Compound income Scores Portfolio Performance
April proved to be another positive month for the UK stock market and also the Compound Income Scores Portfolio (CISP) which continued it out performing streak again this month with a total return of 7.53% versus the 4.29% from the FTSE All share. This leaves the portfolio with a total return of 18.18% , 8.5% ahead of the index in the year to date.
As you can see in the table above the current / on going bull market in pretty much everything has helped the CISP to produce positive returns and be in the blue over every period shown & it has outperformed in all the periods shown too. Indeed after we saw a Pink moon last month seeing something like that in performance numbers is probably as rare as a blue moon. Since inception the CISP has now beaten the return from the FTSE All Share by over 100% and has delivered annualized returns of around 15% versus the 5% per annum from the index for 10% per annum outperformance. Not bad for a low stress once a month screened portfolio I'd say.
It is quite pleasing to see such a positive outcome / picture I'm not getting carried away with the success as pride often comes before a fall. In a bull market like this it is important to keep your feet on the ground as it is easy to get carried away and think you are an investing genius as the rising tide lifts all boats. Having said that though I'm pretty happy that the Compound Income Scores are a good way of identifying potentially interesting quality, income growth stocks which have the potential to outperform the market.
There were 3 potential candidates considered for sale based on their Scores with a couple of these having been considered and given the benefit of the doubt in the past. In the end I decided to just sell the one, Sage (SGE), that had fallen out of the top quartile of Scores, as it had recovered in price a little since I gave it the benefit of the doubt, but it has continued to see some earnings downgrades. While the valuation doesn't look that attractive with the PE of over 25x albeit with a yield of 2.8% but this is not that well covered. They have results due later this month so it remains to be seen if that was the right call or if I should have continued to hold while they struggle to grow as they transition to more of a cloud based subscription model.
To replace that there were 3 candidates that I considered from the top decile of the Scores. Firstly was Morgan Sindall (MGNS) which I could have / should have bought last month based on a similar score, but dismissed it given it is a low margin contractor and therefore has a lower than average quality score in the Scores. So I skipped buying it again this month after a strong performance last month post their positive trading update left it looking it over bought from where it might be vulnerable to some mean reversion in the short term.
The second candidate I seriously considered but passed on in the end was Kingfisher( KGF). Again perhaps I'll live to regret skipping it as they are trading well, have good momentum and continue to see upgrades as they benefit from the lock down buying as householders look to do up their homes and gardens as a result. As ever with such stocks the question is over the sustainability of that trend, although in this case they have some help measures in progress and the currently active housing market should also be good for their business. It trades on around 14x with a similar yield to that of Sage at 2.8% but again like Morgan Sindall it scores below average on quality given their relative low margins and return on capital employed. So on that basis I decided to pass on that opportunity too.
So the one I decided to add in the end was a higher quality stock (based on its operating metrics) Paypoint (PAY) which has been in the portfolio in the past but was sold based on its Score back in November 2016 at 1075p. It is struggling with a similar transition phase to Sage as they migrate their business away from serving cash customers and towards more card based, on line payments and a parcel delivery & collection network . Again this was a slightly tricky decision as it has quite poor price momentum and has seen fairly steady downgrades, although these may have just stopped in the last month. They also have results this month so it will be interesting to see how those come out, but last time they spoke on trading they implied they were pretty confident of hitting their numbers.
The valuation though was much better value than Sage with a PE of under 12x for March 2022 year end and a yield approaching 6% on the rebased dividend although again that is also not that well covered. They also offer a double digit EBIT / EV yield more than twice that of Sage. Thus the quality and value scores are both in the top decile as is the overall Score and it is looking oversold on the overbought / oversold indicator which is also included in the Scores data.
So on that basis I took the decision to add it to the portfolio as it plays into the current expensive growth into value trend that seems to be underway and both the businesses seem to be struggling with transitioning their business which both have some good quality metrics. The difference is that Paypoint is rated much lower and closer to a no growth type of rating and arguably maybe has less competition to its payment network in convenience stores than Sage has in its accounting software area.
Other things to note are that they have recently completed the sale of their Romanian business and are now UK focussed and are bedding in some recent card payment acquisitions. They may also have to pay a regulatory fine as part of an on going investigation which probably adds to the low rating / out of favour nature of the stock - so definitely a bit of a contrarian value idea too on that basis. I was also reasonably impressed by the names on the largest holders list shown below, although the one at the top, Astericos Group, who have 15% was not one I am familiar with. On checking though it seems they are absolute return investors with a value / quality approach which chimes with the Scores.
Summary & Conclusion
Another positive month for UK equities and also the Compound Income Scores portfolio which continued the outperforming streak it has been on this year and indeed over the last 1, 3, 5 years and since inception too. However, in a bull market such as this it pays not to get too carried away and indeed such a positive performance it probably as rare as a blue moon but the Scores do seem to be a good way of identifying suitable candidates for a successful quality, income growth portfolio.
As for the screening, while the Scores can direct one, you still need to implement decisions based on them which as ever may add or detract from performance but then that is always the case in any event. This month it was Sage into Paypoint rather than Kingfisher or Morgan Sindall but as ever time will tell on the success or otherwise of that.
Any way I'll leave it there as this has already taken me a while and having mentioned blue moons I'll leave you with some music this month based on that. It's a tricky decision so I'll put up three versions and leave you to decide which one you prefer. Personally, I prefer the one by the Marcels that featured in one of my favourite horror films - An American Werewolf in London.
I'll try and keep this brief as there is a lot going on in the world right now & October was, a is often the case, quite a poor one for the market.
Monthly Timing Indicators.
These in the main continue to suggest caution as the generally weak market returns in October kept the headline indices FTSE 350 & FTSE 100 6 to 7% or so below their trends. Somewhat surprisingly given what has been seen on the dividend front in my last post on here, the Mid 250 and Small cap indices fared better. As a result the 250 is only around 1% below its trend, while the Small Cap index has remarkably made it back into positive territory against its moving average trend as it actually saw positive total returns in October.
Compound Income Portfolio
The Portfolio saw a negative total return of -2.65% in October which was 1.17% better or less bad than the -3.82% from the FTSE All Share. This leaves the portfolio with a -12.76% total return for the year to date compared to -22.98% from the FTSE All Share. If I was still a fund manager I'd be delighted with a 10% out performance, but as a private investor I guess it is bit meh, but not too bad for a fairly low attention mechanical / Quant type approach. The full history and total returns over the last 5 and a half years are available in a table here if that's of any interest to you and these and comparisons with various UK indices are summarised in the graph at the end of this piece after the music playlist.
As for this months Screening there were three natural sells which came up based on their Scores. One of these was a long standing House Builder holding which I let go as it seems to me that the current run in the housing market may not be sustainable. That may of course prove to be too pessimistic if the Stamp Duty holiday and the Help to Buy Scheme should get extended next year like many of the other support schemes at the moment. The other two were at the smaller end of the scale. Despite these looking reasonable quality and being potentially cheap and oversold, they are still suffering from downgrades and an uncertain outlook - so following the process I let them go, although personally I might have been prepared to give them the benefit of the doubt for the longer term.
Against that I made some purchases of larger businesses in similar related areas of activity to the last two smaller stocks that were sold. While I replaced the house builder (despite my own reservations about miners) with a larger Gold miner which I'd skipped in recent months as the portfolio already had a smaller Gold miner, but it may now be a time for more exposure to gold perhaps? So I let it be bought this month as it had drifted back with the Gold price in recent months and we are apparently entering a seasonally stronger period for Gold.
Summary & Conclusion
So a difficult month for most UK Indices and the Compound Income Portfolio although it managed to outperform the broader market probably in part thanks to its greater exposure to Mid & Smaller Cap stocks which managed to outperform too.
The UK Market Timing indicators continue to suggest a cautious approach overall, although Small Caps have turned bullish which may or may not be of any significance to the broader market, but here's to hoping it is.
Any way as we enter a second lock down in England I'll leave you with some music to be going on with in a Playlist I made up during the last lock down and have add to since - enjoy (?) and I hope that you and your family manage to stay safe and well through what looks like being a tough winter.
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>