Another positive month in terms of performance as the value of the portfolio increased by 3.13%. However, as you may re-call from yesterday's market update this lagged slightly behind the total return from the FTSE All Share Index which saw a +4.69% total return.
This is the first month in which the portfolio has been behind the index, but this is no surprise as up to now it has benefited from its bias towards mid and small cap / AIM stocks and a corresponding underweight in FTSE 100 stocks and some of the main sectors like Oils and miners which led the way down over the summer. As we saw in the market review it was FTSE 100 and some of these commodity stocks that led the way back up in October, while mid and small cap stocks overall recovered to a much lesser extent having gone down less beforehand. So therefore as I say no surprise that the portfolio lagged behind this recovery.
However it was pleasing to see the portfolio up by 3.13% which was more than the returns seen by the Mid Cap and Smaller indices. The winners that drove this performance this month were:
+26.7% 32 Red (TTR) the online casino & gambling business - a stunning performance from one of this months new holdings after the latest quarterly review at the end of September.
This just seemed to reflect a re-rating possibly in a belated response to their interims towards the end of September rather than any particular news flow this month.
+11.2% WH Smiths (SMWH) after well received results in the month.
+10.8% Maintel (MAI) - this smaller telecoms provider continued to respond positively to its results announced in September and broke out successfully from its trading range as I hoped it might.
On the downside the biggest losers were:
=5.4% RM Group (RM.) the education software provider a more subdued performance from another of this quarters new holdings, which sagged on no news but this may just reflect it closing at the bid rather than the offer last month.
-4.2% Renishaw (RSW) continued its de-rating from last month which has left this quality metrology Company looking better value on a mid teens PE.
-3.8% Howden Joinery (HWDN) the kitchen and joinery specialist is also de-rating but was probably down this month in sympathy with other repair and maintenance stocks as some of these reported weaker trading in recent months.
Summary & Conclusion
Another positive month for the portfolio with a +3.13% total return even if it was behind the broader index. This leaves it up by 11.62% since inception in April 2015. This compares to -3.73% from the FTSE All Share over the same time frame for an outperformance of 15.35%.
So a great start to the life of this portfolio but it is important to remember that given it only consists of 20 holdings and is completely different in construction from the index that we should expect the performance to differ widely from that of the index both in a positive and negative fashion. However if the Compound Income Scores are good at identifying attractive stocks then hopefully this divergence should be in a positive direction over time, so so far so good, but as I always say time will tell.
Meanwhile I have uploaded the updated Portfolio which you can view via the menu at the top of the website or via the drop down menu to the left on mobiles and tablets or by clicking here if that is of interest to you. Of note if I were doing a re-screen this month, which I'm not, the sell candidates on the back of post results down grades would have been IG Group (IGG) and Utilitywise (UTW) with scores of 64 and 71 respectively.
Finally If you are a new or recent reader - welcome and if you are wondering what the Scores are all about and want to learn more about them, then see the Scores heading in the menus mentioned earlier or click here to read & see more about them and how you can access them.
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.
In particular after a day when there were revelation about VW fiddling their emission tests in the US it is perhaps worth starting with bumper interim results from S & U (SUS). This saw a continued strong performance from their Advantage car finance business which saw profits up by 32% on the back of a strong car market in the UK. The other significant feature of these results was their disposal of the home collected credit business in the period with the proceeds of £82.5m being used to fund a special dividend of £1.25 which equates to 5% at the current share price of 2500p. The first interim dividend (they unusually pay three dividends per year) was also increased by 18% from 17p to 20p. Current forecast are for only 11.7% underlying dividend growth to 73.8p, so if the current rate of increase is replicated in the rest of the year then a total of 78p looks possible which would leave them on a reasonable 3% or so yield at 2500p.
I estimate this will leave them with no debt and may be a small cash position versus the £65m or so debt that they had previously. The management say the disposal is transformational as it allows for further investment in the rapidly growing and profitable consumer motor finance business and by taking it into the SME market. In addition to this theyare also talking of investing into what they describe as other specialist finance businesses with growth potential. Of course it remains to be seen what other areas they choose to invest in which does introduce an element of uncertainty and risk but also opportunity for earnings enhancement as cash / debt facilities are utilised.
As you can see from the chart below the shares, which are up 5% or so this morning to around 2500p, has been something of a ceiling on the share price in recent months. So it will be interesting to see if this will continue to be the case before any further details of how they are investing the cash emerges or if there is enough in these numbers to prompt a break out. I guess time will tell but on around a mid teens PE maybe it too early for a break out just yet especially
once it goes ex the special dividend.
Meanwhile we have had updates from two more stocks which feature in the Mechanical Compound Income Scores Portfolio. First was a positive Q1 update from IG Group (IGG) who benefited from a strong August against a weak comparative as nervous financial markets gave clients much more reason and opportunity to trade. Perhaps the poor weather in August also encouraged domestic customers to trade more rather than being distracted by nice weather and out door pursuits.
The shares like markets have been trading sideways this year as their earnings were down slightly and the dividend was flat at their last year end in May and they were looking fairly fully valued as a result on a 20x+ PE. However with this good start to the year and a resumption of growth forecast as their new broking business gains clients then they may be more interesting again now with a prospective rating is closer to a mid teens PE and with a dividend forecast to grow again to give a yield of just over 4%. Looking at the chart though it looks as though 740p to 800p or so may be the trading range for now until we see how the rest of their financial year develops, but so far so good and it has a Compound Income Score (CIS) of 84 before any changes on the back of today's update.
I mentioned the weather above because the other announcement of interims today from AG Barr (BAG), the Scottish drinks producer, included a weather related profits warning and as a result they now expect their full year results to be broadly flat, which probably means slightly down. So this could take earning from the current forecast of 30p back by around 7% to last years 28p. The dividend was however raised by 8% in line with current forecasts suggesting that they will still deliver the expected 13.1p dividend. The share have fallen by 5% or so to 532p this morning to reflect this set back which will leave them on a fullish looking 19x with a lowish 2.5% yield. So not a lot to get excited about on the rating front although this is a quality business so it may be worth watching to see if they drift off more as this is not really a fundamental problem with the business as such and they will have weak comparatives next year as opposed to tough comparatives this year.
It still has a CIS of 87 reflecting the quality and growth, but after today's results and growth set back this may slip a little once the down grades are reflected in the data although dividend growth still seems likely. Technically it has just broken below its 200 day moving average and 500p looks like the next medium term support level so probably no rush but worth watching and revisiting perhaps if it should get down there or even into the 450 to 500p range.
..to a new high on FTSE 100, although personally I wouldn't get too excited about that. I guess we might see it consolidate it's recent gains to try and confirm a break out, but in the meantime I'll be continuing to focus on individual stocks.
Talking of which, while I was away last week I see we had amongst other things like the budget, final results from EMIS the healthcare software provider, Phoenix Group (PHNX) the closed life consolidator and a Q3 trading update from IG Group (IGG). I also note that there were the usual strong results from Next (NXT) although marred somewhat by a more downbeat / realistic assessment of the growth prospects for the current year from their highly regarded CEO Simon Wolfson. This probably makes sense with the forthcoming election and the associated uncertainty given the range of possible outcomes.
Of the others IG Group seemed fine ex the hit from the Swiss Franc move, while Phoenix Group results seem to have been well received with the shares moving up further, although I note they only maintained and talked about a sustainable dividend on the back of cash flows from their closed books of life policies. They also paid down some debt and are targeting an investment grade credit rating, although I note their debt pay down is expected to slow this year. Thus it seems OK so maybe my concerns on this one are misplaced, but as I'm not desperate for yield I'd rather focus on stocks with lower yields and better growth prospects.
EMIS results seemed fine and the outlook statement struck a positive tone, but the shares were largely unmoved on the back of this. This probably reflects the re-rating the shares have enjoyed in the last year as they have risen from around 600 pence when I first wrote them up. With the shares now closer to 900 pence and not far off their all time high, they now look less attractive as the rating has moved up close to 20x this years forecast earnings and the expected yield is only just over 2% at 2.24% which leaves it close to being a sell on my 2% & 20x sell discipline. That being said it seems set fair and the quality is reasonable and they seem to have been able to grow the dividend by around 10% over the last 5 years including the latest 18.4p dividend. So the returns should be acceptable, it is just the price you have to pay now is getting quite high, so probably not one to chase up here.
Today in brief I note that Matchtech (MTEC) which I wrote up in February has announced some contract extensions and a new contract with Southern Water which as Keith Lewis, Chief Operating Officer of Matchtech Group plc, said: "These contract wins clearly demonstrate how the breadth and knowledge of our specialist recruitment teams is enabling the Group to meet the demands of new and existing clients alike in sourcing high quality candidates across both the engineering and professional sectors." These shares have not moved much and still look good value on around 13x with a 4%+ yield and the benefits of the acquisition of Networkers International still to come. Apart from that finally I note that Pennon Group (PNN) have confirmed a continuation of their RPI+4% dividend policy to 2020 after the recent regulatory review completed.
So on a yield of close to 4% that doesn't seem too bad if not outstanding, cheers.
After last weeks move to unpeg the Swiss franc from the Euro we have had interim results from IG Group (IGG) today. This Company which helps to facilitate on line trading and which recently moved into stock broking where they have signed up 1700 accounts, 60% of them new clients, had already announced a £30 million hit from this. Overall they benefited from a volatile second quarter in the markets which helped to offset a quiet first quarter, but the Swiss move has taken some of the gloss off of this and meant that analysts have taken a Swiss army knife to their forecasts.
On the back of this they have seen revenues rise by 8% and within this the UK & Australia performed well but they flagged Europe as being disappointing. They also suggest that within this and more generally their mobile Apps need some improvement as they are not seeing good numbers of conversions from downloads to active clients. They are responding to this with the roll out of new apps which started with one for the I-Pad in December last year.
With regard to the dividend there is a confusing picture because of their decision to increase the pay out ratio last year and pay the interim as 30% of the previous years full year dividend. This was explained by the company as follows:
"Accordingly, we have declared an Interim dividend of 8.45p.This is up 47%, for two reasons. Firstly, the increase in the pay-out ratio last year was recognised entirely in the final dividend, meaning that last year's interim dividend was calculated on the basis of the previous lower pay-out ratio. Secondly, we have increased to 30% the proportion of the total annual dividend which is declared at the interim point in the year, where historically this was approximately 25%."
While this seem great news on the face of it there was a sting in the tail from the Swiss Franc move in the current trading and outlook statement. Here they confirmed that the revenue benefit had been offset by these events such that they expect profits and earnings to be hit by this from a combination of market (£12 million) and client credit (£18 million) exposure. Earnings estimates seem to have come down by about 5% so far this month to around 38 pence to reflect this, which is a forecast fall of about 5% year on year. On this the Company finished up by saying:
"If full year diluted earnings per share were to be lower than last year purely because of this highly unusual event, the Board's current intention would be to maintain the full year ordinary dividend at last year's level. Obviously the Board's final decision would take into account all relevant factors at the time."
Summary & Conclusion
So given where earnings estimates have moved to, this suggests to me, in the absence of a bumper second half, that the full year dividend may well now be flat rather than up by 3.2% which is currently being forecast and is slightly disappointing.
With the current 38 pence earnings forecast and an unchanged (perhaps) dividend of 28.2 pence to be conservative, this leaves it on nearly 19x this years earnings with a yield of 3.9% which is only 1.3x covered and which may not have grown this year. While it is a good quality well run business, given this recent hit, which has led them to look at their risk controls, it certainly seems a lot less compelling up here at 720 pence given its exposure to the vagaries of markets and their impact on IG's clients inclination to trade and their finances.