Just to let you know that this is it for this week and indeed this month as I'm off for an Easter break now and should be back in April. So in the meantime may I wish you all a Happy Easter and I hope that you have a great time whatever you are up to. Otherwise a couple of lacklustre updates from stocks which feature in the Compound Income Score Portfolio today. Firstly there were final results from Next (NXT) the high street and mail order clothing retailer. These on the face of it were fine with the earnings being slightly ahead and the dividend as far as I can tell with all the specials they have paid this year, being roughly in line. Despite this though the shares are off this morning as the statement was relatively cautious as they flagged the coming year as being as tough as 2008. In the outlook they also said that the outlook for consumer spending does not look as benign as it was at this time last year. In this respect they highlighted a fall in the rate of growth of real consumer incomes from 3% or so down to closer to 1.5% to 2% and suggested that perhaps consumers were spending their increased income on other things. It is interesting that Next have joined Restaurant Group in warning about slowing consumer spending, but it does beg the question of who or what is seeing the benefit or is everyone seeing a slowdown as consumers have turned more cautious on the back of all the recent Brexit / global slow down scare stories? Any way on current forecasts for this year after the fall in the price of the share this morning to around 6070p, they may trade on around 13x with a 5%+ yield although both of those could change on the back of downgrades and more buy backs rather than special dividends, given the lower share price. At this level though, having fallen out of the 7000p to 8000p range it looks like it has broken down into the 6000p to 7000p range with some possible support towards the bottom of that range where it is now sitting and the rating being more reasonable now too. So they are probably a hold down here although I note on the Compound Income Scores, before today's results, they were coming out in the low 80's which means they will be at risk of dropping out of the portfolio at the next quarterly screening, especially if they see some downgrades post these numbers, which may not be ideal but that's the nature of a mechanical screening process. Meanwhile Renishaw (RSW) a metrology and CAD business has as far as I can tell put out an unscheduled trading update because it seems they have seen a slowdown since they reported in January which could lead to a short fall in their profits of up to 10% based on the range of £67m - £83m for Pre tax profits which they have included in this statement.
This therefore explains why they have put the statement out and it is unsurprising to see them off by around 10% as a result. It does however potentially leave the price exposed to further falls if investors worry that there could be more downgrades to come and as it is quite an illiquid share. The rating is also relatively high at around 18 to 19x with a yield of only a little over 2%. Thus while it is probably a quality Company for the long term, the rating doesn't leave much room for further disappointment if sales and growth in the global economy should continue to disappoint. While on the chart below I note recent lows were around the 1600p level. On the CIS prior to this, given the quality and growth historically it scored in the 90's but the resultant downgrades could spike the score down in the short term which may also leave it vulnerable to exiting the portfolio too at the forthcoming review. This may be no bad thing in the short term though as I also note that, despite the recent relief rally in the shares after in line interims, the 12 month price momentum as well as the estimate revisions are negative which is not a great combination for a highly rated growth stock.
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What a first week to the New Year in stock markets with Chinese shares being suspended limit down a couple of time this week which has spooked markets around the world. Today after they removed the trading halts the Chinese market actually managed to close up - go figure. So it seems like we will have a more positive end to the week, but I did hear an interview with Neil Woodford on the BBC Today programme talking bearishly on the outlook for China, so we may not be out of the woods just yet. To cap it off there is quite a lot of news today so lets dive right in.
First up in relation to the Compound Income Scores (CIS) portfolio re-screening I did at the start of the year. Worth noting that Next (NXT) have now started to buy back more shares as their share price dipped below their indicated buy back price on the back of their trading update. So this should help to support the price going forward in the short term but if the price remains below their threshold and they continue to buy back stock with their surplus cash then there may not then be any special dividend this year. Time will tell on that, but worth bearing in mind if you are attracted by the high headline yield which includes specials. Meanwhile in this weeks market volatility I also note that the two purchases of Easyjet (EZJ) and Zytronic (ZYT) that I made for the portfolio are now available at knocked down prices. So if you have done your research and like the look of those then you can pick them up at better prices now than I did when I added them to the CIS Portfolio. Talking of the CIS Portfolio we have also had an interesting announcement today from Photo-Me (PHTM) which was included in the original portfolio and therefore still held in the Annually rebalanced version which I am running to see if screening quarterly has added value. It exited the quarterly screened portfolio quite early on as its score deteriorated on the back of some earnings downgrades and still only scores 64. In today's update they have however flagged positive trading in their Japanese operations ahead of the introduction of a new ID card in January, with turnover up by 90% in November and December. They say that if this is continued in the rest of their financial year then all things being equal they would expect to to report results materially ahead of current market expectations. Now I understand that companies usually have to put these kind of statements out if they come to realise that their profits are going to be at least 10% or so away from consensus in either direction. So we should probably expect at least 10% upgrades and possibly more if the trend is continued for the rest of their financial year. The shares are up nearly 9% so they have probably factored most of it in but I guess it could be better than that, although it is hard to get a handle on it as I can't find what proportion of the Asia and ROW division is in Japan, but at the full year they had added 1,000 machines there and said that Japan was the largest territory by far by reference to size of the machines estate and revenue. I did some very rough back of the envelope calculations and if it was say two thirds of that division then this could lead to an extra £11m of operating profit from Japan which could lead to upgrades approaching 30%, but I must stress that is very much a guestimate without knowing the actual proportion they have in Japan and if the recent trend will continue or not. Meanwhile in a strange coincidence the stock which replaced Photo-Me in the portfolio, Paypoint (PAY) has announced the sale of part of its planned disposal with the sale of its Online Payment businesses comprising PayPoint.net and Metacharge to Capita, for a consideration of £14 million satisfied in cash at completion today. This leaves the sale of the Mobile Payments business to be competed in due course and we won't therefore know if the proceeds come up to their downwardly revised expectations until then. This is another one which is now on offer at a cheaper price than I paid for it in the portfolio, although it still has its attractions as it still scores 92. So maybe another opportunity there perhaps if you like the look of that one? Finally we have had an update from another high scoring stock which I have mentioned in the past and which I own as part of a broadly diversified income portfolio, namely XPP Power (XPP), which announced its Q4 trading was in line with expectations. This has driven revenue growth of 8% in FY15 (4% in constant currency). This was helped by a recovery in orders from the US, and overall Q4 order intake was strong, providing positive momentum going into FY16. The recently acquired EMCO business is also said to be trading well and the company has already identified cross-selling opportunities. They also announced a further dividend and suggested that the full year dividend would be up by at least 7% to 65p for the full year which is in line with forecasts. This one also scores well with a CIS of 86 and reasonable looking rating of around 14x with a 4.5% yield. Phew there you go, oh yes and I've updated the Scores today too as usual. So time now for a well earned coffee break - cheers see you back here next week, have a great weekend and be careful out there whatever you are up to in the market or elsewhere. Introduction
This was the third quarterly re-screening since the portfolio was started and I have to say it was one of the hardest so far. Firstly I had to fight typical behavioural biases as I was tempted to apply some valuation constraints and thereby take some profits in some of the big risers. However, since I have not done this up to now and the behavioural bias I'm trying to avoid is selling winners too soon, I resisted the temptation again this time, although perhaps I will apply them with a full re-screening at the annual stage. Any way the other reason I avoided this was that using the 80 threshold on the Scores also suggested a rather excessive 6 sales, 2 of which seemed reasonable, 2 which seemed 50 / 50 and 2 which didn't seem to make that much sense. Thus for this quarter I went with 75 as the cut off which meant the 2 sales that seemed reasonable to me went ahead which I'll discuss in the next section. Not much to report on today, although we have had an in line trading update from Next which made it into the Compound Income Scores portfolio at the last quarterly review as it scores 97 on the CIS. This well managed group did edge up its profits guidance for the year but that's all I have to say as I'm sure it will be covered in great detail everywhere. Talking of detail there was a good detailed look at it recently from another blogger called Damien Cannon - so you can head over there next if you want to read his thoughts on it. While my former colleague also has it in his portfolio which you can read about here if you want, although it is a subscription based service.
As for what Next - I'll try and do an update on the Matchtec (MTEC) figures tomorrow and then round the week off with part 4 of the Back to future series I have been doing. Then as it is the end of the month I'll update the scores at the close of play on Friday so we can take a look at the CIS portfolio for October next after that. Further to the September / quarter end performance update here are the changes as a result of the latest quarterly screening. First up though a quick reminder of the screening criteria and a small tweak to these that I have been hinting at in recent weeks. Firstly the normal criteria remain in place for new purchases which are: 1) Selecting new stocks from top scoring stocks 2) Maximum PE of 20x, minimum dividend yield of 2% and an earning yield in excess of 5%. 3) Minimum market cap. of £50m Now for the tweak which I have decided to add which is to also look at price momentum and exclude from the purchase list any candidates which have negative 12 month price momentum. There are several reasons why I have decided to do this as follows. While I have momentum in the Scores to a certain extent with earnings momentum, which does correlate with price momentum, I have generally fought shy of using price momentum that much myself although I pay some attention to it. However as per this graphic from one of my recent posts: I am also adapting my mode having implemented it and assessing the evidence. The thing that struck me, although this may have been a coincidence and I could be making a false connection, is that the two troublesome stocks in the portfolio in the first six months had negative 12 month price momentum when they were selected. The stocks concerned were Plus500 (PLUS) and Utilitywise (UTW) and on reflection both seemed to have had some background concerns and therefore despite the apparently attractive financial metrics they had both underperformed suggesting the the market was wary of them. It is also noticeable that most top scoring stock tend to also have strong price momentum so when a high scoring stock has underperformed I'm now going to let the mechanical process use it as a red flag and skip that stock. Plus the fact that price momentum itself seems to be a powerful factor despite my own reservations about using it, so it is good force the model to use it in this way as I'm trying to use the model to counter my own human biases.
That's it for the tweaks on the purchase side but I guess it does raise the question as to whether I should use price momentum on the sale side too to cut losers even if they still score well, but I have not applied that this time around to Utilitywise as there were already 4 natural sales using an 80 cut off point on the Scores. So it will be "interesting" to see how it goes from here to see if I should perhaps have applied this rule to sales as well. Any way enough already what about the changes I can hear you thinking. Well on the sale front the natural sales using the 80 Score as a threshold were Alliance Pharma (APH) - which had been re-rated and didn't get any upgrades after results so I'm relaxed about that as I had sold my own holding any way. A.G.Barr (BAG) - had a poor update and big weather related downgrades so as a result it has to go, although personally as it was not an operational problem and the quality and dividend growth remain, I would probably have given it the benefit of the doubt if I held it. Finsbury Foods (FIF) was the next stock to go as it's score had collapsed like a soufflé to 28 on the back of the share price rise, big downgrades post their results and on going low scores in quality and financial security. So I'm sure Paul Hollywood & Mary Berry might have thought it over baked too, that's a British bake off reference in case you don't know who they are. I heard on the news today that sales of baking equipment are booming on the back of it so trying to think of a way to play that. Any way I digress, finally PLUS500 (PLUS) was still coming up as a sell and I only kept it last time because the cash bid was supposed to have completed by now. So since that has dragged on and been delayed by regulatory clearance taking longer than expected, I have decided to eject it this time given it did its job as a cash proxy in the market sell off this quarter any way and I guess the bid could still fail if clearance is not received. That gave me around £6500 to reinvest which I split equally between four top scoring candidates after applying the criteria mentioned above and adding the 12 month performance filter which excluded Elementis (ELM). So the new stocks were the top scoring Sprue Aegis (SPRP) the fire alarm producer which has a strong following in the private investor community so I'm sure that will be a popular choice. Less popular maybe 32Red (TTR), an on line gaming company, which seems like a natural replacement for PLUS500 if you know what I mean. The portfolio has a retailer already and quite a lot of exposure to consumer cyclicals, but nevertheless I let it buy Next (NXT) as the weighting in FTSE stocks is quite low and the alternative would have been Computacener (CCC). I left this because the other purchase was RM Group (RM.) which adds another technology related stock to the portfolio, although this exposure is mostly software rather than hardware. I must admit personally I'm a bit uneasy about buying 32Red but that is the point of this exercise. I'm also probably prejudiced against RM as it doesn't seem to have gone any where for years, although on closer inspection it does seem to be turning around under new management, so it might be one that is worth investigating further. Finally I mentioned the exposure to consumer cyclical earlier so I thought I'd include the charts below to add a bit more colour to this. While it was not surprising to see it tagged as small cap exposed I am a bit surprised to see it identified as growth, but since I'm targeting quality growing income maybe this shouldn't come as such a surprise. So there you go, just remember that if you are attracted to any of the names I have mentioned, don't forget to do your own research as there are no guarantees although I'd say it has been good so far. Cheers good luck with your investing in these difficult times, have a great weekend whatever you are up to, enjoy the weather while it lasts and come on England in the Rugby! |
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