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.
A busy day for announcements today and catching up from yesterday, Aberdeen Asset Management (ADN) had a trading update which showed the expected outflow of assets. This however was perhaps not as bad as feared and reflects their efforts to diversify into what they describe as solutions (alternative assets and hedge funds etc.) is now 43% of the business. They seem to accept that things will, unsurprisingly, remain tough for them given market volatility, their emerging markets exposure and performance issues, but they did flag cost cutting plans to offset the effects of these. Thus this one may be interesting as a contrarian play if you were bullish on the market recovering in the short term from here as it now trades on around 10x PE with an 8%+ yield, although the Scores tend to favour the likes of Jupiter Asset Management (JUP) & Schroders (SDRC) given their better trading.
Meanwhile yesterday RPS Group (RPS) flagged that it's full year results will be within the range of forecasts despite the big downturn, as expected, in their oil related businesses. They did however take a non cash write down on that side of the business, but more seriously they also saw a write off for bad debts of up to £7m which hit the shares hard yesterday. So again another one that is struggling against difficult market conditions, but again it might be worth a look again once the dust has settled given their efforts to diversify the business via on going acquisitions which is what they have tended to do over the years. Whether they can maintain their record of 15% dividend increases remains to be seen.
Today we had a trading update from Matchtec (MTEC) - which was a bit difficult to interpret because of last years Networkers acquisition and while some of the like for like numbers looked mixed year on year, they did say that they are trading in line with expectations. There also seemed to be an improvement in most lines against h2 last year so it seems like a steady improvement is on track as is the integration of the acquisition and a couple of former Networkers executives are due to leave later in the year as this process completes. They continue to look good value on around 10x with a 4.65% yield, but the shares themselves continue to lack momentum and it doesn't seem like there is enough in this announcement to get them going. So a strong hold, but without a catalyst for a re-rating in the short term continued patience will probably be required.
Paypoint (PAY) - also had a trading update today via a downbeat interim management statement. I say down beat as they are again flagging the effects of the mild winter on energy top ups going through their system, extra costs for their Parcel+ JV and the delay in and lower proceeds from their on line business disposal. So it seems like a year of consolidation for this one in terms of the business with earnings now forecast to be slightly down year on year. This has had a knock on effect on the share price, which continues to languish and is down again this morning on the back of this statement. Thus, despite appearing to be a quality business, they seem to be continuing to de-rate as they seem to be struggling to demonstrate growth in the short term. It may however be getting more interesting as on current forecasts for next year it is coming down to less than 13x (still not bargain basement) but with a growing 5%+ yield, but again patience will be required on this one and probably worth waiting to see if there are more downgrades again after this update.
Renishaw (RSW) - another Compound Income Scores portfolio stock reported half year results. These are also difficult interpret, but this time because of a boom that they experienced in the Far East last year. Consequently headline profits are down sharply, but adjusting for last years boom they say that underlying figures are, in the main, ahead on a like for like basis. The bottom line was that on the outlook they reiterated their profits guidance of £85 to £105m that they had set out back in October last year and that they remain confident about the outlook for this year and the future. I note however, that they left the interim dividend unchanged, although they did this last year before increasing the final. I guess they may do the same this year but forecasts are for only around 1.5% growth in the dividend on the back of earnings falling back so I guess it could also be flat at the full year too.
I have to admit I was pleasantly surprised that the result were OK and the outlook maintained as given their operational gearing and all the talk of economies slowing in China and elsewhere I feared that they might have come out with poor results and reduced guidance. The shares are nevertheless off this morning, having bounced ahead of the announcement as this appears to be another quality stock under going a de-rating which has thus far brought it down to a still not cheap 15 to 17x depending on which year you look at and a not too generous but reasonable yield of 2.7 to 2.9%. So again a quality hold for the longer term I would say, but given the rating and the possibility of an economic slowdown being in the offing, there may ultimately be better buying opportunities for this one along the way.
Finally SSE the energy utility business which is in the news today for finally cutting it's gas prices from March, also announced an IMS. The main point of interest in this was that they confirmed their intention to raise their dividend this year and beyond by at least the rise in RPI, which is nice but may not be that much this year given low inflation. It is quite good though on a starting yield of 6% and although the cover is pretty thin that is probably more acceptable on a utility business.
Phew that's it for today, off to prepare for a podcast with Justin Waite at Sharepickers tomorrow. I will try and put something up about the stock I'll be talking about and a link to the podcast tomorrow afternoon once it goes live, if I have time. Otherwise look out for a month end update on the CIS portfolio and the market timing indicators over the weekend or early next week.
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.
After the strong recovery in October, November proved to be a bit more lack lustre with a small positive total return for the FTSE All Share of 0.57%. The Mid 250 led the way again, as it often does, with a 1.9% total return while FTSE 100 delivered a more modest 0.33% as the miners fell again after a strong bounce in October and the likes of Standard Chartered and Rolls Royce fell heavily on the back of corporate developments. Finally the Small Cap indices fell and produced a -0.33% total return.