After the carnage of March we had something of a relief rally in April, or as I suggested last month the reflexive rebound stage which is quite common during bear markets. As a result the FTSE All Share managed to bounce back and provide a positive total return of 4.9% for the month. This does however leave it with a negative total return of 21.5% for the year and as you can see from the chart above, the UK market has lagged the recovery in other markets around the world. Some of this lag is probably explained by the make up of the various indices with Nasdaq obviously being helped by it tech bias and the FTSE 100 in the UK being held back in the main by its heavy exposure to more vulnerable sectors like Banks & Oil.
Talking of Oils and the headline on the chart about markets being detached from economic reality. I think we had a dose of that the other day as Royal Dutch Shell finally bowed to the inevitable and cut their dividend for the first time since the war. In addition results in the US from a couple of the market darlings, Apple & Amazon were somewhat underwhelming too.
Thus it looks like we may have seen the best of the rally for now and we might even be into the next down leg of the bear market or again as I suggested last month the drawn-out fundamental downtrend.
Indeed referring back to my FTSE ready reckoner that I shared in my recent webcast, with the Royal Dutch Shell dividend cut this week, this brings the 50% dividend cut for the market more into view and futures market is suggesting that too. This would also be in line with the worst case scenario foreseen by Link Asset Services in their Q1 2020 Dividend Monitor update. Thus the risk reward from where we were (briefly) above 6,000 on FTSE recently looks skewed to the downside I would suggest.
While it is worth remembering how bear markets pan out and there was a good reminder of that recently in a good post on the Real Investment website (see highlighted link above) that I recommended in a recent post and on Twitter. Below is their graphic on how the current one compares to the last two bear markets and the different phases discussed above.
Market Timing Indicators
As for the market timing indicators, which to remind you turned negative in February and were confirmed when the US Unemployment rate and other economic indicators indicated that a recession was coming in March. Despite the rally in April these still remain some way (about 12 to 14%) below their trend moving averages suggesting that one should still be cautious of the market from here. Indeed if you feel over exposed and didn't reduce before, the recent rally has probably given you a good opportunity to adjust if you don't want to ride it out for the long term.
With that in mind, on that same Real Investment Website mentioned earlier, there was a slightly alarming post about CSPA (crash statistical probability analyses) and Bull & Bear Tracker algorithms. These seem to have called the recent low and are now calling the end of the rally, as per previous bear markets. It is also making the following bold predictions:
Compound Income Portfolio
Which leads me onto the Compound Income Portfolio (CIP) based on the Scores, which as discussed last month is throwing caution to the wind despite the above discussion and continuing to invest through this bear market to see how that compares with the Market timing signal. So far one month into the experiment it is 1-0 to time in the market versus timing the market, but this is likely to be a marathon rather than a sprint and an easy win for market timing if the alarming post above is to be believed. As ever time will tell on that I guess.
So after March's record fall of 22.2% the CIP saw a record monthly rise or total return of 13.5% versus the 4.9% from the FTSE All Share. This meant that it had clawed its way back ahead of the FTSE All Share Year to date by 4.5%, but that just means it has produced fewer losses with -17% versus -21.5%. Since inception just over five years ago the CIP is now up 68.1% versus 7% from the FTSE All Share or 10.8% per annum versus 1.3%, which is nice. If you would like to see the full history of that in table form then click here or you can see a graph of that below.
Much of this months performance was accounted for by the unwinding of the under performance by Mid and Small Cap names, where the portfolio is overweight versus large cap names and which had driven the fall in the previous month. In addition 3 of the 4 purchases last month did pretty well with two up by over 30% and another up by over 10%. As I mentioned on the Blog during the month one of these was Jarvis (JIM) which has since reassured and then put out a trading ahead of expectations update - which I had manged to predict. So I'd say it is definitely worth focusing on individual names and see if you can see how they might come through this OK and try and avoid those that might not rather than getting too hung up on market level.
Against that 2 of the 3 sales I undertook last month didn't do much but one, Games Workshop (GAW) also went up by more than 30%. So you win some you lose some I guess. This was however on the basis that they were going to start selling on line again and despite some hefty downgrades which has now left it on over 30x earnings so I'm not sure I'd be buying that up here myself now. I maybe worried too much about the operational gearing on the down side. i also just wondered if all their customers would have as much disposable income to spend on their hobby and may even think more about spending their time on more important things like family and friends after all this perhaps? Any way fair play though to those that have held on, may you escape all your Dungeons and slay all your Dragons or whatever the hell it is that their games are all about?
Aside from that, as suggested last month, I did make one switch intra-month where one stock Ramsdens (RFX) had, I felt, recovered far enough and with downgrades it was now on a rather high 20x versus a more normal 10x maximum or so and it is still not operating. Now while Pawn Broking & gold trading might boom on the back of all this I felt that the FX business, which accounts for 40% of their profits, might be missing in action for longer through all this as it seem likely that foreign holidays and air travel may be slow to return, but I could be wrong as it went up another 13% since I sold it!
To replace that I bought a more defensive counter in the food manufacturing sector that came up with a good Score and which was in the main (80%) still trading. This was Finsbury Foods (FIF), which hasn't done much yet since, so maybe I shouldn't bother with the intra month trading? Nevertheless it looks pretty good value to me on around 6x their likely earnings this year (June year end), although they too have withdrawn their profits guidance and latest dividend for now. I would however expect them to pay some kind of final and they should mostly be back up and running in their next financial year. It also looks pretty well invested and as a result does carry some debt, but they have confirmed that they have enough financial flexibility as things stand so shouldn't need to issue shares etc. Now it is not the highest quality operation but as I say it should be fairly defensive (bread and cakes to food retailers 80% and 20% food service) and as such I could see it re-rating back towards its more normal 10x or so and therefore I'd look for it to recover towards 80p to 100p levels from where it has come recently for a potentially decent return of 33 to 66%, although again I could be wrong.
In terms of the Monthly Screening a couple of semi-operative retailers came up as natural sales. One had not been as defensive as I'd hoped (although I didn't expect retailers to get shut down) and although it's not the highest quality, it is at least very financially robust so I was in two minds, but nevertheless let it go given the uncertainty surrounding when and how retailing might return. The other one had recovered more and is more exposed indirectly to housing activity and is more discretionary in nature in terms of the spend. So given the portfolio has a few names that are either directly or indirectly exposed to housing demand, which I think may well be weak going forward - I sold that one too.
Against those I purchased a couple of Companies in different industries that are still operating and which are in the main not that badly affected by the Global Virus Crisis. Any way subscribers to the Scores will be able to see the detail of these and all the other transactions in their Scores sheets and be able to follow the success or otherwise of these. If you would like to join them for less than the price of a cup of coffee per week then click here to find out and sign up for access if that is of any interest to you.
Summary & Conclusion
Well we are certainly living through unprecedented times as everyone keeps saying. As a result we have seen unprecedented falls and rises in share prices in the last two months and May has already started with a down draught. Thus I won't be getting carried away with the bounce back in the market or the CI Portfolio this month. This is because based on my experience and prior bear markets we are probably in or have just gone through the reflexive rebound rally stage. We may already be in or may soon enter the drawn out fundamental downturn stage.
The market timing indicators that I follow also suggest that it is too early to turn bullish too. While an article about some algorithms is also suggesting another down leg starting about now and being done potentially in double quick time again, which would at least tie in with the first two phases of the Global Virus Crash (GVC) a term I'm looking to coin after the GFC last time. Beyond that, if it comes to pass, we might then get a longer drawn out bottoming & recovery phase which could also include some sharp rallies along the way. One other depressing thing that has occurred to me is that west seems to be following Japan, but with about a 10 year delay, although I know this is not an original thought. So as the Japanese market is still below its bubble highs after 30 years, it is depressing to think that on that basis the FTSE might still be below 7,000 in another 10 years time.
Having said all that there are always opportunities for stock picking even in a bear market or sideways trading pattern, you just need to be active and nimble to take advantage of them, although I'm doubtful of any ones ability to perfectly time the market but I'm sure there are some exceptions out there who can claim to disprove that. Consequently I'm keeping the CI Portfolio pretty much fully invested throughout while trying to pick my way through the fall out from the GVC by trying to gravitate towards stocks that might benefit from it like Jarvis (JIM) last month and one of this months purchases.
Consequently it will hopefully be interesting to see how this plays out against the on going bear market and whenever the timing indicators / economic indicators suggest that it is safe to go back in the market. As I like to say, I guess time will tell on that. Talking of which thank you for taking the time to get this far and if you have as a reward or punishment (depending on your view of my musical taste) I'll leave you this month with a few more music tracks. Take care, stay safe and take your time in investing your cash I'd say if you have any to invest and good luck when you do!
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!
With September having come and gone I'm sure investors will be glad to see the back of it as nearly all UK indices fell on the month. FTSE 100 again led the way down with its heavy weightings in commodity related stocks and produced a -2.86% total return while the All Share produce -2.73%. This reflected modest outperformance by mid and small cap names, but most of those also produced negative returns, with only the FTSE Fledgling index producing a positive return on the month with a total return of +0.12%.
For the Quarter it was a similar pattern with FTSE leading the way down with a -6.13% total return down to the Fledgling Index being the best performer again but that was still a -1.65% total return.
Market Timing Indicators
When I last looked at these at the end of August there were mixed signals from these moving average based indicators, with large cap indices indicating sell / cash, while mid and small cap indices were still above their 10 month moving averages and therefore in buy / invested territory.
After September's fall across the board all the indicators have now turned negative to suggest sell / cash although the small cap and Mid cap indices are only 1.1% and 1.6% below their moving averages. So a rally in October could turn those positive again whereas another fall would obviously leave them more in bearish territory. In contrast the large cap indices seem to be firmly into a bear trend as they are 6.3% to 7.4% below their moving averages, so it will take a big rally in October to turn these around in the short term.
So these trend following indicators are now suggesting a cautious approach may be best for now as the trend in the market may have turned negative now. I say may as these have given a number of negative signals which have then been rapidly reversed as the market traded sideways, but the recent sell off has been more decisive and may therefore mark a turn. However as we have passed St Ledgers day and we are approaching a seasonally stronger period I guess time will tell.
Mechanical Compound Income Scores Portfolio
Regular readers will know that this is a portfolio that I set up back in April this year based on top decile stocks in the Compound Income Scores. The portfolio which is skewed towards mid and small cap / AIM stocks has benefited from this in previous months and September saw a continuation of this trend. As a result the portfolio delivered a positive total return of +1.78% compared to the -2.73% for the FTSE All Share mentioned earlier, representing another 4.51% of outperformance this month.
This reflect the markedly different make up of the portfolio compared to the index and leaves it with a total return of
+8.24% since inception in April 2015, which compares with -8.05% from the All Share for outperformance of 16.28%.
Interestingly the annually re-balanced portfolio which has remained untouched since the start has produced +8.63% in the six months or so since inception reflecting the large commonality in stocks so far and slightly less in the way of frictional transaction costs.
However I'm not getting carried away with the success so far as, given the different make up of the portfolio, performance is likely to be volatile in both directions and it just so happens it has been in a positive direction so far. At least it is encouraging that the Scores have so far been able to identify attractive stocks even in a difficult market.
Talking of attractive stocks 14 of the 20 holdings were up this month despite the market falls and the big winners were Utilitywise (UTW) which bounced back by 24% from the previous months sell off. While the illiquid Maintel (MAI) rose by 13% from the bottom of its recent trading range to the top on the back of some decent results. Others that also benefited from good results were EMIS the healthcare software group (+11.3%) and IG Group (IGG) the spread betting / stock broking firm (+5.4%). While the big winners in the quarter were Alliance Pharma (APH), Finsbury Foods (FIF) and Rank (RANK)
On the downside Diploma (DPLM) -8.3% and A.G. Barr (BAG) -6.8% fell on the back of lack lustre updates in September. While Renishaw (RSW) -7.8% continued to drift off from an expensive rating post results earlier in the quarter. These names were also the biggest fallers over the quarter too.
Summary & Conclusion
So a tricky September has left markets and headline indices looking damaged with trends potentially broken to the downside for now with the often difficult month of October still to come. It will be interesting to see if investors regain some confidence and come back in for so bargains to produce a traditional year end rally or if the markets are sending an early warning sign of economic trouble on the horizon - China slow down, US rate rise etc.
However as ever it remains a market of stocks and it is always possible to find some attractive stocks and make some money, but like King Canute this may not be possible if the tide has really changed. Any way that's all I have time for now, good luck with your investing in these difficult times. I'll do the quarterly re-screen of the portfolio today as planned and report back later with the changes.
...which is one of the stocks that made it into the Mechanical Compound Income Scores portfolio (MCIS) as it had been scoring in the top decile back in April this year. Since then they had put out a positive year end update back in July which I wrote up at the time. It seems that their their turnover came in as expected being up by nearly 46%, with 6% like for like growth and expansion in the operating margin to 4.8%, which is close to their previous high of 4.9% achieved in 2010.
This translated into earnings per share of 7.7p which was 10% better than the 7p guesstimate I came up with in July, but a little shy of the 7.95p that analysts had moved up to post the last trading update, so maybe scope for a small bit of disappointment there. Otherwise the dividend seemed to be in line with forecasts at 2.5p which was up by 150% from last year.
The balance sheet and the level of the debt was the other factor which needed watching post the trading update in July given their acquisitions in the food service area in the last year and the increased capital expenditure they were flagging. This came in at £21.3m at the year end which compares with a market cap. of around £130m and apparently equates to about one times pro forma annualised EBITDA of the Group. That seems fine, but is worth bearing in mind and keeping an eye on if they should make more acquisitions for cash this year.
On the outlook the appropriately named Non Executive Chairman, Peter Baker, suggested that the group still have aspirations and the capabilities to grow further although he also suggested that the economic and market environment remained challenging. They seem to be alluding to and it seems to me that more acquisitions may be on the cards which may be an opportunity for further diversification and earnings enhancement, but not without its risks and the funding will need watching, but I guess they could issue shares if they saw a larger opportunity now the shares are more highly rated.
Talking of which, having had a spike up to around 105p to 110p recently, it seems that there may not be enough in these numbers to move the shares on from here today in the short term. However at 102p today's figures leave them on a fair looking 13.25x with a lowish 2.5% yield. On current forecasts for the coming year, assuming no changes on the back of these results, the shares are on around 11x with a 2.75% suggested yield.
This seems fine but given the run up in the shares and the lack of further icing on the cake in the figures, I suspect it might consolidate in the short term. So personally I would be tempted to take profits if I held them and the Compound Income Score has come down to 79 recently so it is also at risk of exiting the MCIS portfolio at the next quarterly review at the end of September. Otherwise it looks like a reasonable hold for the medium term as part of a diversified portfolio.
Regular readers will know that MCIS stands for the Mechanical Compound Income Scores Portfolio which I launched back at the start of April this year. This is designed to see how a portfolio based on the Scores would perform if it was just selected "Mechanically" without too much input from myself. Over time this will also enable me to compare it with the returns from my own focussed ISA portfolio and my broader portfolio to see if I should be diversifying less and focussing more on what the Scores are telling me.
As I mentioned at the weekend it has got off to a reasonable start delivering a total return of just under 10% since early April compared to a small negative return from the All Share. This compares to a total return of just over 5% from my ISA over the same period so I guess I would have to say it is Machine 1 – Man 0 so far. I'm not about to throw in the towel or pull the plug however, as my ISA has provided a total return of 15% YTD v 5.5% from the All Share and made 3% in July compared with the 2.5% for the MCIS. So a promising start for the MCIS but it is early days and it really is too short a time period to draw any firm conclusions.
As for July the big winners were a couple of stocks I wrote up last month – Alliance Pharma +31.6% and Finsbury Foods post a reasonable trading update which was up by 16.9%. Aside from those the other top performer this month was Rank which rose buy 8.4% to 245p. This is really annoying as I looked at it personally earlier in the year when it was around 190p, but held off buying in the hope of getting a better entry price. So there is a live example of following the Scores trumping human biases in action.
On the downside it was some of the more expensive stocks which fell back this month with two stocks which now trade on 18x or so, Renishaw (ahead of results at the end of July) and Diploma (no news), which came back by 9.7% and 8.5% respectively. Otherwise the other main laggard was another fullish priced stock, Howden Joinery, which was down by 8% after their Half Year report towards the end of the month failed to excite investors. Interestingly these all still score well on the Compound Income Scores whereas Alliance Pharma and Finsbury Foods after their moves are now closer to falling out of the top quartile and therefore into the sell zone, but I'm getting ahead of myself as we will have to see how they score come the next quarterly review at the end of September.