December proved to be a positive month for the UK market as a “Santa Rally” finally arrived despite the on going concerns in the UK & elsewhere about the spread of the new variant of the Corona virus. It seems that although it has spread rapidly & become the dominant variant it doesn’t, as I hoped, seem to be as severe in terms of the illness that it causes. While some existing vaccine booster shots seem to reduce the risks of hospitalization further and new pills for treatment are either imminent or on the horizon. Thus it seems it was right, in the short term, not to panic last month.
As we entered the New Year traders seemed to be bidding up travel and leisure stocks which seems to indicate that the general consensus is thinking along those lines on Covid. Hopefully we might be through the worst of the latest bout by Spring / Summer without too many more restrictions and learn to live with it longer term thereafter. What follows is a review of the performance for the year & over the longer term for the Compound Income Portfolio and a few outlook comments.
If you are pushed for time you can skip the the Summary and Conclusion which tries to sum it all up briefly.
The UK market as measured by the FTSE All Share index (which I use as a benchmark) produced a total return of +4.68% in December and +18.32% for the year. The Compound Income Portfolio underperformed this month with a 3.66% return but did still have a terrific outcome for the year of +29.9%. I calculated the returns that could have been had from just holding the same portfolio from the end of last year and also one selected from the Top Scoring Stocks alone. Both of these returned around 20% for the year, so still a modest outperformance, but it does suggest that this year at least, the process of monthly screening have added value – which is what I have found in the past too So I’ll stick with that again for the year ahead.
Big winners during the year included Ashtead (AHT), Airtel Africa (AAF) and IMI which have all grown to become top 10 holdings. While Renew Holdings (RNWH) which enjoyed a re-rating and Ultra Electronics (ULE) which received a bid were also big contributors although they have since exited the portfolio. Another former position that did well was Dotdigital (DOTD) which I managed to run quite successfully by relaxing my normal value tendencies to sell on valuation ground until such time as the rating and growth rating did not marry up for me. While a risk control reduction of Sylvania Platinum (SLP) at 130p also helped as they subsequently slumped to under 100p.
Talking of slumping, spread betting company CMC (CMCX) disappointed as lockdowns lifted and subsequently sold. I regretted selling Ultra Electronics early in the bid timetable to buy Qinetiq (QQ.) as they came up with some disappointing contract news and Hikma Pharmaceutical (HIK) proved to be worthy but dull and therefore drifted off despite performing reasonably well as a business. Finally some exposure to other precious metals miners like Polymetal (POLY) and Caledonia Mining (CMCL) & the more diversified Rio Tinto (RIO) failed to pay off in price terms but they did pay good dividends which they continued to pay and increase.
Dividend / Income Commentary
Here it was encouraging to see that the income from the portfolio bounce back strongly this year after the Covid inspired cuts seen last year. The income from the portfolio increased by 125% from the 2020 figure which had fallen by 31%. This meant it was up by around 56% from the level of income achieved in 2019 & 2018 pre Covid. This represented a yield of 5.1% on the starting value of the Portfolio – so a bit better than the suggested income yield of 4.5% which expected from the Portfolio at the start of 2021. Obviously it does reflect some changes to stock positions along the way as I’m not comparing a static portfolio and there were also a few large special dividends included in that which will have boosted the total. So I wouldn’t be surprised if the headline total were to decline a little next year if some of those are not repeated.
On these dividends, it is worth pointing out that I don’t target a particular yield from the portfolio. It tends to be a residual result from the stocks selected from the top decile and held along the way, although obviously the process does direct me towards dividend paying stocks and no zero yielders are held. That’s just the way the process is managed, although others may wish to target a certain level of income or yield and try to increase that each year. Personally I do like to see my income rising each year and try to keep it up with or ahead of inflation in the medium term, which I have managed to do generally over the years.
It is worth noting that the RPI Index has grown at 3% per annum since 1989. So assuming the Government / Bank of England are not trying to inflate away all the debt that has been taken on before and during the pandemic then it might be worth factoring in inflation of at least 2.5% to 3% to your run rate calculations for real returns. It is also worth remembering that UK equities have generally returned around 5% per annum in real terms (after inflation) - so you would probably need a total return of around 7.5% to 8% to maintain the real value of your portfolio in the long term.
Fortunately that was not so difficult this year as dividends bounced back strongly as inflation came roaring back & the market was strong in capital terms. The coming year may be more difficult if inflation remains elevated and various cost pressures such as energy, labour and supply chain issues cause Companies to be more cautious on the dividend front.
Longer Term Performance – 5 years in a row and 6 out of 7 years of outperformance.
The performance for the year and the last two, three and five years and since inception back in April 2015 is shown in the Bar Chart at the start of this post above, which are more meaningful periods of time to look at rather than one month or year to date figures. It is also pleasing to note that the portfolio has now outperformed for five years in a row (a pretty rare event in itself) & six out of seven years since inception in April 2015 so that one wasn’t a full year. This line graph at the top also shows that this and that the portfolio has now almost made it back to almost to an all time high value it reached this summer and significantly outperformed all the main UK Indices. While the table below shows most of that in numbers form.
The table above shows performance year by year has been somewhat volatile, with good years for harvesting returns followed by fallow drought type years for returns. So with that in mind, given the strong returns that the Portfolio and the market have delivered recently I can’t help thinking, along with most commentators probably, that 2022 may be a more difficult year for investors than 2021 was. This is especially so given that Central Banks seem to have started tightening and draining liquidity. While investors have gone all in with US individual investor stock holdings at record highs and the inflows into US equities in the last 12 months having matched those seen in total in the previous 19 years! (Source:Merrill Lynch). Breadth has also been poor with the FAANG stocks mostly driving the headline indices, where the ratings look to be towards the top end of their range seen at previous frothy occasions like 1999 / 2000. While margin debt over there is close to all time highs, although has come of a little recently, which can apparently also be a bearish signal.
Thus I think you couldn’t rule out a rougher ride for the market in the first half with a possible normal type correction if rising rates, slowing economic growth, Corona virus issues and continued inflation hit sentiment. Aside from that the economic indicators that I follow for flagging a recession and a more serious setback in economies & markets are all in positive territory, as are the market timing indicators that I compile. So while I might be a bit more cautious short term, beyond that I think we should be OK provided the Central Banks don’t lose control & have to overdo the tightening. In the absence of that they will probably come back in yet again if things do cut up rough.
Having said that though looking at the Portfolio valuation it shows that at the end of the year it had a weighted average one year forward PE of 14.4x which is around the long term average for the market I would say. While on the yield front the forecast yield for the portfolio for the year ahead is 3.8% with forecast dividend growth of 9.5%. This suggests that hopefully I’m being too pessimistic about the outlook as in the absence of a re-rating either way the portfolio could return around 13% which is not far off the 15.2% per annum achieved since inception in April 2015. Given that the UK market overall continues to look reasonable value compared to some other international market, maybe the UK could buck the trend even if things turn out less favourable elsewhere, but as ever I guess time will tell on that.
Summary & Conclusion
So a better month for markets and although this month the Compound Income portfolio didn’t manage to outperform, it did achieve another year of outperformance against the FTSE All Share. This make it 5 years in a row now that it has outperformed and 6 out of 7 years since inception. Compounded annual total returns since then have been 15.2% versus the 5.7% from the broader market.
Income from the portfolio bounced back well to more than double from the Covid induced cuts last year and represented a 5%+ yield on the portfolio value at the start of the year versus the 4.5% that was expected. This did include a number of special dividends which may not be repeated next year and it is most unlikely that the income will double again in 2022, indeed it could drop back a little if there are fewer specials and as I do not specifically target a level of income when constructing the portfolio.
The outlook for the market looks a bit less auspicious this year, especially in the US perhaps. There private investor seem to have gone all in at a time when valuations look stretched and the market has been led by a few big tech giants. While headwinds abound in the shape of the US Federal reserve aiming to raise rates and drain liquidity to deal with high and rising inflation as the economy maybe slowing a little from its rapid Covid induced bounce back.
While in the UK the authorities and the markets face similar issues in terms of inflation and rising interest rates. While the UK market looks more reasonably valued, having lagged the US and other markets for the last few years and private investors seem less enthused. Being heavily exposed to more commodity type sectors like oil and miners may also help the UK market to perform better if commodities continue to be strong in the inflationary environment. Of course though, an economic slow down and any restrictive measures from the Chinese government could of course undermine that view with a likely dampening effect on commodity prices.
Having said all that the Compound Income Portfolio looks reasonably well placed to weather some volatility if we see it this year. As the PE is around the long term average for the market at 14x and the dividend yield close to 4% based on high single digits suggests it might be able to deliver returns close to its longer term average of around 15% per annum in the absence of any dramatic change in ratings. Thanks for your attention and persistence if you got this far or just skipped to this bit and may I wish you good luck with your investments in the year ahead no matter what markets and the Covid virus throw at us.
...that is the question as November proved difficult for investors as a new variant of Covid-19 was discovered. This was in addition to concerns about inflation, supply constraints, governments debt mountains and the Central Banks response to these. Consequently as shown in the table at the start the FTSE All share has produced a total return of -2.2% for the month and 13% for the year to date.
The Compound Income Scores Portfolio (CISP) outperformed again this month with a smaller negative total return of -1.6% and has delivered +25.3% for the year to date. Since inception in April 2015 the CISP has compounded at just under 15% compared to 5% from the FTSE All Share Index which I use as a benchmark.
Total returns over various periods and each year for both are shown in the table above, while this performance against the FTSE All Share plus the Mid 250 and Small Cap are shown in the graphs at the end. In addition, while not particularly relevant to this portfolio (as it is only invested in UK stocks) I also had a quick look at how the performance since inception compared with an I-Shares All World Tracker (SSAC). It was pleasing to see that it was also ahead of this with the 250% total return versus the 211% from the All World Index especially as the UK market seems to have performed better recently and remains substantially cheaper than many others, having underperformed badly in recent years.
Largest Positive contributors:
Airtel Africa (AAF) after excellent results late last month led to more upgrades plus further positive news flow this month on tower sales, granting of a banking licence and second closing of another investment round in their mobile payments business which has brought in $500m so far for further investment in their mobile businesses in Africa.
Safestore (SAFE) which responded positively to an excellent Q4 trading update which led to a continuation of their positive earnings estimates trend as occupancy levels and rates charged both increased further.
Jarvis Securities (JIM) bounced back from an oversold position as they announced another increased dividend this month.
Largest Negative contributors:
Sylvania Platinum (SLP) sold off after their bounce last month after the results late last month led to earnings downgrades and the platinum price sold off in the second half of the month.
Luceco (LUCE) also sold off again after a bounce last month & a trading update late in October.
Barclays (BARC) fell after their CEO was forced to resign and as the Bank of England unexpectedly decided not to raise base rates which might have been positive for banks in the short term if they had.
After a fairly active October I only decided on one sale this month as Qinetiq (QQ.) fell into the sell zone with a Score of 67, while a few others I gave the benefit of the doubt to. In the case of Qinetiq on further consideration of their recent update I was a bit spooked by the write off on a large complex contract. I recall they have got into difficulties like this in the past so perhaps it is not as good a quality company as I thought and perhaps has not changed its spots. It does look reasonable value and towards the low end of their trading range, so if you trust the management then you may be OK down here. Nevertheless on that basis I let it go and replaced it with an equally boring industrial stock which subscribers will be able to see the details of in their Scores sheets. See here if you’d like to become a subscriber to get the power of the Compound Income Scores working for you in generating new quality income growth stock ideas for your portfolio.
Summary & Conclusion
A tricky month for investors due to inflation & other concerns was capped off by the possibility of a new Covid strain taking hold, although as yet it is unclear how widespread or dangerous this might become. It is also unclear if current vaccines will work against it. I am encouraged however that virus manufacturers seem confident of coming up with a vaccine for the new variant within 100 days. So either way it doesn’t seem that much to worry about as either it will or won’t be a bad and dangerous variant and if it does there should be another jab along shortly. In addition I thought viruses were supposed to become less dangerous the more they mutate, but I'm not a viroligist so maybe I’m being complacent there? I don’t know and I don’t think anyone else does either but as Corporal Jones in Dad’s Army used to say in Dad’s Army and as Coldplay sang – Don’t panic or if you're more of a Smiths fan then I guess you could Panic.
The CISP continues to perform well in both an absolute and relative sense this year to date even if it had a negative return in November. Having limited the trading this month I may undertake more trades and rebalance the portfolio a little when we move into next year.
Seasons greeting to any one who happens to be reading this & I hope you get to have a great Christmas with all your family and loved ones if that proves possible.
Compound Income Scores Portfolio Performance
October didn’t turn out to be such a dangerous or spooky month as it has done in the past or as Mark Twain once joked. The FTSE All share produced a total return of +1.8%, while the Compound Income Portfolio saw a return to outperformance this month with a total return of +2.4%. This leaves the portfolio with a total return of +27.3% in the year to date which is some 11.7% ahead of the FTSE All Share which I use as a benchmark.
Meanwhile the longer term performance of the Compound Income Scores Portfolio compared to the index is shown in the bar chart graph above. It is pleasing to note that the portfolio has compounded at just over 15% per annum since inception just over 6 years ago, which is also around 10% ahead of the FTSE All Share. See the graph at the end of this post for comparisons with other UK Indices like the FTSE Mid 250 and FTSE Small Cap.
Top contributors to this months outperformance were Luceco (LUCE) & Sylvania Platinum (SLP) as they bounced back from particularly steep falls recently having announced Quarterly updates which seemingly reassured investors. The negative side of the attribution ledger was headed by Qinetiq (QQ.) as their updated disappointed on the back of Geo-political and short term supply chain issues which led to some small downgrades. Admiral (ADM) also tacked backwards for the portfolio this month for no apparent reason other than perhaps the fact that Munich Re placed around 12 million shares from their strategic stake at 2940p. While City Of London Investment Group (CLIG) featured on the negative side this month as the former founder Barry Olliff reduced his stake again at the 550p level and the earnings estimates continued their inexplicable yo-yo run with downgrades this month after last months upgrades. Seemingly one house may be marking to market and currency adjusting on a month by month basis maybe?
British American Tobacco (BATS), EMIS, & Paypoint (PAY) all featured again this month together with Renew Holdings (RNWH) as holdings with scores in the second quartile & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better quality or cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt again as their scores were still 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 & the NHS even approved the use of their Vaping Products recently to help those trying to quit smoking, so that could be a drag on as well as a puff to BATS profits I guess. 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 for now as a quality compounder for even though the rating has got a bit richer, although it and BATS did both underperform last month.
As Paypoint came up yet again I decided to get back to following the process as their score remained anchored around 50, although I was sorely tempted to to hold it again ahead of the H1 results in November. These could still be good and lead to upgrades for the full year – or not as the case may be. So I wouldn’t put you off holding them if you want to. That’s just the way the process is supposed to be applied – so I’m getting back to that and locking in a total return of around 20% from Paypoint since it was purchased for the Portfolio in May this year. Indeed Selling Strix (KETL) on a similar basis last month worked out fortuitously as the shares subsequently fell on the back of some chunky directors sales.
Renew Holdings (RNWH) looked a more finely balanced call as their Score was 67 and they also have results due shortly after a recent positive update, although somewhat surprisingly this has led to some downgrades in the last month. While it seems OK and the results should be fine, I decided to sell this one too given it has re-rated to a fairer looking rating. I also have some concerns about their balance sheet and the way in which they finance their business plus the fact that they are quite acquisitive and seem to have had quite a few write off's subsequently along the way in the past. I could of course be too cautious there, so again feel free to carry on holding if you are so minded to do so.
In addition to the two natural sale candidates which I pushed the button on this month, since I have a lot of performance in the bank this year, I also decided to sell a couple of other higher scoring stocks too. The rationale here being that it was possible to switch into higher Scoring similar alternatives which looked better value.
One was City of London Investment Group (CLIG) mentioned earlier in the performance review. This has been a good performer for the portfolio and again I wouldn’t put you off continuing to hold it. I chose however to switch into one of their larger competitors which has also undertaken an acquisition and is also struggling to grow its assets. It is however trading slightly cheaper than CLIG on traditional value measures and around half their level in terms of its pricing to AUM, although the difference in profitability levels they are currently making may explain some of this.
The second relative value switch I undertook was by selling dot Digital (DOTD) which has been a big winner for the portfolio and nearly trebled since it was acquired in April last year. Now I know this goes against all the advice of running your winners, although that is what I had done already by relaxing my usual valuation biases to get to this position. My natural value tendencies just felt offended with this one on around 60x PE, with an earnings yield of less than 2% and a dividend yield of under 0.5%. They also have results due which should be good given their last update, but unless there are dramatic upgrades on the back of those I think the shares could be vulnerable like other highly rated stocks that have come under pressure recently given rising interest rates on the back of higher inflation. Or failing that going sideways for a while to grow into the rating perhaps.
The stock I switched into, while still a bit rich for my own personal value tendencies, looks to be better value than DOTD after a recent positive update and massive upgrades ahead of their own results due soon too. So I guess time will tell if any of these prove to worthwhile. Subscribers will have seen full details of these in the transactions and the stocks that were purchased against them in the transactions and portfolio sections of their sheets along with brief bullet explanations in the Journal section.
Summary & Conclusion
After a disappointing end to the summer in the UK last month we have had a better start to the Autumn in markets and also for the Compound Income Scores Portfolio as we approach a traditionally stronger seasonal period.
I don’t have a lot to add to last months Macro type comments about the inflation outlook as that seems to remain a feature despite the slight fall back in the head line rate in the UK last month. Consequently some eyes are on Central Banks to see what the say and do with regards to easing back on QE or even raising rates perhaps in the case of the Bank of England. While the budget passed by without any further hits to investors.
I say some eyes as markets seem to have remained frothy (especially in the US) as they have rallied again towards their highs and some speculative rubbish and SPAC’s seem to be taking the lead again despite stretched valuations over there. I guess all we can do in poor old Blighty is be thankful that our market looks better value as it has been so far off the pace that it looks quite cheap and has big exposure to the non ESG sectors like oils and miners plus a fair share of Banks that it might just hold up better in a sell off if we’re lucky.
Any way as this is already over a thousand word post I’ll leave you there with the graph of the longer term performance that I promised at the beginning as a picture paints a thousand words and a couple of music videos. Otherwise may I wish you good returns from your investments this month and hope that it doesn’t rain too much in November wherever you are.
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.
March was another positive month for equity markets generally including the UK. As a result the FTSE All Share Index, which I use as a benchmark for the Compound Income Scores Portfolio (CISP), produced a total return of +4%. By comparison the CISP had another good month and delivered a third straight month of out performance in Q1 with a total return of +4.9%. This leaves it with a total return for the year to date of +9.9% which is 4.7% ahead of the +5.2% return from the FTSE All Share.
Over the 12 months since the Corona Virus hit the CISP has returned +48.3% versus +26.7% for the Index as the market recovered from its lows. So it is pleasing to be able to report that the Scores and the associated portfolio seem to have weathered the Covid storm and subsequent recovery successfully. This continues the decent run it has had over the last 5 years where it has practically doubled as it has managed to compound at around 14 to 15% per annum over the nearly six years since inception which compares to 4.4% per annum from the FTSE All Share over the same time frame, so about 10% per annum out performance.
This suggests that they are not a bad way for identifying attractive quality stocks with the potential to grow their dividends and your income and capital over time. You can see full details of the performance history in the Table of Returns drop down menu on the Portfolio tab in the site menu or just click the Table of returns link above if that is of interest to you. While if you would like to find out more about the Scores and how you can get access to them you can click the highlighted Scores link above or on the main menu and view a brief presentation about them here too if that is of interest.
This month there were five potential sale candidates based on where their Scores were. Of these two were repeat offenders with Scores well below my normal sale threshold (75% or top quartile CI Score) and the other three were more marginal being closer to the cut off line. So on balance and in the interests of avoiding costly / potentially unnecessary turnover I gave those the benefit of the doubt this month which subscribers will be able to read about in the Journal tab of their Scores sheets.
As for the two that were sold, the first was Unilever (ULVR) which I held last month as it appeared to be oversold. That proved to be a reasonable call as it outperformed the index by about 2% this month. While I pointed out last month that personally I wouldn’t put you off holding it for it’s longer term compounding potential, this portfolio’s process is to follow the Scores and try to maintain exposure to stocks scoring in the top quartile in the main – so on that basis I let it be sold this month after the bounce, as the the score remained well below that threshold at the month end. At least this seems to be in tune with the market where the song remains same. That is stocks over bonds, cyclicals over defensive stocks, value over growth and Small-caps over large – for now as the reflation / inflation trade continues to play out and resonate with investors.
The other sale was Qinetiq (QQ.) which has done quite well for the portfolio and has therefore seen its score come down as it has re-rated to leave it looking rather average overall. The portfolio also held another stock operating in similar markets and while they are likely to be reasonably steady growers, it doesn’t seem like a strong enough theme that I want to double up on the exposure, so out it goes. Results are due in a month or so and their pre-close update was reasonable so they may be worth looking out for if you decide to hold on to it yourself.
Against those Computacenter (CCC) was added as their trading has continued to be positive leading to numerous upgrades as they continue to benefit from the trend for businesses to increase spending on IT hardware and services, which was in place prior to the Virus and which was accelerated by it and which they seem to think should continue this year too. Thus it would seem that their improved performance should be sustained rather than sagging back like some other Covid beneficiaries. It is also one I have held personally for some time which made me more comfortable with adding it up here, hopefully that's not confirmation bias!
The other purchase to replace Unilever was in the General Insurance Sector, so a suitably boring replacement, although this one is also well managed but does offer a much greater yield and therefore a higher value score than Unilever, so again playing into one of the current themes that I mentioned earlier. Again subscribers will be able to see full details of that one and all the other trades in their sheets.
Summary & Conclusion
Another positive month to round off a positive quarter and 12 months for the market and the CISP. Who would have thought that would have been possible 12 months ago when Covid first struck? Nevertheless it is pleasing that the Scores seem to have helped to navigate these strange times successfully.
Meanwhile the current theme playing out in the market is to back the on going recovery / reflation and therefore potential inflation and higher bond yields / interest rates down the track. This has meant rotation from previous winners / beneficiaries of Covid / low rates and into losers from Covid plus value and recovery plays funded by sales of more expensive growth stocks which may suffer in valuation terms as growth becomes more plentiful and bond yields rise.
It remains to be seen how long this trend lasts, but for now both Central Banks and governments seem intent on pumping money out so it may well go on for longer than one might think and for now at least the trend is your friend as they say. The market does however seem to be getting a bit frothy with all these SPAC's in the US and quite a few IPO's being delivered to markets even if they were a bit cool on the Deliveroo offering in the UK. I note that the UK regulators are also trying to loosen the rules to allow more SPAC type listing over here so we don't miss out. I guess there is also a chance that the US Fed at some point may start with yield curve control to keep yields down and keep the recovery going, which would be bullish if it happens. Trying to call the top of the market is in any event a bit of a mugs game and as Keynes was quoted as saying: " Markets can remain irrational longer that you can stay solvent."
Having said that though the UK market does still appear to offer some value and still trades some way below previous highs unlike the US where ratings are higher and indices there are hitting new highs. You would also think that the UK market's larger exposure to Miners and banks etc. should also help it with the current rotation into more value laggards that is going on, but we'd still no doubt suffer if there was a US led sell off.
So for now for me the song remains the same and I'll carry on Compounding with attractive looking stocks identified by the Scores. I'll leave you to enjoy your Easter eggs or whatever outdoor excitement you might have planned for this Easter assuming it is not cancelled for you. Otherwise I hope that markets continue to be kind to you - rock on, ciao for now.