Compound Income Scores Portfolio Performance
So the brief spell of Summer like weather gave way to a more soggy end to the month and so it proved in the Stock market too. The FTSE All share after a strong start in line with the weather sold off mid month before recovering somewhat toward the end and returned -1% for the month as a result. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. The authorities there seem to have that under control though, but on going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
Meanwhile the long run of outperformance by the Compound Income Scores Portfolio since last November finally came to an end in a very disappointing fashion as it returned – 5.9% on the month. The Portfolio has outperformed by over 10% in the year to date with a total return of 24.4% and it has compounded at just over 15% per annum since inception just over 6 years ago.
It is therefore perhaps not too surprising, given the strong run it had prior to this, that some underperformance at some point was probably inevitable. In addition the FTSE 100 held up better than the Mid and Small cap parts of the market where the portfolio has been and remains overweight. That’s just the nature of this investing game and you have to take the rough with the smooth as I always say and not get carried away when things are going well and equally not get panicky or depressed when you have a bad run. As long as you have confidence in your process and are prepared to accept some volatility in your capital in the short term for potential gains in the longer term, which is after all what investing is all about.
There were quite a few contributors to the poor performance this month with 6 stocks underperforming by more than 10% on either fundamental news flow or profit taking in the main. The two worst examples were CMC Markets (CMCX) which fell by around 30% on the back of a poor trading update / profits warning as markets became calmer over the summer and they saw some relapse from the extra trading they had seen in the previous quarters and last year when the pandemic was in full swing.
The other big faller to a similar extent was Luceco (LUCE) which succumbed to a heavy bout of profit taking as their excellent results didn’t lead to any further upgrading of forecasts. This profit taking was probably also prompted by their honesty in admitting that they had seen an extra boost from Covid trading and highlighting cost pressures, although they have been able to deal with those thus far. Their Score fell back to the lower end of the top quartile as they did see a few small downgrades on the month but it stays in the portfolio on that basis and it now also looks better value on a mid teens PE with a well covered 2.5% or so yield.
On the positive side of things there were not too many, but S & U (SUS) put in a good performance after their trading update which led to upgrades which I covered in the mid month update post. While City Of London Investment Group (CLIG) responded well to their full year results reported in mid month which led to some upgrades. While the 10% increase in the dividend for the year was also presumably well received given the dividend background surrounding the pandemic.
British American Tobacco (BATS), EMIS, Strix Group (KETL) & Paypoint (PAY) all featured as holdings with scores in the second quartile this month & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt as their scores were not that far into the second quartile. BATS remains cheap as they continue to manage the decline of tobacco products and invest in new vaping products.
While EMIS continues to trade well as reported in the results recently and they are confident of hitting their full year targets. So I’ll continue to run that one as a quality compounder for now although the rating has got a bit richer. I also decided to keep Paypoint again as they enter their close period ahead of the H1 results in November. A further director purchase by the General Council and Head of Compliance just before that helped to sway my decision, while the coming energy price hikes should help to boost their declining bills paying business.
I did however decide to let Strix Group (KETL) go as a bit like Luceco, even though they did report good results they also struck a note of caution on current market conditions and saw a few small downgrades. In addition the rating was not that cheap on still over 21x PE and with a Score of less than 50. Nevertheless it does appear to be a good quality business with a well protected dominant market position, so I wouldn’t put you off holding it for the long term. That’s just the way the Scores process works and it also felt like the time to rotate into some better value given the inflation / interest rate outlook. With the proceeds from this sale and some cash which had accumulated from dividends over the summer I was able to add a couple of better value situations.
One was a housebuilder, despite my own personal reservations about the timing of this, but as several had appeared towards the top of the list I decided to follow the Scores even if they may be a bit rear view mirror in this case. Housebuilders will probably never be highly rated given their cyclicity, but they currently look fairly cheap within their usual 7 to 10x PE rating ranges. This probably reflects concerns about over heating post the ending of the stamp duty holiday, affordability, plus labour costs and materials pricing and availability. Against that interest rates remaining low (for now) and the on going supply demand dynamics continue to offer support. So again I’d leave you to decide if this is a sector you want to participate in. There was also a good Podcast from Money Week which featured an interview with Gary Cannon of Phoenix Asset Management, who had some interesting comments on the builders and remains a bull of the sector.
The other value stock I added, was even cheaper than the housebuilders and subscribers will have seen the details of this in their Scores sheet. In addition to this I also decided to sell CMC Markets (CMCX) on the back of their profits warning (even though it did not score outside the top quartile) and switch into the similar IG Group (IGG) where I prefer the business model and it scores more highly than CMC having had a positive update last month in contrast to CMC.
Summary & Conclusion
After a disappointing end to the summer in the UK we also had a disappointing start to the Autumn in markets and also for the Compound Income Scores Portfolio. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. On going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
There seem to be concerns that this will retard the on going economic recovery and some of these pressure like supply shortages, commodity price increases and shortages of labour seem likely to put pressure on corporate margins which may well cause the market to continue to struggle in the short term until this picture becomes clearer. Some suggest that this could presage another leg of outperformance for value stocks in the short term if rates rise (or bonds sell off) on the back of higher inflation as hinted at by the US Federal Reserve.
With that in mind I used this months Screening to add a couple of more value orientated shares to the portfolio after taking profits in the more quality growth situation, Strix Group – which had enjoyed a re-rating during its time in the portfolio. While in the UK more widely, the market, for once, seems better placed with its bigger exposure to energy and commodity sectors.
While the UK economy seems to be suffering badly from the after effects of the Pandemic, the resultant supply shortages and the squeeze on energy prices. As a result stagflation fears have stirred given the hit to incomes and coming benefit cuts and tax rises. As a result some fear we might face a Winter of discontent much like the 1970’s which saw three day weeks and power cuts which I remember from my childhood. Despite this politicians have insisted there are no fuel shortages, that Christmas will be fine and that we won’t see power cuts even though some industry representatives claim otherwise.
Given that and the inflation outlook, bonds remain a no go area for me and so personally I continue to rely on a mix of equities and other real & alternative assets to try and maintain and grow my capital and income in real terms. I would highly recommend reading the recent final results from Ruffer Investment Company in this regard and particularly the Investment Managers comments starting on page 19.
After a recent visit to Thatcher’s farm to see their Cider production facilities, it put me in mind of Mrs Thatcher’s comment from the last time we had stagflation & as Maggie May have said "There is no alternative" in terms of sticking with equities. They are simply the best way for me, although I saw that Tina Turner has decided to cash in her royalties which may be the best way for her at her at the age of 81, although I do have a few Hipgnosis Songs Fund (SONG) as part of my alternative assets exposure.
Any way that’s all for now as I must get off down to the shops and get some candles, a frozen turkey before they sell out or go up in price. I’ll leave you with some music appropriate to the above comments.
Compound Income Scores Portfolio Performance
Further to the Mid Month Update - some masterly inactivity proved to be profitable again in August as the Compound Income Scores Portfolio outperformed again. This month it was by a more modest 0.72% versus the FTSE All Share Index which I use as a benchmark to measure the the performance against. This continues a run of monthly out performance since last November - so nine months in a row. So it is good to see the Portfolio delivering a scorching performance & plenty of blue even if summer in the UK has rather disappointing visage and tended to Fade to Grey.
Of the top contributors two of the three that were mentioned in the last post on here namely: Strix Group (KETL) and Paypoint (PAY). While Luceco (LUCE) the LED lighting and electrical accessories provider continued its strong run and re-rating on the back of their strong operating performance and financial targets.
On the downside the three largest detractors included a couple of mining stocks Sylvania Platinum (SLP) and Rio Tinto (RIO) on the back of mixed results in the case of the former and weaker metals prices which hit sentiment & triggered profit taking on both of them. While Jarvis Securities (JIM) also suffered some price weakness after going XD two dividends totalling 12p in late July & during August & probably saw some profit taking after a very strong share price response to their recent trading update.
In terms of activity, looking back it is pleasing to note that the reduction to SLP at 131p on risk control grounds given the size the position had got to back in June worked well given it is now trading at just under 100p. This is especially so when one of the trades at that time included the initial purchase of LUCE at 344p vs the current 480p.
Looking at the longer term, aside from the recent monthly run of out performance it is good to see a sea of blue in the returns bar chart shown towards the top of the page, but that's a bull market for you as a rising tide generally lifts all boats. Nevertheless it is encouraging as an indicator of the power of the Scores to help with selecting decent income growth stocks. As evidenced by the fact that assuming the portfolio doesn't have a massive under performance in the next four months, then it should have outperformed the FTSE All Share for five years running too. While since inception in April 2015 it has compounded at 16.4% per annum versus the 5.5% from the Index over the same time period.
Finally on this I came across this graph which I think is quite useful in putting the above performance in context and probably helps to explain why the portfolio struggled from March to November last year during the inflection point / recovery phase, but has done better as we have moved into the expansion phase & they seem to have done OK in the other phases too.
This month I continued to await results on three stocks with second quintile scores - EMIS (mentioned last month), Renew Holdings (RNWH ) & Sureserve (SUR) whose scores this month had also drifted down on no news but have results shortly. I also exercised some judgement on one stock Paypoint (PAY) which again featured in the Scoring zone where I consider its position in the portfolio.
Having given it the benefit of the doubt last month this had paid off as detailed in the Mid Month Update post thanks to the OFGEM situation and the subsequent multiple director purchases which led to a strong share price performance last month. Thus it was a closer call as they have re-rated more towards the sort of initial rating and levels that I outline when I presented it in the Stockslam back in May this year. If that event looks like something you'd be interested in there is another one due next week which you can sign up for here but I am not be presenting in this one.
Thus it was a closer call as to whether to retain it this month after such a strong run had left the shares which had gone XD another 8.3p dividend too, looking overbought and vulnerable to some mean reversion potentially in the month ahead. On balance though I decided to keep given the directors buying & the proximity to the end of their latest interim period at the end of September. They do not normally put out an update on that but I'm gambling that given the directors buying, re-opening benefits and the pick up in card based transactions & imminent energy price hikes might force them to put out a positive trading update if they are trading more than 10% ahead of expectations. Technically they also seemed to have broken out of a tight range which could also target higher levels around 750p - 780p and previous rally highs in that range. So we will have to wait and see if that was some more masterly inactivity or if I have pushed my luck too far and get whacked by mean reversion & no positive update being forthcoming.
I did however break my run of masterly inactivity when I decided to lock in profits on the Ultra Electronics (ULE) bid situation which is not due to complete until Q1 2022. Now while there is still a fairly attractive return of around 9% or so available assuming the bid goes through at £35, there is also a small risk that it could be referred on national interest grounds etc. In that case I'd think the price could sink back towards £20 so the risk reward didn't look that favourable even if the risk is low. So on balance I took profits and reinvested in a similar space as Qinetiq (QQ.) made a return to the portfolio ahead of their September period end.
Summary & Conclusion.
So another positive month, helped by last months inactivity and some trades from earlier in the year & despite the summer doldrums in markets & on going concerns about inflation and the likely actions of the US Federal Reserve. This continues the run since last November and the vaccine led expansion phase in the economy which has suited the Scores more than the recovery phase from the initial inflection point from all the Central bank & government support.
As a result the Portfolio is, barring a disaster in the next few months closing in on five straight years of out performance, which in the investing world is quite rare I believe. Any way if you'd like to access the Scores to help you with your stock selection then don't forget you can sign up via in the menu section titled Scores. If that's of any interest you'll be able to subscribe for a years access for the equivalent of just £1 a week - about the price of a single cup of coffee in McDonald's these days!
There is also a short presentation about them in the sub menu of the Scores section there too, as well as the new feature for Subscribers to view the Scores in google sheets directly from the site if they wish. If any Dropbox subscribers would like to be able to access the Scores directly from the site like this then please get in touch via e-mail or the contact box on the site and I'll sort that for you.
Any way that's all for now thanks for reading if you got this far and here's to hoping the promised Indian summer this weekend last more than a few days here in the UK.
In the last monthly update I highlighted four positions that had flagged up as potential sales based on their Scores. Nevertheless I decided to hold onto them all based on awaiting forthcoming news flow on three of them and on the basis that nothing had really changed on the other.
We have had news flow on two of those so here is a brief update on that:
S & U (SUS) had a trading update rather than results that I had expected, although those will be published on 28th September. The update was positive in the main with all the right metrics like profitability, collections and debt quality all moving in the right direction. Within that Advantage, the main car finance business, was likely to see profits ahead of budget and was seen as being on track to return to previous ROCE levels, despite a bit of a shortage of second had cars. While at Aspen the bridging loan business showed strong growth despite the limited supply of second hand properties too. On the back of this there have been 16% or so upgrades to this years forecasts which has catapulted the Score back into the top decile again.
Paypoint (PAY) - where I hadn't expected any news put out an update on their outstanding OFGEM investigation. In this it seems that OFGEM are minded to accept Paypoint's suggested remedies and payment of compensation that they have already largely provided for. The price seems to have responded positively to this news rising by about 7% since then and a couple of directors have since purchased some shares. So again so profitable masterly inactivity there although slightly more fortuitous is this case.
On Strix Group (KETL) - while there has been no news as such the shares continued to steam ahead another 5% or so on the back of a bullish initiation by Liberum in which they suggested substantial upside on a further re-rating on the increasing growth prospects here apparently.
Finally, even dull old EMIS has managed to move up about 4% while we await their results in September. So here's to the success of masterly inactivity and long may it continue!
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.
Month End Update for January 2016.
So one of the worst starts to a year ever from equity markets around the world comes to a close with a sharp rally. This fall seems to have been caused or rationalized post event as being driven by fears of a global slowdown, especially in China and the effects it was having on commodity prices and in particular the oil price. In addition markets had been on a bull run for nearly seven years on the back of Central Bank support and as a result some markets, such as the US, had also got onto extended and historically high ratings.
Thus with the US Federal Reserve starting to tighten monetary policy in December it seems as though investors came into the New Year and suddenly feared that the Fed put may have been withdrawn and so like Wylie Coyote they suddenly looked down and had a panic attack.
Fast forward to the end of the month and we had a sharp rally seemingly on the back of the Japanese central bank introducing negative interest rates and some weak US growth numbers which probably firmed peoples expectations that the US Fed may now be one and done in terms of raising rates, rather than doing a series of rate rises this year, perhaps.
However, it does all beg the question of how dependent markets have become on central bank support as each time they try to start withdrawing it markets seem to have a fit. Thus I guess time will tell if the central banks have now blinked on the back of the markets sliding in January and if therefore this current sell off turns out to be another temporary affair or if it is the harbinger of something worse. Which brings me nicely onto a look at the monthly timing indicators and how the Compound Income Scores Portfolio has done in this difficult month.