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.
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.
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
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.
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.
This was the third quarterly re-screening since the portfolio was started and I have to say it was one of the hardest so far. Firstly I had to fight typical behavioural biases as I was tempted to apply some valuation constraints and thereby take some profits in some of the big risers. However, since I have not done this up to now and the behavioural bias I'm trying to avoid is selling winners too soon, I resisted the temptation again this time, although perhaps I will apply them with a full re-screening at the annual stage. Any way the other reason I avoided this was that using the 80 threshold on the Scores also suggested a rather excessive 6 sales, 2 of which seemed reasonable, 2 which seemed 50 / 50 and 2 which didn't seem to make that much sense. Thus for this quarter I went with 75 as the cut off which meant the 2 sales that seemed reasonable to me went ahead which I'll discuss in the next section.