Here is another update on the Compound Income Scores Portfolio (CISP), this time on the monthly screening and recent announcements from companies in the portfolio.

Taking the announcements first, we had slightly underwhelming results from Headlam (HEAD) the flooring distribution company which struggled a bit for growth as one of its major customers cut back on orders and conditions in the UK were generally more difficult than the previous year as the squeeze on household budgets from falling real incomes presumably had its effect on demand for carpets etc. Having said that though the European performance was stronger and they also undertook some cost saving measures and made some add on acquisitions which helped to produce some modest 6 to 7% growth in profits and earnings despite the tougher domestic conditions. They also increased the dividend by 10%, helped by their robust balance sheet and their reasonably confident view of the future and a clear dividend policy based on a target level of cover. There was however no special dividend this year as there has been in the last few years given the outlook and the demands for capital investment that they see. Overall an OK set of numbers but the market didn't seem to like them that much and marked the shares down quite sharply on the day of the announcement. They have not recovered since and I note there have been a few small downgrades since then, so they may well continue to drift for now despite looking good value on 10x with a 5%+ dividend yield for the current year. So in summary good value and reasonable quality but lacking momentum and some concerns about the outlook, although their self help measures should help to alleviate the worst of this, so a hold for now but we will have to see how it scores come the next monthly screening to see if it remains in the portfolio. It does however, look like it has come back into a range of support between about 400 and 465p, see chart at the end.

On the same day we had better news from Bodycote (BOY) which saw strong growth, paid a special dividend and rose on the day as the market clearly liked these numbers and this helped to offset some of the weakness seen in the Headlam share price, which after all is the whole point of a portfolio. So we have something of an opposite here a quality cyclical which is benefiting from stronger demand and therefore is rated more highly (18x with a 2% yield or thereabouts) and which therefore has better price momentum which is supported too by earnings upgrades seen since the figures.

Moving onto the transactions this month these gave me something of a mental challenge as the scores challenged my preconceptions and natural inclination on some stocks as well as presenting some challenges in constructing a suitably diversified portfolio. Firstly on the sales the stocks that came as a result of the screening was Unilever (ULVR). Unilever is of course well know and a solid company which is a classic compounder and one which personally I'm happy to continue holding of a more broadly diversified income portfolio. I did decide to sell it for the CISP though to follow the process, as despite it being somewhat over sold in the short term, it still looks a bit of an expensive defensive, albeit not as expensive as it was given recent share price falls. It has however had earnings downgrades and I guess maybe investors generally are rotating towards more cyclical names given the improving economic situation globally if not in the UK.

The second sale candidate was XL Media (XLM), which even though it had only been in the portfolio for a short time, I decided to sell for a small profit despite the recent positive trading update. This was because the score had deteriorated on the recent re-rating and there had been some small downgrades. In addition to this the CISP still has exposure to this area via Taptica (TAP ) and they both seem to have come off recently as they have tapped the market for new capital and perhaps investor appetite for this area is satiated in the short term, so maybe you can have too much of a good thing.

Talking of having too much of a good thing that brings me onto the buys this month. Now back in January, which was poor timing with the benefit of hindsight, I did buy another market related stock in the shape of Miton (MGR), which gave the portfolio three positions in market sensitive stocks. Thus when Plus 500 (PLUS) came out top of the pops this month I didn't feel able to add it to the portfolio for that reason as well as being naturally biased against it myself. It does however look very cheap having just had a strong upgrades on the back of a positive trading update and it does trade on about half the rating of IG Group - so the scores are signalling that it should do well if you can stomach the risks. I note however that the directors have also placed a large slug of stock recently, although they do still retain quite substantial holdings - so even they are hedging their bets having tried to sell out previously at 400p to Playtech (PTEC). So in the end I bought some Amino Technologies (AMO) which helps TV networks with IPTV streaming and some Spectris SXS which helps companies with enhancing their productivity, see the name links for more details of their operations. Both these scored well and bring something different to the portfolio.

This now leave the portfolio looking reasonable value on around 14x with a 3.4% prospective yield based on the forecast dividend growth 15% for the current year, thereby hopefully it will deliver on the objective of delivering value, income and growth which the Compound Income Scores are designed to identify. So there you go that's it for this week and don't forget if you would like to find out more about the Scores and how you could gain access to them to help you with your portfolio monitoring and construction then check out the Scores page which has all the details.

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!

As regular readers will know and as I mentioned yesterday, I started this April what I called the Mechanical Compound Income Scores Portfolio. If you are a new or recent reader - welcome and see this link for the original post about the portfolio and the thinking behind it.

In that post I mentioned that I was thinking about using a minimum Compound Income Score of 60 or 75 for a stock to remain in the portfolio and I also said I might look at making it a top decile portfolio. However at this quarters first re-screening I note that if I used 90 as the threshold then this would have led to potentially 6 sales, which if repeated in following quarters would lead to over 100% turnover in the year. As costs can eat away at your returns I have decided to not go down the costly top decile route.

Using 75 as the threshold threw up a more reasonable 2 potential sales (Plus500 and Photo-Me) so I have decided to go with that as my threshold for now. I wrote Photo-Me up recently but it seems that there have been some big downgrades post the results which have lowered its score to 71 and left it on just over 20x which is a valuation threshold I use as a trigger to look at a potential sale. However I note that the dividend forecasts seem to have gone up reflecting the likely special dividend this year and the valuation is not as rich if you factor in the cash. I still therefore think it is an interesting situation worth watching, but as this is meant to be a mechanical process without too much human intervention it has to go for a loss of 5.2%.

Plus500 was the main disaster for the portfolio as they confessed to problems with the regulator regarding their signing up of clients. This unsurprisingly led to downgrades and a forecast cut in the dividend this year which dropped the score to 74 just below the 75 threshold. However, given that they have since been bid for by Playtech in what now looks like pretty much a done deal I have decided to retain it and wait for the 400p cash bid to complete. This will save the cost of selling, plus the discount the shares are trading at to the terms of the bid, which together should give a return of around 3.75% over selling today. it should also act as a cash proxy which may also be useful in the current volatile market, provided of course that the bid does not fail or get withdrawn for some reason.

With the proceeds of the Photo-Me sale I have selected Paypoint (PAY) which is the highest scoring stock after the screens have been applied which is not already held in the portfolio. Coincidentally I wrote this one up recently after their results which you can read here if you are interested. So I added a 5% holding in this one which leaves around 1% cash plus the quasi cash of 2.7% in Plus. I'll look to utilize this cash and hopefully the proceeds from the Plus bid at the next quarterly re-screening. Thus for this quarter the portfolio will only have about 96% market exposure which of course may or may not be a good thing.