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.
Now that the dust has settled on the recent bout of volatility, just thought I'd put a few thought down and provide an update on the January screening of the Compound Income Scores Portfolio (CISP). So taking the market first as I suspect that will be of more interest, it has obviously come as a bit of a shock to many that share prices can go down as well as up! This is because we had been lulled into a false sense of security by the seemingly never ending story of Central Bank Quantitative Easing or QE as it is known. This led to an extraordinary period of smoothly rising asset prices, or a bull market in everything as one wag called it.
This period seems to be coming to a close as the US Federal Reserve had already started raising rates from the emergency levels which had endured for years and had quite clearly sign posted a route to the withdrawal or reversal of QE over the coming quarters a kind of Quantitative tightening or QT as it were. Stock markets had ignored these signals, even as bonds started to sell off, causing some famous bond investors to call the end of the long bond bull market. Equity investors were aided in this myopia by stronger economic statistics and the US government passing some hefty corporate tax cuts which further boosted animal spirits & hopes of stronger growth. These moves in bond yields were accelerated and brought into sharper focus after the US Non Farm Payrolls and Unemployment data last Friday came in with another strong reading and showed unemployment sticking at 4.1%. The fly in the ointment was however a pick up in wage growth, which in turn fed into fears of rising inflation and hence the knock onto bond yields and ultimately equity markets.
Now I'm not saying that this divergence originally was irrational as earnings, share buy backs and dividends tend to drive stock market returns along with expansion and contraction of the multiple that investors are prepared to pay for those earnings. Given the benign background on the back of QE and recent signs of accelerating growth investors chose to focus on that and bid up stock prices in an exponential fashion, rather than worrying about the build up of debt, rising bond yields and the probable prospect of at least three interest rate rises from the Fed this year. Last weeks events seem to have brought about a reassessment and a quick bought of profit taking which has then led to more volatility as some automated algorithms probably kicked in too. Thus equity investor may now reconsider how much they are prepared to pay.
Any way enough of the rationalizing already, what to make of it all? Personally I wouldn't be too concerned just yet, given the stronger economic background discussed above. Thus this is probably just one of those normal periodic corrections of up to 10 to 20% that you quite often get in stock markets. Quite frankly if you are not prepared for that, which is the price you pay for investing in volatile equities then you should probably not be investing in the stock market at all. In addition to that you also need to be prepared to see the value of your equity portfolio potentially cut in half, when a really bad bear market rolls around, usually on the back of a recession or more recently the financial crisis. Now that is relevant here as I don't see a risk of recession in the statistics that are coming our from the US and elsewhere at the moment and that's why I say this is probably just one of those normal periodic corrections. Going forward I will however continue to watch the US unemployment & ISM numbers as well as the shape of the yield curve which has proved to be one of the best advanced indicators of a coming recession.
So no great change to my strategy as I want to remain invested in real assets and to benefit from the power of Compounding, but I will look to reduce risk when and if a recession seems to be on the horizon. On which the only thing I can add is that in recent decades we usually seem to have had either events like recessions, the dot com crash in 1999 and the early 2000's and the financial crisis in 2007-9 starting or having their effect late in each decade with the effects extending into the early part of the next decade. Earlier back in time I'm thinking of the late 1970's peak and early eighties recession, the late eighties peak and early 1990's recession etc. As the old saying goes history doesn't repeat itself, but it rhymes so as we approach the end of this decade it seems we may well be overdue another recession or event but as ever I guess time will tell.
Update on the CIS Portfolio
So if you are still with me I'll finish up with a quick review of this months CISP Screening. There were three potential sale candidates that came up this month, Wynstay (WYN) which was a clear sell on the scores and two which were much more marginal - Bloomsbury Publishing (BMY) and Unilever (ULVR). On balance I decide to give the latter two the benefit of the doubt. In the case of Bloomsbury I was tempted as it was a the top of its trading range and looked as though it could be breaking out of what has been a fairly well defined trading range, plus there had not really been any news flow recently which is why the score had moved down on unchanged earnings. I must admit I was tempted to let it go though because of the trading range. Sadly I didn't, as when the volatility hit it promptly collapsed back toward the bottom of its range where it is now looking over sold, so maybe there's a buying opportunity there again now?
On Unilever they had just reported results and having come back from their highs it was starting to look better value and a tad oversold. Thus I thought I'd leave that for another month and see how the market digests the figures, although I note that the earnings have been downgraded since - knocking the Score further. So we shall probably have to bite the bullet and sell it at next months screening, but we will at least pick up the dividend this month.
The replacement for Wynstay was Portmeirion (PMP) - the exciting (OK I made that up) ceramic tableware, cookware, gift ware and tabletop accessories provider. Not that being dull is a bad thing in the stock market it can mean that an attractive business is overlooked. In this case that is what the Scores are saying as it had upgrades after its recent trading update and looks reasonable value if not an outright bargain on around 13x with a 3.75% yield for the coming year. My only doubt is that it has been flat lining for the last 18 months or so after a sell of in mid 2016 on a trading disappointment I seem to remember, although it had done pretty well in the years prior to that. Since then the market has been strong and maybe enough time has now elapsed since the trading problem which may mean it's not such a bad time to get into it - I guess time will tell?
Finally I've been updating the Scores daily this week for subscribers so they can keep up to date with the moves in Scores on the back of the price moves and search for good value over sold stock. So if you would like to be able to do that too do check out the Scores page for details.
Lots of results from my kind of stocks and too many for me to go into great detail. So look out for results and updates from the likes of Britvic (BVIC), Nichols (NICL) & Unilever (ULVR) in the food, drinks and personal care area. Britvic & Nichols have both made add on acquisitions which should enhance their growth prospects. There is also a small (5%) placing from Britvic to help fund their Brazilian deal and it looks the best value of these stocks on a mid teens PE compared to 20x+ for the other two.
Aberdeen Asset Management (ADN) have reported more fund outflows reflecting investor worries on emerging and far eastern markets and less favourable investing conditions generally. They do however flag their strong balance sheet and diversification efforts but the market doesn't seem to like it.
Meanwhile after my DIY efforts yesterday and my purchases from Screwfix which is owned by Kingfisher (KGF) I see their results seem OK with even France finally showing some signs of life. Bloomsbury Publishing (BMY) have also had a good start to the year in what is a quiet quarter for them any way. Finally SSE has reiterated their earnings expectations and promised dividend increases at least in line with RPI going forward from the current full year dividend which gives a yield of 5.5%.
That's all for now as I am preparing to do a piece with the ADVFN Podcaster Justin Waite at Sharepickers.com today. So I'll try and do a quick update later with what I'm covering and details of where you can listen to it if that is of interest to you.
I have written in the past how "boring" stocks can be brilliant. Today we have had an update from one of the boring stocks I featured and I have a sell rational for another. So if your not put off by the boring bit here goes.
First up we had Q1 results from Unilever (ULVR) today - it doesn't get much more boring than that does it? They summarised it as a good start to 2015 helped by currencies which gave them a 10.6% boos to their turnover. Aside from that they reported underlying sales growth of 2.8% which included 1.9% gain from price increases.
Within the underlying sales growth was a 5.4% gain in emerging market sales which is one of the reasons I like this one as they seek to sell more of their consumer products to the developing consumer markets in the emerging market economies.
So enough on that already as I'm sure you can find all the detail on the results elsewhere. However in terms of valuation this is now getting quite rich on this one given the share price performance as you can see in the graph below. The rating
has got quite rich on this one with a PE in excess of 20x, although the earnings yield is around 6.5% and the dividend yield is still around 3% and 1.5x covered by earnings and forecast to grow at around 7% for the next two years. This all leaves it looking around average with a 53 Score on the Compound Income Scores. So getting a bit twitchy about the valuation up here and the recent earnings revision trend has been poor, so will be worth watching to see if this update can turn that around, so just about a hold for me given the quality, yield and expected growth.
However on a similar track I have reduced recently another of my boring stocks which has also enjoyed a decent re-rating and share price performance. Again this was one of the boring is brilliant stocks I featured call Berendsen (BRSN).
So why have I decided to reduce this one? Well in this case it comes down to a combination of valuation 18x and 2.8% yield, poor estimate revisions, the Compound Income Score of 39, likely negative currency translation effects from their large operations in Europe and director selling (click link to see details). This latter point was the catalyst for me to reduce my holding while the going is good as this one has in the past been vulnerable in an economic downturn (see previous update for more on this), although I accept I'm probably way too early on that front. I just feel on the current valuation and growth prospects it is up with events and I can probably find better value elsewhere.