Introduction / background comments
Not a great quarter for markets or the World in fact as the terrible Russian invasion of Ukraine is on going. While Covid seems to be doing its best to continue to disrupt things despite many Countries  moving on from restrictions and trying to live with it as a mild endemic kind of thing. Coming out of that on the economic front we are facing inflationary pressures brought about by a hangover from the pandemic, the effects of the Ukraine invasion and in the case of the UK the on going issues arising from BREXIT, if I dare mention that? 

As if that were not enough we also have behind the curve Central Banks trying to play catch up and put the inflation genie back in the lamp even though that is what they wished for. As indicated by Fed Chairman Powell when he updated their policy back in August 2020 when he said they would allow inflation to run hot for some time above their 2% target. Be careful what you wish for as the old saying goes!
 
With Central Banks and the US Fed in particular now ramping up their intention to raise rate we have seen an early inversion of the 2 year to 10 year yield curve there which has historically been a reliable indicator of a forthcoming recession within the next couple of years. There has been quite a bit of debate about the significance of this at present given the Central Banks policy of financial repression by keeping short rates artificially low. 

So there is probably no need to panic about equities on the back of this just yet, but it does suggest that at some point as short rates rise then some problems may arise in the financial system. That in conjunction with the on going squeeze in living standards could then lead to a recession perhaps later this year of in 2023. However for now the economic indicators I follow and the market timing indicators for the main UK equity indices (FTSE 100, 350 & All Share) are still suggesting it is right to stay invested, although Mid Caps and Small Caps remain in a bear trend for now. Of Course you'd have to decide for yourself based on your own risk tolerance etc.

Performance Review
March was at least a positive month for the Compound Income Scores portfolio (CISP) with a +0.4% total return, although this again lagged behind the FTSE All Share which returned +1.3%. Thus in the year to date after declines in January & February the CISP has a -7.5% total return for the YTD versus the +0.5% for the FTSE All Share. See the table & graph at the top of this post which show this & performance together with longer time periods and since inception.

This recent underperformance and indeed some of the outperformance in the longer term is partly explained by the portfolio tilt towards Mid & Small cap names and away from FTSE. More of the FTSE has held up or have even gone up in the recent market conditions marking a rare moment in the sun compared to recent years when investor generally shunned them and chased tech shares in the US and elsewhere. This had left them looking pretty cheap and with a heavy exposure to Commodity names this outperformance may well continue for now. 

I suspect the Mid & Smaller cap parts of the market may, in the main, be more sensitive to an economic pressures brought about by commodity prices and problems brought on by the cost of living squeeze. So I suspect the CISP may continue to struggle against that background, but I will try and address it as far as I can with the forthcoming monthly screenings. 

Monthly Screening
Which brings me onto this months screening which did throw up quite a few names where the Scores had deteriorated enough to make me consider their position in the portfolio. There were 6 of these which I decided to keep as I am happy with their recent updates and fundamentals etc. in the current environment. One of these though, Ashtead (AHT), I did top slice given the lower score,  as it had grown to be the second largest holding, but I will run the rest for now as it seems like a quality compounder.

Aside from that I did process three natural sales based on their Scores and the fundamental outlook. These were Kingfisher (KGF), which I must admit does look fundamentally cheap, although there are question marks about the outlook on the consumer / housing front etc. While the portfolio also has another name which is exposed to some of the same categories in a more limited way, but I'm trying to reduce duplication in the portfolio and increase the diversification by business type too when carrying out transactions, unless there is a strong trend or theme I'm looking to play to a greater extent.

In a similar way the portfolio also said farewell to a more successful position than Kingfisher with the sale of Jarvis Securities (JIM). This had been a beneficiary of the boom in trading during the pandemic, but that seems to have come to an end now. While they may be a beneficiary of rising interest rates, they have seen some big downgrades and the forecast outlook is pretty flat. This one has in the past gone to sleep in price terms & I suspect it could be entering another one of those periods, although it does seem a pretty good business in terms of its financial metrics for the longer term, so I wouldn't put you off holding if you want to. In the context of the CISP this is a another situation where it also holds a similarly exposed business but in this case it is the bigger, better diversified and cheaper IG Group (IGG). So with the waning of the dealing boom by private punters and a more difficult market back ground it seems reasonable to reduce exposure to that theme, but retain IG group which at least seems to benefit from tougher markets.

The final sale was of another seemingly cheap share Barclays (BARC) which has seen its score slip on the back of downgrades post what seemed like ok results. While it may also be a beneficiary of rising rates, it could also be more vulnerable to worsening economic and market conditions. Their case was also not helped by them over issuing a ETN offering which they will now have to pay a large sum of money in compensation. So out it went as it is a bank after all.

Against those sales on the purchase side I did add a couple of financials to replace the two sold which bring in the main a different kind of exposure to markets. One was a strong recent momentum play, while the other was a much smaller more contrarian value type of play. Aside from those I added a well managed, if somewhat boring packaging distributor Macfarlane (MACF) which has traded well and continues to look cheap on the back of some decent upgrades. Aside from those I also reinvested the proceeds of the Ashtead (AHT) top slice into another quality / growth  situation which has de-rated quite a bit along with other higher rated names recently. So now seemed like a reasonable time to bring it up to an average weighting in the portfolio after their recent in line trading update seems to have reassured investors.

Subscribers will be able to see full details of the transactions in their Scores sheets. May I also take this opportunity to welcome all the new subscribers this quarter. If you'd like to join them then you can do so here. 
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Hopefully the rest of the year might be more productive for the CISP and your investments. So may I wish you well with your investing, mind how you go and don't forget to be careful what you wish for.

I thought I'd share a quick back of the envelope calculation I've done this morning on Jarvis Securities (JIM) which subscribers will know was bought for the Compound Income Scores Portfolio last April at around 94p as it Scored well and I saw it as benefiting from a pick up in trading by private investors that we were seeing at the time on the back of the market volatility. 

The news today was the announcement by Equiniti of the disposal of their Share Dealing arm to Interactive Investors for £48.5m. Based on that Corporate sale price and the stated EBITDA of £3.3m for 2020 that equates to a 14.7x EV/EBITDA multiple and a 22.75% EBITDA margin on the stated turnover of £14.5m.

Looking at Jarvis they are forecast to have similar turnover of around £13-£14m for 2020 . I suspect these estimates may be on the low side as there don't seem to have been much in the way of upgrades since their last positive update. We won't have long to wait to find out though as I believe their final results for 2020 are due to be reported in the next week or so.
Digging further into Jarvis's numbers they are on an Enterprise value (EV) of about £97m or roughly twice what Equiniti has just been sold for in a corporate transaction which can sometimes be a good guide to valuation for similar businesses, which Jarvis is in this case. It does however earn EBITDA margins of roughly twice those indicated as being earned by Equiniti which I think should justify the EV being twice that achieved for the Equiniti business. 

So the bottom line is that this leaves Jarvis looking perhaps fairly / fully valued on this basis but I'll await the results with interest in the near future to see if they can be current forecasts and hear what they might have to say about current trading and the sustainability or otherwise of the boom condition they have enjoyed in the last 12 months. The conventional wisdom seems to be that the trading boom will tail off or normalize in the year ahead.

​Thus Jarvis may not be the bargain it was just over a year ago, but still looks reasonable value on around 17-18x with a yield of nearly 5% as they have raised the dividend by around 70% this year on the back of their successful trading. While on the chart at the top it appears that they are towards the top of their recent range and trend channel so it will also be interesting to see if this provides resistance or if they manage to break out of this range on the back of the results - one to watch out for this month for sure. 

Update as at 11/3/21 post results announcement.
These were largely as forecasts suggested although turnover & eps were modestly ahead at £13.3m v £13.2m  and 12.7p v 12.4p respectively, while the dividend had been announced previously. These figures did represent 43% growth or thereabouts on the previous year reflecting the boom conditions for share trading firms last year.

Encouragingly in the brief Chairman's statement he said the following: "I expect our trade volumes to continue at higher levels than we experienced in 2020 and the years leading up to that.  I also see no signs of organic growth slowing as we move into 2021 with a healthy pipeline of potential new outsourcing contracts. Client numbers and cash under administration continue to increase, we are seeing profitable growth in international settlement and our relationship with Primary Bid."

This suggests to me that the 8% growth in earnings to 13.7p that are currently forecast should be achievable if growth does settle back and this would be more in line with the growth seen in 2019. While the dividend is forecast to rise by a similar amount to 12p. At the current price this morning of around 250p this leaves it on around 18x with a 4.8% yield. The yield is around the middle of the range of yields (roughly 3.5% to 6%) it has traded on in the past while the PE rating has peaked out at around 20x in the past. So that leaves it looking fairly / fully valued I'd say unless Mr. Market wants to move it on towards its peak rating of the past or even re-rate it beyond that towards the ratings it ascribes to the likes of AJ Bell and Hargreaves Lansdowne, but I wouldn't count on that. 

Market Background
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:

• New lows for the markets of nine countries which have yet to penetrate their initial 34% March 2020 correction lows. The lows will occur between May 9 and May 22, 2020.
• 100% probability that world economic depression has already begun and will last until at least 2023. See “Worldwide 1930s Style Depression Has Begun”, April 27, 2020.
• The markets of the 13 of the countries to decline by 79% from their 2020 highs by Q4 of 2022.

Make of that what you will but probably best to be a bit cautious I would say and at least, given their precise prediction (breaking the first rule of forecasting about never giving a figure and a date) we won't have too long to see if they are right on the new lows front! While lets hope they are being too pessimistic about a Worldwide Depression on the back of the Global Virus Crisis and the likely falls in markets, although that is in line with the bursting of previous bubbles like Japanese equities in 1989 and Nasdaq in 1999. 

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.
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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!

A quick note for subscribers in these difficult times. On the Scores sheet in addition to the usual Scores measuring financial security, operational quality, dividend cover, & estimate revisions amongst other things. I am planning from today's update to add the underlying data points for these to the sheet to help you with monitoring and filtering stocks financial health, earnings changes and resultant dividend cover etc. more directly as the crisis evolves and we start getting more financial updates and guidance from Companies. I would recommend looking in particular at the interest cover column at the moment as anything less than 3x here could well indicate a company that may get into financial trouble from this or be in need of extra funds depending on how badly their business is impacted.

Secondly just to note that one of the stocks that was added to the Compound Income Portfolio this month, Jarvis Securities (JIM) when I said "Bought on Score as still operating & probably benefiting from more client trading, looks very cheap compared to HL. & AJ Bell & has cash rich balance sheet.

The CEO has put out a reassuring letter to shareholders. In this they suggest that they will still pay an interim dividend on or around 11 June 2020, to shareholders on the register at 22 May 2020, in line with the Company's dividend policy and a further announcement will be made when this dividend is declared. He also added that, as I suspected would be the case, that they had seen a pick up in trading activity post the election and since the virus outbreak, in common with other financial platforms. More encouragingly and something I was concerned might hit them he also claimed that he believed the reduction in the Bank of England base rate should have a negligible effect on interest income. 

So all in all good news and it has cash on the balance sheet and the CEO finished his letter by saying; "Finally, I would like to reassure Jarvis' shareholders and wider stakeholders that despite the seriousness of the current situation globally and the effect this will have for the economy we are not seeing a detrimental impact on the Jarvis business model at this time."

Just be aware though that it is right at the bottom end of the market cap. size that I normally invest in and has a small free float so as such it is not terribly liquid and therefore the spread can be quite wide too. See the graphic below for a comparison on Jarvis with Hargreaves Lansdown & A.J.Bell. Take care, stay safe and enjoy the rally in the market while it lasts.