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October was indeed a dangerous month!

3/11/2018

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"Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest."

A quote from my September catch up last month and October 2018 did indeed prove to be a dangerous month to invest in, although given the volatility it also threw up some opportunities too I guess for nimble traders who had the stomach for it. Talking of traders I think many newer investors who have started out during this prolonged bull market are discovering this year that having highly focussed concentrated portfolios is great when things are going well, but can be very painful when things cut up rough like they did this month. This should be a good learning point for all investors both new and old as you never stop learning in the investing game.

Talking of which as an aside on that subject, I've been reading the latest book from Anthony Bolton, the former Fidelity Special Situation Manager, which I happened across recently on a trip to my local library. Along with many quotes from other famous investors one of his own struck me as being quite relevant to today's markets which he suggests have become more short term due to the growing influence of hedge funds as follows:

"I do think this has increased the opportunities for professional investors prepared to take the one to two year view rather than a time period measured in months or weeks. Often there is so much analysis of the branch or even the leaves on the branch, there are fewer people taking a view on the tree, let alone a view of the forest."

His advice for private investors is to take a three to five year view and not to put money in the stock market if you are likely to need it in the next three years, which to be honest is fairly standard advice. Otherwise it has some useful tips on what it takes to be a fund manger and what you should look for in Companies plus plenty of reminiscing.

Any way back to October and the CIS Portfolio. This fared badly again in October as I suspect many concentrated portfolios will have done. It produced a negative return of 7.87% which was 1.47% behind the 6.4% loss from the FTSE All Share which I use as a benchmark. This leaves it down 3.73% year to date which at least is still 1.86% ahead of or down by less than the -5.59% from the FTSE All Share. I'll not go into details of the individual stocks as for example there were 10 that fell by more than 10% and only two that managed a positive return. If you want to see the  full history of the performance which has taken the portfolio up by 62.46% since inception in March 2015 then please click here to see that or see the table at the end of this piece. If you are interested in learning more about the process used to highlight potential candidates for the portfolio, then please see the Scores link in the menu at the top of the page or in the three bars menu if you are on a hand held device.

So on to this months screening, which I promised to get back to having ducked out of placing trades for the last couple of months. Interestingly a couple of those that I refused to sell last month because they looked oversold actually saw their scores improve sufficiently to stay in the portfolio this month with Alliance Pharma (APH) outperforming substantially & Spectris (SXS) underperforming slightly. The third one though went on to underperform badly and still ranked as a sell this month so out went Forterra (FORT), although I'd still be tempted to run it short term personally as their update seemed fine apart from some unexpected  downtime for one of their kilns and as the budget extended help to buy for first time buyers of new homes. Aside from that two long standing holdings XPP & Zytronic (ZYT) also came up as sells on the scores so out they went, although here personally I'd be more inclined to run with XPP for the long term.

Against this the Portfolio purchased some Page Group (PAGE) which replaced some Hays (HAS) that was sold higher up prior to this sell off, Moneysupermarket (MONY) & Cohort (CHRT) which may also be a beneficiary of the budget with extra spending on defence / cyber security. All these bring something different to the portfolio compared to the existing holdings, although they were not all as over sold as some of the stock they replaced.

Monthly Timing Indicators
Unsurprisingly these all turned negative given the big drop in the market this month with all the indices falling to between 3.9% and 6.5% below their trailing 10 month moving average. You have to go back to March this year and January 2016 for the last time these indicators were this negative. I would not however take this as a signal to sell everything as for one we have seen a decent sell off already and the market has found some support in the short term. In addition the economic statistic that I use in conjunction with these to indicate when you should take them seriously as a recession in the US may be imminent are still not flagging. See this post for the explanation of and rational for this & also see the other links in that piece too.  So in the absence of a US / Global recession, it seems we may be into a more normal 10 to 20% correction or mini bear market for now, rather than a really painful recession induced 40 to 50%+ decline.

So given that and the fact that we have seen a big sell off already plus some support holding recently, as we are coming into a seasonally stronger period and a typically positive phase of the US presidential cycle I would be a bit more optimistic in the short term. In addition with the UK market being unloved and under owned by institutions and is not as stretched in valuation terms as some other markets like the US. I therefore reckon we could see a sharp rally if we get an unexpected BREXIT deal in the next few weeks as the Chancellor seemed to be hinting at in his budget statement and as was suggested in the press over the weekend. The budget also highlighted steady, if low growth expectations, rising real incomes and continued low inflation and interest rates plus tax cuts which all seems quite a supportive background to me.

Having said that though, I was somewhat spooked (given it's been Halloween) or discombobulated (if you prefer fancy English)
by a recent piece I read and a chart that it included (which I reproduce below) which included an indicator which suggests a global recession could in the offing and which has a 90%+ hit rate when this indicator has flagged in the past!

So with that in mind I wouldn't get too carried away in any rally that we might see. Especially as we see Central Banks withdrawing liquidity, while valuation are high elsewhere, bond yields rising and economic growth may be slowing. If anything I'd suggest maybe using rallies as opportunities to sell into rather than looking to buy the dips as we have got used to over the last 10 years or so. Though that does depend on your age / stage of life and your resultant time horizon. If you are a younger person with many years to invest then obviously set backs should be welcomed and utilized as long as you are expecting to continue to feeding money into investing over the years.

Nevertheless however old you are and in whatever situation you find yourself in, I'd suggest being careful out there.


Let's Be Careful Out There GIF from Letsbecarefuloutthere GIFs
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2 Comments

A long term holding powering ahead.

1/3/2018

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XP Power (XPP) a long standing holding in the Compound Income Scores Portfolio (CISP) has announced final result for the year to December 2017 today. These were good as expected given their previous updates, but did still came in slightly ahead of forecasts at the earnings and dividend lines. While James Peters, the Chairman of XP Power struck a reasonably confident note tinged with some realism when he said: ..."Although we cannot be immune from all external economic shocks resulting from cyclicality in the capital equipment markets we serve, we are optimistic regarding our prospects for 2018.”

Thus they seem set fair for another reasonable year and if you want to read more about the results I suggest you look them up on your favoured news provider. In addition there was a good sponsored brokers note from Edison with an update on the back of the results which included some upgrades from them given the results beat their forecasts and the outlook seems fine. Their forecasts for this year of 158.9p with an 82p dividend may, they suggest , still be conservative with the possibility of upgrades as the year progresses. Nevertheless at the current 3180p price, this does leave them on just under 20x with a 2.6% yield, which looks fairly full but is probably deserved given the quality of their business and the steady delivery they have offered over recent years and their on going growth and investment plans.

On the charts I note a gap the 200 day moving average and a gap on the chart from their previous positive update at around 3000p which could offer a good entry point if they should get down there on any more market weakness or profit taking. I say that because this one does tend to move in fits and starts with strong rises punctuated by some long sideways pauses, as seen a couple of times in the last year. It does however continue to score reasonably well on the Compound Income Scores and will therefore remain in the portfolio.

That's all I have time for today but, weather permitting, I hope to be back tomorrow with a month end update on the CISP and the timing indicators for the UK Market. So hope to see you back here then and mind how you go in the snow and keep warm if you can.
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Sorting the good from the bad & the ugly.

12/1/2018

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Today's update of note for the CISP is another of the portfolios longer term winners in the shape of XP Power (XPP) - which if you are not familiar with it (you can click the name link for more details) is a £700m  United Kingdom-based developer and manufacturer of critical power control components for the electronics industry.

They had Q4 trading update today in which they said the Company had a good finish to the year, in line with the Board's expectations, as the strong order intake reported in the third quarter drove robust revenue growth in the final quarter. Other points of note were that they moved into a small net debt position following the acquisition of Comdel on 29 September 2017 for US$23.0 million (£17.0 million), net debt at 31 December 2017 was £10.1 million, compared with a net cash position of £3.6 million at 31 December 2016.

They also said that the 4th quarterly dividend is not expected to be less than 28 pence per share, representing a minimum total dividend of 77 pence per share for 2017, an increase of 8% over the total dividend of 71 pence per share paid for 2016. Furthermore on the outlook they said they are encouraged by the continued strong order intake experienced across the business during the second half of 2017 and the overall book to bill level for the year and that they enter 2018 with positive momentum and therefore expect to grow orders and revenue in 2018 above that in 2017. I would suggest you check out the full statement at their investor relations part of their website for full details if you are interested in researching this one further.

As far as the CISP goes it remains in the portfolio as it continues to score highly, although the valuation has got a bit higher than I would normally entertain for new purchases at 24 to 25x with a yield of just over 2%. However, having trimmed it late last year in a portfolio re-balancing, I'm allowing it to run as a winner while it continues to make the cut on the scores despite my reservations about the valuation, as it does seem like a good quality operation.

Finally talking of quality companies and winners, the latest Compound Income Scores are out today. So if you are not already a subscriber and would like to be able to sort the good form the bad and the ugly and pick some future winners for yourself, then check out more details about the Scores and how you can gain access to them by clicking here or in the Scores navigation tab on the site. Otherwise thanks for reading, have a great weekend and good luck with your investing and see below for a couple of tunes / videos on today's theme.

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Market rally testing resistance...

22/2/2016

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....while HSBC is approaching it's 2009 lows. Looks like it will be a busier week for news flow and it will be interesting to see if last weeks rally fails at the 6000 to 6100 resistance level. Today we have had disappointing and flat looking results from HSBC which they described as broadly satisfactory, but which did included a small 2% increase in the dividend from 50c to 51c for the year.

In approving the dividend increase, the Board noted that prospective dividend growth remained dependent upon the long-term overall profitability of the Group and delivering further release of less efficiently deployed capital. Actions to address these points were core elements of the Investor Update that they provided last June and which they expanded on in the statement. 

No doubt we will gets lots of column centimetres on this one but it does look good value with a PE of 6.5x with an 8% yield and a price to book value of around 0.6 to 0.7x which seems fair given the 7.2% return on shareholders equity that they reported in these figures. Thus with the shares down by 4% or so to around 430p on the back of these drab looking numbers this morning they are closing in on their 2009 lows around 400p and as such might be interesting for a brave contrarian value investors down here, but the Compound Income Score is only 18 and Stockopedia only ranks it at 45 which both suggest caution and that there might be better opportunities elsewhere. Talking of which we have also had
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 final results from XP Power (XPP) the £280m market cap power supply solutions business which I have written up in the past. These came in ahead of recently downgraded forecasts as it seems they had a strong Q4. Therefore earnings came in at 104.3p v 98.8p and 106p currently forecast for this year. On the dividend this came in at 66p v 64.9p forecast and 68.9p for the coming year.

In the statement they said: "While early 2016 has seen economic headwinds strengthen in some of our markets, we consider that the Group remains well positioned, with good momentum established as our design pipeline continues to grow and a healthy order book.  We are encouraged by the progress made by the Group during 2015 and look forward to another successful year in 2016.”

So this suggests that the current forecasts could be upgraded but should at least be maintained. So taking the current forecast for this year and this mornings 3% higher price of 1524p this leaves them on a fairish looking PE of 14.4x with a prospective yield of 4.5% which seems fine to me and it scores 90 on the Compound Income Scores and coincidentally the Stockopedia StockRank too.
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A busy end to dodgy week.

8/1/2016

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What a first week to the New Year in stock markets with Chinese shares being suspended limit down a couple of time this week which has spooked markets around the world. Today after they removed the trading halts the Chinese market actually managed to close up - go figure. So it seems like we will have a more positive end to the week, but I did hear an interview with Neil Woodford on the BBC Today programme talking bearishly on the outlook for China, so we may not be out of the woods just yet. To cap it off there is quite a lot of news today so lets dive right in.

First up in relation to the Compound Income Scores (CIS) portfolio re-screening I did at the start of the year. Worth noting that Next (NXT) have now started to buy back more shares as their share price dipped below their indicated buy back price on the back of their trading update. So this should help to support the price going forward in the short term but if the price remains below their threshold and they continue to buy back stock with their surplus cash then there may not then be any special dividend this year. Time will tell on that, but worth bearing in mind if you are attracted by the high headline yield which includes specials. Meanwhile in this weeks market volatility I also note that the two purchases of Easyjet (EZJ) and Zytronic (ZYT) that I made for the portfolio are now available at knocked down prices. So if you have done your research and like the look of those then you can pick them up at better prices now than I did when I added them to the CIS Portfolio.

Talking of the CIS Portfolio we have also had an interesting announcement today from Photo-Me (PHTM) which was included in the original portfolio and therefore still held in the Annually rebalanced version which I am running to see if screening quarterly has added value. It exited the quarterly screened portfolio quite early on as its score deteriorated on the back of some earnings downgrades and still only scores 64. In today's update they have however flagged positive trading in their Japanese operations ahead of the introduction of a new ID card in January, with turnover up by 90% in November and December. They say that if this is continued in the rest of their financial year then all things being equal they would expect to to report results materially ahead of current market expectations. Now I understand that companies usually have to put these kind of statements out if they come to realise that their profits are going to be at least 10% or so away from consensus in either direction. So we should probably expect at least 10% upgrades and possibly more if the trend is continued for the rest of their financial year. The shares are up nearly 9% so they have probably factored most of it in but I guess it could be better than that, although it is hard to get a handle on it as I can't find what proportion of the Asia and ROW division is in Japan, but at the full year they had added 1,000 machines there and said that Japan was the largest territory by far by reference to size of the machines estate and revenue. I did some very rough back of the envelope calculations and if it was say two thirds of that division then this could lead to an extra £11m of operating profit from Japan which could lead to upgrades approaching 30%, but I must stress that is very much a guestimate without knowing the actual proportion they have in Japan and if the recent trend will continue or not.

Meanwhile in a strange coincidence the stock which replaced Photo-Me in the portfolio, Paypoint (PAY) has announced the sale of part of its planned disposal with the sale of
its Online Payment businesses comprising PayPoint.net and Metacharge to Capita, for a consideration of £14 million satisfied in cash at completion today. This leaves the sale of the Mobile Payments business to be competed in due course and we won't therefore know if the proceeds come up to their downwardly revised expectations until then. This is another one which is now on offer at a cheaper price than I paid for it in the portfolio, although it still has its attractions as it still scores 92. So maybe another opportunity there perhaps if you like the look of that one?

Finally we have had an update from another high scoring stock which I have mentioned in the past and which I own as part of a broadly diversified income portfolio, namely XPP Power (XPP), which
announced its Q4 trading was in line with expectations. This has driven revenue growth of 8% in FY15 (4% in constant currency). This was helped by a recovery in orders from the US, and overall Q4 order intake was strong, providing positive momentum going into FY16. The recently acquired EMCO business is also said to be trading well and the company has already identified cross-selling opportunities. They also announced a further dividend and suggested that the full year dividend would be up by at least 7% to 65p for the full year which is in line with forecasts. This one also scores well with a CIS of 86 and reasonable looking rating of around 14x with a 4.5% yield.

Phew there you go, oh yes and I've updated the Scores today too as usual. So time now for a well earned coffee break - cheers see you back here next week, have a great weekend and be careful out there whatever you are up to in the market or elsewhere.


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