A quieter end to the week after the manic start on Monday. I have however noticed that the market is generally seeing more activity as M & A reaches levels last seen in 2009 as Melrose (MRO) went hostile on GKN this week. There has also been a flurry of placings as companies use the stock market for its purpose of raising capital and also take advantage of elevated share prices too. A couple of these were in the mobile advertising space where both Taptica (TAP) and XL Media (XLM) raised fresh funds to bolster their finances for further add on acquisition. Both stocks have fallen back as a result of these and Taptica is now trading below the placing price and actually comes out top of this weeks Compound Income Scores, so if they can keep the growth going and integrate their recent and any future acquisitions successfully then this could be a good entry point - perhaps.
Finally today and for this week we have had an AGM trading update from Character Group (CCT) which despite all the news flow noise of the finance director leaving and the Toy 'R' Us related warning has remained in the CISP despite this as it continued to score sufficiently well. Thus the portfolio didn't sell out at the bottom of this longer term holding and has benefited from the share price recovery since.
Today's update is of the in line variety, although they still see the current year being down on last year as previously flagged. They do however suggest that they will see a second half recovery and are confident that this will lead to a return to their growth trend in 2019. As the management here seem to have been pretty good at calling the trends in their business I would be inclined to take those comments at face value. If they deliver on that I guess that could mean say 50p of earnings in in 2019 with say the currently forecast dividend of 25p which at today's lower price of 432p (-5%) would leave them on a still cheap sub 10x rating with a 5.8% yield. So while they may not excite much in the short term & indeed could even drift off further, this one still looks like a reasonably well run business, albeit in a somewhat fickle industry. I also note in passing that some people seem to be upset by the levels of boardroom pay here so might be worth checking that out to make sure you are comfortable with that too if you are considering an investment here.
Any way that's it for this week and as I say the latest Compound Income Scores are out as usual today, so if you'd like to know how Character Group and the other 593 stocks in the Compound Income Universe score then head on over to the Scores page to learn more about them (if you're not already familiar with them) and to see how you can access them. Safe investing and have fun whatever you are up to this weekend.
We had interim results from Character Group (CCT) yesterday, which I last wrote up here back in September last year. Then I suggested it could provide 20%+ returns if it managed to make it back to the top of its trading range at 550p. It managed this in March so you would have been able to lock in a decent return if you managed to sell them up there. Since then they had OK final results & a slightly disappointing trading update in January when they flagged that their H1 numbers would be down due to US$ cost effects. Despite this they said they were confident of meeting full year numbers.
The interims yesterday confirmed this fall in profits in H1 as expected and they reiterated their confidence in meeting full year estimates despite this and backed this up with a 28.6% increase in the interim dividend from 7p to 9p. Looking at the pattern of their recent dividends these have gone sequentially 5, 6, 7, 8, & now 9p so with a bit of straight line forecasting I think they might do a 10p final given their progressive policy, cash balances and high cover levels. This would give 19p for the full year versus current forecasts of 16.8p for this year and 19.5p for next year. This would give a yield of around 4% at current prices.
I also note in the chart below that the management have been fairly active buyers of the stock on dips and they were buying again recently and after yesterdays interims, suggesting they have some confidence in their forecasts / prospects as they seem to be able to forecast the swings in their business quite well.
Summary & Conclusion - This appears to be a well managed company which has developed quite a good record of delivering decent profits, earnings, cash flow and dividends in recent years, although longer term it has had its ups and downs. Consequently the market seems reluctant to afford it a decent rating and therefore a dramatic re-rating (outside of a bid) does not seem to be on the immediate horizon. They have however achieved a rating of between 10 & 12x in recent years, so if they do manage to hit forecasts for this year then this would suggest the price could get up into a 520p to 620p range, so a return at least to the top of its range / resistance at 550p / 560p does not seem too much of a stretch.
On the downside it could drift off further to the bottom of its range around 430p in the short term in response to these numbers, but I think that would be an even better buying opportunity if it happens. Of course they may be over optimistic and miss the full year numbers, in which case it would probably break down out of its range.
Further to the post on Character Group (CCT) which as mentioned has scored well on the Compound Income Scores (CIS) for a while. Coincidentally after today's weekly update of the Scores it has come out at the top of the list.
So if that was of any interest to you and you would like to find other good quality stocks which offer value with growing well covered yields, then don't forget you can read more about the background to the thinking and research behind them by clicking here. There you will find links to sign up for access for the equivalent of just £1 per week, or you can sign up straight away by clicking here if you wish.
I also mentioned that Character Group has featured in the Compound Income Score Portfolio for some time. If you are not familiar with it, this is a portfolio that is based on top scoring stocks in the Scores and was started in April 2015. Since then it has outperformed the All Share Index by just over 7%. This was originally screened and updated on a quarterly basis, but this year it has been re-screen and comes with refreshed Compound Income Scores at the end of each month. So if you are only investing occasionally or on a monthly basis then that may be of interest to you perhaps? You can read more about the background to the portfolio and how to gain access to it by clicking here. This plan (portfolio and monthly updated scores) is available at the same price as the weekly updated scores which is equivalent to around £1 per week. Please note both these plans, the weekly Scores and the Monthly Portfolio & Scores , are also available via monthly payments - please get in touch if that is of any interest.
I'll endeavour to getting around to putting the performance numbers for this on the website and will try and remember to share a 6 month update at the end of the month.
Any way the weekend beckons, have a good one whether you are at work, resting or playing and good luck with your investing next week and beyond too.
Here is a quick review of what might be an interesting little play down here which is a stock which has been in the CIS Portfolio for a while now and as a result is currently the position with the largest unrealized gain. I say play because the stock concerned is Character Group (CCT) the AIM listed £95m market cap. toy manufacturer. Now if that doesn't prejudice you against it then why do I think you should take a look at it? Well first up it Scores well on the Compound Income Scores (CIS) and it has done for a while, as it has generally been consistently cheap as the market has tended to be fairly sceptical about it given the nature of the business and its somewhat chequered past. Depsite this though the Company has delivered decent results fairly consistently in the last few years and as such I believe it might be worthy of further consideration.
Just last week they had an in line trading update in which they highlighted two new ranges, one based on the old Hasbro character Stretch Armstrong (see image above which you can click to read more about it) and the other being something called Twozies which is a girls collectible item apparently. They also flagged that a significant proportion of the Company's purchases are made in U$ dollars and, therefore, the increasing strength of the US$ against Sterling continues to put pressure on Group profitability. Nevertheless, the Board remains of the view that it can continue to mitigate the resulting increased costs. This is being achieved through the expansion of their international business, which generates revenue and profit in US$'s, and by their continuing active programme of monitoring all costs and rationalising operations where possible through increased efficiencies. They also flagged their strong balance sheet which showed cash of nearly £15m recently and they also suggested this had strengthened further thanks to working capital management and cash generation.
Despite this update and reassurance the share price has come off by around 10% in recent weeks (see chart at the end) which leaves it close to being oversold and looking good value on under 10x this years forecast earnings (which they have just confirmed) and with a yield of over 3% which is more than 3x covered and backed by a cash backed balance sheet, so that looks pretty secure too. It is also worth noting they have grown this at over 20% per annum for the last 5 years and this years forecast dividend of 14p is also therefore expected to be up by over 20% on last years 11p. Perhaps the market was hoping for a better update and another round of upgrades. More likely someone has perhaps been reducing their holding in an illiquid stock a fact which they flagged in a recent update about their share buy back policies. Following on from that they have today announced that they have bought back just over 1% of the share capital 447p & 448p. In addition to which I note that the FD and a non executive director also bought shares recently. So members of the board and the Company, who have been quite good with share buy backs in recent year, seem to think it is reasonable value down here too. The only holder I could see who reduced earlier in the year was Miton who went from over 5% down to 3% or so. Perhaps they have now gone below 3%, guess we'll have to wait and see if there is an announcement on that in due course.
In conclusion I would tend to agree with the board that this looks good value down here as it also has an earnings yield of nearly 15% (EBIT/EV) and based on their recent operating margins of around 10% or more the EV/ Sales for this year of 0.72x also look pretty reasonable too. Technically though the shares have been stuck in a sideways range between about 440p and 560p for the last year or more so at least you would not be buying in at the top but does suggest, at a stretch, possible returns of 20%+ if it can make it back to the top of that trading range.
Month End Update for January 2016.
So one of the worst starts to a year ever from equity markets around the world comes to a close with a sharp rally. This fall seems to have been caused or rationalized post event as being driven by fears of a global slowdown, especially in China and the effects it was having on commodity prices and in particular the oil price. In addition markets had been on a bull run for nearly seven years on the back of Central Bank support and as a result some markets, such as the US, had also got onto extended and historically high ratings.
Thus with the US Federal Reserve starting to tighten monetary policy in December it seems as though investors came into the New Year and suddenly feared that the Fed put may have been withdrawn and so like Wylie Coyote they suddenly looked down and had a panic attack.
Fast forward to the end of the month and we had a sharp rally seemingly on the back of the Japanese central bank introducing negative interest rates and some weak US growth numbers which probably firmed peoples expectations that the US Fed may now be one and done in terms of raising rates, rather than doing a series of rate rises this year, perhaps.
However, it does all beg the question of how dependent markets have become on central bank support as each time they try to start withdrawing it markets seem to have a fit. Thus I guess time will tell if the central banks have now blinked on the back of the markets sliding in January and if therefore this current sell off turns out to be another temporary affair or if it is the harbinger of something worse. Which brings me nicely onto a look at the monthly timing indicators and how the Compound Income Scores Portfolio has done in this difficult month.