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February Update

3/3/2021

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Introduction
February proved to be a positive month for the UK market as investors and residents of the UK generally gained some hope and expectation that the successful and rapid roll out of the vaccines might bring forward the day when our lives and the economy might get back to some sort of normality. This is shown in the table on the site which can be accessed here as is the out performance by the CI Portfolio for the second month running. This leaves it 3.6% ahead of the FTSE All Share in the year to date and builds on the excellent relative performance shown in the last three and five years and since inception back in April 2015, as shown in the Chart above, which are more meaningful periods of time to look at rather than one month or year to date figures. This also shows that the portfolio has now made it back to an all time high value.

The performance so far this year comes as a pleasant surprise as market moves have in the main been a bit discombobulating as many poor and struggling Companies have soared in price while some quality names have been under pressure. This however is explained in part by the rush of liquidity provided by central banks finding its way into markets, especially it seems in the US, with the likes of Gamestop soaring thanks to Reddit forums and Robin Hood traders buying up call options and creating a short squeeze. More broadly it can be rationalised as reflecting hopes for a return to normality being discounted as the vaccine roll out seems to be going well. Thus plays on reflation, re-opening and recovery from Covid effects are being bought as the natural winners of that process and the lock down winners and more defensive / quality / growth plays being sold off in return as part of this rotation.

Monthly Screening
This month there were four potential sale candidates that came up based on where their Scores were aside from a couple that I gave the benefit of the doubt to. One of these was Moneysupermarket (MONY) which had results and saw downgrades as a result which led to a decline in the Score as the shares rallied against this background. The outlook statement was quite cautious, but I guess maybe the market is giving them the benefit of the doubt and perhaps perceives them as a potential beneficiary of re-opening and a consequent pick up in Money & Travel comparisons which they flagged. As ever time will tell on this but in the end I decided to go with the Scores and sell it along with another stock which I had waited for results this month which also seemed underwhelming. Since that was a stock I didn't have a strong feel for and there was no improvement in the Score this month, I let that one go through too.

Two more sale candidates that I found more tricky were decent steady businesses which one would might want to hold for their longer term compounding attributes. One of these was Watkins Jones (WJG), which as it is a property developer, some may not view as a quality operation. It does however operate with a capital light model in the main in some growth areas like student accommodation and build to rent and has a decent pipeline of work. As a result it has some attractive looking operating characteristics and should be fairly steady. Again I had waited for results and a subsequent management presentation. These were well received and the price did well despite some subsequent downgrades. While the webinar I watched did highlight a bit of a potential dip in their development pipeline after they had put things on hold post the first lock down. Again I think the market might be prepared to look through this so I wouldn't put you off holding it for the long term. Despite that, given the price move and the effects of the downgrades on the Score I decided to let that one go as well.

The second quality long term compounder that came up as a sell was Unilever (ULVR) after their results were not that well received and they also saw some downgrades which leaves them with a fairly pedestrian growth outlook in the short term. It was also no doubt sold off aggressively as part of the reflation / re-opening trades of selling the winners and buying the low quality losers / recovery plays discussed earlier. This had however left the shares looking very over sold in the short term (as shown by the OB/OS indicator in the Scores sheet)  and I suspect might leave the possibility of some mean reversion in the short term if the recent market weakness should be extended or resume. Beyond that I guess it will remain fairly unloved in the short term so I'll review it again next month although personally I'd be more inclined to hold it for the long term as a classic quality compounder.

Against those sales three purchases were made for the portfolio this month. One of these was a specialist operational property REIT as a straight swap for the property type exposure forgone by selling Watkins Jones. A second one was a well run family lending business which operates in some specialist niches which should be a beneficiary of the re-opening and thus plays into that trend against the similar recovery prospects that Moneysupermarket may  offer. It did however have a better Score as it offered better value and momentum and it is a business that I know well and hold myself, so I was happy to add that one.

Finally somewhat more controversially perhaps Games Workshop (GAW) made a belated return to the portfolio having been sold early (and badly as it turned out) in the pandemic when the score had deteriorated on downgrades and I was worried about operational gearing to the downside as they had shut all their operations at that time. Now with the shares at more than twice the price when it was sold it feels very uncomfortable to be buying it back up here, especially as it could be seen as a beneficiary of lock down and therefore vulnerable to a reversal of sentiment and fortunes thereafter perhaps? Nevertheless I followed the Scores as it now looks more reasonable value having come back in price from peaks above £100 despite some chunky upgrades. I also believe there should be another trading update this month in which they may still produce some forecast beating results, so it will be interesting to see if the market is more enthusiastic about those this time around if that should come to pass or if they end up disappointing this time around.

Subscribers can see details of these trades and some journal comments too plus the rest of the portfolio. If you are not familiar with the Scores and would like to know more about them and how to gain access, I put up a presentation on the site recently to try and explain the background to them in as clear a way as possible & how you can access them - you can find that here if that is of any interest. 
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Summary & Conclusion
So a better month for markets and another month of out performance for the Compound Income portfolio despite a dash for trash and recovery plays and a move away from quality / growth and lock down winners. Despite some of the moves (like Gamestop in the US) seeming pretty confusing and inexplicable, in the main the broader moves seem more understandable in the context of hopes for a recovery on the back of central bank & government money supporting the economy and the vaccine roll out and a subsequent re-opening unleashing pent up demand etc. - hopefully!

This also meant something of a switch from growth to value names depending on how you define those, although it remains to be seen if that has run it course now or if it has further to run. Valuations in the US continue to lead to some concerns about these bubble like moves in some stocks and things like Bit coin and especially at a time when inflation fears and bond yields are rising which may impact on valuations if these rates go too far up. For now these moves don't seem to be getting out of hand just yet. So I'll sign off for now but leave you with a couple of tunes that seem to my mind to sum up recent market activity and those that might be getting involved at this stage. 
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October was indeed a dangerous month!

3/11/2018

2 Comments

 

"Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest."

A quote from my September catch up last month and October 2018 did indeed prove to be a dangerous month to invest in, although given the volatility it also threw up some opportunities too I guess for nimble traders who had the stomach for it. Talking of traders I think many newer investors who have started out during this prolonged bull market are discovering this year that having highly focussed concentrated portfolios is great when things are going well, but can be very painful when things cut up rough like they did this month. This should be a good learning point for all investors both new and old as you never stop learning in the investing game.

Talking of which as an aside on that subject, I've been reading the latest book from Anthony Bolton, the former Fidelity Special Situation Manager, which I happened across recently on a trip to my local library. Along with many quotes from other famous investors one of his own struck me as being quite relevant to today's markets which he suggests have become more short term due to the growing influence of hedge funds as follows:

"I do think this has increased the opportunities for professional investors prepared to take the one to two year view rather than a time period measured in months or weeks. Often there is so much analysis of the branch or even the leaves on the branch, there are fewer people taking a view on the tree, let alone a view of the forest."

His advice for private investors is to take a three to five year view and not to put money in the stock market if you are likely to need it in the next three years, which to be honest is fairly standard advice. Otherwise it has some useful tips on what it takes to be a fund manger and what you should look for in Companies plus plenty of reminiscing.

Any way back to October and the CIS Portfolio. This fared badly again in October as I suspect many concentrated portfolios will have done. It produced a negative return of 7.87% which was 1.47% behind the 6.4% loss from the FTSE All Share which I use as a benchmark. This leaves it down 3.73% year to date which at least is still 1.86% ahead of or down by less than the -5.59% from the FTSE All Share. I'll not go into details of the individual stocks as for example there were 10 that fell by more than 10% and only two that managed a positive return. If you want to see the  full history of the performance which has taken the portfolio up by 62.46% since inception in March 2015 then please click here to see that or see the table at the end of this piece. If you are interested in learning more about the process used to highlight potential candidates for the portfolio, then please see the Scores link in the menu at the top of the page or in the three bars menu if you are on a hand held device.

So on to this months screening, which I promised to get back to having ducked out of placing trades for the last couple of months. Interestingly a couple of those that I refused to sell last month because they looked oversold actually saw their scores improve sufficiently to stay in the portfolio this month with Alliance Pharma (APH) outperforming substantially & Spectris (SXS) underperforming slightly. The third one though went on to underperform badly and still ranked as a sell this month so out went Forterra (FORT), although I'd still be tempted to run it short term personally as their update seemed fine apart from some unexpected  downtime for one of their kilns and as the budget extended help to buy for first time buyers of new homes. Aside from that two long standing holdings XPP & Zytronic (ZYT) also came up as sells on the scores so out they went, although here personally I'd be more inclined to run with XPP for the long term.

Against this the Portfolio purchased some Page Group (PAGE) which replaced some Hays (HAS) that was sold higher up prior to this sell off, Moneysupermarket (MONY) & Cohort (CHRT) which may also be a beneficiary of the budget with extra spending on defence / cyber security. All these bring something different to the portfolio compared to the existing holdings, although they were not all as over sold as some of the stock they replaced.

Monthly Timing Indicators
Unsurprisingly these all turned negative given the big drop in the market this month with all the indices falling to between 3.9% and 6.5% below their trailing 10 month moving average. You have to go back to March this year and January 2016 for the last time these indicators were this negative. I would not however take this as a signal to sell everything as for one we have seen a decent sell off already and the market has found some support in the short term. In addition the economic statistic that I use in conjunction with these to indicate when you should take them seriously as a recession in the US may be imminent are still not flagging. See this post for the explanation of and rational for this & also see the other links in that piece too.  So in the absence of a US / Global recession, it seems we may be into a more normal 10 to 20% correction or mini bear market for now, rather than a really painful recession induced 40 to 50%+ decline.

So given that and the fact that we have seen a big sell off already plus some support holding recently, as we are coming into a seasonally stronger period and a typically positive phase of the US presidential cycle I would be a bit more optimistic in the short term. In addition with the UK market being unloved and under owned by institutions and is not as stretched in valuation terms as some other markets like the US. I therefore reckon we could see a sharp rally if we get an unexpected BREXIT deal in the next few weeks as the Chancellor seemed to be hinting at in his budget statement and as was suggested in the press over the weekend. The budget also highlighted steady, if low growth expectations, rising real incomes and continued low inflation and interest rates plus tax cuts which all seems quite a supportive background to me.

Having said that though, I was somewhat spooked (given it's been Halloween) or discombobulated (if you prefer fancy English)
by a recent piece I read and a chart that it included (which I reproduce below) which included an indicator which suggests a global recession could in the offing and which has a 90%+ hit rate when this indicator has flagged in the past!

So with that in mind I wouldn't get too carried away in any rally that we might see. Especially as we see Central Banks withdrawing liquidity, while valuation are high elsewhere, bond yields rising and economic growth may be slowing. If anything I'd suggest maybe using rallies as opportunities to sell into rather than looking to buy the dips as we have got used to over the last 10 years or so. Though that does depend on your age / stage of life and your resultant time horizon. If you are a younger person with many years to invest then obviously set backs should be welcomed and utilized as long as you are expecting to continue to feeding money into investing over the years.

Nevertheless however old you are and in whatever situation you find yourself in, I'd suggest being careful out there.


Let's Be Careful Out There GIF from Letsbecarefuloutthere GIFs
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