Contrary to Mark Twain's advice that October is a dangerous month to invest, investors actually saw some gains in equities last month, although this was only clawing back some of the horrible losses that were suffered in September. This has the feel of the counter trend rally from an oversold position that I felt could be in the offing when I wrote last month.
Thus the YTD and one year numbers in the table above remain negative for the FTSE All Share Index and more so for the CI Scores portfolio as it has a more equally weighted construction versus the market cap weighting for the FTSE All Share as discussed previously.
Some of this months gains were also built on hopes of an early "pivot" from the US Federal Reserve in terms of their interest rate rises. These hopes have since been dashed by comments from Jerome Powell which induced some more volatility, although markets seemed to be trying to rally further as we have came into November this week. The much anticipated Non Farm Payroll numbers were still strong, potentially further undermining those earlier hopes of a pivot. However the headline rate of US Unemployment did edge up by 0.2% and despite the stronger than expected payroll numbers an underlying slow down in employment is evident in the longer term numbers. Indeed the US Unemployment rate is close to breaking below its moving average and all the UK headline indices are still below their longer term moving average trends suggesting caution too.
In addition the US yield curves both 3 month to 10 year and 2 year to 10 year have inverted (where short yields are higher than longer yields) and these occurrences have been reliable indicators or a recession 12 to 18 months ahead. While I have also seen a Bloomberg recession indicator that is showing a 100% chance of a recession, although I'm not so sure how reliable that is. Obviously stock markets have already discounted some of this as they tend to look 6 to 9 months or maybe even a year ahead. So at some point markets will bottom out even when the news is generally getting worse.
It just feels that it is a bit early for that to be the case as we haven't seen that much pain yet in terms of job losses or the effects on corporate earnings. Indeed thus far corporate earnings (& forecasts) seem to have held up remarkably well, although strategist are suggesting big downside on these to come as we go into next year and analysts are notorious for being wrong and often behind the curve with their forecasts in upswings and downswings. Thus on balance I'd remain cautious and not be tempted to chase the current rally too aggressively, if you are sitting on lots of cash, as I suspect there may be better opportunities to come, although I could of course be wrong in that assumption.
As far as the Compound Income Scores Portfolio is concerned this is not a concern as I am not trying to time the market and by and large remaining fully invested as I feel there is good value on offer in the UK stock market. This is demonstrated by the Year 1 PE of 8.7x & 5% dividend yield on average for the portfolio, as shown in the fact sheet at the end of this piece. That yield is forecast on 12% growth in dividends this year which should just about keep up with or be slightly ahead of inflation too.
There were more transactions last month (the table below should read October 2022 rather than September) as I decided to sell out of EMIS after they went XD their latest interim dividend in early November. This was done as they had obviously held up well as a cash proxy in the weak market and I suspect there is a chance of a referral. Subsequent to that they did announce a delay to the timetable into Q1 next year as they prepare a Merger notice for the CMA prior to a Phase one investigation of the deal. This may well be routine, but I still think that a referral is a risk here.
The proceeds were invested as I am looking to keep the portfolio fully invested rather than trying to time the market. Thus one new holding in Record ( REC a currency fund manager) was added while other existing holdings were added too and it was pleasing to see the three that were added to making a top contribution to this months performance. While since the month end Morgan Advanced Material (MGAM) had a positive trading update which has led to a further jump in the share price.
Summary & Conclusion
We saw some welcome respite to the bear market in October with what I believe is likely to be another counter trend bear market rally as we await the impact of recessionary conditions to hit corporate earnings. Thus I would expect to see further draw down to come but nevertheless the Compound Income Portfolio remains largely fully invested as I am not trying to time the market & I also believe there is plenty of value on offer in the UK market too. Please see the Fact sheet below for evidence of this & if you would like to see the full portfolio and have access to the Scores for managing your portfolio then please see here for how to subscribe. a("CMA"), preliminary to a Phase One investigation of the Acquisition.
Thought I would try something different and write up an individual stock based on how it looks in the Scores to see if that appeals to anyone.
The stock I have chosen for this is perhaps a slightly contrarian opportunity as it is a seller of upmarket branded clothing and accessories, Burberry (BRBY - see fact sheet via the link highlighted name). Consequently it might seem like a strange one to investigate when there is a cost of living crisis brewing up a potential recession and problems in China due to the latest Covid related lock downs.
All of which might put a dampener on sales of their famous check gaberdine raincoats and related checked accessories. Then again those who are prepared to splash out thousands on such items probably won't be too troubled by filling up their gas guzzling Range Rovers & Bentleys, the cost of groceries going up or heating their draughty mansions or swanky Penthouses I guess.
So enough rambling lets take a walk through the financials etc:
CI Score = 65/ 100 against other UK dividend paying stocks in the Compound Income Scores universe, based on an EBIT/ Enterprise Value Yield of just under 10%. It also offers a forward dividend yield of 3.4% which is predicated on these growing at around a double digit rate - which should take care of inflation and maintain the value of that yield at least in real terms for now - so not too bad I'd say. While on the our more broadly based value score across a broader universe of some 1500+ UK stocks used in our VQM model it Scores 61/100 and 61 overall in terms of VQM, dragged down by the poor price momentum.
So overall it is offering slightly better than average value at the moment. It is also worth noting that the current prospective PE of around 15-16x is somewhat below average for the last 5 to 10 years which has usually been close to 20x or above probably reflecting the quality and growth that this one has demonstrated over the years. It is a bit lower right now given rising bond yields and the sell off in higher rated growth stocks recently & perhaps the concerns about recession etc. on retailers.
On the dividend, which has generally grown steadily over the years, apart from the recent pandemic, although they have suggested they will return to pre-covid levels going forwards. So it is yielding an above average 3.4% against the historic average of around 2.5%. On dividend safety (as measured by cover ratios) and dividend growth it also scores slightly better than average with scores of 58/100 & 68/100.
Thus if they can achieve the forecasts which those ratings are based on and get back to their average historic rating of around 20x with a 2.5% yield then this could suggest potential upside of around 25 to 35%. We can gain some reassurance on that as their recent update suggested they were confident of hitting their numbers for this year and their comments on the dividend, they have also seen earnings upgrades where they Score 84/100 and helps to support this view.
Obviously it is too early to say for the year to March 2023 given the concerns outlined at the start, so if one if cautious it might be best to wait to see what they have to say when they report full year numbers tomorrow. However, having come through a bit of a restructuring in the last couple of years and with a new CEO having just arrived it seems they are confident of making progress if their Factsheet (linked to above) is to be believed.
Operating Metrics & Financial Security or Quality
They Score well on this front with a mid teens operating margin and around a 20% ROCE over the last 5 years along with limited borrowings and an improving balance sheet. So on these metric they Score 92 & 80. While it is worth noting that they are looking to get debt to EBITDA in the range of 0.5-1.0x and they have been undertaking share buy backs too in an attempt to achieve this and as part of their capital allocation policy. On the back of this they Score 81 (100 is best) on our SHY score.
Summary & Conclusion
Based on the factors in the Scores covered above Burberry comes out in the top decile in the Compound Income Scores and was purchased for the portfolio after their update and upgrades earlier in the year. Since then it has drifted off with the market and on the back of a sell off in higher rated stocks due to rising bond yields and in this case perhaps their exposure to Chinese consumers too, given the lock downs over there as well as cost of living / recessionary worries.
On valuation grounds it would appear that there might be some upside of around 25-35% (£20 to £21) if they can deliver the currently forecast earnings and dividends and make it back towards their historic average rating. Thus it seems the market might be offering an opportunity to buy a quality branded company at a reasonable price given the current market and economic uncertainties.
On that basis it will remain in the Compound Income Scores portfolio and I think it might be a good opportunity to pick some up for the longer term on even better terms now. If you are a cautious investor then I'd suggest adding it to your watch list and wait for further updates with their final results tomorrow. For traders, looking at the graph below it looks like it could be a potential trade ahead of tomorrows figures with recent support just below 1500p which would be 100p of downside, versus potential towards around 1800p and a recent gap on the chart for a 2:1 reward to risk if that's enough for you. Longer term I've suggested it could get back to around 2000p plus which would be a more generous 4:1 reward to risk.
Of course nobody knows what the future holds and it is possible that they might be hit more than currently forecast by the economic difficulties around the world and that markets might sell off more this summer. So mind how you go and don't forget to take a (Burberry) umbrella with you in case of summer showers.
If you have enjoyed this post and would like to find other similar ideas and opportunities across the UK market, then do check out our Scores and how you can gain access to them by clicking here.
A note for subscribers about a further enhancement to the recently added expanded All Scores Section, although it may also be of interest to others & potential subscribers too.
In addition to the Haugen QVM, SHY and Conservative formula Scores across some 1600 UK stocks, we have added some new absolute & relative price momentum indicators. These are available for all these stocks in addition to the Triple Trend Momentum indicators on the 500 or so original Compound Income Scores stocks. They are designed as a quick way to identify stocks with the strongest and weakest trends based on the absolute total returns over 12 months and their relative performance over the last 12 months too less the latest month to make allowance for short term mean reversion.
Those with positive trends on both of these measures (those with the strongest momentum trend) will be flagged as Buy, while those positive in just one of those are suggested as Hold. Finally those with negative trends on both of these (the weakest momentum stocks) are suggested as Sells. Now these should probably not be followed blindly, but I hope that subscribers will find them useful in quickly identifying if a stock that Scores well and they are researching is in a strong upward or downward trend and being aware of that before taking further action.
The thinking behind this is based on the Dual Momentum research popularized by Gary Antonacci in his various research papers and his book called Dual Momentum Investing which all suggests that this can help to deliver higher returns at lower risk. He did mostly suggested applying this to sectors or as an overlay to index asset allocation as a way of reducing turnover and downside in more negative market periods. Nevertheless I think it could be helpful at the stock level too which is why I have added it to the All Scores as a quick guide to the strongest and weakest stocks in terms of momentum, particularly as we are currently going through one of those periodic more difficult times in the market. If subscribers do have any questions or feedback then do please get in touch. Or if you'd like to become a subscriber then please see here for details of how to sign up for access to the Scores and these momentum indicators plus the associated portfolio.
Further note for subscribers.
Footnote on next scheduled update & Monthly Screening. Having avoided extra turnover last month and as I will be holidaying abroad for the first time in a few years around the end of the month, I will probably bring forward this months screening to next week & I will endeavour to keep the Scores updated assuming the hotel wi-fi is up to the job. Not sure if I will have the time or inclination to do a detailed performance update this month though, but lets see, adios Amigos for now.
Introduction / background comments
Another tricky month for investors as economies Worldwide struggle with the fall out from the Russian invasion of Ukraine in terms of its impact on supply chains and inflation. In addition these macro economic concerns are reinforced by the Geo-political concerns as NATO countries ramp up their military & humanitarian support for Ukraine. This is being done despite the potential of Ukraine & other Eastern European Nations joining NATO having led to the invasion, according to the Russians. As a result they now accuse the West of fighting a Proxy war, although I guess they were damned if they did and damned if they didn't. Hopefully it might come to some peaceful resolution soon, although a long drawn out messy affair or a War of attrition seems more likely at the moment. Markets continue to struggle against this background and as Central Banks grapple with the now non transitory inflation along with trying again to reduce the stimulus that they have been dishing out to varying degrees since the GFC and more recently during the Pandemic.
As a result Bond yields seem to have finally broken out to the upside to bring to an end (for now) the long bull run they have enjoyed since the early 1980's. I say for now as if these moves lead to an economic slowdown / recession and a market rout then it is always possible that inflation could come down quicker than expected & the tightening might not be as large as currently discounted. Some also worry about deflationary pressures resuming after the current inflation surge is over, although I'm not personally convinced by those arguments at present.
Alternatively, as in the past, Central Banks may again halt their tightening programmes and once again open the liquidity taps again if markets cut up rough and economies seem to be heading for a serious downturn. This might lead to another rally in bonds if inflation is by then showing signs of coming down again and equities might then join in the fun down the line if any or all of that comes to pass.
Of course that could be wishful thinking or it "could be different this time" to coin an expensive phrase - with more persistent inflation and Central Banks therefore having to push on with rate rises and draining liquidity to bring inflation under control despite the damage to economies and stock markets. Or there is an outside chance that they could pull off a dampening of inflation along with achieving a rare soft landing. I won't believe in either of those until I see them, but as ever time will tell I guess.
For now the sell off in bonds and equities seems likely to continue as investors anticipate further rate rises from Central Banks and are starting to worry about / discount tougher times or a recession ahead. Having said that though some of the economic stats like PMI's and unemployment are still showing positive trends, so a recession is not guaranteed just yet, but it remains to be seen how long that lasts.
April proved to be another negative month for the Compound Income Scores portfolio (CISP) which was disappointing as the FTSE All Share did manage to eek out a positive return as shown in the table at the start of this piece. Thus for the YTD the CISP is - 9.3% versus the +0.8% for the All Share.
As mentioned last month this is partly down to the make up of the CISP versus the FTSE All Share in terms of exposure to large caps. By way of illustration it just over 60% in FTSE 350 stocks and within that it is skewed towards Mid 250 stocks which have been hit harder than the big FTSE stocks. AIM and small cap holdings have also suffered bigger hits in a reversal of their previous outperformance in recent years.
There were quite a few names that therefore suffered double digit falls and not enough risers to offset this overall. One of the bigger fallers was Ashtead, which at least was reduced in last months screening, but with the benefit of 20:20 hindsight I obviously wish I'd sold it all. Which brings me on to an update about this months screening
There were quite a few names this month which had seen their scores deteriorate sufficiently to be up for consideration for being sold. 6 of these were repeat offenders from last month, including Ashtead again, plus one recent purchase.
In the end I decided to give all of these the benefit of the doubt this month as in some cases the reasons for holding remained the same and in others like Ashtead they seemed very oversold. So I was reluctant to sell them on that basis in the expectation that we might see some mean reversion in the next month, as is often the case after a big move. In addition some of the possible replacement candidates did not look that cheap and on the flip side had pretty strong one month performance. Thus having put through quite a bit of turnover the previous month and as it seems hard to add much value from trading currently unless something is obviously at risk. So it seemed prudent to save on turnover in what might have been poorly timed / marginal trades.
Just a quick note for subscribers, in case you are not aware, brief notes on the Monthly Screening and candidates that are considered on both sides of the ledger are shown in the Journal tab, but these appear below the news flow comments. Since this may not have been obvious, I have therefore moved those this month to the foot of the Transactions sheet where more logically they can then be read in conjunction with the trades actually carried out in the rows above.
Summary & Conclusion
Another difficult month for investors as bonds and equities continue their sell offs. While for the more general public it is becoming increasingly difficult to make ends meet as inflation continues to soar and as Central Banks tighten monetary policy and look to drain liquidity.
As a result bonds seem to have ended their long bull run for now and equities have generally entered what would be deemed a correction or even a bear market depending on which index you are looking at. This is on expectations of further action to come from the Central Banks and some rising concerns that this will likely lead to negative economic growth and a potential recession later this year or in 2023.
Apart from a brief inversion of a yield curve last month as an early indicator other economic indicators such as PMI indices and unemployment data are not signalling trouble ahead just yet and the UK headline indices continue in a bullish trend for now as FTSE 100 stocks have performed well overall this year as Commodity producers have prospered. Outside of that the Mid, Smaller and AIM indices have all slipped into bearish downtrends to the detriment of the CISP as shown in the table at the top.
Nevertheless I shall be sticking with the process as I believe it remains sound as demonstrated by the longer term track record of nearly 15% per annum compound returns since inception. Overall as I always say you have to take the rough with the smooth in this game and not get too carried away when things are going well nor too depressed when things are tougher. Indeed Ray Dalio of Bridgewater (one of the largest Hedge Funds in the World) said as much when he was reviewing the current state of play recently on Linkedin.
So mind how you go and I hope markets are not being to cruel to your portfolio & it's not going down like a Led Zeppelin! However you are managing it remember not to get too down if things are tough as that is all part of the investing game and you have to learn to live with Good Times, Bad Times.
Another poor month for stock markets generally on the back of on going inflationary worries & the Russian invasion of Ukraine which unsettled investors and added to those inflation concerns. As a result it seems that my concerns that this years returns might be poor after bumper returns last year are so far being realised.
The UK stock market actually held up relatively well against that background given it was not as expensive as some others having lagged behind in performance terms in recent years. This was due to heavy weightings in old non tech type sectors like oil & mining which all did relatively well as a result of rising commodity prices. Consequently the FTSE 100 continued to outperform this month & thus it and the broader FTSE All Share, which it is a large part of, maintained their existing bullish trend - for now. In contrast the Mid 250 and Small Cap Indices fell further behind and both are now in bear trends.
For the Scores Portfolio these trends hit the performance again this month as having benefitted from being overweight Mid Cap, Smaller and AIM names previously this is now weighing on performance. Subscribers can see some monthly attribution figures towards the right hand side in the Portfolio sheet. Also worth noting that a summary of all the Scores has been added here for easy checking along side the triple trend momentum buy, hold, avoid & sell suggestions.
The impact of this at the portfolio level is shown in the table above with the fall back in the last 6 months and year to date reducing some of the outperformance achieved last year. Nevertheless the longer term performance remains good. Please seen the link to the table of returns under the Portfolio menu for the full performance history or click here if that is of interest.
A couple of sales and purchase this month as I held onto a few stocks where the Score had slipped on the basis that they have updates or results due soon. Subscribers will be able to see the details of these in the Portfolio sheet of their Scores file.
Summary & Conclusion
Another poor month in what is so far shaping up to be a poor year for stock market investors after good times for the last decade or more albeit with other sell offs along the way. Obviously the current situation in Ukraine is another fairly extreme concern coming so soon after the Covid shutdowns etc. and the debt / asset bubbles that have been blown up on the back of that. On top of that we have the inflation problems and the complication of Central Banks trying to deal with that in the face of the Ukraine war.
Thus it is probably not a time for taking too much risk but equally maybe best not to panic either as in the past crises have tended to blow over and markets have often been higher 12 months later. No doubt as events develop there will threats and opportunities & I'm sure the Scores may help to identify some of those along the way, but however you do it mind how you go and good luck with your investments this year.