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.
Thus the sale candidates which came up as a result of their scores dropping below 75 were: Miton Group (MGR), Ferguson (FERG) and Hays (HAS). Of these Miton Group was the closest call as it had a score of 72 on the back of a low quality score form their variable margins & low ROCE in recent years plus, somewhat surprisingly some recent downgrades. it had however re-rated since it was bought at the turn of the year and provided a total return of 57.4% for the portfolio, including the annual dividend. As the CISP has two fund managers with the other holding in this sector being Jupiter Fund Management which looks cheaper and scores better than Miton (despite having seen bigger downgrades) so I decided to let Miton be sold, although overall it is probably still OK if you wanted to run with it yourself.
Ferguson's score had also slipped due to downgrades and middling quality and reduced value after a 20%+ rise in the price since it was purchased so that went too. Hays was similar although in this case, although the Score was well below the cut off I was tempted to keep it as the score mostly seemed to have deteriorated on not much news and they have a trading update coming up. But given that and the fact that chart seems to be in the middle I guess that could go either way when they update so again I let this one go through.
The replacement candidates that came up again included Plus500 which I have avoided putting in the fund due to my own reservations to detriment of the fund. If I had allowed it when it first came up it would now be showing a 50%+ gain. I see this week they have delivered another positive profits warning although on this occasion the price has not really responded. So maybe the market has caught up to this one now?
So that aside I did plump to put some Ramsdens Group (RFX) into the fund to replace Miton Group. This brings foreign currency (travel money), jewellery retailing, Pawn broking and a bit of a roll out story to the portfolio and might provide some defensive aspects if things do cut up rough given their exposure to the gold price and more demand for the pawn if the economy should go into reverse. It also looks quite cheap on less than 10x with a 4%+ yield and as a bonus was looking oversold thanks to some badly handled / communicated directors sales last week. I was probably biased in favour of this one though as I bought some myself recently too, but in my defence I note Stockopedia rates it as a Super Stock.
Next in was Qinetiq (QQ.) which describes itself as a leading science and engineering company operating primarily in the defence, security and aerospace markets (click their name & the other two to visit the investor relations websites if you want to learn more about them and research them further). It seems a pretty good quality play with improving fundamentals, although it is not the cheapest stock in the market, but nevertheless it brings something different to the portfolio and Scores well with a CIS of 97 so in it goes. Again I probably have a bias here, but in favour of this one as I bought it myself earlier in the year in the low 200's, although again this is a Super Stock according to Stockopedia.
Finally for a bit more defensive stodge I reluctantly allowed Wynnstay (WYN) to re-enter the portfolio, despite its previous low return appearance. It seems to be recovering from a difficult patch and has seen upgrades after their interim results and Stockopedia have it down as a Super Stock too so who am I to argue. If it can return to its previous highs from last year, then it could at least provide a 20%+ return this time around which might be more exciting, but I wouldn't hold your breathe as this seems like a boring dependable stock, albeit low quality with low stable margins of around 2%, which has been around as a business for 100 years, but sometimes boring is good! I note it is a bit over bought in the short term, so if you are tempted you might get a better entry point if you are patient or not as the case may be. Personally I struggle to get excited about this one with its low margins, but for the record Stockopedia seems to think this one is a Super Stock too - so appropriately given what it does, their Stock Rank system is er... bullish on this one!
Click a chart any chart below to bring up a larger view and you can then scroll right through them.
A busy day for announcements from holdings in the Compound Income Scores Portfolio (CISP) today, so much so I had to check the calendar to make sure it wasn't Thursday today. So any way here in brief is a summary of the relevant news announcements.
Alliance Pharma (APH) - the acquisitive group which buys mature licences to drugs and medicines etc. has, in line with this strategy, announced that it has agreed to acquire the marketing rights in the Asia-Pacific region for an anti-dandruff shampoo (Nizarol) for £60 million ($79.5 million). This is being acquired from a subsidiary of J & J & is being funded by an underwritten placing of shares at 91p which will therefore raise £34 million with the balance of the cost being funded from their existing debt facilities. They say that it had a Pro Forma EBITDA of £7.1m in 2017 on sales of £18.5m, so it seems quite profitable and the multiple they are paying does not seem too high. Consequently they say that it expected to generate material earnings enhancement in the first full year of ownership. This is quite helpful as the shares were starting to look a little stretched in valuation terms, although the placing and the recent rapid rise in the share price resulting in a re-rating may mean the shares are capped out for a while now. Thus I suspect they may go back into one of their customary sideways trading ranges, but I could be wrong of course.
Ferguson (FERG) - the specialist plumbing and heating distributor announced its Third quarter results for the 3 months to 30 April 2018 which saw revenues up by just over 10% in total and 7% on an organic basis. Most of the growth was driven by the strong US economy while the UK operations are undergoing a restructuring. They also said that the fourth quarter has started well with organic revenue growth in line with the third quarter and that given the third quarter out turn, the Group is well positioned for a successful outcome for the year.
Taptica (TAP) - the data-focused marketing solutions company announced a trading update which, after the profits warning from XL Media (XLM which was sold back in March on a deteriorating Score prior to their warning) was a pleasant surprise as they said they expect to report adjusted EBITDA for FY 2018 moderately ahead of market expectations and revenue growth in line with market expectations demonstrating a moderately higher-than-expected EBITDA margin.
This was helped by the fact that they have also continued to work closely with the Tremor Video DSP team to implement operational and cost efficiencies and have been able to achieve further improvements in gross margin in that unit. They also said that they continue to evaluate acquisition opportunities, which remains a key element of the Company's growth strategy. Thus with the current trading going OK and the integration of Tremor Video DSP delivering improved margins if they can do some more successful add ons then this should help them to continue their more recent successful growth streak, which the rating of around 9x PE doesn't seem to give much credit for.
A surprisingly busy even manic Monday today, or maybe even Blue Monday as I see #bluemonday is trending on twitter today.
As far as the Compound Income Scores portfolio (CISP) goes we have had positive US tax related update from Bodycote (BOY) where they say it will add 5p or around 10% to this years earnings thanks to a one-off revaluation of US net deferred tax liabilities. In addition they said that Q4 trading had been strong & therefore the Board now expects full year 2017 headline operating profit to be towards the upper end of market expectations (company compiled analysts' estimates range: £117 million - £126 million). So continued good momentum in the business and the shares here, although this has left it looking poor on the value front as it approaches the upper end of my normal comfort range at around 20x with a circa 2% yield.
Also on the US tax cut front Ferguson (FERG) outlined the effects of this and the reduced tax charge they will have going forward. They didn't give explicit guidance as to the effects but I would expect we will see upgrades here too. This should help to continue their strong momentum where the price has broken out to new highs. While they are good quality and offer slightly better value than Bodycote.
Away from US related tax changes we had an operational update from Central Asia Metals (CAML) which saw production towards the top end of their expectations. For the coming year they affirmed expectations of similar production levels at this stage and confirmed that as of 31 December 2017, CAML had cash in the bank of $46 million.
Finally XL Media (XLM) announced the acquisition of a number of leading Finnish gambling related informational websites from Good Game Ltd for a total cash consideration of up to €15 million. The Acquisition is expected to complete during the first quarter of 2018 and to be immediately earnings enhancing in the current financial year following completion. Seems fine and a continuation of their acquisition strategy, although on this occasion it is not diversifying but bulking up their original core operations.
That's it for the CISP today so I'll leave you with some music appropriate to today's title to choose from and cheer you up if you need it or not as the case may be. Happy Investing & listening.