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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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September catch up.

4/10/2018

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Market Timing Indicators
Given the positive returns from headline UK indices like FTSE in September, these remained positive, although with the Mid 250 & Small Cap indices showing lower returns in September these are now less bullish than the larger / broader indices like FTSE 100 & 350.

Elsewhere all the economic indicators are still in positive / bullish territory with the US Unemployment rate for example hitting a near 50 year low yesterday at 3.7%. Which all suggests that one should continue to remain fully invested.



I note that the US bond market continues to sell off as the economic strength means bond investors are discounting further rises from the Fed ahead in the near term, but at least the yield curve has not inverted yet (see graph at the start)  which also still suggests no reason to take evasive action just yet.

I do however stand by the note of caution I struck last month with the snippet about Warren Buffet's cash levels. 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. So with that in mind I'll end this section with a link to the latest memo from another famous investor, Howard Marks  - who is cautioning about the potential for fall out from bonds and debt this time around.

CIS Portfolio
September proved to be another disappointing month for the CIS Portfolio as it produced another negative return of -0.9%. Unlike August this represented an underperformance of 1.6% versus the FTSE All Share Index, which I use as a benchmark,  produced a positive return of 0.7% in September.

The main damage was done by Alliance Pharma (APH) which reported interim results which on the face of it seemed fine if a little dull. They did however include a small write off of £2.5m non-cash impairment charge on its investment in Synthasia International Co., an infant milk formula business in which it has a 20% stake. Consequently reported earnings fell by 35%, but underlying they edged ahead. This write off and consequent fall in the earnings, plus the high valuation they were sitting on, may have prompted some to sell and the price therefore took a hell of a beating and ended the month down by 30.5% - which seems a bit over done to me. Aside from that the other less extreme fallers in September were Zytronic (ZYT) - 9.3% - on no news apart from a long serving non executive leaving. While  Avon Rubber (AVON) fell 7.2% as it's in line trading update presumably disappointed some investors who may have been hoping for a better outcome.

On the positive side the main winners were a mixed bag of Ferrexpo (FER) +22.7% on no news as it recovered somewhat from a long losing streak. While Taptica International (TAP) +14.3% & Churchill China (CHH) +14% both responded positively to their results statements reported in the last month.

In this months screening three shares came up as potential sales, although in each case their Scores were only just below the 75 cut off that I use. The three candidates were the aforementioned Alliance Pharma (APH), Forterra (FORT) and Spectris (SXS). In the end I decided to give them all the benefit of the doubt given they were all closed to the threshold and not therefore obvious sales. In addition I felt disinclined to sell APH down here given it looked oversold and was now offering more reasonable value, which in the week since has been vindicated by a small rally in the share price.

Forterra, despite some very modest downgrades,  still seems  cheap and all the talk  is still of trying to build more houses. So one would think that demand for their product should still have solid foundations for now. It was also close to what could be a support level.

Finally Spectris also had very modest downgrades but also seemed to be offering reasonable value, although in the week since then it has come off a bit more. So overall my override of the mechanical sale process has probably just about broken even on a very short term view ex of any trading costs and opportunity cost of not buying potential alternatives.

Any way I'll see how they come out in next month screening & get back with the programme then.

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Round up of news this week in the CISP

17/5/2018

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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
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Screening for over sold stocks offering value.

10/6/2016

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Having updated the Compound Income Scores (CIS) for subscribers this morning I thought I would share an idea coming out of the latest run. One aspect of them is an over bought / over sold or OB/OS indicator that I like to use to help time entries into good quality growing yield stocks at reasonable prices. I base this indicator on a combination of short term and longer term price momentum indicators and I tend to use it in conjunction with the the share price chart and a traditional 14 day RSI OB/ OS indicator. The short term indicator I use is the one month relative performance on the basis that this has been found to be mean reverting i.e. strong rises or falls have a tendency to reverse the next month, although each individual situation will be different depending on the circumstances. Meanwhile the longer term indicator is based on the distance that the price is above or below the 200 day moving average (roughly one year). Again I have found when this get extended in either direction there is a tendency for this to revert towards the average over time.

Any way this is probably best illustrated by a current example of a small stock Zytronic (ZYT) which makes large robust touch screens for specialist applications and currently comes out at the top of the list. On this OB/OS measure the stock comes in with a Score of 16 suggesting it is in the bottom 20% of stocks (most oversold) in my 600+ universe.

Now they had interim results last month which seemed fine to me, although may have disappointed some as the turnover was flat. This was to some extent expected and consistent ‎with their strategy of moving away from the business' traditional glass displays and growing its technologically advanced touch product business. This included a dividend increase of 10% which is in line with full year forecasts and I note that the earnings have been upgraded since the results giving me some confidence that the full year dividend of 13.2p will be achieved. This is also covered twice by forecast earnings and backed up by strong cash flow and nearly £10m of cash on the balance sheet versus the market cap of around £56m.

On current upgraded forecasts with the shares at their depressed 360p price they trade on a fairish looking 14x or so, although adjusted for the cash this could be 12x or less and they come with a yield of 3.7% and the shares are currently cum the interim of 3.45p until they go XD on 7th July, which is worth about 1%.

So I would say they look over sold and offer reasonably good value if you adjust for the cash and the chart shows they are towards the bottom end of their recent range. I do however note the gap on the chart earlier in the year at around 307p which do have a tendency of being filled in the medium term. So if you are not inclined to buy any stock at the moment due to the BREXIT debate then it might be worth putting this one on your watch list with a price alert for less than say 310p. I note it also Scores 94 on the Stockopedia Stock Ranks.

So there you go there's a good value and good quality stock which is looking over sold and towards the bottom of its recent range. It also remains in the Compound Income Scores portfolio which I run along side the Scores. If you are unfamiliar with these then you learn  more about them and how to subscribe by following these links to the Scores and the Portfolio.

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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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