  Click to enlarge Compound Income Scores Portfolio Performance So the brief spell of Summer like weather gave way to a more soggy end to the month and so it proved in the Stock market too. The FTSE All share after a strong start in line with the weather sold off mid month before recovering somewhat toward the end and returned -1% for the month as a result. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. The authorities there seem to have that under control though, but on going inflation worries and supply constraints in certain areas also weighed on sentiment more generally. Meanwhile the long run of outperformance by the Compound Income Scores Portfolio since last November finally came to an end in a very disappointing fashion as it returned – 5.9% on the month. The Portfolio has outperformed by over 10% in the year to date with a total return of 24.4% and it has compounded at just over 15% per annum since inception just over 6 years ago. It is therefore perhaps not too surprising, given the strong run it had prior to this, that some underperformance at some point was probably inevitable. In addition the FTSE 100 held up better than the Mid and Small cap parts of the market where the portfolio has been and remains overweight. That’s just the nature of this investing game and you have to take the rough with the smooth as I always say and not get carried away when things are going well and equally not get panicky or depressed when you have a bad run. As long as you have confidence in your process and are prepared to accept some volatility in your capital in the short term for potential gains in the longer term, which is after all what investing is all about. There were quite a few contributors to the poor performance this month with 6 stocks underperforming by more than 10% on either fundamental news flow or profit taking in the main. The two worst examples were CMC Markets (CMCX) which fell by around 30% on the back of a poor trading update / profits warning as markets became calmer over the summer and they saw some relapse from the extra trading they had seen in the previous quarters and last year when the pandemic was in full swing. The other big faller to a similar extent was Luceco (LUCE) which succumbed to a heavy bout of profit taking as their excellent results didn’t lead to any further upgrading of forecasts. This profit taking was probably also prompted by their honesty in admitting that they had seen an extra boost from Covid trading and highlighting cost pressures, although they have been able to deal with those thus far. Their Score fell back to the lower end of the top quartile as they did see a few small downgrades on the month but it stays in the portfolio on that basis and it now also looks better value on a mid teens PE with a well covered 2.5% or so yield. On the positive side of things there were not too many, but S & U (SUS) put in a good performance after their trading update which led to upgrades which I covered in the mid month update post. While City Of London Investment Group (CLIG) responded well to their full year results reported in mid month which led to some upgrades. While the 10% increase in the dividend for the year was also presumably well received given the dividend background surrounding the pandemic. Monthly Screening British American Tobacco (BATS), EMIS, Strix Group (KETL) & Paypoint (PAY) all featured as holdings with scores in the second quartile this month & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt as their scores were not that far into the second quartile. BATS remains cheap as they continue to manage the decline of tobacco products and invest in new vaping products. While EMIS continues to trade well as reported in the results recently and they are confident of hitting their full year targets. So I’ll continue to run that one as a quality compounder for now although the rating has got a bit richer. I also decided to keep Paypoint again as they enter their close period ahead of the H1 results in November. A further director purchase by the General Council and Head of Compliance just before that helped to sway my decision, while the coming energy price hikes should help to boost their declining bills paying business. I did however decide to let Strix Group (KETL) go as a bit like Luceco, even though they did report good results they also struck a note of caution on current market conditions and saw a few small downgrades. In addition the rating was not that cheap on still over 21x PE and with a Score of less than 50. Nevertheless it does appear to be a good quality business with a well protected dominant market position, so I wouldn’t put you off holding it for the long term. That’s just the way the Scores process works and it also felt like the time to rotate into some better value given the inflation / interest rate outlook. With the proceeds from this sale and some cash which had accumulated from dividends over the summer I was able to add a couple of better value situations. One was a housebuilder, despite my own personal reservations about the timing of this, but as several had appeared towards the top of the list I decided to follow the Scores even if they may be a bit rear view mirror in this case. Housebuilders will probably never be highly rated given their cyclicity, but they currently look fairly cheap within their usual 7 to 10x PE rating ranges. This probably reflects concerns about over heating post the ending of the stamp duty holiday, affordability, plus labour costs and materials pricing and availability. Against that interest rates remaining low (for now) and the on going supply demand dynamics continue to offer support. So again I’d leave you to decide if this is a sector you want to participate in. There was also a good Podcast from Money Week which featured an interview with Gary Cannon of Phoenix Asset Management, who had some interesting comments on the builders and remains a bull of the sector. The other value stock I added, was even cheaper than the housebuilders and subscribers will have seen the details of this in their Scores sheet. In addition to this I also decided to sell CMC Markets (CMCX) on the back of their profits warning (even though it did not score outside the top quartile) and switch into the similar IG Group (IGG) where I prefer the business model and it scores more highly than CMC having had a positive update last month in contrast to CMC. Summary & Conclusion After a disappointing end to the summer in the UK we also had a disappointing start to the Autumn in markets and also for the Compound Income Scores Portfolio. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. On going inflation worries and supply constraints in certain areas also weighed on sentiment more generally. There seem to be concerns that this will retard the on going economic recovery and some of these pressure like supply shortages, commodity price increases and shortages of labour seem likely to put pressure on corporate margins which may well cause the market to continue to struggle in the short term until this picture becomes clearer. Some suggest that this could presage another leg of outperformance for value stocks in the short term if rates rise (or bonds sell off) on the back of higher inflation as hinted at by the US Federal Reserve. With that in mind I used this months Screening to add a couple of more value orientated shares to the portfolio after taking profits in the more quality growth situation, Strix Group – which had enjoyed a re-rating during its time in the portfolio. While in the UK more widely, the market, for once, seems better placed with its bigger exposure to energy and commodity sectors. While the UK economy seems to be suffering badly from the after effects of the Pandemic, the resultant supply shortages and the squeeze on energy prices. As a result stagflation fears have stirred given the hit to incomes and coming benefit cuts and tax rises. As a result some fear we might face a Winter of discontent much like the 1970’s which saw three day weeks and power cuts which I remember from my childhood. Despite this politicians have insisted there are no fuel shortages, that Christmas will be fine and that we won’t see power cuts even though some industry representatives claim otherwise. Given that and the inflation outlook, bonds remain a no go area for me and so personally I continue to rely on a mix of equities and other real & alternative assets to try and maintain and grow my capital and income in real terms. I would highly recommend reading the recent final results from Ruffer Investment Company in this regard and particularly the Investment Managers comments starting on page 19. After a recent visit to Thatcher’s farm to see their Cider production facilities, it put me in mind of Mrs Thatcher’s comment from the last time we had stagflation & as Maggie May have said "There is no alternative" in terms of sticking with equities. They are simply the best way for me, although I saw that Tina Turner has decided to cash in her royalties which may be the best way for her at her at the age of 81, although I do have a few Hipgnosis Songs Fund (SONG) as part of my alternative assets exposure. Any way that’s all for now as I must get off down to the shops and get some candles, a frozen turkey before they sell out or go up in price. I’ll leave you with some music appropriate to the above comments.
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...as today we have had final results from Persimmon (PSN), a fruit and one of the largest UK house builders. As with other house builders these are strong, as one would expect, so I won't dwell on the detail for which I suggest you look into the full announcement at their investor website. On the income front worth noting though that they boosted their planned return of capital under their plan to 110p again this year and they boosted the extent of this further by suggesting a similar level of returns for the next five years too. At this mornings price of around 2050p this would give a decent yield of 5.4%. While on the earnings front the 173p seemed to well ahead of forecasts and close to the 176p currently forecast for the coming year. So I presume we could see some upgrades to earnings and dividend forecasts on the back of these numbers. However, this may be required to keep the shares going as others in the sector have been weak and this one looks a bit expensive on a PE of 11.6x before any upgrades and they are not far off resistance from their highs last September. Thus I probably wouldn't chase it up here and if you wanted a house builder the higher scoring stocks in the sector on the Compound Income Scores are Bellway (BWY), which is in the Compound Income Scores Portfolio and the lower yielding Inland Homes (INL) if you are not so worried about income.  Meanwhile amongst a flood of other announcements and dividend cuts from BHP Billiton (BLT), Ladbrokes (LAD), and Standard Chartered (STAN) I've seen a 22.6% increase in my dividend from Provident Financial Group (PFG) which was about 2% better than forecast. This non standard lender continues to do well on the back of restructuring their home collected credit business, the acquisition of car loan business Money Barn and growth in their Vanquis bank business which includes a credit card operation too. The shares have however factored much of this growth in as they have doubled in the last two years to their current 3300p or so and now trade on a PE of around 18x with a yield of 4% for the current year on the back of a further 10% growth. Thus they seem fairly fully valued to me although they did trade up to 3600p recently. They are probably a strong hold though for income and growth as they continue to fund their dividend and growth from internally generated capital, including their latest venture into on line loans under the Satsuma brand.  We have unsurprisingly had strong updates from housing and property related stocks recently, with Taylor Wimpey (TW) reporting today being the latest house builder to report strong trading. Meanwhile we have also seen a trading update from Savills (SVS) the global estate agents, facilities management and property investment manager which has been in the Compound Income Scores portfolio since inception in April last year. In the update they said that the Group experienced a strong finish to the year with the completion of some significant commercial transactions in several of their businesses around the world. In addition they also flagged a stronger than expected year for their investment management operation on the back of some disposals occurring sooner than expected. As a result they said that they expect underlying results for the year to 31 December 2015 will be ahead of their previous expectations, so this may lead to some upgrades to this years numbers in the short term. However they sounded a note of caution about the current year on the back of heightened uncertainty over global economic prospects and rising interest rates. Consequently they said that they expect a tempering of the strong transaction volumes seen recently in certain markets, but nevertheless they felt that market fundamentals remain sound. Accordingly they retained their original expectations for 2016 suggesting no changes to forecasts for next year despite the strong performance this year. The shares are up modestly by around 1.5% today at pixel time and by just over 5% from the price last April when they were purchased for the portfolio. They now trade on 14x with a 3% yield for the year just ended which falls to around 13x with a 3.3% yield on the back of forecast dividend growth of 11%. This seems fair enough and they currently score 81 on the Compound Income Scores which therefore leaves them close to the automatic sell zone between 75 and 80, but we'll have to see where they sit when it comes to the next quarterly review due at the end of March. On the chart the shares had come back toward their lows of last Spring recently, while on the upside, moving averages and price peaks between 900p and just shy of 1000p look like they may provide some resistance. So like the update not too much to get excited or worried about either way for now, hold.  ...continued strength in the UK housing market as we have had a few announcements today. Two from Inland Homes (INL) and M.J.Gleeson (GLE) relate to development land sales suggesting that there is still good demand for land, especially in the South East. In addition we had strong looking results from Berkeley Group and a further special dividend as expected.
However the experienced Chairman there, Tony Pidgley, was quoted in this article as saying "while the recent general election had brought stability, but warned that upcoming mayoral elections and uncertainty over Britain’s role in the Eurozone could impact business. “Berkeley is a supporter of the UK remaining in Europe as this is the best way for London to remain a world city," said Pidgley. " Now I guess that makes sense for Berkeley Group given their emphasis on London in particular and I guess the uncertainty or even an unexpected vote to leave could diminish the attractions of the London property market and as has been reported could also cause some large banks like HSBC & JPM may move parts of their operations to Luxembourg as has been rumoured in the event of an out vote. For the rest of the industry which is probably more nationally based in general this uncertainty should not have too much effect on demand for houses in the short term. However, I guess if there was an out vote and if the government did then eventually get to grips with immigration then that could reduce some of the demand push, but a couple of ifs there so I wouldn't worry about that just yet. ...that Bellway - (BWY) the UK house builder (CI Score 99) announced bumper interim profits today as they had already flagged in a prior trading update that they would see strong trading results which would be weighted towards the first half. So rather than reproduce lots of big % gain numbers like the 56.1% rise in earnings I'll leave you to read the announcement if it is of interest. Of interest to me was the fact that the dividend was also up by 56.3% to 25 pence. They suggested they would continue with "The payment of a progressive dividend, together with the growth in net asset value, is delivering long term, sustainable returns for shareholders." So given that they already told us that the results were going to be first half weighted what does this leave them to do in the second half? Well last year they made 89.9p of earnings in H2 and they have just reported 103.5p in H1 this year. So looking at forecast of 210.2p for the full year (Source: Stockopedia) this leaves them 106.7p to do in the second half or growth of 18.7% in H2, which doesn't seem too demanding against the growth just reported. However, I guess we have had some signs of a slow down in the housing market and with the General Election to come this could impact them. But talking of politics each party seems to be trying to out do the other in terms of the number of house they are planning to build - although I'm not quite clear how they are going to do that? Plus the latest scheme from the Chancellor George Osborne to provide help to buy ISA's with tax relief on top might eventually help (house prices) at the margin, but surely increasing supply and bringing prices down would be better for those looking to get on the debt treadmill, but then falling house prices presumably don't help win elections. Any way I digress, getting back to the point, it seems Mr. Market likes the numbers and has marked the shares higher this morning by around 4% to nearly 2100p. Looking at the chart (see below) they seem to be making a break for new highs, which will be good if it is confirmed. I see also that Panmures and Liberum have price targets of 2126p and 2278p. However, I note that the shares have gone up faster than some builders scaffolding recently and their vertical ascent has also left them looking overbought in the short term. So on around 9.5x with a 3.5% yield (3x covered) based on current forecasts for this year, before any changes on the back of today's numbers, they seem fine but I probably wouldn't chase them up here. It will be worth watching to see what happens to the numbers to see if there are any upgrades as this could make them look better value and possibly justify the higher price targets. So there you go: No Alarms and No Surprises Such a pretty house, such a pretty garden Radiohead - No Surprises - seems like an appropriate song for today so see also the video at the end if music is your thing and even if its not I would urge you to check it out as I think Radiohead are an "interesting" band and this tune is one of their more relaxing, if a bit weird - enjoy.  |
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