Market Timing Indicators
Given the positive returns from headline UK indices like FTSE in September, these remained positive, although with the Mid 250 & Small Cap indices showing lower returns in September these are now less bullish than the larger / broader indices like FTSE 100 & 350.
Elsewhere all the economic indicators are still in positive / bullish territory with the US Unemployment rate for example hitting a near 50 year low yesterday at 3.7%. Which all suggests that one should continue to remain fully invested.
I note that the US bond market continues to sell off as the economic strength means bond investors are discounting further rises from the Fed ahead in the near term, but at least the yield curve has not inverted yet (see graph at the start) which also still suggests no reason to take evasive action just yet.
I do however stand by the note of caution I struck last month with the snippet about Warren Buffet's cash levels. Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest. So with that in mind I'll end this section with a link to the latest memo from another famous investor, Howard Marks - who is cautioning about the potential for fall out from bonds and debt this time around.
September proved to be another disappointing month for the CIS Portfolio as it produced another negative return of -0.9%. Unlike August this represented an underperformance of 1.6% versus the FTSE All Share Index, which I use as a benchmark, produced a positive return of 0.7% in September.
The main damage was done by Alliance Pharma (APH) which reported interim results which on the face of it seemed fine if a little dull. They did however include a small write off of £2.5m non-cash impairment charge on its investment in Synthasia International Co., an infant milk formula business in which it has a 20% stake. Consequently reported earnings fell by 35%, but underlying they edged ahead. This write off and consequent fall in the earnings, plus the high valuation they were sitting on, may have prompted some to sell and the price therefore took a hell of a beating and ended the month down by 30.5% - which seems a bit over done to me. Aside from that the other less extreme fallers in September were Zytronic (ZYT) - 9.3% - on no news apart from a long serving non executive leaving. While Avon Rubber (AVON) fell 7.2% as it's in line trading update presumably disappointed some investors who may have been hoping for a better outcome.
On the positive side the main winners were a mixed bag of Ferrexpo (FER) +22.7% on no news as it recovered somewhat from a long losing streak. While Taptica International (TAP) +14.3% & Churchill China (CHH) +14% both responded positively to their results statements reported in the last month.
In this months screening three shares came up as potential sales, although in each case their Scores were only just below the 75 cut off that I use. The three candidates were the aforementioned Alliance Pharma (APH), Forterra (FORT) and Spectris (SXS). In the end I decided to give them all the benefit of the doubt given they were all closed to the threshold and not therefore obvious sales. In addition I felt disinclined to sell APH down here given it looked oversold and was now offering more reasonable value, which in the week since has been vindicated by a small rally in the share price.
Forterra, despite some very modest downgrades, still seems cheap and all the talk is still of trying to build more houses. So one would think that demand for their product should still have solid foundations for now. It was also close to what could be a support level.
Finally Spectris also had very modest downgrades but also seemed to be offering reasonable value, although in the week since then it has come off a bit more. So overall my override of the mechanical sale process has probably just about broken even on a very short term view ex of any trading costs and opportunity cost of not buying potential alternatives.
Any way I'll see how they come out in next month screening & get back with the programme then.
Here is a quick update on the trades that resulted from the latest monthly screening on the Compound Income Scores Portfolio (CISP) which is based off of the Compound Income Scores. For a reminder this generally tries to pick new holdings from the top Decile & hold positions which at least rank in the top quartile.
First up on the sale candidates was Amino Technologies (AMO) the Software provider to network TV operators, which had reported disappointing half year results as expected earlier in the month. The conundrum with this one is that they say this is due to a major customer order scheduling, but they say they expect to make up the shortfall in the second half. This does however leave them as a hostage to fortune and potentially an accident waiting to happen, so I let it go. The only thing that gave me pause for thought was that the forecasts had jumped after the figures, so maybe an analyst is confident they will bounce back or more likely just following the company line, as ever time will tell, but I'll be watching from the sidelines.
The second sale was VP the tool hire & services company which had done well since entering the portfolio at the turn of the year. The score had therefore deteriorated & the shares looked overbought so I didn't argue with it.
Those together with the cash that was retained last month & from 3 dividends this month gave room for three new positions, based on their Scores and factoring exposure the portfolio already has in place. Thus to replace VP, Somero (SOM) another cyclical construction related service provider seemed like a natural replacement as it scored better than VP.
Next up was a slightly strange one called Chruchill China (CHH) - which is quite similar to Portmeirion (PMP) which the portfolio has traded successfully in the past. In this case it looks as though it is being well managed as it increases the proportion of sales it gets from international catering markets and by increasing value added offerings thereby helping to shrink the contribution from the UK consumer business where conditions remain difficult.
Apart from it scoring well i notice that despite the recent upgrades after their trading update, the price has not really responded. So given the numbers I reckon the market might wake up to it and respond positively when they actually deliver their final results at the end of August., assuming of course that the outlook then still remains positive.
Finally the last new holding which brings something different to the portfolio was the recently listed legal services group Gateley (GTLY). This one scores well and looks reasonable value having come back from highs recently, despite earnings upgrades and the fact that it is still come the final dividend of 4.8p which is worth about 3% at recent prices.