We have had results from two AIM listed stocks today which I have written up in the past. One is a EMIS a high quality healthcare software business which has a large amount of recurring revenues and is growing strongly but as a result is expensively rated . While the other is Fairpoint (FRP) the debt service business which is diversifying into legal services.
Another busy day for stocks which feature in the Compound Income Scores portfolio. So in brief firstly EMIS the healthcare software provider produced a trading update which saw turnover held back by timing of contracts within Secondary Care so growth in revenues of 13% look about 3% light of forecasts. But they do say overall trading is in line as they saw further progress in the like-for-like operating margins. It will remain to be seen if the earnings can come in line or if we will see downgrades on the back of this. With a highly rated stock such as this, which has held up well in the recent sell off, it is therefore perhaps unsurprising to see it off by around 12% on the back of this announcement, but it does remain a quality company nevertheless, albeit highly rated to reflect this.
Meanwhile 32Red (TTR) announced a trading update for the full year with record revenues and EBITDA expected to be slightly ahead of expectations. They also said that the new year had started well with revenues for the first nineteen days in January up 27% on the corresponding period in 2015 and up 54% including contribution from Roxy Palace which they acquired last year. On the back of this the shares spiked over 150p first thing and the holding therefore hit the 10% risk control limit that I set the other day. I have therefore sold half the holding at this mornings price of 152p to rebalance and retained half as I note their brokers apparently put out a note the other day with a target price of 200p.
As for the proceeds I did discuss the other day topping up some losers, which is not generally a good thing to do and one of those has now slipped into the sell zone as far as the Scores go. So I have resisted the temptation to do that. While I could have done a full re-screen and sold another three stocks as a result, I decided in the end to just add another holding instead as given the current volatility doing lots of trading may prove to be counter productive.
The new holding I decided to add was XL Media (XLM) which I mentioned the other day and which looks good value to me and has a CIS of 88 v 86 for TTR. They have also announced today a final dividend today which means their full year payout, which is based on a 50% payout policy will be 24% ahead of forecasts on Stockopedia. This statement therefore also suggests to me that their eps will also therefore be around 4% ahead of forecasts at just over 10c. So this one has been added to the portfolio at this mornings 63.3p price and therefore effectively keeps exposure related to a similar industry to 32Red but in a stock which looks much better value (94 value score v 14 for 32Red) and comes with a 5%+ yield versus 2% for 32Red. Whether this proves to have been a good idea or reduces the risk and increases the returns remains to be seen!
Talking of returns, I note that after this update that the portfolio seems to be down by around 5.7% since the year end which compares with -9.3% from the FTSE All Share year to date. So at least it seems to be holding up reasonably well in a down market too, although no doubt helped by continued lack of exposure to commodity sectors and the astonishing running streak from 32Red. Obviously if a market bounce back comes about and should be led by the commodity sectors then it would obviously then lag that.
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.
...from EMIS Group the healthcare software provider today. This came in their half year results today which saw revenues, operating profits and earnings all up by between 16 &18%. On the back of this they increased their interim dividend by 15% to 10.6p which compares to full year forecast dividend growth of just over 10% to 20.3p. Given that they have historically paid two equal dividends each year they seem to be signalling their confidence in this growth continuing and therefore a full year dividend of 21.2p. At this morning's unchanged price of around 936p this would put it on a yield of 2.26%.
One aspect of this type of software company that I like is the amount of recurring revenue that they generate and in these results this proportion increased to more than 77%. Otherwise the fact that they have large market shares in GP and Primary Care areas and are benefiting from the trend towards the NHS using technology to save money and increase efficiencies is also attractive. They have also seen the expected earnings enhancement from last year acquisitions and they completed another one this July which is also expected to be immediately earnings enhancing too.
Strong cash flow saw them end the half year with £1.3m in cash but the July acquisition for £3m will help to utilize this and some of the likely cash generation in the second half, thus the balance sheet seems fine which also helps to underpin the dividend.
Summary & Conclusion
A decent set of numbers from EMIS Group, as expected, given their prior pre-close update. Since the company suggest they continue to trade in line with their expectation is seem unlikely, apart from the dividend, that we'll see that much in the way of earnings upgrades. Thus it remains a quality stock on a fairly full rating as it trades on around a 20x with the 2.26% yield indicated above on the back of mid teens expected growth for this year. Given it has out performed strongly in the recent market correction by rising back towards it highs it seem that there may not be that much to go for in the short term. Beyond that though, if it can break resistance from its old highs around current levels and move back down to a 2% prospective yield again, then it could perhaps achieve 1050p or so.
For a good overview of the results and the groups activities see also an interview with the CEO Chris Spencer.
So in the usual one minute to midnight fashion or maybe 6am in this case, the EU and Greece came up with a new fudged proposal to bail out the Greek economy for another three years - maybe. I find it sad that in the home of democracy they went though the charade of giving the people a vote on whether to accept or reject further austerity then turn around and sign up for pretty much what had been rejected while extracting little or nothing in the way of concessions or badly needed debt relief. It seems unlikely to me that further spending cuts and tax rises and staying in the Euro is going to do much for the plight of the sickly Greek economy.
Consequently it remains to be seen if they will get it through parliament or not or if there will be a popular back lash against this apparent injustice. I also find it strange that the EU leaders tried to manipulate the vote by saying a No would mean an exit from the Euro, while The European commission president, Jean-Claude Juncker said pretty much the same thing.
Meanwhile a week on Junker says "there will be no Grexit, satisfied with deal" with the inconvenient No vote apparently meaning nothing and promptly being forgotten about. This carries on the pattern of No votes in referenda being generally ignored as EU leaders carry on with their grand plan for ever closer union regardless and do their utmost to keep the Euro from falling apart. As a result the poor Greeks are losing much of their sovereignty to the EU which is the ultimate goal of ever closer union at the end of the day. Oh well plus ça change as they say in France, but as investors I guess we should just be happy that the uncertainty is over for now (assuming it is approved by the Greek parliament) and that markets can maybe focus on something else for now until the next inevitable Greek crisis blows up again a few years down the line.
Talking of which we have had a trading update from EMIS Group (EMIS) the £600m Aim listed UK leader in connected healthcare software and services which is helping another over spending outfit, the NHS in England, to achieve cost savings. In their in line update today they flagged that the NHS in England has identified the need to create £22bn in efficiency savings to fill a £30bn gap between likely demand and funding by 2020, Tim Kelsey, National Director for Patients and Information at NHS England, has announced that the use of digital technology can create savings of £8.3bn to £13.7bn a year by then. Emis therefore see themselves as being well placed to help with delivering some of this given their strong market positions in some key areas such as GP surgeries, Primary & Community Care, Community Pharmacies and Secondary and Specialist Care software.
Longer term readers may remember that this is one I suggested looking into when it was down around 600p per share in 2014. Since then it has done well and been re-rated onto a fairly full looking rating of around 20x with a yield of just over 2% but with 20%+ earnings growth forecast for the current year.
As I have explained in the past with posts on sell discipline here and here which outlined why I tend to use those kind of metrics (20x & 2%) as a trigger for re-considering a stock as don't tend to buy stocks on that kind of rating and above.
Thus this one is one I have been toying with the idea of selling, but for now I have continued to run it as it continues to be a good quality company which is continuing to perform well and which has seen upgrades to earnings this year. While looking ahead, given the statement today and the separate announcement of another small (£3m) earnings enhancing acquisition, this should help to underpin and possibly lead to further upgrades to earnings. On this basis I'm still just about inclined to run with it given the continued positive trading, but accept that a further upwards re-rating seems unlikely. However if I do find something offering similar quality and growth but on a more reasonable rating then I may rotate into that, so a hold / look to sell up here rather than a buy I would say.