We have reached the half way point in the year & perhaps in the bear market as I speculated in my last post. It was apparently one of the worst six months in markets for the last 50 years. We might see another bear market rally in the next few months if all the pessimism has been over done in the short term and as we enter the summer doldrums, but of course it could still get worse before it get better too as we see more rate rises & a potential recession become a reality perhaps.
Forecasting the market though is quite frankly a bit of a mugs game, but for now at least the bear trend seems firmly in tact and spreading further, the headline indices look to have rolled over gently in a top formation, while there could well be worse to come in the next earnings reporting season, but as ever time will tell.
Market timing Indicators
Having said that, the Market timing indicators that I maintain (another mugs game perhaps) have all now turned negative, with this months falls finally dragging the larger headline indices such as FTSE 100, FTSE 350 & FTSE All Share into bear territory below their moving averages. In the past research had found that it was worth ignoring this signal and only selling out when and if other indicators turned negative or indicated a likely recession. So while the ISM indices in the US remain above 50 & US unemployment has not yet turned up this suggests it may still be ok to remain invested for now.
Nevertheless with recession widely anticipated it seems likely that these indicators will turn negative before too long, by which time the market may well have discounted all that and be going up again as by then, it will be discounting a recovery, once again demonstrating the futility of trying to time the market perhaps? Indeed this is what we saw in the Covid sell off as these indicators turned negative near the lows, but then that was in unusual circumstances and the authorities stepped in with support in double quick time, whereas this time around they have limited flexibility.
Portfolio & Market Returns
June was pretty poor month with the FTSE All Share providing -5.98% total return and hence -4.57% year to date. Against that the Compound Income Scores portfolio also fell but for the first time this year did actually manage to outperform the index by falling less and providing a total return of -5.59%. So a small glimmer of hope there, but one swallow does not a summer make, as this was largely down to the unexpected bid for EMIS (EMIS) which soared by nearly 50% on the back of it.
Longer term this leaves the portfolio with -16% returns year to date & now lagging the index YTD and over 1 and 2 years. So quite a lot of damage in the short term, but given the bias it has towards mid, smaller cap & AIM names which currently make up roughly 80% of the portfolio, this is perhaps not so surprising as Mid 250 is -19.4% TR & Small Cap Index -15.1% TR YTD. While the All AIM index is down by 28% in capital terms this year. So they have all seen much greater falls than the FTSE 100's -1% TR thanks to its higher exposure to more resilient oil and mining names this year. By the same token the portfolio benefitted from that tilt in prior years and thus the longer term track record is still looking good with total returns of 14% per annum since inception in April 2015 versus the 5% or so from the Index.
Over that time period it is interesting to note in the chart at the top that the Mid 250 has now underperformed the All Share Index in total returns terms. That is certainly a turnaround from previous experience, but probably reflects the greater domestic exposure of Mid cap names and possibly a BREXIT effect? Small Caps remain well ahead, but I guess they could still play catch up to the downside perhaps if the bear market continues and broadens out, although there have been some pretty painful losses in some Small cap and Aim names already as seen in the index returns mentioned above and as I'm sure some readers may already be painfully aware. Of course some of the worst pain has been felt in previously excessively exuberant areas such as meme stocks, tech stocks and dare I say Crypto, but then I don't do crypto!
I am however happy to stick with good value quality income stocks which are forecast to increase their dividends. The current Compound Income Portfolio of 29 stocks currently trades on a weighted average year one forecast PE of 10.6x with a net yield of 4.45% assuming they deliver the forecast 10% dividend growth, which should just about keep up with the rampant inflation we are seeing this year. Looking at the income ledger the portfolio has earned about half of the forecast income for the year at the end of June so seems on track to deliver the expected income, although the running yield is now higher due to the fall in capital values in the first half.
On a personal note my net worth has held up a little better, being down by 11.5%, although it is notable that this translates to a fall of 16.5% in real terms once you factor in the effects of the current rampant inflation. While the income from my portfolios is up by 3.3% in the half. So I can live with that even if the current inflationary episode is detracting from my efforts to grow my capital and income in real terms this year at least, although it comes after many years when that was the case.
Having minimized turnover recently by giving some stocks where their Scores had slipped the benefit of the doubt, I decide to try and get back with the process and put through a few more trades this month. Having said that I still gave the benefit of the doubt to a few names where based on the Scores it looked quite marginal and also where they had news flow due in then next month or so.
One example of this was the recruiter Robert Walters (RWA) which has de-rated significantly to historically low levels compared to their history. While in their last update they were still trading well & I'm conscious that a more specialised competitor of theirs S-Three upgraded their full year outlook recently. On that basis I've held onto it as the market seems to have moved to discount a downturn which may not yet have appeared in their business, but I guess it could down the line when and if unemployment turns up in a recession presumably. Having said that it is also possible that they could still do ok form the on going labour shortages and rising wage pressures coming from the inflation problem we have at the moment.
Of those that I did sell one for me was a more straight forward call - B & M European Value (BME) which had a Score of just 42. I say easier because despite their recent update maintaining their Ebitda guidance, I still suspect that they may have a profits warning in them as their sales and margins seem likely to come under pressure as the boom from Covid that they enjoyed seems to be unwinding. On top of that it is often a bad sign when a founder either chooses to or is forced to step back from the business. Superdry (SDRY) and Ted Baker (TED) spring to mind as recent examples of that. We have also seen problems for US retailers having to de-stock, but maybe B & M are a bit smarter with their buying perhaps.
In addition to that looking at their margins & rating versus other retailers like Tesco, JS, Kingfisher & Halfords covering the same kind of categories they are involved in, it seems their margins are out of line and their rating, even though it has come down, still looks rich compared to those competitors unless they can maintain their margin premium, which I have doubts about, as discussed above . To replace that I bought some M. P. Evans (MPE) which I had ducked previously but which was now again a top scoring stock and offering better value than B&M as they benefit from the firmer pricing for their Palm Oil production, although the price of that has come off recently & some government interference, hence the set back in the price presumably.
Another sale that I struggled with a bit more was in Ashtead (AHT) where I had top sliced successfully earlier in the year and given the benefit of the doubt to previously ahead of their finals. These were fine and they had a pretty confident outlook statement and suggested further progress this year as their business is now more diversified than it was the last time they saw a recession and less geared too, although still with a fair bit of debt. Thus with the de-rating that had already occurred I was tempted to try and look through that & sweat it out. In the end as they had still seen some downgrades I let the Score of 70 guide me & switched in to a more UK cyclical name which Scores better and offers better value.
That was brick maker Forterra (FORT) which has already demonstrated pricing power this year, has some self help and organic growth investments and where the outlook for demand and supply still seems fine for now as house builders still seem to pumping out houses for now. They also seem to be coping ok with energy prices too, but I guess that could still become a bigger problem in the future perhaps & a big recession could also clobber them down the line too I guess.
Aside from that I made another less straight forward relative value switch. In this case I decided to take profits in Cerillion (CER) which I had also acquired as a relative value switch out of Dot Digital (DOTD) before it collapsed last year. My thinking here was although it seems to be trading well it has seen some downgrades after the interims as they warned about the possibility of potential timing delays in their lumpy contracts. If that comes to pass I feel it could be vulnerable to a sharp correction given the relatively high 28x rating as we have seen many other highly rated stocks under the cosh this year, which this one seems to have escaped for now given their expected growth. Against that I switched into a former holding Auto Trader (AUTO) which had drifted back recently after decent results & a positive outlook statement . This had left it with a better Score & value than Cerillion with a sub 20x PE and around twice the yield. Again time will tell if that was wise or not.
Summary & Conclusion
So we have had a very poor first half to the year with very few places for investors to hide as bonds joined in the falls along with equities. So even the traditional 60:40 balanced fund has suffered this year. Only players majoring in oil stocks and commodities or successful traders / macro investors are likely to have seen much in the way of gains this year. While I get the impression most smaller investors have suffered similar or worse falls as their focussed portfolios skewed towards small caps have been hit hard by the developing bear market.
It remains to be seen if we will see another bear market rally or indeed if we may have seen the worst already. As per my last post it looks like we might have further to fall or another leg down if earnings start to disappoint and a recession is confirmed. That could set us up for the market to bottom at some point in the second half if investors have capitulated and Central Banks led by the US federal reserve stop raising rates or even start cutting again as a recession takes hold.
Indeed bond markets have staged a rally recently as they have started to try and anticipate that kind of outcome. Of course it remains to be seen if any of that comes to pass or if the Central Banks have to keep on going if inflation refuses to peak out. I think the best I can say is to borrow the phrase from J.P. Morgan I think it was, that prices will fluctuate. Mind how you go, good luck with your investing in current markets and here's to hoping for a better outcome in the second half of 2022 and beyond.
"Life is a roller coaster just got to ride it" Ronan Keeting
Well that would have been good advice if only we had been able to live our lives last year, but as we all know we were stopped from doing that in the main by Covid-19. In terms of Stock Market investments it was certainly a roller coaster ride as a record breaking bull market, in terms of duration, finally came to an end. This was then followed by a seemingly record short bear market (certainly in the US) or does that mean it was just a correction? While in the UK we have continued to struggle on back below 7,000 on FTSE as our old economy type stocks and sectors and lack of technology champions in the main took their toll on the index.
Meanwhile we finally managed to leave the EU and agree some sort of on going trading relationship at the last minute as is always the EU way, but as ever time will tell as to how good or bad that might turn out to be. Unbelievably I see that people are already calling for us to re-join even though we have only just left and finally agreed some sort of trade deal.
So early signs of a neverendum mentality taking hold already until remainers / EU get the answer they want I guess. Any way I'm sure you are all familiar with and fairly fed up with all these issues - so I'll move on.
Compound Income Portfolio - Performance
If anyone is interested in this, it managed to outperform the FTSE All Share (which I use as a benchmark) again this year making it 5 years out of 6 now since inception in April 2015 or 4 out of 5 years if you count just full years. As this was set up to try and demonstrate if the Scores had any merit in picking outperforming stocks, I think an 80% or so success rate might be some evidence that they do, but as they say the past is not necessarily a guide to the future.
Having said that though the numbers this year are to be honest a little underwhelming in absolute terms as the CI Portfolio produced a total return of -1.26% versus the -9.8% from the FTSE All Share, although that is still a decent 8.55% out performance. This came as the portfolio produced a 6.01% return in December versus the 3.86% from the FTSE All Share, thereby clawing back just over 2% or around 1/3 of the under performance it saw last month in the vaccine inspired rally.
Since inception the CI Portfolio has just about doubled with a 99.84% total return or 12.8% per annum which compares to the 22.79% or 3.64% total return from the FTSE All Share. See also the graph on the website under the portfolio menu or at the end of this piece for comparisons with the Mid 250 and Small Cap Indices as well as the All Share. I put these on there as the portfolio has tended to have an above average exposure to these out performing part of the market, which will have accounted for some of the performance differential. For example at the end of the year the portfolio was split roughly 50/50 between FTSE 100 stocks and Mid 250 + Small Cap stocks (including AIM).
At the year end I also like to check how the CI Portfolio has done versus widely available pooled funds to see if I'd be better off putting more of my money into those type of vehicles. This year while the returns were not that great they still compared favourably with the UK Equity Income sector where its returns would have put it 5th out of 85 funds and 5th out of 26 in the UK Income Investment Trust sector. While over 3 and five years it has substantially outpaced all of the funds in both of these sectors. So even though the returns were a bit underwhelming in this unusual year I'm satisfied that the Scores are still doing a good job compared to pooled fund / index alternatives.
So I shall continue to use them in helping me to identify and select suitable Companies to help me achieve my investment objectives. The Scores will also continue to be available to subscribers' for a modest fee if they should like to use them to help them with their investing too. A table showing the total returns from the CI Portfolio and the FTSE All Share over the last 1,3 & 5 years is presented below and you can see the full table of returns via the Portfolio menu on the site.
Out of interest I took a quick look at how the Portfolio would have performed if I had left it untouched from it's positions at the end of March & April and it appears that the returns were around 5 to 8% better as a result of the trades that I did subsequently. So not bad for a monthly screening process, although this year was one in which it probably paid to be even more aggressive with your portfolio as evidenced by some of the exceptional returns I've seen reported. Rightly or wrongly I tended to focus on those businesses that could survive and manage their way through all this as it seemed that vaccines might have taken a long time to arrive. As it happens they managed to come up with those in double quick time so recovery plays then came to the fore even more.
This threw up three potential sale candidates this month, based on how they score in the Compound Income Scores. Of these I decided to hang onto Sage (SGE), a fairly recent addition to the portfolio, which has taken a bit of a hit as they are having to invest to stand still as it were as they transition to a software as a service model. Given it is a high return business you'd want them to reinvest if they can, but the wrinkle here is that they are having to invest to update / keep up with the competition. Nevertheless I felt that they still looked reasonable value on an EBIT/EV Yield basis & offer a well covered 3% Dividend yield, even if the PE doesn't look particularly cheap at around 24x.
Another high quality business that looked more of a sell on valuation grounds was Auto Trader (AUTO) which as well as a high rating has seen some substantial downgrades and the car market in the short term still seems to be quite challenged. Thus I let it be sold as per the process but personally feel a bit mixed about it as the valuation certainly feels expensive but it is a high return moat type of business that one would probably want to hold for the longer term. Having said that though I felt the same back in October last year when the process had me sell Avon Rubber at £43.40 due to a poor score based on high valuation and poor earnings trend too. So it will be interesting to see if Auto Trader crashes too on any future disappointment given the valuation. As this post is already getting quite long and taking longer than I thought it would, I'll move on. Subscribers though can see the full details of this and the other sale plus the two new stocks that replaced them on their files as normal.
Brief Economic / Market Outlook.
After such an exceptional year the consensus seems to be that we are through the worst and that some kind of economic recovery is at hand despite the fact that we seem to be entering another National lock down in effect in the short term. The roll out of the vaccines thus far is encouraging investors to look through that and anticipate a V-shaped recovery as all the pent up demand and cash that may have built up in some peoples bank accounts is released as and when we get back to some kind of normality.
While the initial recovery might well be quite perky on the basis of pent up demand and the sod it factor as we hopefully eventually emerge from the grip of the virus, I do worry a bit about the medium / longer term. That's mostly due to the level of debt to GDP around the world, which while it may be manageable if central banks and governments engage in yield curve / financial repression, the conventional wisdom is that debt at these levels is likely to prove to be a drag on growth in the medium term (like Japan as I mentioned last month).
I guess governments might continue to print and spend to offset those effects but it is above my pay grade to forecast where that might all end, although quite a few are expecting a pick up in inflation as a result this time around, which might offer governments a way out from their debt traps, perhaps.
In terms of dividends, as previously discussed and as I'm sure some readers are painfully aware of, these have been cut substantially this year with the UK dividend base expected to be down by around 40 to 50%. Having analysed the dividend flows on the Compound Income Portfolio is seems that the total income received this year was down by 30% year on year suggesting that some of the existing holdings and the changes that were made along the way have helped to lessen the effects of the cuts. So some evidence that they help one to select dividend paying stocks that might be more robust than the average.
That represents a yield of about 2.3% on the average portfolio value for the year which is somewhat lower than that of previous years but not that surprising in the circumstances and also as I have relaxed my value constraints somewhat this year and ran winners on higher valuation more. Based on forecasts the portfolio is expected to generate a yield of 4.2% with some strong dividend growth forecast. While in PE terms it is on 13.7x with an EBIT/EV Yield of 8%, so it looks to be offering decent value and growth on the basis of current forecasts. Again subscribers can see the full details of the portfolio in their Scores file.
In terms of the UK market when Link asset service last provided an update in Q3 they suggested that they thought dividends in the UK could recover by between 6% and 15%. While the FTSE ended the year at 6460.2 and offered a yield of 3.65% to give a dividend base of 235.79 index points. So I thought I would update my FTSE Dividend ready reckoner and see what it looks like if we assume those dividends could remain unchanged or grow by up to 15%. For the bulls I have also added a 3% yield column to see how far we could go if investors really get carried away and bid the market up and consequently down to a historically toppy level of a 3% dividend yield.
Outside of that I suspect that a 3.5% to 4% range is more likely to pertain this year suggesting a trading range for the FTSE of potentially between about 5900 - 7747 or say 6,000 to 7,500 if you wanted to tighten that up a little by looking at the chart from the beginning of this post and where likely support and resistance might come in. Indeed on that basis, while I wouldn't be surprised to see FTSE hitting or exceeding 7,000 again at some point this year, although technically it looks like there is a lot of over head resistance in the 7000 to 7700 range. It seems therefore that we might have to wait another year for the FTSE to surpass its 1999 high. At least it means if it should make it up into that range then we might be able to look forward to 10 to 15% returns this year to make up for last years disappointing returns from the UK market as a whole.
Summary, Outlook, Conclusion & Personal Note.
So very much a year to forget in terms of what happened to our lives and how the stock market performed in the UK at least. Obviously within that and globally there were many threats and opportunities thrown up so congratulations if you manged to navigate that and make decent returns & hats off to you. Equally if you lost some money, don't get too down about it but put it down to experience and try and learn from it I guess.
In terms of economies and markets the consensus seems to be expecting economic recoveries on the back of the vaccine roll out, but that may be tempered by the on going 2nd or 3rd waves and associated lock down restrictions, but hopefully we might be out the other side of all that by the summer, perhaps. Heaven forbid that the new variant of the virus should turn out to be resistant to the vaccines or that they should turn out to have more serious side effects than expected. If either of those came to pass I suspect all bets would be off.
On the market side of things the US market is generally perceived to be expensive (hasn't that been the case for a few years now?) but seems to carry on regardless so far. The flip side of that is that some other developed markets like Japan and the UK in particular look cheap, while emerging markets are widely tipped to do well along with commodities.
Whatever or however you decide to approach things this year may I wish you good fortune in the markets and good health for you and your families and loved ones and my deepest sympathies if you or someone close to you have been hit by Covid in the last year.
Talking of Covid I'm pretty sure that both my wife and I had it back in March before the lock down started and before it was widely known about. Fortunately being fairly fit and healthy (touch wood) 50 somethings we managed to come through it pretty quickly after a few days
of feeling unwell and fortunately did not need any medical intervention. Our planned trip to Berlin at Easter got cancelled and we didn't get to go away at all last year - what a drag.
On the portfolio front across the piece with our overall more broadly diversified asset mix we did at least manage to increase our net worth by 1.5% so thereby just about maintaining the real value of our assets. I should probably say more about longer term compounding and rates of returns but that is probably the subject for a post in itself as this one is already rather long.
For the income side of things my boring diversified stock investing approach together with the use of investment trusts helped to protect us from the worst of the dividend cuts this year. It was also helped by redeploying most of the cash buffer that we'd built up in 2019 during October and November after NS&I cut rates to zero and the market was having a second leg down before the vaccine news broke.
As a result our income was "only" down by about 9% year on year so not great, but not too bad in the circumstances and we can easily live with that. So while we didn't manage to increase or maintain that in real terms this year it does still leave it well up in absolute and real terms since we started full time investing for a living in 2009. So despite this somewhat trying year we have still managed to achieved my objective of growing our capital and income in real terms over that time frame. I still think that accessing quality companies with with good yields and the prospect of dividend growth is still a good way to try and achieve that, although of course others will have their own ideas.
So we literally live to fight another year having survived Covid and the roller coaster ride in the market last year. Here's to hoping that 2021 might be a better year all round, but so far it has not started that well with another national lock down, but perhaps we might get back to some sort of life by Easter or the Summer at the latest and maybe we might even get to travel somewhere too thereafter if we're lucky. Thanks for reading, you deserve a medal if you got this far and sorry for being so boring, take care & good luck for the year ahead.
So here we are half way though the year already and for once we seem to be having a proper summer in the UK, as the jet stream is apparently behaving itself this year. Fortunately, like the weather the UK stock market has also picked up and started to behave itself after a decidedly chilly first quarter, although June did provide a modestly negative total return. See the table below for full details.
Source: FTSE Russell
Consequently the Monthly market timing indicators that I track for the UK indices all remain ahead of their respective moving averages by around 4%, although only 2% in the case of small caps as they have lagged the broader recovery this quarter. Thus these are signalling that it should be safe to carry on compounding as do the economic indicators that I monitor.
With that in mind moving onto the Compound Income Scores Portfolio (CISP) - it was another good month for the portfolio. It produced a total return of +2.61% for the month which compares with the -0.18% from the FTSE All Share which I compare it to. This leaves it up by 6.6% YTD, which is 4.9% ahead of the above index. The star this month was Auto Trader (Auto) which roared up by 21.3% on the back of well received results. While I'm glad I gave VP the benefit of the doubt last month ahead of its results, as they also rose by 14.7% when these were well received too. The third double digit riser was Tapitica (TAP) which bounced back more on relief that it's update was not a warning like the one produced by XL Media, which the Scores managed to get the CISP out of before it happened.
On the downside Ferrexpo (FXPO) continued to sink like a lead balloon on the back of trade war fears leading to falling metals prices, while Bellway (BWY), despite a good update, suffered from profit talking as some others in the sector seemed to be indicating that margin may come under pressure from here. So maybe this is as good as it gets for housebuilders perhaps? Finally Spectris (SXS) fell by 8% but I can't see anything that might have caused that other than a catch all profit taking comment.
Since inception just over three years ago it means that the CISP has achieved annualized returns of 19.9% per annum, not bad although that's not a patch on the 50% per annum returns reported by @Glasshalffull1 on Twitter. Finally on the numbers don't forget you can get a breakdown of the monthly performance via a link on the Portfolio page or by clicking here if it's too hot for you to click twice.
So everything in the Stock Market garden appears rosy at the moment even if the actual garden is looking a bit scorched as we continue with the proper summer referenced earlier and the continuous blue skies. Indeed for recent investors it must seem like blue skies every day in the stock market these days. It is however worth remembering that stock markets tend to be leading indicators of trouble ahead and can and do start corrections or have crashes even when the skies seem blue, think 1987 crash, 2000 .com bear market and of course the financial crisis in 2008.
Now I'm not saying that one of those events is imminent, but worth bearing in mind that we have had a 9 year bull market already and the US Federal Reserve seems likely to continue raising rates and as the old saying goes "don't fight the Fed." So at some point the effects of that and the withdrawal of liquidity by other Central Banks around the world will, like the sun and plants in the garden, cause stock market returns to wilt, in the same way that it lubricated them on the way up.
Finally since we're having a Summer a bit like 1976 I'll leave you with a track from that year, the lyrics from which stating "You can check in any time you like but you can never leave..." also seem appropriate to the seemingly impossible BREXIT negotiations where re-moaner rebels seem intent on ensuring that we never actually leave. Indeed I've doubted all along if we would ever actually leave and I continue to think I'll believe it when and if I see it.
After that I'll just share another video which I saw recently featuring Paul McCartney which was both funny & moving at the same time. If you dind't see it and even if you don't like James Corden I'd recommend it as it might change your mind - enjoy and have a great summer.
Another post today as it is Thursday and there always seems to be a flood of announcements on a Thursday. This time full year results from Auto Trader Group (AUTO) another member of the CISP.
The numbers at the headline level seem to be slightly ahead of the consensus forecasts, while good cash flow generation saw their debt decline and the leverage ratio fall to 1.5x EBITDA which is acceptable. Aside from the debt that their previous VC owners landed them with it also means they have a threadbare balance sheet with negative NAV or shareholders funds in recent years. Despite this they have been able to return £148.4m to shareholders via share buy backs of £96.2m and dividends of £52.2m while the dividend this year was raised by 13.5% to 5.9p.
The outlook reads pretty positively highlighting the up selling to their commercial customers and the wide take up of their finance offering although this is tempered by the on going caution on the private listing side of things. Nevertheless they are flagging further rise in turnover and margins (which are already very high) and are confident of hitting their growth targets for the year which seems to suggest another year of double digit growth.
Thus the shares don't seem too fully valued on around 18x for the coming year especially when compared to other on line disrupters like Rightmove & Purplebricks. Indeed we saw Zoopla taken out recently, so I wouldn't be surprised if this one attracted a takeover at some point given their growth, profitability and market position. It still Scores well on the CIS so it remains in the portfolio for now.