Compound Income Scores Portfolio Performance
So more blue in evidence on investors screens this month as UK equities continued to rise and thereby provided total returns of +1.1% as measured by the FTSE All Share which I use as a benchmark for the Compound Income Scores Portfolio (CISP). This did better than the market again this month with a +2.6% total return and thereby continued its winning streak against the index this year and over all periods since inception.
That actually makes it six month in a row since November last year, although I should probably point out that this is more clawing back a sharp underperformance that the portfolio saw in November 2020 on the back of the vaccine inspired rally when many financially challenged and low quality names led the way. Nevertheless it is good to see the portfolio now pulling further ahead having made up the underperformance seen in November as the market has perhaps focused more on fundamentals again and maybe started to question how great the re-opening benefits will be in some cases. If it is of interest you can see the full performance history here.
With practically a years worth of outperformance in the year to date, I decide to do some portfolio tidying in addition to the regular sells that were suggested by the Scores. This involved trimming back a couple of big winners that have been run successfully.
The first of these Sylvannia Platinum (SLP) has gone up 3.6 times since purchase in October 2019 and as such it has grown to become the largest holding in the portfolio and has been flirting with a 10% weighting in recent months. Thus I decided to reduce it on risk control grounds. Now call me a wimp, as I know some people like to run with massively concentrated portfolios, which is fine if you are comfortable with that, but that's not how I roll as I like to run with a broadly equally weighted portfolio of around 20 to 30 positions. As this one still looks cheap and continues to Score very well it has been maintained as the largest holding, just not 9 to 10% any more.
The second reduction of a still high Scoring stock was done on valuation grounds and involved Dot Digital (DOTD) which was bought in April 2020 based on its Score and as a SaaS business with 90% recurring revenue I felt it would be resilient to the Covid crisis & could even be a beneficiary. Since then it has gone up 1.5x and re-rated and I feel that the rating has got a bit rich for my tastes with a PE of > 50x seeming expensive for the single digit growth that is currently forecast. The yield is also now < 0.5% and the EBIT/EV yield is also looking rich too at 2%. On that basis and given the current trend for switching away from expensive tech / growth stocks and towards more cyclical recovery / growth plays I feel OK with going against the old adage of running your winners, although in this case I have retained a position as despite the valuation it still Scores in the top decile.
Aside from these there were two sales based on their Scores with Avast (AVST) also confirmed by the new treble momentum trends that I mentioned in my last post. The other one Mondi (MNDI) was suggested as a hold on those trends so I wouldn't put you off holding it if you do. It has however been coming up as a potential sale for a few months now and having given it the benefit of the doubt a couple of times I decided to let it go as part of this month more active trading round as it Scores pretty averagely across the piece.
The proceeds from all these sales gave sufficient fire power for three new positions which takes the number of holding up to 30 which is the upper end of my preferred range. The new positions did however all bring something different to the portfolio and help with the diversification which after all is the whole point of a more broadly based portfolio, but as I say each to their own if you want to do it differently.
Summary & Conclusion
Another positive month for UK equities and the CISP as the recovery rally which has continued to gather pace since the vaccine news in November last year shows no sign of flagging despite some concerns about inflationary pressures.
Given the out performance by the portfolio this year and the extent to which some winning holdings had moved I took the opportunity for some portfolio house keeping in terms of risk reduction and profit taking on valuation grounds in addition to the normal sales thrown up by the monthly screening process (see above for more details). This leaves the portfolio with decent exposure to the factors underpinning the Compound Income Scores and it still looks to be offering a decent mix of value and growth with the overall PE being 16x with a 3.6% yield for the current year based on forecast dividend growth of 11% which excluding any rating change tends to suggest that the portfolio could still deliver close to its compound return since inception of around 15% per annum. So I'm happy with that and the progress shown by the portfolio in the year to date and indeed since inception.
Subscribers will be able to see details of all the new purchases and the resultant make up of the portfolio on their sheets, together with the new triple momentum trend suggestions for Buys, Holds, Avoids and Sells for every stock in the Scores. I hope this might help you with your decision making process when using the scores by tapping into the power of momentum too.
Aside from that on a personal & musical note it was a welcome change to see some blue sky outside in addition to the blue on the portfolio. Hopefully we are through the worst of the Covid crisis now and can look forward to finally enjoying some fun in the Summertime. While I probably won't be enjoying a Dreadlock Holiday any time soon it is good to see some cricket back on TV as I don't like cricket, I love it. Whatever you are up to this summer, assuming we are allowed out, take care and may the sun continue to shine on you and your portfolio.
Announcements from companies in the CIS Portfolio this week included a positive trading update from recent purchase Mondi (MNDI). These suggested that their underlying operating profits are up by 15% in the half year to date. This includes the effect of some planned down time at some of their plants which overall they now expect to be a slightly greater drag on results this year than last at €115m v €95m and this is also slightly up on their previous estimates. They also flagged higher costs and a headwind from currencies, but despite these negatives they still say that the outlook for the business remains postiive as they continue to experience a strong pricing environment in a number of key product segments and also good demand. Thus they expect to continue to deliver what they describe as "value accretive growth", so it looks like a hold on that basis.
On a less positive note there was also a rather lacklustre set of interim results from Zytronic (ZYT) which in a mirror image of Mondi saw their basic eps decline by around 15% as their revenues fell slightly on the back of weak demand in the Financial area, primarily ATM's which they make flat screens for. On a more positive tack they did suggest that there had been a customary pick up in demand in this area in H2 so far, but went onto suggest that demand overall may be suppressed compared to recent years. This was disappointing and may help to explain the recent de-rating of the shares and prompted another sell off on the day of the results. One saving grace against this is the strength of the balance sheet with net cash of £13.7m against a market cap. of £65m. This allows them to pursue a progressive dividend policy. Thus although the earnings were down they raised the interim dividend by 100%.
This was however partly to address the split between the interim and finals so I wouldn't expect such an increase for the full year, but forecast growth of 20% in the dividend for this year and next puts it on potential yields of 5.6% and 6.7%. this is however at the expense of cover which will come down towards a rather low 1x if the current forecasts are achieved. Thus it looks good value on yield grounds with a fairish looking PE of 12 to 14x or less if you factor in the cash. So a dull hold for income at the moment but unlikely to excite on the capital side I suspect, until they are able to return to demonstrating more turnover and earnings growth. As it has drifted back towards it's recent lows this might be a good entry point for a patient contrarian investor if you believe they will be successful in returning to a growth path, otherwise might be worth waiting for evidence of an upturn.
The only other snippets worth mentioning were a contract win in Slovenia for Amino Technology (AMO) and a slightly unusual RNS from Taptica (TAP) which included a Q & A with the CEO which you can read here if that's of any interest and you haven't seen it yet.
Charts below left to right from top are; TAP, AMO, MNDI & ZYT
Just a quick note to say that the latest Compound Income Scores have been updated again today. Meanwhile as promised here are brief details about the trades that were carried out in the CIS Portfolio which is run using the scores. This month there were three potential sales, although in the end I gave VP Group (VP) the benefit of the doubt as they had issued an in line trading update and final results are due in June.
Consequently Central Asia Metals (CAML) and Portmeirion (PMP) whose scores had deteriorated both left the portfolio having delivered decent returns over about a year in the case of CAML & just three months in the case of PMP. CAML was replaced directly with a similar stock with a higher score - Rio Tinto (RIO) albeit that it is much bigger and more diversified in terms of its operations. While PMP was replaced with Mondi (MNDI) the much larger , international packaging group where the portfolio then picked up the final & special dividends which gave an immediate yield of 6.27%, although obviously the price will have adjusted down accordingly on the XD day.
Finally in a bit of portfolio tidying up I also topped up a couple of holdings which had lagged with some of the proceeds of the above sales and from some cash that had accrued from dividends. Thus holdings in Headlam (HEAD) & Ferrexpo (FXPO) were topped up. I know this goes against all the suggestions of running your winners and cutting your losers but in this case FXPO continues to score extremely well and HEAD's score is still quite good at 88 and the CIS portfolio will also pick up the final dividend of 17.25p worth 3.88% which goes xd towards the end of May.
That's all for now but don't forget if you would like to learn more about the Scores and how to gain access to them or learn more about the CIS Portfolio then do explore the navigation links at the top of the site if you are on a PC or in the three lines menu at the top if you are on a mobile or tablet or click the highlighted links in the first paragraph. Good luck with your investing and have a great weekend whatever you are up to.
I wrote about Mondi (MNDI), the global packaging group back in April 2014 here and here, which looked cheap at the time and has done well for me since then. More recently, in July this year, the Compound Income Scores (CIS) portfolio had picked up a holding in another smaller packaging company called Powerflute Oyj (POWR) at 70p thanks to its high score in the Compound Income Scores & the fact that it looked cheap in comparison to its bigger rivals like Mondi. This stock was in the news yesterday as the founding Chairman Mr Smurfit, who has a long history in the packaging industry, has decided to sell out his large holding and thereby facilitate a takeover bid for the whole company at the 90p level. Now while this still seems to be a bit cheap and not that great a premium to the recent price, it probably reflects Mr. Smurfits desire to sell his large stake and get the deal done. Thus being recommended and with over 50% of the shares either bought or where they have received irrevocable undertakings to accept it looks like a done deal.
This is the first holding in the CIS Portfolio to attract a bid, so what lessons can we learn from it? Well as ever value investing can be rewarding if you are prepared to look in out of the way places or be a bit contrarian. Now the Compound Income Scores are not necessarily contrarian as they do include estimate revisions, but they do otherwise tend to highlight stocks which offer good value, quality, financial security and which offer growing dividends. They also highlight stocks, like Powerflute, which may not be that palatable at first glance. At least in this case they prompted me to take a closer look and benefit from the recent move in this one.
More broadly given this looks like a done deal as Mr. Smurfit seems keen to exit this does give me pause for thought, given his experience of this cyclical industry. I also note that quite a few VC led IPO's (new issues) are opportunistically coming back out of the wood work again now which suggests to me that the market is getting quite fully valued and may be getting a bit toppy. Added to that are the concerns about the US Fed raising rates again, perhaps this month, or more likely by the end of the year at a time when US economic data has been a bit mixed. I continue to watch the US unemployment data closely to see if it breaks upwards through its moving average, but so far it has remained below, as this has in the past been a good lead indicator of a forthcoming recession. Thus I am also getting a bit more wary of more cyclical stocks and in light of that I reduced my Mondi holding recently when it was over 1600p.
As for the Powerflute holding in the CIS Portfolio, this will be reviewed at the next monthly re-screening at the end of this month and as it looks like a done deal I'll probably use it as a chance to lock in a decent 25% profit and move onto the next opportunity. So if you would be interested in finding out what that turns out to be or in getting access to the Scores yourself then you can read more about them and how to subscribe to the Scores here and the CIS Portfolio here.
....round up as there are lots of results and updates out today, but I'll cover briefly those that I have mentioned in the past or those that currently score well on the Compound Income Scores as they may be worthy of further research. So in no particular order we have had:
That's it for today as I'm trying to get a more in depth look at another stock done, hopefully might have that ready for you tomorrow or over the weekend.