Computacenter (CCC), the independent provider of IT infrastructure services that enables users and their business, today provided an update on trading for the year ended 31 December 2017. This turned out to be acurates egg of an announcement as they started out by saying: "The adjusted pre-tax results for the year are anticipated to be ahead of the Board's expectations as at the time of our trading update on 14 November 2017 and which have been upgraded a number of times throughout 2017." They did however go onto say in the outlook that a number of one-off costs and investments within the Group in 2018 that will not repeat in 2019, will hold back the enhancement of profitability in 2018. As a result they disappointingly said that at this early stage they therefore expect 2018 to be a year of "stable profitability", hence my curates egg comment. Looking at the forecasts I see there was only modest growth suggested for 2018 so maybe this won't be such a shock but could lead to downgrades of around 3% which is not great. This leaves them on a fairly full looking 18x with a well covered yield of around 2.2%, so probably up with events for now.
Alliance Pharma plc (AIM: APH), the specialty pharmaceutical group, announced its pre-close trading update ahead of the announcement of its preliminary results for the year ended 31 December 2017.
This was of the in line variety with the main features being a strong performance from their growth brands, a boost from FX & a reminder about recent acquisitions that they made. They also highlighted that this had led to debt levels rising to 2.5x EBITDA at the year end, but they also flagged their strong cash flow generation and therefore that they expect their debt ratio to decline to 2x EBITDA by the end of 2018. This strong cash flow and good levels of earnings cover (3x) should continue to underpin their progressive dividend policy of about 10% per annum growth. On this basis and assuming no changes on the back of this update they trade on around 15x earnings with a yield of just over 2%, in summary not that exciting a bit like the business.
Another busy Thursday with a throng of results and updates as the New Year reporting season gets into full swing. Of interest to the Compound Income Scores Portfolio were trading updates from Jupiter Asset Management (JUP) and Hays Group (HAS) the international recruitment Company. While also of interest was a sponsored note from Hardman & Co. on Alliance Pharma (APH) - covering the background and benefits from their recent add on acquisitions which you can read or download from here if that is of any interest, or click below if you want to read more.
Equity markets in the UK generally had a poor December as they fretted about the first US rate rise in years and FTSE 100, with its heavy weightings in oil and commodity stocks, produced a total return of -1.71%, on the back of on going price weakness in those sectors. While continuing the trend from recent months the more domestically exposed and diversified Mid 250 and Small Cap Indices continued to edge ahead with positive total returns of +0.23% and +1.49% respectively.
Given the large weighting of FTSE 100 in the FTSE All Share & FTSE 350 indices, this caused them to have negative total returns of -1.27% and -1.37% respectively, although there were positive total returns across the board for the quarter. For 2015 as a whole this meant positive total returns in the main, with FTSE Fledgeling, Mid 250 and Small Cap indices leading the way, while if you have been in a FTSE tracker you will be likely to have seen a negative total return as FTSE 100 produced -1.32% for the year, as shown in the table below.
Monthly Timing Indicators for UK Indices
Last time I looked at these the main indices were in a bearish trend below their 10 month moving averages while the Mid and Small Cap indices were just about hanging onto bullish trends. These patterns were maintained given the performance of the various indices discussed above. Consequently the broader and larger FTSE All Share , FTSE 350 & FTSE 100 Indices remain in their bearish trends some 2 to 3% below their moving averages, a trend which has been in place since the end of August 2015 and suggests a note of caution as we enter 2016. However against that the Mid 250 and Small Cap indices remain in bullish territory around 2% above their moving averages. So it will be interesting to see if this can be maintained, especially as some of the smallest stocks, represented by the Fledgling index, seemed to succumb to some profit taking in December or perhaps this was becasue there are lots of rubbish resource stocks down there?
It seems to me that, as ever, markets are climbing a wall of worry as the old saying goes. There are always things to worry about like interest rates, economic growth rates, Chinese slow down, US valuations, deflation, inflation etc. etc. Against that the UK market does look quite good value, although some of that apparent cheapness is probably accounted for by the large weightings in commodity stocks which have been de-rated as commodity prices have collapsed this year. The other element of cheapness which may also be a bit misleading is the yield as the main indices are again dominated by a few large stocks in this respect, with the likes of Royal Dutch Shell, BP, Glaxo SmithKline for example, all making up a large proportion of the income and all of these plus the miners have a question mark over the sustainability of their dividends. Indeed researchers have pointed out that the overall level of cover in the market has come down to levels not seen since 2008/9, which does call into question the prospects for dividend sustainability and the prospects for growth if economic growth should disappoint.
As individual investors though we have an advantage over institutions as we do not have to own the index, unless you want to as part of a low cost index tracking approach. Thus although there can be concerns surrounding individual shares and sectors it is possible to avoid these and construct a winning portfolio despite difficulties elsewhere. However, clearly if we get into an protracted bear market with a serious decline of 20% or more then it is likely that most stocks and portfolios would get dragged down by that to varying degrees. So having said all that this brings me nicely onto to have a look at how the Compound Income Scores portfolio has performed in the mixed market conditions since it was started in April 2015.
Compound Income Scores Portfolio
As mentioned above and as regular readers may recall, this was set up in April last year to test the efficacy of the Compound Income Scores. It was also designed to be a fairly mechanical or automated process to select from top scoring stocks to avoid human biases as much as possible as research has suggested that quantitative models tend to be a ceiling on performance which human intervention then detracts from. Having said that no process can be completely automated as I am still required to run the screens and implement the resulting trades, but I try and make sure that I don't allow any biases to creep in during that process. This is also why I have allowed the CIS Portfolio to go where it finds good quality growing dividends rather than enforcing a sector neutral approach, but this can lead to some sector concentration which needs to be controlled and monitored. As a result having nothing in energy and basic materials has probably helped, as has exposure to Consumer cyclicals and industrials but would leave the current portfolio exposed in the event of an economic downturn.
December turned out to be another winning month for the CIS Portfolio as it produced a total return of +2.4% which put it ahead of the FTSE All share by 3.7% on a relative basis. The biggest winners this month which helped to deliver this out performance were:
Utilitywise (UTW) + 16.8% - in response to a positive AGM statement and a further major supplier agreeing new payment terms.
32 Red (TTR) +14.2% - a further re-rating as they continued their winning streak.
Bellway (BWY) +8.3% - continued gains as a beneficiary of government backing for a strong housing market.
On the downside the losers were:
Next (NXT) -8.3% - fell on the back of other retailers warning about the effects of the incredibly mild weather so far this winter and some small down grades.
Paypoint (PAY) - 5% - fell further as the market digested the disappointment from their updated on the progress, or lack of it, on the disposal of the on line business.
Jupiter Fund Management (JUP) - Seems to reflect some profit taking on no news in a nervous market.
Since inception in early April 2015 the biggest gains from stocks still in the portfolio have come from 32Red & Rank Group which are both up by over 50% suggesting that the on line and traditional gambling markets have been a lucrative hunting ground for investors recently. While along the way the portfolio also realised a profit in excess of 50% on Alliance Pharma too. On the downside the biggest losses since inception on those stocks still held are -23.7% and -19.2% on Renishaw and Utilitywise respectively. While on realised losses the biggest loss were -46.2% and -15% on Plus500 and A.G.Barr respectively.
Summary & Conclusions
Another good month meant another positive quarter in both absolute and relative terms and this has left the portfolio up by 16% since inception in April 2015 which is more than 20% ahead of the FTSE All Share which produced -4.4% over the same time frame. It is also around £1,000 or 3% or so ahead of the original annually rebalanced portfolio suggesting that thus far the quarterly re-screening has be worth while and made up for the extra costs involved so far.
While my own portfolios have performed well this calendar year with total returns of around 15% it is noticeable to me that they have not kept pace with Scores portfolio since it was launched. This seems to be in line with the research that I mentioned at the start of this piece which suggests that quantitative investment models tend to outperform humans as they tend to bring their biases and weed out some top performers as they are unpalatable. I know myself that I missed out on Rank Group as I was too greedy or penny wise and pound poor when trying to finesse an entry point. I still even failed to buy it even when I put it in the CIS portfolio too! 32 Red was another one that got away from me as I had an aversion to it as it was on line gambling related, which seems to reinforce the point about humans stripping the winners from Quantitative models. Having said that though I should add that I have also been able to trade Utilitywise more successfully, held Bellway and EMIS and avoided losses in Plus 500. I also participated in the gains from Alliance Pharma and have had my own share of big winners outside of those stocks held by the CIS so I don't feel too hard done by being beaten by my model portfolio.
Personally I prefer to run a broader more diversified portfolio, which probably accounts for the lower returns, but it is thought provoking that such a relaxed and emotionally detached process has done so well, so far. Thus this year I'll certainly be paying closer attention to the Scores and the stocks which enter the portfolio and I'll be looking to improve my returns and the process further this year. So stay tuned for that and for this quarter's re-screening which will be up next. Happy New Year and good luck with your investing this year.
Well it is that time of year again, thanks giving in the USA and we have to thank them for giving us the horrible Black Friday import. I was amused to see this year that Asda (owned by Walmart) had decided not to do a Black Friday event this year.
Any way if you are not taken by all the fake offers and have some cash left to invest, I have updated the Compound Income Scores today should you want to go shopping for bargains in the stock market. They are on special offer as it is Black Friday - you can get them for free instead of er free - yes now that seems like one of those "genuine" Black Friday offers - perhaps I should be putting the price up as it is Black Friday like some of the other retailers out there.
Not much news around today but there was an announcement yesterday from Alliance Pharma (APH) which was previously held in the CIS portfolio. This was a significant acquisition by them (which is something they have been looking to do) and there was a placing to fund it, which has brought the shares back, so it might be worth delving into the detail of that as they say it should be earnings enhancing and it Scores 90 on the CIS again.
That's all for this week, be back next week with a month end update on the CIS portfolio and some other stuff no doubt. Have a nice day as they say in the USA and a great weekend whatever you are up to.
Further to the September / quarter end performance update here are the changes as a result of the latest quarterly screening. First up though a quick reminder of the screening criteria and a small tweak to these that I have been hinting at in recent weeks.
Firstly the normal criteria remain in place for new purchases which are:
1) Selecting new stocks from top scoring stocks
2) Maximum PE of 20x, minimum dividend yield of 2% and an earning yield in excess of 5%.
3) Minimum market cap. of £50m
Now for the tweak which I have decided to add which is to also look at price momentum and exclude from the purchase list any candidates which have negative 12 month price momentum. There are several reasons why I have decided to do this as follows. While I have momentum in the Scores to a certain extent with earnings momentum, which does correlate with price momentum, I have generally fought shy of using price momentum that much myself although I pay some attention to it. However as per this graphic from one of my recent posts:
I am also adapting my mode having implemented it and assessing the evidence. The thing that struck me, although this may have been a coincidence and I could be making a false connection, is that the two troublesome stocks in the portfolio in the first six months had negative 12 month price momentum when they were selected. The stocks concerned were Plus500 (PLUS) and Utilitywise (UTW) and on reflection both seemed to have had some background concerns and therefore despite the apparently attractive financial metrics they had both underperformed suggesting the the market was wary of them. It is also noticeable that most top scoring stock tend to also have strong price momentum so when a high scoring stock has underperformed I'm now going to let the mechanical process use it as a red flag and skip that stock. Plus the fact that price momentum itself seems to be a powerful factor despite my own reservations about using it, so it is good force the model to use it in this way as I'm trying to use the model to counter my own human biases.
That's it for the tweaks on the purchase side but I guess it does raise the question as to whether I should use price momentum on the sale side too to cut losers even if they still score well, but I have not applied that this time around to Utilitywise as there were already 4 natural sales using an 80 cut off point on the Scores. So it will be "interesting" to see how it goes from here to see if I should perhaps have applied this rule to sales as well.
Any way enough already what about the changes I can hear you thinking. Well on the sale front the natural sales using the 80 Score as a threshold were Alliance Pharma (APH) - which had been re-rated and didn't get any upgrades after results so I'm relaxed about that as I had sold my own holding any way. A.G.Barr (BAG) - had a poor update and big weather related downgrades so as a result it has to go, although personally as it was not an operational problem and the quality and dividend growth remain, I would probably have given it the benefit of the doubt if I held it. Finsbury Foods (FIF) was the next stock to go as it's score had collapsed like a soufflé to 28 on the back of the share price rise, big downgrades post their results and on going low scores in quality and financial security. So I'm sure Paul Hollywood & Mary Berry might have thought it over baked too, that's a British bake off reference in case you don't know who they are. I heard on the news today that sales of baking equipment are booming on the back of it so trying to think of a way to play that. Any way I digress, finally PLUS500 (PLUS) was still coming up as a sell and I only kept it last time because the cash bid was supposed to have completed by now. So since that has dragged on and been delayed by regulatory clearance taking longer than expected, I have decided to eject it this time given it did its job as a cash proxy in the market sell off this quarter any way and I guess the bid could still fail if clearance is not received.
That gave me around £6500 to reinvest which I split equally between four top scoring candidates after applying the criteria mentioned above and adding the 12 month performance filter which excluded Elementis (ELM). So the new stocks were the top scoring Sprue Aegis (SPRP) the fire alarm producer which has a strong following in the private investor community so I'm sure that will be a popular choice. Less popular maybe 32Red (TTR), an on line gaming company, which seems like a natural replacement for PLUS500 if you know what I mean. The portfolio has a retailer already and quite a lot of exposure to consumer cyclicals, but nevertheless I let it buy Next (NXT) as the weighting in FTSE stocks is quite low and the alternative would have been Computacener (CCC). I left this because the other purchase was RM Group (RM.) which adds another technology related stock to the portfolio, although this exposure is mostly software rather than hardware.
I must admit personally I'm a bit uneasy about buying 32Red but that is the point of this exercise. I'm also probably prejudiced against RM as it doesn't seem to have gone any where for years, although on closer inspection it does seem to be turning around under new management, so it might be one that is worth investigating further. Finally I mentioned the exposure to consumer cyclical earlier so I thought I'd include the charts below to add a bit more colour to this. While it was not surprising to see it tagged as small cap exposed I am a bit surprised to see it identified as growth, but since I'm targeting quality growing income maybe this shouldn't come as such a surprise.
So there you go, just remember that if you are attracted to any of the names I have mentioned, don't forget to do your own research as there are no guarantees although I'd say it has been good so far. Cheers good luck with your investing in these difficult times, have a great weekend whatever you are up to, enjoy the weather while it lasts and come on England in the Rugby!