So here we are half way though the year already and for once we seem to be having a proper summer in the UK, as the jet stream is apparently behaving itself this year. Fortunately, like the weather the UK stock market has also picked up and started to behave itself after a decidedly chilly first quarter, although June did provide a modestly negative total return. See the table below for full details.
Source: FTSE Russell
Consequently the Monthly market timing indicators that I track for the UK indices all remain ahead of their respective moving averages by around 4%, although only 2% in the case of small caps as they have lagged the broader recovery this quarter. Thus these are signalling that it should be safe to carry on compounding as do the economic indicators that I monitor.
With that in mind moving onto the Compound Income Scores Portfolio (CISP) - it was another good month for the portfolio. It produced a total return of +2.61% for the month which compares with the -0.18% from the FTSE All Share which I compare it to. This leaves it up by 6.6% YTD, which is 4.9% ahead of the above index. The star this month was Auto Trader (Auto) which roared up by 21.3% on the back of well received results. While I'm glad I gave VP the benefit of the doubt last month ahead of its results, as they also rose by 14.7% when these were well received too. The third double digit riser was Tapitica (TAP) which bounced back more on relief that it's update was not a warning like the one produced by XL Media, which the Scores managed to get the CISP out of before it happened.
On the downside Ferrexpo (FXPO) continued to sink like a lead balloon on the back of trade war fears leading to falling metals prices, while Bellway (BWY), despite a good update, suffered from profit talking as some others in the sector seemed to be indicating that margin may come under pressure from here. So maybe this is as good as it gets for housebuilders perhaps? Finally Spectris (SXS) fell by 8% but I can't see anything that might have caused that other than a catch all profit taking comment.
Since inception just over three years ago it means that the CISP has achieved annualized returns of 19.9% per annum, not bad although that's not a patch on the 50% per annum returns reported by @Glasshalffull1 on Twitter. Finally on the numbers don't forget you can get a breakdown of the monthly performance via a link on the Portfolio page or by clicking here if it's too hot for you to click twice.
So everything in the Stock Market garden appears rosy at the moment even if the actual garden is looking a bit scorched as we continue with the proper summer referenced earlier and the continuous blue skies. Indeed for recent investors it must seem like blue skies every day in the stock market these days. It is however worth remembering that stock markets tend to be leading indicators of trouble ahead and can and do start corrections or have crashes even when the skies seem blue, think 1987 crash, 2000 .com bear market and of course the financial crisis in 2008.
Now I'm not saying that one of those events is imminent, but worth bearing in mind that we have had a 9 year bull market already and the US Federal Reserve seems likely to continue raising rates and as the old saying goes "don't fight the Fed." So at some point the effects of that and the withdrawal of liquidity by other Central Banks around the world will, like the sun and plants in the garden, cause stock market returns to wilt, in the same way that it lubricated them on the way up.
Finally since we're having a Summer a bit like 1976 I'll leave you with a track from that year, the lyrics from which stating "You can check in any time you like but you can never leave..." also seem appropriate to the seemingly impossible BREXIT negotiations where re-moaner rebels seem intent on ensuring that we never actually leave. Indeed I've doubted all along if we would ever actually leave and I continue to think I'll believe it when and if I see it.
After that I'll just share another video which I saw recently featuring Paul McCartney which was both funny & moving at the same time. If you dind't see it and even if you don't like James Corden I'd recommend it as it might change your mind - enjoy and have a great summer.
A busy day for announcements from holdings in the Compound Income Scores Portfolio (CISP) today, so much so I had to check the calendar to make sure it wasn't Thursday today. So any way here in brief is a summary of the relevant news announcements.
Alliance Pharma (APH) - the acquisitive group which buys mature licences to drugs and medicines etc. has, in line with this strategy, announced that it has agreed to acquire the marketing rights in the Asia-Pacific region for an anti-dandruff shampoo (Nizarol) for £60 million ($79.5 million). This is being acquired from a subsidiary of J & J & is being funded by an underwritten placing of shares at 91p which will therefore raise £34 million with the balance of the cost being funded from their existing debt facilities. They say that it had a Pro Forma EBITDA of £7.1m in 2017 on sales of £18.5m, so it seems quite profitable and the multiple they are paying does not seem too high. Consequently they say that it expected to generate material earnings enhancement in the first full year of ownership. This is quite helpful as the shares were starting to look a little stretched in valuation terms, although the placing and the recent rapid rise in the share price resulting in a re-rating may mean the shares are capped out for a while now. Thus I suspect they may go back into one of their customary sideways trading ranges, but I could be wrong of course.
Ferguson (FERG) - the specialist plumbing and heating distributor announced its Third quarter results for the 3 months to 30 April 2018 which saw revenues up by just over 10% in total and 7% on an organic basis. Most of the growth was driven by the strong US economy while the UK operations are undergoing a restructuring. They also said that the fourth quarter has started well with organic revenue growth in line with the third quarter and that given the third quarter out turn, the Group is well positioned for a successful outcome for the year.
Taptica (TAP) - the data-focused marketing solutions company announced a trading update which, after the profits warning from XL Media (XLM which was sold back in March on a deteriorating Score prior to their warning) was a pleasant surprise as they said they expect to report adjusted EBITDA for FY 2018 moderately ahead of market expectations and revenue growth in line with market expectations demonstrating a moderately higher-than-expected EBITDA margin.
This was helped by the fact that they have also continued to work closely with the Tremor Video DSP team to implement operational and cost efficiencies and have been able to achieve further improvements in gross margin in that unit. They also said that they continue to evaluate acquisition opportunities, which remains a key element of the Company's growth strategy. Thus with the current trading going OK and the integration of Tremor Video DSP delivering improved margins if they can do some more successful add ons then this should help them to continue their more recent successful growth streak, which the rating of around 9x PE doesn't seem to give much credit for.
Announcements from companies in the CIS Portfolio this week included a positive trading update from recent purchase Mondi (MNDI). These suggested that their underlying operating profits are up by 15% in the half year to date. This includes the effect of some planned down time at some of their plants which overall they now expect to be a slightly greater drag on results this year than last at €115m v €95m and this is also slightly up on their previous estimates. They also flagged higher costs and a headwind from currencies, but despite these negatives they still say that the outlook for the business remains postiive as they continue to experience a strong pricing environment in a number of key product segments and also good demand. Thus they expect to continue to deliver what they describe as "value accretive growth", so it looks like a hold on that basis.
On a less positive note there was also a rather lacklustre set of interim results from Zytronic (ZYT) which in a mirror image of Mondi saw their basic eps decline by around 15% as their revenues fell slightly on the back of weak demand in the Financial area, primarily ATM's which they make flat screens for. On a more positive tack they did suggest that there had been a customary pick up in demand in this area in H2 so far, but went onto suggest that demand overall may be suppressed compared to recent years. This was disappointing and may help to explain the recent de-rating of the shares and prompted another sell off on the day of the results. One saving grace against this is the strength of the balance sheet with net cash of £13.7m against a market cap. of £65m. This allows them to pursue a progressive dividend policy. Thus although the earnings were down they raised the interim dividend by 100%.
This was however partly to address the split between the interim and finals so I wouldn't expect such an increase for the full year, but forecast growth of 20% in the dividend for this year and next puts it on potential yields of 5.6% and 6.7%. this is however at the expense of cover which will come down towards a rather low 1x if the current forecasts are achieved. Thus it looks good value on yield grounds with a fairish looking PE of 12 to 14x or less if you factor in the cash. So a dull hold for income at the moment but unlikely to excite on the capital side I suspect, until they are able to return to demonstrating more turnover and earnings growth. As it has drifted back towards it's recent lows this might be a good entry point for a patient contrarian investor if you believe they will be successful in returning to a growth path, otherwise might be worth waiting for evidence of an upturn.
The only other snippets worth mentioning were a contract win in Slovenia for Amino Technology (AMO) and a slightly unusual RNS from Taptica (TAP) which included a Q & A with the CEO which you can read here if that's of any interest and you haven't seen it yet.
Charts below left to right from top are; TAP, AMO, MNDI & ZYT
Here is another update on the Compound Income Scores Portfolio (CISP), this time on the monthly screening and recent announcements from companies in the portfolio.
Taking the announcements first, we had slightly underwhelming results from Headlam (HEAD) the flooring distribution company which struggled a bit for growth as one of its major customers cut back on orders and conditions in the UK were generally more difficult than the previous year as the squeeze on household budgets from falling real incomes presumably had its effect on demand for carpets etc. Having said that though the European performance was stronger and they also undertook some cost saving measures and made some add on acquisitions which helped to produce some modest 6 to 7% growth in profits and earnings despite the tougher domestic conditions. They also increased the dividend by 10%, helped by their robust balance sheet and their reasonably confident view of the future and a clear dividend policy based on a target level of cover. There was however no special dividend this year as there has been in the last few years given the outlook and the demands for capital investment that they see. Overall an OK set of numbers but the market didn't seem to like them that much and marked the shares down quite sharply on the day of the announcement. They have not recovered since and I note there have been a few small downgrades since then, so they may well continue to drift for now despite looking good value on 10x with a 5%+ dividend yield for the current year. So in summary good value and reasonable quality but lacking momentum and some concerns about the outlook, although their self help measures should help to alleviate the worst of this, so a hold for now but we will have to see how it scores come the next monthly screening to see if it remains in the portfolio. It does however, look like it has come back into a range of support between about 400 and 465p, see chart at the end.
On the same day we had better news from Bodycote (BOY) which saw strong growth, paid a special dividend and rose on the day as the market clearly liked these numbers and this helped to offset some of the weakness seen in the Headlam share price, which after all is the whole point of a portfolio. So we have something of an opposite here a quality cyclical which is benefiting from stronger demand and therefore is rated more highly (18x with a 2% yield or thereabouts) and which therefore has better price momentum which is supported too by earnings upgrades seen since the figures.
Moving onto the transactions this month these gave me something of a mental challenge as the scores challenged my preconceptions and natural inclination on some stocks as well as presenting some challenges in constructing a suitably diversified portfolio. Firstly on the sales the stocks that came as a result of the screening was Unilever (ULVR). Unilever is of course well know and a solid company which is a classic compounder and one which personally I'm happy to continue holding of a more broadly diversified income portfolio. I did decide to sell it for the CISP though to follow the process, as despite it being somewhat over sold in the short term, it still looks a bit of an expensive defensive, albeit not as expensive as it was given recent share price falls. It has however had earnings downgrades and I guess maybe investors generally are rotating towards more cyclical names given the improving economic situation globally if not in the UK.
The second sale candidate was XL Media (XLM), which even though it had only been in the portfolio for a short time, I decided to sell for a small profit despite the recent positive trading update. This was because the score had deteriorated on the recent re-rating and there had been some small downgrades. In addition to this the CISP still has exposure to this area via Taptica (TAP ) and they both seem to have come off recently as they have tapped the market for new capital and perhaps investor appetite for this area is satiated in the short term, so maybe you can have too much of a good thing.
Talking of having too much of a good thing that brings me onto the buys this month. Now back in January, which was poor timing with the benefit of hindsight, I did buy another market related stock in the shape of Miton (MGR), which gave the portfolio three positions in market sensitive stocks. Thus when Plus 500 (PLUS) came out top of the pops this month I didn't feel able to add it to the portfolio for that reason as well as being naturally biased against it myself. It does however look very cheap having just had a strong upgrades on the back of a positive trading update and it does trade on about half the rating of IG Group - so the scores are signalling that it should do well if you can stomach the risks. I note however that the directors have also placed a large slug of stock recently, although they do still retain quite substantial holdings - so even they are hedging their bets having tried to sell out previously at 400p to Playtech (PTEC). So in the end I bought some Amino Technologies (AMO) which helps TV networks with IPTV streaming and some Spectris SXS which helps companies with enhancing their productivity, see the name links for more details of their operations. Both these scored well and bring something different to the portfolio.
This now leave the portfolio looking reasonable value on around 14x with a 3.4% prospective yield based on the forecast dividend growth 15% for the current year, thereby hopefully it will deliver on the objective of delivering value, income and growth which the Compound Income Scores are designed to identify. So there you go that's it for this week and don't forget if you would like to find out more about the Scores and how you could gain access to them to help you with your portfolio monitoring and construction then check out the Scores page which has all the details.
A quieter end to the week after the manic start on Monday. I have however noticed that the market is generally seeing more activity as M & A reaches levels last seen in 2009 as Melrose (MRO) went hostile on GKN this week. There has also been a flurry of placings as companies use the stock market for its purpose of raising capital and also take advantage of elevated share prices too. A couple of these were in the mobile advertising space where both Taptica (TAP) and XL Media (XLM) raised fresh funds to bolster their finances for further add on acquisition. Both stocks have fallen back as a result of these and Taptica is now trading below the placing price and actually comes out top of this weeks Compound Income Scores, so if they can keep the growth going and integrate their recent and any future acquisitions successfully then this could be a good entry point - perhaps.
Finally today and for this week we have had an AGM trading update from Character Group (CCT) which despite all the news flow noise of the finance director leaving and the Toy 'R' Us related warning has remained in the CISP despite this as it continued to score sufficiently well. Thus the portfolio didn't sell out at the bottom of this longer term holding and has benefited from the share price recovery since.
Today's update is of the in line variety, although they still see the current year being down on last year as previously flagged. They do however suggest that they will see a second half recovery and are confident that this will lead to a return to their growth trend in 2019. As the management here seem to have been pretty good at calling the trends in their business I would be inclined to take those comments at face value. If they deliver on that I guess that could mean say 50p of earnings in in 2019 with say the currently forecast dividend of 25p which at today's lower price of 432p (-5%) would leave them on a still cheap sub 10x rating with a 5.8% yield. So while they may not excite much in the short term & indeed could even drift off further, this one still looks like a reasonably well run business, albeit in a somewhat fickle industry. I also note in passing that some people seem to be upset by the levels of boardroom pay here so might be worth checking that out to make sure you are comfortable with that too if you are considering an investment here.
Any way that's it for this week and as I say the latest Compound Income Scores are out as usual today, so if you'd like to know how Character Group and the other 593 stocks in the Compound Income Universe score then head on over to the Scores page to learn more about them (if you're not already familiar with them) and to see how you can access them. Safe investing and have fun whatever you are up to this weekend.