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 so far has certainly been a challenge for investors as the markets finally seemed to have panicked as the number of Corona virus cases continued to ramp up around the world and Italy went into lock down.
Against this background Central Banks including the US and UK have undertaken emergency cuts in interest rates as they seek to protect their economies from the negative effects from the virus in the short term. In addition to this governments are also likely to be coming forward with various measure on the spending and fiscal side to provide support and bolster economies too.
So given that and the fall in the markets so far, which is getting on for a fairly normal 20% correction it may not pay to get too bearish down here. That is unless this all leads to a larger and longer lasting recession rather than a v shaped affair if the virus effects and counter measures work out satisfactorily. As ever time will tell on that one, but as of now the other economic indicators I follow are not yet signalling a recession, although there does seem to be a increased risk of one in the short term. If that does come to pass then you would need to be prepared as Warren Buffet says for your holdings to be cut in half in the short term. If you are not prepared for that then obviously you would need to make other plans.
Meanwhile the Compound income Portfolio has been hit along with the rest of the market, but given it has no direct exposure to the oil sector, I think it should have fared reasonably well again in a relative sense at least. Indeed looking at the various metrics on the CI Portfolio as at last nights close it seems to be on 13x forecast PE with a 4% expected net yield on the back of forecast 1 year dividend growth of 18%. We should however take those forecasts with a pinch of salt as they could be vulnerable to downgrades if a recession does really take hold rather than a short sharp shock from the virus.
Meanwhile it is budget day today and this is widely expected to include quite a number of spending commitments on infrastructure type things with road, rail, telecoms and flood defences already being mentioned as recipients I think. On that basis I think it should be quite good for a stock called Renew Holdings (RNWH) which recently entered the CI Portfolio based on its good Scores and decent value metrics.
This one jumped on the Conservative Election victory but has drifted off a bit with the market recently, although it has out performed by falling less. It seems to tick many of the boxes of areas which are likely to be seeing extra government spending as follows:
What's not to like? Apart from the fact that it is construction related, which is often bad news when you are talking about contractors (see Costain today). The saving grace here may be that most of their stuff is more related to on going maintenance and upgrades etc. which should make their revenues & margins more predictable. I also seem to remember Paul Scott mentioning working capital financing by clients seeming hefty & negative assets etc. See here if you are a Stockopedia Subscriber. If not and you'd like to check it out here and if you sign up I might get a referral credit off my subscription.
The only other thing that slightly concerns me about the limited assets on the balance sheet, from reviewing past accounts, this seems to result from a few asset write downs in subsidiaries over the years which I don't quite know what to make of. It could mean that past profits were overstated and they have taken the losses through the balance sheet to hide this. They did however have a stated aim of raising margins over the last few years so maybe they were just tidying up an old structure by closing down lower margin operations to focus on the higher margin maintenance type work. Any way I'll give them the benefit of the doubt for now and don't forget to do your own research and make sure you are comfortable with these aspects if it is one that attracts you too. Happy Budget Day - hopefully barring any nasty surprises on the tax front!