With it being the first week of the new month and a New Year in this case I undertook the monthly re-screening of the portfolio having not done any trades on the back of the one in December given the likely thin market conditions and some marginal sales that came up at that time. There were however two natural sales this month, the first of which was the insurance broker Jardine Lloyd Thomson (JTL) which had only entered the portfolio at the end of October on the back of some upgrades. This time around the score had deteriorated to 69 as the previous upgrades seemed to have been reversed. This was now well below the 75 to 80 sale threshold that I normally use, having been just around it in December. Thus it was a natural sale on the process and therefore booked a small profit of around 6% on this as the share price had risen despite the downgrades. Personally I felt indifferent about it too as it is on close to 20x with a 2.6% yield and only had fairly modest dividend growth forecasts of 5.3% in the current year.
This was replaced with another financial in the shape of Miton Group (MGR) the small (£64m Market Cap.) fund management company, although the emerging market specialist City of London Group (CLIG) ran it a close second as it seems pretty stable, good value and emerging markets still seem relatively cheap. I did also debate this with myself as the portfolio already has a fund manager and a broking company, but hey we are in a bull market and global economies seem set fair so I let it go in as the highest scoring qualifying candidate after applying my value constraints. The other attraction with Miton, in contrast to JLT, was that it had already said they were going to beat forecasts and had upgrades accordingly. Despite this and a rise in the price post the announcement it seems to have drifted back since (on profit taking presumably), so it also seemed to be offering an attractive entry point. It also offers reasonable valuation characteristics of a PE under 12x and a yield of close to 4% based on next years (December 2018) forecasts which suggest dividend growth of 27% after this years forecast 10%. That does seem like quite a jump so maybe this years dividend could be better than expected as analysts often upgrade earnings but fail to adjust their dividend forecasts, plus they have a cash rich balance sheet too. Finally also worth noting that they only seem to pay the dividend once a year in May with an XD in March - so another reason why this may be an opportune moment to pick some up. However, given the small market cap. it may not be that liquid, but in the interests of full disclosure I have managed to buy some myself having booked a decent trading profit on some Polar Capital (POLR) that I picked up towards the end of last year after they had strong upgrades.
The second natural sale based on a decline in its score, also primarily on downgrades, was the expensive, quality, defensive(?) stock Diageo (DGE) where the score had fallen to 73 making it much more of a marginal call. The valuation is looking stretched though as the share price momentum it has displayed has left it with a PE of 22.2x, a yield of 2.55% and an earnings yield of less than 5%. So I decided to follow the process rather than my own feelings as personally I continue to hold it as part of a broader diversified income portfolio.
A couple of similar or defensive type stocks which came up as possible replacements were Stock Spirits (STCK) and AB Foods (ABF). Neither of these seemed particularly cheap either so in the end I replaced it with a much cheaper, but more cyclical company which scores highly. This was the equipment rental firm VP which trades on a sub 10x PE with a yield of 3.2% with dividend growth forecast to be 15% and a good track record on that front too. It had also seen upgrades recently on the back of an upbeat trading statement, although the shares had also drifted back a bit recently too. It does feel a bit like I'm coming late to this particular party, but then that's what following a quantitative process does, makes you take what feel like uncomfortable decisions. In this case I can probably rationalize it given the valuation and the strongish economic background generally.
Other candidates in a similar space were Ashtead (AHT), dismissed because it yielded under 2% and Somero (SOM) which was sold back in August for the portfolio, but which I picked up myself toward the end of last year. It looks pretty solid (pun intended) assuming they can deliver the promised second half recovery from poor weather related trading in H1. It didn't score as well as or look such good value as VP on a PE and yield basis, although it does offer a more attractive looking earnings yield, but personally I can see the attractions and they could also be a beneficiary of the recently proposed US tax changes.
So there ends the update on the trades & other ideas from the Compound Income Scores Portfolio monthly screening and don't forget if you would like to identify more opportunities like these yourself by using the Compound Income Scores as part of your investment research process too, then you can read more about them and gain access to them for the equivalent of just £1 a week by clicking here or on the Scores menu in the navigation menu toward the top of the site or the three bars if you are on a mobile / tablet. Here's to a Happy and Prosperous New Year.
A quick note today to catch up on what was out yesterday and today's news. Stocks which featured that I have covered in the past included Micro Focus (MCRO), Photo Me (PHTM),
S & U (SUS) and Sprue Aegis (SPRP). While today we have had announcements from Bellway (BWY) and Polar Capital (POLR)..
Today we have had updates from two UK fund management Companies Jupiter (JUP) & Polar (POLR) which showed contrasting fortunes. Jupiter, which features in the Compound Income Scores Portfolio saw net inflows of £77 million in Q3 despite the difficult market background which therefore wiped £884 million off their funds to leave them overall at £33.5 billion, down by 2.3% on the quarter. The inflows were aided by demand for their European equity and dynamic bond funds.
Meanwhile Polar Capital saw continued outflows, primarily from their Japanese funds, although at a slower rate given their improved performance. Thus they saw outflows of $710m which, in contrast to Jupiter, was greater than the market effect which was $616m in Polars case, although they were reporting on a six month period rather than Q3. This left their assets under management at $10.9 billion, down by 10.8% over the six months to the end of September and by 11.4% over Q3.
On value and quality grounds they are similar, although Polar is smaller and has been around for a shorter period of time so perhaps has more to prove but also maybe therefore has more scope to grow organically. The other main difference is in the yield where Jupiter yields around 5.7% whereas Polar yields about 1% more with a 6.8% yield, but if you are a fan of momentum, then you would probably favour Jupiter over Polar. However on the charts / technicals, while both look toward the bottom of their range, Polar perhaps looks more oversold and may have greater short term upside reflecting its poorer recent momentum.
So as ever you pay your money and take your choice and with contrasting fortunes they both may be interesting short term recovery plays if you think markets can maintain their recent form and sustain a year end rally. Of course if you think we have entered a bear market then you would probably not want to be long fund management companies.
First a quick update on Kingston Communications (KCOM) which I highlighted back in January this year as offering value and at that time I suggested that they could perhaps return to around 100p from the 80p level they were trading at around the time. I updated on this after the final results earlier this month when they reported a further 10% dividend increase and I concluded that there didn't seem to be enough in these numbers to me to justify it breaking our from its range at this time.
I note that in the last week it has hit my 100p target, although it has just nosed above that briefly in the past. I note also that forecasts for the dividend to March 2017 are now out and these show the slow down I expected to around 2% or so. The yield of around 6% should still support them up here, but I'm not sure they will re-rate much more for now. Thus with the shares due to go XD the final dividend of 3.58p this Thursday, I suspect this may help to maintain the resistance at the 100p level for now.
So if you are not bothered about income, now might be a good point to lock in a decent 25% or so capital gain in the space of 6 months against a market that has been flat. Otherwise it seems like a solid hold for the 6% yield, but I wouldn't expect much more from it in capital terms for now though.
The second 6% or so yield stock today is one I mentioned briefly back in early November 2014 as a way of playing a recovery in the Japanese market by investing in a fund manager that was big in Japan. While the idea was a reasonable one as the Japanese market has gone up by around 20% since then, sadly Polar Capital (POLR) the suggested stock has lagged this. In my defence though at least the Sterling Hedged I-Shares MSCI Japan GBP Hedged UCITS ETF I also suggested as a purer way of playing it has outperformed.
Polars under performance was due to the fact that their Japanese fund suffered a poor performance run and saw large outflows and consequently in today's results they suffered their first outflow of funds since the financial crisis. Despite this they did maintain the level of the full year dividend payment as they are confident about their business going forward having added a few new teams and product areas to diversify the business. They look OK value on around 16x with a near 6% forecast yield for the current year, but their larger more established competitors like Jupiter and Aberdeen look more attractive on the Compound Income Scores right now.
Thus again it is probably one that is supported by the yield, but will need the underlying business to improve to move it on in price terms. They seem optimistic on this front and the Chairman's outlook statement in today's results is worth reading as it includes sensible comments such as:
"Markets are by no means cheap and are susceptible to a meaningful correction if central banks cannot manage to deflate at a measured rate the various bond market bubbles they have created in Western economies. Overall debt levels remain uncomfortably high in too many countries although there has been notable progress in some such as the US."
In conclusion, probably not one to chase after the recent share price move and on the back of these slightly disappointing results. However, if you are sanguine on markets medium term and Polars ability to continue outperforming and attracting assets then this could be one to consider on weakness as they seem to be finding good support between 360p and 400p.
Finally, if Greece manage to pull off another great escape (for now) from default then I guess markets could have a relief rally too in the short term.