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.
Quite an interesting and tricky month for the screening with four potential sale candidates coming up based on their Scores. VP the plant hire group again fell into this category, but as I kept it in last time awaiting their results, I am going to do that again this month as these are due this week on the 5th June. The shares have had a good run into this week and the prior update was of the in line variety. So it seems unlikely that there should be any surprises unless they have deliberately kept expectations low so they can pleasantly surprise, perhaps. Lets hope they don't disappoint and leave me regretting my decision to await the results rather than selling before, which might have been the lower risk option. Other than that with the acquisition of Brandon Hire late last year it will also be worth watching out for an update on how the integration is going there for any problems or increase in the expected synergies & cost savings.
Another sale candidate that I decided to give the benefit of the doubt to was Hays Group (HAS) the staffing company which had a positive trading update and looks set for a strong year which ends this month. The main reason the score has fallen is due to no changes to the forecasts in the short term and a decline in the cover ratio as they are expected to pay a much larger dividend via the payment of a special dividend. Thus with the year end approaching I thought I'd await the year end up date & see if that leads to upgrades and an improvement in the Score again and the possibility of hanging on to collect the final and special dividends too. Alternatively I could have switched into the better scoring and similar company Robert Walters, but this was not much cheaper so I dismissed that idea to keep the trading costs down, which is one of the few costs that an investor can control.
The remaining two sales candidates which I let go through were Headlam Group (HEAD) & Jarvis Group (JIM). Of these I had given Headlam the benefit of the doubt previously and indeed topped it up last month. But having taken the final dividend their score has deteriorated again after their trading update this month led to downgrades. While it remains lowly valued and they seem to be taking action to manage the business against a difficult background, they acknowledge that achieving their targets will depend on a customary stronger second half & no continuation of recent weaker trends, which leaves them open to the risk of having to warn on profits later in the year. Equally it may all pan out as they hope and the shares might then re-rate on the back of relief over there being no profit warning, but as ever we'll have to wait and see on that.
As for Jarvis Group the score has deteriorated here after their somewhat cautious statement that accompanied their bumper full year figures. Thus the expected growth looks pretty lack lustre and there is no dividend growth forecast. Thus although it is probably fine for the long term it doesn't seem to offer that greater value on around 15x earnings. In addition the CIS portfolio has a lot of exposure to financials any way, with two fund management companies, so out it goes, but personally I'll probably continue to hold it myself for the long term as part of a more broadly diversified portfolio.
In terms of the replacement candidates a few interesting ideas came up including Phoenix Spree Deutschland (PSDL) which is a property fund that is now specializing in Berlin property. While I toyed with the idea, it seemed a bit too off piste for what I'm trying to demonstrate with the CISP but I might treat myself to a few for a bit more diversification. Aside from that Howden Joinery (HWDN) came up again as a potential re-entrant to the portfolio. But having sold Headlam on around 10x I was reluctant to replace it with another similarly exposed consumer cyclical on 15x, although it may be better quality. Meanwhile Henry Boot (BOOT) also came up as another that could have re-entered the portfolio. But since the portfolio has a housebuilder (Bellway) and plant hire via VP I decided to give that a miss too.
In addition I could have picked Abcam (ABC), Renishaw (RSW), Patisserie Holdings (CAKE), Advanced Medical Solutions (AMS) & even Fevertree Drinks (FEVR) but I overlooked these due to my value bias. It does highlight the fact that the Compound Income Scores are not just for yield stocks, but can highlight attractive, quality growth stocks too - hmm perhaps I should rename them the Compounding Scores? Or maybe as I have suggested in the past perhaps I should run an unconstrained portfolio based on the Scores, but of course if you subscribe to them yourself you're able to do that if you want.
Any way in the end I decided on a couple of cheaper alternatives in Renew Holdings (RNWH) which may not be the highest quality outfit, but the nature of their business (essential maintenance in the main) should provide a bit of stability. In addition they have seen some upgrades post their recent interims and made a reasonable looking acquisition too. This bolsters their exposure to railway maintenance and is expected to be materially earnings enhancing with the return on investment also expected to comfortably exceed their cost of capital. So on this basis I think there could be more upgrades to come and a possibility that the share which have sold off this year, could may be return toward their previous highs around 480p, perhaps.
Finally the other stock I settled on was Forterra (FORT) a brick making company, which trades quite cheaply, but looks to be trading well given the on going push to build houses and shortage of bricks which is leading them to invest in more capacity funded from their cash flow. Obviously not without its risk if the housing market or economy should suddenly go into reverse, but for now it seem fine so into the portfolio it goes. It does also add to the housing and construction exposure on top of Bellway & VP. The portfolio will also pick up the final dividend of 6.4p which goes XD on 14th June for an immediate yield of 2% which will help recover the cost of these trades.
So after those changes that leaves the CISP on a forward PE of around 14.5x with a forecast yield of 3.25% on the back of expected dividend growth of 13.2% which all seems OK to me. Don't forget if you'd like to Score your portfolio or get more ideas like these on a regular basis then check out the Scores link here or at the main menu at the top of the site or in the three bars if you are on a mobile.
A quick month end round up of recent results from companies held in the Compound Income Scores Portfolio (CISP). Last week we had interim results from Hays (HAS) which showed strong growth and material investment in their growth markets with 22 countries growing net fees by more than 10%. These are overseas as the UK continued to lag so they are investing and increasing their International consultant headcount by 18% to reflect this.
Looking at the numbers which showed 18% profits and earnings growth and a 10% increase in the dividend leaves them well placed to hit and probably exceed full year forecasts in my view. I say this as even if they were flat in H2 I calculate they would exceed current forecasts and given the momentum and investment they are putting in I'd bee surprised if they were flat in h2, although I guess they will be up against tough comparatives.
Thus I was surprised that the shares came off after the numbers despite on going upgrades. Perhaps this was a behavioural bias coming into play as they were trading around 12 month highs and looked like breaking into new high ground. They have however found support above the previous 12 month high so personally I think this may be a good buying opportunity as they still score reasonably well too.
This week we have had more good results from Croda (CRDA) the high quality chemical company which is therefore relatively expensive on about 24x this coming years earnings and a yield of barely 2%. The results were there or there about but probably not sufficient to push it ahead from here given the rating and especially in the absence of a special dividend which some nay have been looking for.
While Jupiter Asset Management (JUP) the high performing fund manager which has 81% of mutual fund AUM with investment performance above median over three years also came in around forecasts as the earnings level although the dividend in total up 20% was better than expected thanks to the (usual) special dividend. This leaves them on a reasonable looking 14x with a 6%+ dividend yield, assuming markets continue to progress allowing them to pay another special dividend next year. If you are still bullish on markets then it could be of interest down here as it has come back sharply in the recent correction.
That's it for now but back soon with a month end update on the portfolio and the UK market timing indicators.
Just a quick update on the performance of the Compound Income Scores Portfolio (CISP). After such a promising start it was a fairly disappointing month in the end. FTSE 100 and the broader FTSE All Share Index both ended the month with total returns of nearly -2%, while the Mid 250 stocks did slightly worse with -2.24%. As is often the way at the start of a sell off (if that's what this is) the Fledgling & Small Cap Indices held up better with Small Caps flat and Fledgling stocks actually delivering positive returns of 1.83%. The more general weakness seems to have been led by nervousness about rising bond yields on the back of the gradual withdrawal of Central Bank Quantitative Easing or QE being therefore replaced by Quantitative Tightening or QT.
So onto the CISP and its returns for the month of January were similarly drab but were at least just about positive at +0.06%. This compared to the 1.93% loss from the FTSE All Share giving 2% of out performance on the month. Since inception of this portfolio in April 2015 it is now up by 68.8% which equates to an annualised return of 25.3%, albeit that this has been achieved in a very favourable market background. Within the portfolio it was pleasing to see one of last months new purchases - Miton Group (MGR) - coming in as the top performer with a near 20% rise, while Hays Group and Bodycote delivered 11.5% and 6.6% respectively on the back of their updates. On the downside the laggards were Games Workshop (-10%), Jupiter Fund Management (-6.1%) & Bellway (-4.3%) which all probably succumbed to profit taking after previous strong performance.
Personally since I'm be using the Compound Income Scores, together with Stockopedia Stock Ranks more this year to manage my portfolios I was also able to benefit from the rise in Miton Group too. I firmly believe that these quant models can be a great help in identifying shares that outperform, as demonstrated by CISP and other portfolios based on ranking sytems. If you are not familiar with the Compound Income Scores (which have been updated for subscribers today) you can read more about the background to them and how to get access to them if you want by clicking here.
Finally we have the US Unemployment data with the non-farm payrolls today. These should still be fine, while the main FTSE Indices all still remain about 2.2 to 2.4% above their moving averages, with the Small Cap index is nearly 4% above. So these still suggest that we should not be that worried about the sell off just yet, although I guess it could develop into something nasty given valuations and the levels of complacency that have built up over the last few years on the back of QE which meant that corrections were few and far between recently.
Another busy Thursday with a throng of results and updates as the New Year reporting season gets into full swing. Of interest to the Compound Income Scores Portfolio were trading updates from Jupiter Asset Management (JUP) and Hays Group (HAS) the international recruitment Company. While also of interest was a sponsored note from Hardman & Co. on Alliance Pharma (APH) - covering the background and benefits from their recent add on acquisitions which you can read or download from here if that is of any interest, or click below if you want to read more.