March was another positive month for equity markets generally including the UK. As a result the FTSE All Share Index, which I use as a benchmark for the Compound Income Scores Portfolio (CISP), produced a total return of +4%. By comparison the CISP had another good month and delivered a third straight month of out performance in Q1 with a total return of +4.9%. This leaves it with a total return for the year to date of +9.9% which is 4.7% ahead of the +5.2% return from the FTSE All Share.
Over the 12 months since the Corona Virus hit the CISP has returned +48.3% versus +26.7% for the Index as the market recovered from its lows. So it is pleasing to be able to report that the Scores and the associated portfolio seem to have weather the Covid storm and subsequent recovery successfully. This continues the decent run it has had over the last 5 years where it has practically doubled as it has managed to compound at around 14 to 15% per annum over the nearly six years since inception which compares to 4.4% per annum from the FTSE All Share over the same time frame, so about 10% per annum out performance.
This suggests that they are not a bad way for identifying attractive quality stocks with the potential to grow their dividends and your income and capital over time. You can see full details of the performance history in the Table of Returns drop down menu on the Portfolio tab in the site menu or just click the Table of returns link above if that is of interest to you. While if you would like to find out more about the Scores and how you can get access to them you can click the highlighted Scores link above or on the main menu and view a brief presentation about them here too if that is of interest.
This month there were five potential sale candidates based on where their Scores were. Of these two were repeat offenders with Scores well below my normal sale threshold (75% or top quartile CI Score) and the other three were more marginal being closer to the cut off line. So on balance and in the interests of avoiding costly / potentially unnecessary turnover I gave those the benefit of the doubt this month which subscribers will be able to read about in the Journal tab of their Scores sheets.
As for the two that were sold, the first was Unilever (ULVR) which I held last month as it appeared to be oversold. That proved to be a reasonable call as it outperformed the index by about 2% this month. While I pointed out last month that personally I wouldn’t put you off holding it for it’s longer term compounding potential, this portfolio’s process is to follow the Scores and try to maintain exposure to stocks scoring in the top quartile in the main – so on that basis I let it be sold this month after the bounce, as the the score remained well below that threshold at the month end. At least this seems to be in tune with the market where the song remains same. That is stocks over bonds, cyclicals over defensive stocks, value over growth and Small-caps over large – for now as the reflation / inflation trade continues to play out and resonate with investors.
The other sale was Qinetiq (QQ.) which has done quite well for the portfolio and has therefore seen its score come down as it has re-rated to leave it looking rather average overall. The portfolio also held another stock operating in similar markets and while they are likely to be reasonably steady growers, it doesn’t seem like a strong enough theme that I want to double up on the exposure, so out it goes. Results are due in a month or so and their pre-close update was reasonable so they may be worth looking out for if you decide to hold on to it yourself.
Against those Computacenter (CCC) was added as their trading has continued to be positive leading to numerous upgrades as they continue to benefit from the trend for businesses to increase spending on IT hardware and services, which was in place prior to the Virus and which was accelerated by it and which they seem to think should continue this year too. Thus it would seem that their improved performance should be sustained rather than sagging back like some other Covid beneficiaries. It is also one I have held personally for some time which made me more comfortable with adding it up here, hopefully that's not confirmation bias!
The other purchase to replace Unilever was in the General Insurance Sector, so a suitably boring replacement, although this one is also well managed but does offer a much greater yield and therefore a higher value score than Unilever, so again playing into one of the current themes that I mentioned earlier. Again subscribers will be able to see full details of that one and all the other trades in their sheets.
Summary & Conclusion
Another positive month to round off a positive quarter and 12 months for the market and the CISP. Who would have thought that would have been possible 12 months ago when Covid first struck? Nevertheless it is pleasing that the Scores seem to have helped to navigate these strange times successfully.
Meanwhile the current theme playing out in the market is to back the on going recovery / reflation and therefore potential inflation and higher bond yields / interest rates down the track. This has meant rotation from previous winners / beneficiaries of Covid / low rates and into loser from Covid plus value and recovery plays funded by sales of more expensive growth stocks which may suffer in valuation terms as growth becomes more plentiful and bond yields rise.
It remains to be seen how long this trend lasts, but for now both Central Banks and governments seem intent on pumping money out so it may well go on for longer than one might think and for now at least the trend is your friend as they say. The market does however seem to be getting a bit frothy with all these SPAC's in the US and quite a few IPO's being delivered to markets even if they were a bit cool on the Deliveroo offering in the UK. I note that the UK regulators are also trying to loosen the rules to allow more SPAC type listing over here so we don't miss out. I guess there is also a chance that the US Fed at some point may start with yield curve control to keep yields down and keep the recovery going, which would be bullish if it happens. Trying to call the top of the market is in any event a bit of a mugs game and as Keynes was quoted as saying: " Markets can remain irrational longer that you can stay solvent."
Having said that though the UK market does still appear to offer some value and still trades some way below previous highs unlike the US where ratings are higher and indices there are hitting new highs. You would also think that the UK market's larger exposure to Miners and banks etc. should also help it with the current rotation into more value laggards that is going on, but we'd still no doubt suffer if there was a US led sell off.
So for now for me the Song remains the same and I'll carry on Compounding with attractive looking stocks identified by the Scores. I'll leave you to enjoy your Easter eggs or whatever outdoor excitement you might have planned for this Easter assuming it is not cancelled for you. Otherwise I hope that markets continue to be kind to you - rock on, ciao for now.
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.
Final results from Computacenter (CCC) today the £1bn information technology and infrastructure services company. These look fine on the face of it with the earnings slightly ahead of forecasts, although they are somewhat confused by disposals and subsequent share consolidations last year. Probably as a result of this effect the dividend looked to be a little light of forecasts. I'm not unduly worried by that as the cash generation here remains good and they are back up to record levels of cash on the balance sheet despite returning significant sums to shareholders during the year.
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!
...or cinemas, computers, convenience stores & CCR. The cinemas part is the final result from Cineworld (CINE) which look very good and in fact the adjusted eps of 24.4p was close to the 25.8p forecast for 2015 and the bumper dividend of 13.5p (+33%) was ahead of the 13.1p forecast for the year to 2015. With the shares up by about 4% to 465p this morning, this leaves them on a fullish looking historic 19x PE with a reasonable 2.9% yield.
The shares had a good run prior to these numbers but they seem well placed with a strong film release schedule for this year, benefits from the merger with Cinema City the Israeli and eastern European cinema chain being upgraded to £5m from £2m and with 20 new cinemas (about 10%) planned.
Thus while they have done well and look a bit expensive now, with consumer confidence and incomes improving, the prospects looking good and upgrades likely they seem like they should be well supported or could still show some further momentum to the upside. Late morning update I see that Numis have upgraded to £90m Pre Tax for this year which I estimate would translate to around 27p of earnings for a 17.5x P/E @ the now 473p price.
The second C today came from Computacenter (CCC) the independent provider of IT infrastructure and services that enables users which reported final results today. These are somewhat difficult to interpret due to the recent return of capital and resulting share consolidation. Thus the numbers which are adjusted for this don't seem to square with the forecasts, which presumably were not adjusted. Nevertheless there seems to be underlying progress here in the UK and Germany but continued losses in France on the back of poor older contracts and they say a return to profit here is still some way off and it has led to a write off.
These shares have also risen recently ahead of and post the return of capital and as a result they have enjoyed something of a re-rating. So taking the reported adjusted numbers of 46.8p eps and 19.8p dividend (although confusingly they also mention 19p in the headlines) this leaves them on a fair looking historic PE rating of 15.4x and a yield of 2.75%, although with the overall operating margins being up to 2.77% the earnings yield comes in at a decent looking 10%.
On balance it seems like a well managed group with a shareholder friendly management, although the operations in Germany and France continue to struggle, they seem confident of making further progress this year. As such I can't honestly say you should rush out and buy it here as I suspect forecasts may reset downwards as the confusion surrounding the consolidation clears, but it would seem like a solid hold as part of a diversified income portfolio.
The final C is C-Stores or convenience stores as mentioned in Morrison's (MRW) final results today. They have taken a write off and are closing some of these which seems bizarre given they were charging into this last year as they played catch up, obviously they were not discerning enough about the sites they were buying. Apart from that the headline numbers all seem to be reasonably in line with the guidance they set out about a year ago, which is quite an achievement given the industry background.
This saw a big drop in profits as they invested in lowering their prices and it seem this will be on going when the new Chief executive joins next week. It also means, unsurprisingly that they are also cutting the dividend from this years promised 13.65p to a minimum of 5p for next year for a 2.4% yield. So on that basis and given the on going price war etc, in the industry I'm not tempted to buy this one here, although I could see that some might want to buy it as a recovery / new management turnaround play or maybe there's a bad moon rising so here some CCR for you?