A surprisingly busy even manic Monday today, or maybe even Blue Monday as I see #bluemonday is trending on twitter today.
As far as the Compound Income Scores portfolio (CISP) goes we have had positive US tax related update from Bodycote (BOY) where they say it will add 5p or around 10% to this years earnings thanks to a one-off revaluation of US net deferred tax liabilities. In addition they said that Q4 trading had been strong & therefore the Board now expects full year 2017 headline operating profit to be towards the upper end of market expectations (company compiled analysts' estimates range: £117 million - £126 million). So continued good momentum in the business and the shares here, although this has left it looking poor on the value front as it approaches the upper end of my normal comfort range at around 20x with a circa 2% yield.
Also on the US tax cut front Ferguson (FERG) outlined the effects of this and the reduced tax charge they will have going forward. They didn't give explicit guidance as to the effects but I would expect we will see upgrades here too. This should help to continue their strong momentum where the price has broken out to new highs. While they are good quality and offer slightly better value than Bodycote.
Away from US related tax changes we had an operational update from Central Asia Metals (CAML) which saw production towards the top end of their expectations. For the coming year they affirmed expectations of similar production levels at this stage and confirmed that as of 31 December 2017, CAML had cash in the bank of $46 million.
Finally XL Media (XLM) announced the acquisition of a number of leading Finnish gambling related informational websites from Good Game Ltd for a total cash consideration of up to €15 million. The Acquisition is expected to complete during the first quarter of 2018 and to be immediately earnings enhancing in the current financial year following completion. Seems fine and a continuation of their acquisition strategy, although on this occasion it is not diversifying but bulking up their original core operations.
That's it for the CISP today so I'll leave you with some music appropriate to today's title to choose from and cheer you up if you need it or not as the case may be. Happy Investing & listening.
Today's update of note for the CISP is another of the portfolios longer term winners in the shape of XP Power (XPP) - which if you are not familiar with it (you can click the name link for more details) is a £700m United Kingdom-based developer and manufacturer of critical power control components for the electronics industry.
They had Q4 trading update today in which they said the Company had a good finish to the year, in line with the Board's expectations, as the strong order intake reported in the third quarter drove robust revenue growth in the final quarter. Other points of note were that they moved into a small net debt position following the acquisition of Comdel on 29 September 2017 for US$23.0 million (£17.0 million), net debt at 31 December 2017 was £10.1 million, compared with a net cash position of £3.6 million at 31 December 2016.
They also said that the 4th quarterly dividend is not expected to be less than 28 pence per share, representing a minimum total dividend of 77 pence per share for 2017, an increase of 8% over the total dividend of 71 pence per share paid for 2016. Furthermore on the outlook they said they are encouraged by the continued strong order intake experienced across the business during the second half of 2017 and the overall book to bill level for the year and that they enter 2018 with positive momentum and therefore expect to grow orders and revenue in 2018 above that in 2017. I would suggest you check out the full statement at their investor relations part of their website for full details if you are interested in researching this one further.
As far as the CISP goes it remains in the portfolio as it continues to score highly, although the valuation has got a bit higher than I would normally entertain for new purchases at 24 to 25x with a yield of just over 2%. However, having trimmed it late last year in a portfolio re-balancing, I'm allowing it to run as a winner while it continues to make the cut on the scores despite my reservations about the valuation, as it does seem like a good quality operation.
Finally talking of quality companies and winners, the latest Compound Income Scores are out today. So if you are not already a subscriber and would like to be able to sort the good form the bad and the ugly and pick some future winners for yourself, then check out more details about the Scores and how you can gain access to them by clicking here or in the Scores navigation tab on the site. Otherwise thanks for reading, have a great weekend and good luck with your investing and see below for a couple of tunes / videos on today's theme.
I thought I would take another look at models as the BBC are doing a series of features and programmes this week about robots and the possibilities offered by artificial intelligence, including this piece titled: Intelligent Machines: The jobs robots will steal first.
Regular readers will know that I have been developing and running an on going experiment with my own Scores Model which so far has been performing well. So with that in mind I thought I would revisit the case for using models in investing as it has been proven in many different fields that models or algorithms can often outperform experts and even when the experts have access to the models the models tend to act as a ceiling to prediction performance rather than a floor.
Don't take my word for it as there was a great white paper a while ago from Wesley Gray the Author of one of my favourite recent investing books Quantitative Value. On his site Alpha Architect as well as great research like this they also offer some free screening tools too. In this paper he looked at much of the background to the case for systemic decision making, giving examples of experts versus models in section 4.
However don't despair because before that in section 2 he did see a place for experts in the research, development and assessment of models, just not in the implementation as shown in this graphic below from the paper.
With that in mind I have been assessing my own Scores model as it has been implemented in a mechanical way and I do have a tweak to it that I plan to introduce at the next quarterly review at the end of this month - so watch out for that and if I get around to writing it up in more detail. If you are not interested in my model or don't want to develop your own then I would also recommend Stockopedia and their Stock ranking system, if you are not familiar with it, as the humans there have done a great job in developing a successful model for identifying stocks which are good value, quality and have momentum. It is a subscription based service but you can read more about it and get a two week free trial by clicking the link above if that is of interest to you.
Talking of models I note that there is also a ranking system for human models at a website called models.com where you can check out their rankings for models of the year 2014 and lots of other categories too if that is of any interest. Finally given the subject today I can't finish with out a bit of media to go with it. So on the visual front there was a good series recently on Channel 4 called Humans - which was about synths helping with domestic and other chores which was quite entertaining and worth catching up with if you missed it. While on the audio front this one seems appropriate. <END>
As regular readers know I have a dual passion for investing and music and further to my last post which featured Supertramp and Crisis What Crisis, I thought I would inflict upon you some more of my Dodgy musical taste - they were a band too incidentally and apparently they are still going and even on tour soon. If that is of interest click the not at all dodgy link above to find out more.
So in the same way that Radio stations tend to do count downs of various musical genres on Bank Holidays to fill up their airwaves, like Radio 2 Beatles versus Elvis today I'll do the same with my blog. So with that in mind for a bit of fun I thought I would try and come up with my own count down of vaguely market / investment related music. So here goes in reverse order, click the highlighted links to watch / listen if you want to.
10. Staying Out For the Summer - Dodgy - which could relate to the old adage of sell in May and go away?
9. What Goes On - Velvet Underground - Starts What goes on in your mind - has to be a reference to behavioural finance?
8. Money - Pink Floyd - A classic track and what Investing is all about at the end of the day?
7. Wall Street Shuffle - 10CC - A classic tune may be about their investing experience as it was recorded in the 1970's?
6. Boom Boom Pow - Black Eyed Peas - A good description of what happens at the end of a market cycle?
5. Money For Nothing - Dire Straits - What people think they can get at top this stage of a cycle?
4. 48 Crash - Suzi Quatro - The original rock chick in her leather cat suit and the % correction you may get after a boom?
3. Down Down - Status Quo - The old geezers and what happens to share prices in a bear market?
2. The Only Way is Up - Yazz - Technically she sang about property but could refer to shares after a bear market?
1. Mr. Blue Sky - ELO - Could refer to those hyping loss making stocks and what everyone wants on a Bank holiday!
Have a good one - rock on and let's hope it doesn't turn into a Boulevard of Broken Dreams and we get a Green Day tomorrow and given how my mechanical Scores portfolio perhaps I should get someone to Wake me up when September Ends? In the meantime feel free to add your suggestions in the comment section if you are bored.
Or a contrarian idea for you. Now it cannot have escaped your attention that commodity prices have been under pressure for a while now with the oil price halving last year for example. This has also been the case for industrial commodities like copper, iron ore and also gold too. The net effect of this has been pretty disastrous for the oil & gas and metals and mining sectors.
Indeed we saw further falls in the mining sector yesterday, along with the rest of the market as it happens, but this took the sector down to lows last seen at the depths of the crisis in 2009. This has stirred some contrarian interest on my part, so I thought I would do some digging of my own and share with you what I have dug up.
Here is a ten year chart for BHP Billiton (BLT) which is something of a bell weather for the broader mining sector given its diversified nature, although they have focussed a bit more recently with the disposal of some non core assets via the demerger of South 32. As you can see it is not quite back to its lows of 2009, probably reflecting the slightly better quality of their operations versus the sector overall.
In terms of its rating it currently stands on nearly 20x for the year to June 2016 with a big decline (more than halving) of earnings already baked into the forecasts. Despite this the dividend is forecast to be up by 5% this year before being flat may be in 2016 despite cover collapsing to less than 1x next year. Thus there could be a risk of a dividend cut which the 7% or so yield is starting to factor in, although their dividend policy form the report and accounts is as follows. "We have a progressive dividend policy that seeks to steadily increase or at least to maintain the dividend in US dollars at each half-yearly payment." I note they did maintain their dividend during the last downturn in 2009, although they had much greater levels of cover as mining was still in the midst of its so called super cycle back then.
Talking of which I read an interesting article the other day which suggested that the mining sector or rather demand for industrial commodities is really reflecting the reality of underlying economies, demand and supply balances and deflationary pressures. Whereas financial markets are in their own super cycle these days being boosted by liquidity from central banks and resultant demand for financial assets. Thus ironically the miners might be better able to withstand a withdrawal of central bank liquidity and rising interest rates than other sectors as that might then indicate a more sustainable pattern of growth in the world which could be good for commodities.
Any way I digress lets get back to digging for value and yield. An alternative to BHP Billiton would be Rio Tinto (RIO) another diversified mining group. They actually look better value on around 16x this years earnings although their yield is lower at 5.6% to 5.8% as their cover is expected to remain above one and there may therefore be less risk of a dividend cut. Failing that if you are a gold bug and wanted to get really speculative you could always check out a Zimbabwean Gold miner - Caledonia Mining (CMCL) which has reported first half results today, although the recent fall in gold price makes that one less attractive now.
But as Status Quo sang - Is there a better way? Well regular readers will know I am a keen on investment trusts (as well as music) and there are a few ways you can play the sector via these. One I would highlight is the biggest most liquid play in the sector - BlackRock World Mining (BRWM) which has a market cap. of over £400m and stands at a discount of around 7% or so to its estimated Net Asset Value. So not only can you pick up a diversified portfolio of miners (if you want to) at a discount (including 10% or so in both BLT & RIO) but you also get a yield of 8.5% based on the current 21p dividend and a 245p share price.
Now that dividend is not cast in stone as the dividend from this one has been quite variable over the years (see page 7 of the report and accounts) and they did last cut it by nearly 14% back in 2009. in recent years they have introduced more of a focus on delivering a yield, although this did mean they messed up a bit by getting too heavily into some royalty schemes which didn't work out so well. Putting that to one side though the other attractive feature is the fact that they have revenue reserves (which can be used to pay and smooth dividends) equivalent to about 140% of the cost of the dividend. So if the manager and the board do their job then barring a complete collapse in mining dividend generally then they should at least be able to maintain or only slightly cut the dividend again.
Summary & Conclusion
So in summary the attraction here is that you can get a professionally managed and diversified portfolio of miners at a discount, plus a bit of gearing (12.5%) and with a yield that is greater than some of their main holdings and arguably better covered given the revenue reserves. Quite useful if you don't have the desire or inclination to get your head around metal prices and commodity cycles, but would like some longer term exposure as part of a diversified portfolio. If you did - then this seems like a good way to get it. The other reason to think about it now is on a contrarian basis as the sector has done so badly for the last six years or so and the yields available seem to indicate some value. However, as ever with investing no guarantees that it won't get worse and that the dividends and share prices could go down as well as up etc. but certainly one to put on the watch list. Personally as I was in need of some losses to offset against some of my gains I sold my BHP Billiton and stuck the proceeds into this for the reasons stated above.
Any way if that has whetted you appetite you can check out their site at the link in the name of the trust above where you'll also find a copy of their annual report and fact sheets etc. If not (did I mention I like music?) as a reward for getting this far, I'll leave you with some music, which hopefully you'll enjoy, as it is a fine album appropriately called After The Gold Rush by good old Neil Young.