We have had strong looking numbers from three stocks that I have covered in the past. First up alphabetically is Bellway (BWY) the well managed national housebuilder which unsurprisingly osi doing well given the recent buoyant housing market in the UK. This meant that turnover, margins, profits and therefore earnings and dividends were all up by strongly. Indeed the 43% rise in h1 earnings and 36% rise in the dividend were ahead of the growth rates forecast for the full year so it looks like some more upgrades might be due here. Even without that they still look cheap on less than 9x with a yield of close to 4% and with a Compound Income Score of 99 it seems likely to remain in the CIS Portfolio at the next review.
Meanwhile there were also some strong looking Q3 numbers from a former CIS Portfolio stock IG Group (IGG), the financial services firm which was focussed on spread betting but has more recently expanded into stock broking too. Their numbers today also look strong and have probably benefited from the more volatile market conditions in recent months.
It fell out of the portfolio when it had got onto an expensive rating and as lack lustre markets and the costs of investing in their stock broking business led to flat earnings and dividends. With the more volatile markets and presumably some return on their investments in stock broking forecasts are for some modest growth in earnings and dividends, which with the fall in the share price recently has brought the rating back a little.
It does however still look fairly fully valued on a PE of around 18x for this year, although the yield is more attractive at around 4%. It still scores reasonably well on the Scores but probably not well enough to get back into the portfolio.
Finally we had full year results from S&U (SUS) the motor finance and specialist lender. Comparisons here are muddied somewhat by the disposal of their home collected credit business which led to a 125p special dividend. The earnings seems to have missed forecasts by some way, but I suspect this may be due to the effects of the disposal as the dividend ex the special seems to be in line or may be 1p ahead of some forecasts.
So I guess the miss could lead to some downgrades although they do say they see very significant opportunities to maintain and even accelerate the steady and sustainable growth which has been S&U's hallmark. They also flag a 2x dividend policy going forward which, on current forecasts suggests a dividend of around 88p which at the current price of 2260p would give a yield of 3.9%. The PE again on current forecasts is a reasonable looking 13x, although it is probably best to see where forecasts settle.
If there are some downgrades then that might afford a better buying opportunity for the medium term if you are attracted to their simple business model, with lows around 2000p in the last year appearing to offer some support. Not one that scores that well but still one I'm happy to hold for the long term.
We have had a couple of announcements from CIS Portfolio stocks today. Firstly Bellway (BWY) the housebuilder reported another strong trading update for the first half of their current financial year. As expected, given the recent background of rising house prices, this is again a strong update. This was boosted by stronger than average price rises thanks to the mix of houses they sold this period with more London apartments and fewer affordable homes.
Looking forward they say they have a strong order book and land bank to continue to deliver on going volume growth of around 10% in the current year aided by the government initiatives to increasing housing output. So with government support on going and interest rates seemingly on hold until next year the shares, which have come back with the market recently, look good value on around 9x this years earnings with a well covered 3.7% yield and a top Compound Income Score of 100. They have more recently traded on up to a 10x PE, which suggests there could be scope for some upside from here towards recent highs around 2800p to 2900p, although this may of course be curtailed by the current economic and market malaise.
Meanwhile 32Red(TTR) one of the stars of the CIS Portfolio when it doubled in around 3 months recently, has come out with a pleasant surprise by way of a special dividend of 3p per share which goes XD next week to be paid in March. So that is worth a decent 2% or so on the current share price and will be in addition to the final dividend which they are due to be announced on 10th March 2016 which they have already said will be slightly ahead of expectations. This one is on a fuller looking rating of around 20x with a 2% yield for the year they are just about to report. That is however expected to fall sharply to more like 12x and it still Scores 99 on the CIS. Given the strong forecast growth it still looks reasonable on that basis despite the doubling in the share price.
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.
A quick note today to catch up on what was out yesterday and today's news. Stocks which featured that I have covered in the past included Micro Focus (MCRO), Photo Me (PHTM),
S & U (SUS) and Sprue Aegis (SPRP). While today we have had announcements from Bellway (BWY) and Polar Capital (POLR)..
Another day and another announcement from a stock in the Compound Income Scores portfolio. As expected these were strong results from Bellway (BWY) with revenues up by 18.9% to £1765.4 million which seems to be about £20m ahead of forecasts. With operating margins rising by over 3% to 20.4% this helped earnings to rise to 231.5p and they hiked the dividend by 48% to 77p, which was in line with the earnings growth as promised. Both of these figures were therefore ahead of consensus forecasts which were for 220.1 p and 72.5p for a 5% & 6% beat respectively.
Their return on capital employed increased to 23.1% as they continued with their disciplined approach towards investment and they completed 7752 homes. As part of this they invested a further £620m this year into their owned and controlled land bank which has risen to 36,211 plots or around 4.75 years worth of houses at the current rate of completions. Despite this, strong operational cash flow meant that debt remained low at £38.5m versus the market cap. of £2.9 billion so they therefore have significant capacity for future investment in land and work in progress.
On the outlook they suggest this remains positive and that the strength of their forward order book should enable the Group to achieve volume growth of up to 10% in the current financial year. Even with today's beat on current forecasts this would only put revenues up to around where current forecasts are, so unless analysts factor in another jump in operating margins, which seems unlikely from here, then I assume we will not see much in the way of upgrades.
Thus on valuation taking current forecasts for the coming year of 251.2 p earnings and 82.4p dividend this leaves them at last nights close of 2370p on around 9.5x with a 3.5% prospective yield which is 3 times covered by earnings. This seems to be the kind of rating that the market is happy to put on this stock so I probably wouldn't expect to see a dramatic re-rating from here, but returns are more likely to be driven buy the on going earnings and dividend growth. This looks like it will be in the region of 10% for now based on today's statement, but I guess there could be scope for upgrades through the year if their current guidance proves to be conservative.
Summary & Conclusion
Another set of forecast beating results from Bellway which comes as little surprise as they have done that quite a few times over the last few years and the housing market remains fairly firm on the back of supply and demand issues and on going government support.
Given their current guidance though it seems that we may not see upgrades but the market has nevertheless marked the shares up by around the extent of today's beat.
They seem to be sitting on their default rating of just under 10x with a 3 to 3.5% yield which the market has been happy to rate this one on in recent years. Thus future returns, absent a re-rating, should be driven by the on going 10% to perhaps 15% earnings and dividend growth which seems likely for the coming year. I guess some could be cautious on this one and the sector given the possibility of a rate raise at some point in the next year (how many years have we been saying that?) but I would not unduly worried about that.
So the shares look like a strong hold as long as you are not a bear on housing, and as in the last few years they seem as though they should be able to progress on the back of steady delivery of more houses, earnings and dividends. They also still Score 95 on the Compound Income Scores and as such are likely to remain in the Portfolio, while the Stockopedia Stock Ranks still has it at an 80, which is dragged down, somewhat surprisingly, by an average value score of 49.