Compound Income Scores Portfolio Performance
So the brief spell of Summer like weather gave way to a more soggy end to the month and so it proved in the Stock market too. The FTSE All share after a strong start in line with the weather sold off mid month before recovering somewhat toward the end and returned -1% for the month as a result. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. The authorities there seem to have that under control though, but on going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
Meanwhile the long run of outperformance by the Compound Income Scores Portfolio since last November finally came to an end in a very disappointing fashion as it returned – 5.9% on the month. The Portfolio has outperformed by over 10% in the year to date with a total return of 24.4% and it has compounded at just over 15% per annum since inception just over 6 years ago.
It is therefore perhaps not too surprising, given the strong run it had prior to this, that some underperformance at some point was probably inevitable. In addition the FTSE 100 held up better than the Mid and Small cap parts of the market where the portfolio has been and remains overweight. That’s just the nature of this investing game and you have to take the rough with the smooth as I always say and not get carried away when things are going well and equally not get panicky or depressed when you have a bad run. As long as you have confidence in your process and are prepared to accept some volatility in your capital in the short term for potential gains in the longer term, which is after all what investing is all about.
There were quite a few contributors to the poor performance this month with 6 stocks underperforming by more than 10% on either fundamental news flow or profit taking in the main. The two worst examples were CMC Markets (CMCX) which fell by around 30% on the back of a poor trading update / profits warning as markets became calmer over the summer and they saw some relapse from the extra trading they had seen in the previous quarters and last year when the pandemic was in full swing.
The other big faller to a similar extent was Luceco (LUCE) which succumbed to a heavy bout of profit taking as their excellent results didn’t lead to any further upgrading of forecasts. This profit taking was probably also prompted by their honesty in admitting that they had seen an extra boost from Covid trading and highlighting cost pressures, although they have been able to deal with those thus far. Their Score fell back to the lower end of the top quartile as they did see a few small downgrades on the month but it stays in the portfolio on that basis and it now also looks better value on a mid teens PE with a well covered 2.5% or so yield.
On the positive side of things there were not too many, but S & U (SUS) put in a good performance after their trading update which led to upgrades which I covered in the mid month update post. While City Of London Investment Group (CLIG) responded well to their full year results reported in mid month which led to some upgrades. While the 10% increase in the dividend for the year was also presumably well received given the dividend background surrounding the pandemic.
British American Tobacco (BATS), EMIS, Strix Group (KETL) & Paypoint (PAY) all featured as holdings with scores in the second quartile this month & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt as their scores were 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.
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 as a quality compounder for now although the rating has got a bit richer. I also decided to keep Paypoint again as they enter their close period ahead of the H1 results in November. A further director purchase by the General Council and Head of Compliance just before that helped to sway my decision, while the coming energy price hikes should help to boost their declining bills paying business.
I did however decide to let Strix Group (KETL) go as a bit like Luceco, even though they did report good results they also struck a note of caution on current market conditions and saw a few small downgrades. In addition the rating was not that cheap on still over 21x PE and with a Score of less than 50. Nevertheless it does appear to be a good quality business with a well protected dominant market position, so I wouldn’t put you off holding it for the long term. That’s just the way the Scores process works and it also felt like the time to rotate into some better value given the inflation / interest rate outlook. With the proceeds from this sale and some cash which had accumulated from dividends over the summer I was able to add a couple of better value situations.
One was a housebuilder, despite my own personal reservations about the timing of this, but as several had appeared towards the top of the list I decided to follow the Scores even if they may be a bit rear view mirror in this case. Housebuilders will probably never be highly rated given their cyclicity, but they currently look fairly cheap within their usual 7 to 10x PE rating ranges. This probably reflects concerns about over heating post the ending of the stamp duty holiday, affordability, plus labour costs and materials pricing and availability. Against that interest rates remaining low (for now) and the on going supply demand dynamics continue to offer support. So again I’d leave you to decide if this is a sector you want to participate in. There was also a good Podcast from Money Week which featured an interview with Gary Cannon of Phoenix Asset Management, who had some interesting comments on the builders and remains a bull of the sector.
The other value stock I added, was even cheaper than the housebuilders and subscribers will have seen the details of this in their Scores sheet. In addition to this I also decided to sell CMC Markets (CMCX) on the back of their profits warning (even though it did not score outside the top quartile) and switch into the similar IG Group (IGG) where I prefer the business model and it scores more highly than CMC having had a positive update last month in contrast to CMC.
Summary & Conclusion
After a disappointing end to the summer in the UK we also had a disappointing start to the Autumn in markets and also for the Compound Income Scores Portfolio. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. On going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
There seem to be concerns that this will retard the on going economic recovery and some of these pressure like supply shortages, commodity price increases and shortages of labour seem likely to put pressure on corporate margins which may well cause the market to continue to struggle in the short term until this picture becomes clearer. Some suggest that this could presage another leg of outperformance for value stocks in the short term if rates rise (or bonds sell off) on the back of higher inflation as hinted at by the US Federal Reserve.
With that in mind I used this months Screening to add a couple of more value orientated shares to the portfolio after taking profits in the more quality growth situation, Strix Group – which had enjoyed a re-rating during its time in the portfolio. While in the UK more widely, the market, for once, seems better placed with its bigger exposure to energy and commodity sectors.
While the UK economy seems to be suffering badly from the after effects of the Pandemic, the resultant supply shortages and the squeeze on energy prices. As a result stagflation fears have stirred given the hit to incomes and coming benefit cuts and tax rises. As a result some fear we might face a Winter of discontent much like the 1970’s which saw three day weeks and power cuts which I remember from my childhood. Despite this politicians have insisted there are no fuel shortages, that Christmas will be fine and that we won’t see power cuts even though some industry representatives claim otherwise.
Given that and the inflation outlook, bonds remain a no go area for me and so personally I continue to rely on a mix of equities and other real & alternative assets to try and maintain and grow my capital and income in real terms. I would highly recommend reading the recent final results from Ruffer Investment Company in this regard and particularly the Investment Managers comments starting on page 19.
After a recent visit to Thatcher’s farm to see their Cider production facilities, it put me in mind of Mrs Thatcher’s comment from the last time we had stagflation & as Maggie May have said "There is no alternative" in terms of sticking with equities. They are simply the best way for me, although I saw that Tina Turner has decided to cash in her royalties which may be the best way for her at her at the age of 81, although I do have a few Hipgnosis Songs Fund (SONG) as part of my alternative assets exposure.
Any way that’s all for now as I must get off down to the shops and get some candles, a frozen turkey before they sell out or go up in price. I’ll leave you with some music appropriate to the above comments.
In the last monthly update I highlighted four positions that had flagged up as potential sales based on their Scores. Nevertheless I decided to hold onto them all based on awaiting forthcoming news flow on three of them and on the basis that nothing had really changed on the other.
We have had news flow on two of those so here is a brief update on that:
S & U (SUS) had a trading update rather than results that I had expected, although those will be published on 28th September. The update was positive in the main with all the right metrics like profitability, collections and debt quality all moving in the right direction. Within that Advantage, the main car finance business, was likely to see profits ahead of budget and was seen as being on track to return to previous ROCE levels, despite a bit of a shortage of second had cars. While at Aspen the bridging loan business showed strong growth despite the limited supply of second hand properties too. On the back of this there have been 16% or so upgrades to this years forecasts which has catapulted the Score back into the top decile again.
Paypoint (PAY) - where I hadn't expected any news put out an update on their outstanding OFGEM investigation. In this it seems that OFGEM are minded to accept Paypoint's suggested remedies and payment of compensation that they have already largely provided for. The price seems to have responded positively to this news rising by about 7% since then and a couple of directors have since purchased some shares. So again so profitable masterly inactivity there although slightly more fortuitous is this case.
On Strix Group (KETL) - while there has been no news as such the shares continued to steam ahead another 5% or so on the back of a bullish initiation by Liberum in which they suggested substantial upside on a further re-rating on the increasing growth prospects here apparently.
Finally, even dull old EMIS has managed to move up about 4% while we await their results in September. So here's to the success of masterly inactivity and long may it continue!
A quick update on the two growing small cap stocks I featured recently. Firstly on Taptica (TAP), where I was wrong to say that there probably wasn't enough in the numbers for the shares to challenge their previous high in the short term. Well they have only gone and done it just to prove me wrong. I don't think however it would be a good idea to chase them up here as I note that the finance director sold 200,000 shares on 5th October 2017 at 445p & now holds only only 94,572, although I suspect he's probably got a few options no doubt. Of course I could be wrong again as stocks around 12 month highs can go onto perform well as investors (and maybe even the FD here) make behavioural mistakes by anchoring on the previous high price, although the shares are off this morning. It does however continue to score well in the Compound Income Scores (CIS) and as such is probably still worth sticking with despite the directors sale as these tend not to be as instructive as directors purchases.
Meanwhile on S & U (SUS) I note that the shares have managed to sneak up into their previous range between about 2000p and 2500p and sustained it for now. So some modest encouragement there despite the on going weaker new car sales, although that is not so relevant to them as they deal in loans for second hand cars. I note too that there have been some modest upgrades to forecast post the results which is a good sign, so some encouragement there too. Talking of upgrades there was also a good, detailed, sponsored (?) note from Edison which also included some upgrades and in which they maintained a valuation at 2,700p per share suggesting significant upside from the current share price.
If that is of interest to you I attach a copy below. On that basis and given my long standing holdings in this one I'm happy to continue holding it even though the CIS is only average on this one right now.
That just leaves me to wish you happy and safe investing and hope you have a great weekend whatever you are up to.
We have interim results from a couple of small cap growth stocks today. First was a long time favourite of mine S&U plc (SUS) the £237m market cap. motor finance group. Despite all the talk recently of potential problems in the car finance area and in particular the PCP area, they point out that they have no exposure to that type of lending. In addition the 20% or so growth that they reported today is a continuation of the growth trend they have seen for the last 17 years in this business. See the full RNS announcement for more detail on this in the commentary from the Chairman Anthony Coombs.
Talking of the Chairman's statement there were a couple of things in there that did give me some cause for concern, although on balance I'll give them the benefit of the doubt given their track record up to now. For the record though these were the fact that bad debt provisions were up sharply despite the strong employment background that was referenced in the statement. This was explained by Mr. Coombs as follows:
"Although a return, for competition reasons, to Advantage's traditional customer mix has seen an increase in impairment to revenue, risk adjusted yield has been protected by good interest rates. Indeed, current levels of impairment are significantly below those experienced just five years ago following the financial crisis, when the business continued to increase profits and maintained very good returns on capital employed."
Not quite sure what they mean by for competition reasons, may be they had tried to go up market & found more competition and so had to return to lower scoring higher risk customers to maintain the growth perhaps? The other thing that bothered me in this part of the statement and allied to that was mention of the fact that a refined Delphi 10 based scorecard system had been introduced. This might be a better explanation for the sharp jump in bad debts perhaps? I think this will need watching after the Provident Financial debacle recently where they messed up by changing a long standing way of doing business, although in this case the change does not seem as dramatic as in that case.
Aside from that the dividend was up by a pleasant 16.7% but the debt continues to rise to fund the growth, but remains relatively low for a finance business. Meanwhile the nascent Bridging Loan business is looking like it will be second half weighted after a slower start than expected. Assuming there is nothing in these numbers to change the forecasts dramatically this should therefore leave it on a reasonable looking sub 10x PE with a 5%+ yield with strong growth. The shares are up this morning back into the 2000 - 2600p range that they had been trading in, so it will be interesting to see if they can sustain a move back into this range in the short term. Or if they will be sold off again this might confirm the recent break down into a new lower range of 1500 -2000p perhaps, although be aware I don't claim to be a chartist.
Second up today, in brief was another Small Cap growth stock, the £213m Market Cap. Taptica (TAP) which is Israeli based and provides mobile advertising and has recently made an acquisition to move into the Video area too. In addition to this recent acquisition they have in the past made some other smaller acquisitions in their core area of mobile advertising to expand their geographic reach into Japan in addition to the UK, China, US & South Korea. In the statement they say they have ambitions beyond these areas to expand into ten hubs worldwide in the next three years to make it Russia, China, Germany, San Francisco, New York, Korea, Japan, India, South America and the UK. Thus it seems there should still be plenty of growth potential from geographic expansion in addition to their move into video advertising more recently & growth in advertising moving more onto mobile channels from more traditional areas like print and broadcast media.
Any way if it is of any interest I suggest you read the RNS and visit their website for more details and there was a conference call this morning too. The shares also look cheap for the growth they are delivering trading on about 12x falling to 10x for 2018, although the yield is lower than I normally like to see at just 1.7%.
The only other reason I mention it is that this is another example of one of those potentially unpalatable looking stocks which therefore trades cheaply and therefore scores well on quantitative systems like Stockopedia where it has a StockRank of 88 and on our own Compound Income Scores where is scores a maximum 100. So if you can get your head around the business and are not put off by it being a foreign company then it might be worth a look, but there's probably not enough in these numbers for it to challenge recent highs I suspect, although the shares are up this morning after recent weakness prior to the figures.
The corny title refers to one of my long standing holdings which has delivered excellent returns for me over the years. As I have written before it is one of those family run businesses which Lord Lee is fond of backing and indeed I think he has been in this one in the past. Any way I digress, but the stock concerned is S & U Plc which is now a £240 million market cap. car loan company which also has a fledgling bridging loan operation. So why mention it today? Well they have their AGM today and have put out a trading update statement ahead of that.
This confirmed continued strong trading despite what the share price might have been suggesting. If that is of interest you can read the announcement and learn more about S&U at their investor relations website. Here you'll also find links to some Proactive Investor Interviews with Anthony Coombs, chairman of S & U. I thought the last one, which you can view here if your want, was interesting as he seemed to be pretty confident about on going growth as they only take a small proportion of all the loans they are offered by their panel.
Cutting to the chase I think the shares look good value down here on around 10x this years forecast earnings with a 5% yield based on both of these growing in double digits, which seem likely given the latest update and the Chairman's confident comments in the interview after the finals in April.
Looking at the chart you are would not getting in at the top if you were to buy in now as the they have come back from over £25 to their current £20 or so. Looking at the chart below I have drawn on the trading range and what is called a triangle formation by connecting the highs in the recent downtrend and it looks like it might break out of this triangle one way or the other fairly soon. The theory is I believe that it should then move by around the height of the triangle which in this case is roughly 500p. So that would suggest targets on a decisive break, of either £15 or £25 which would be around the old highs which could then act as resistance.
My money is obviously on a breakout to the upside and having top sliced some of mine near the £25 high in 2015, I have been buying some back around the £20 levels recently. As ever you pay your money and take your choice. In the meantime I'll continue to enjoy the 5% yield including the 39p final worth 1.95% which is due to go XD on 15th June.