions are lifted in July as promised. In the meantime an Englishman can dream that after 55 year the England Football team might come back home from a tournament with something rather than nothing this month!
Compound Income Scores Portfolio Performance
So more blue in evidence on investors screens this month as UK equities continued to rise and thereby provided total returns of +1.1% as measured by the FTSE All Share which I use as a benchmark for the Compound Income Scores Portfolio (CISP). This did better than the market again this month with a +2.6% total return and thereby continued its winning streak against the index this year and over all periods since inception.
That actually makes it six month in a row since November last year, although I should probably point out that this is more clawing back a sharp underperformance that the portfolio saw in November 2020 on the back of the vaccine inspired rally when many financially challenged and low quality names led the way. Nevertheless it is good to see the portfolio now pulling further ahead having made up the underperformance seen in November as the market has perhaps focused more on fundamentals again and maybe started to question how great the re-opening benefits will be in some cases. If it is of interest you can see the full performance history here.
With practically a years worth of outperformance in the year to date, I decide to do some portfolio tidying in addition to the regular sells that were suggested by the Scores. This involved trimming back a couple of big winners that have been run successfully.
The first of these Sylvannia Platinum (SLP) has gone up 3.6 times since purchase in October 2019 and as such it has grown to become the largest holding in the portfolio and has been flirting with a 10% weighting in recent months. Thus I decided to reduce it on risk control grounds. Now call me a wimp, as I know some people like to run with massively concentrated portfolios, which is fine if you are comfortable with that, but that's not how I roll as I like to run with a broadly equally weighted portfolio of around 20 to 30 positions. As this one still looks cheap and continues to Score very well it has been maintained as the largest holding, just not 9 to 10% any more.
The second reduction of a still high Scoring stock was done on valuation grounds and involved Dot Digital (DOTD) which was bought in April 2020 based on its Score and as a SaaS business with 90% recurring revenue I felt it would be resilient to the Covid crisis & could even be a beneficiary. Since then it has gone up 1.5x and re-rated and I feel that the rating has got a bit rich for my tastes with a PE of > 50x seeming expensive for the single digit growth that is currently forecast. The yield is also now < 0.5% and the EBIT/EV yield is also looking rich too at 2%. On that basis and given the current trend for switching away from expensive tech / growth stocks and towards more cyclical recovery / growth plays I feel OK with going against the old adage of running your winners, although in this case I have retained a position as despite the valuation it still Scores in the top decile.
Aside from these there were two sales based on their Scores with Avast (AVST) also confirmed by the new treble momentum trends that I mentioned in my last post. The other one Mondi (MNDI) was suggested as a hold on those trends so I wouldn't put you off holding it if you do. It has however been coming up as a potential sale for a few months now and having given it the benefit of the doubt a couple of times I decided to let it go as part of this month more active trading round as it Scores pretty averagely across the piece.
The proceeds from all these sales gave sufficient fire power for three new positions which takes the number of holding up to 30 which is the upper end of my preferred range. The new positions did however all bring something different to the portfolio and help with the diversification which after all is the whole point of a more broadly based portfolio, but as I say each to their own if you want to do it differently.
Summary & Conclusion
Another positive month for UK equities and the CISP as the recovery rally which has continued to gather pace since the vaccine news in November last year shows no sign of flagging despite some concerns about inflationary pressures.
Given the out performance by the portfolio this year and the extent to which some winning holdings had moved I took the opportunity for some portfolio house keeping in terms of risk reduction and profit taking on valuation grounds in addition to the normal sales thrown up by the monthly screening process (see above for more details). This leaves the portfolio with decent exposure to the factors underpinning the Compound Income Scores and it still looks to be offering a decent mix of value and growth with the overall PE being 16x with a 3.6% yield for the current year based on forecast dividend growth of 11% which excluding any rating change tends to suggest that the portfolio could still deliver close to its compound return since inception of around 15% per annum. So I'm happy with that and the progress shown by the portfolio in the year to date and indeed since inception.
Subscribers will be able to see details of all the new purchases and the resultant make up of the portfolio on their sheets, together with the new triple momentum trend suggestions for Buys, Holds, Avoids and Sells for every stock in the Scores. I hope this might help you with your decision making process when using the scores by tapping into the power of momentum too.
Aside from that on a personal & musical note it was a welcome change to see some blue sky outside in addition to the blue on the portfolio. Hopefully we are through the worst of the Covid crisis now and can look forward to finally enjoying some fun in the Summertime. While I probably won't be enjoying a Dreadlock Holiday any time soon it is good to see some cricket back on TV as I don't like cricket, I love it. Whatever you are up to this summer, assuming we are allowed out, take care and may the sun continue to shine on you and your portfolio.