Compound Income Scores Portfolio Quarterly Re-Screening

As regular readers will know and as I mentioned yesterday, I started this April what I called the Mechanical Compound Income Scores Portfolio. If you are a new or recent reader - welcome and see this link for the original post about the portfolio and the thinking behind it.

In that post I mentioned that I was thinking about using a minimum Compound Income Score of 60 or 75 for a stock to remain in the portfolio and I also said I might look at making it a top decile portfolio. However at this quarters first re-screening I note that if I used 90 as the threshold then this would have led to potentially 6 sales, which if repeated in following quarters would lead to over 100% turnover in the year. As costs can eat away at your returns I have decided to not go down the costly top decile route.

Using 75 as the threshold threw up a more reasonable 2 potential sales (Plus500 and Photo-Me) so I have decided to go with that as my threshold for now. I wrote Photo-Me up recently but it seems that there have been some big downgrades post the results which have lowered its score to 71 and left it on just over 20x which is a valuation threshold I use as a trigger to look at a potential sale. However I note that the dividend forecasts seem to have gone up reflecting the likely special dividend this year and the valuation is not as rich if you factor in the cash. I still therefore think it is an interesting situation worth watching, but as this is meant to be a mechanical process without too much human intervention it has to go for a loss of 5.2%.

Plus500 was the main disaster for the portfolio as they confessed to problems with the regulator regarding their signing up of clients. This unsurprisingly led to downgrades and a forecast cut in the dividend this year which dropped the score to 74 just below the 75 threshold. However, given that they have since been bid for by Playtech in what now looks like pretty much a done deal I have decided to retain it and wait for the 400p cash bid to complete. This will save the cost of selling, plus the discount the shares are trading at to the terms of the bid, which together should give a return of around 3.75% over selling today. it should also act as a cash proxy which may also be useful in the current volatile market, provided of course that the bid does not fail or get withdrawn for some reason.

With the proceeds of the Photo-Me sale I have selected Paypoint (PAY) which is the highest scoring stock after the screens have been applied which is not already held in the portfolio. Coincidentally I wrote this one up recently after their results which you can read here if you are interested. So I added a 5% holding in this one which leaves around 1% cash plus the quasi cash of 2.7% in Plus. I'll look to utilize this cash and hopefully the proceeds from the Plus bid at the next quarterly re-screening. Thus for this quarter the portfolio will only have about 96% market exposure which of course may or may not be a good thing.