Just a quick flag up for non-subscribers that this months purchase might be due a catch up. This is especially so given the on going re-bound in markets and the fact that this Company has continued to operate and actually benefits from stronger markets, but hasn't actually responded to them yet. Since it has a June year end there should be a trading update next month so there should be catalyst too.

So the stock in question is the small fund manager which specialises in funds based on investment trusts and with a bias towards emerging markets called City of London Group (CLIG). It is pretty conservatively run and the earnings estimates seem to be realistic after their trading update on the 21st April, although I suspect they could even beat those given the bounce back we have seen in markets since then. They also said they would review the dividend but were aware of the importance of this to shareholders - so i think there is quite a good chance they may maintain that too. 

Based on those estimates and that assumption on the dividend it is trading on around 9x with a 9% yield and has cash on the balance sheet. So on that basis it entered the Compound Income Scores Portfolio this month to reinvest the top sliced money which came from a stock on over 30x and on yield of less than 1%. So although I'm going against the old adage of running your winners there as per the title of the monthly update I'm going for Value instead.

Finally looking at the chart is looks to have been making a base but has thus far refused to participate in the rally part from a brief burst of strength in April prior to the trading update.
I note the gap on the chart at about 367p and these usually get closed along the way. The only other thing to note is that it is not that large with a market cap of around £80m so towards the bottom end of the range in terms of size of Company that I normally invest in but in this case I know this one quite well. It does mean that it is not that liquid and the spread can be quite wide, 311- 324p or 4% or so currently although you might be able to get inside that. 

Any way I'll leave it there and we'll see how it goes when they update the market next month. Have a great weekend, stay safe and well and mind how you go. 

Market Background
May saw another positive month for markets on top of the recovery seen in April. This comes as quite a relief given the nervousness that was around and as it turned out, unfounded fears of a relapse and rapid re-test of the March lows, so far. 

Indeed with the ongoing Central Bank support and some evidence that the worst of the virus effects may be behind us as some economies start to unlock, investors seem to be betting on a V shaped recovery. Indeed market action, in the US in particular, has stayed above the long term trend and with the S&P 500 recently recovering above its 200 day moving average it could even go onto to test recent highs potentially. (See Chart above).

Within all this after early narrow breadth with the FANG technology type stock leading the way, more recently there has been something of a broadening out and even a small rotation into value stocks. This came as some pointed out that the value versus growth performance and valuation comparisons had reached extremes last seen in the dot com era, although it remains to be seen if this will be a lasting shift and indeed if the rally will last or continue. 

Market Timing Indicators
These which are based on the trend in UK Equity markets remain in negative territory about 10% below their trend, as the FTSE UK Indices largely lagged the recovery (as usual these days it seems) in other global markets. Thus this would suggest remaining cautious or out of the market if you are trying to time it. This would be reinforced by the large spike upwards in US unemployment that we have seen which has taken that indicator above its trend. 

Thus even if markets should carry on rallying and turn the market indicators positive, the theory underlying this model would require the US Unemployment to come back below its trend and this seems some way off. Thus if you are in cash / market timing this would suggest that you will need nerves of steel and the patience of a saint to wait this one out while the markets continue to confound the bears and wait for them to come out of hibernation.

Compound Income Scores Portfolio
Having ignored the timing indicators and kept this pretty much fully invested this continued to benefit from the positive market background. Thus in May it produced a positive total return of 4.2% which leaves it with a negative return of 13.5% for the year to date. This compares to +3.4% and -18.8% for the FTSE All Share Index over the same time frames. Since inception just over 5 years ago the comparison is +75.2% v 10.6% or 11.5% per annum versus 2% per annum from the Index. 

Not too many trades this month as few if any of the Scores justified action and one needs to be a little cautious of most figures these days any way given that Companies are reluctant to forecast and predicting outcomes is largely guesswork educated or otherwise.

I did however top slice one of the big winners in the portfolio, breaking the old adage of running your winners. This did however reflect a deterioration in its score, large driven by its valuation moving up toward the top decile as it hit new all time highs. The proceeds were reinvested into a much better value play, which remained oversold having lagged the market recovery despite being sensitive to it. This move therefore played rightly or wrongly to my natural value tendencies. 

Summary & Conclusion
So another positive month for markets confounding hopes and fears of a further bout of weakness to potentially re-test the March lows. This was driven by on going support from Central Banks around the world and perhaps better than expected or not as bad as feared outcomes on the Virus front as some economies started to reverse their lock downs. 

Consequently investors seem to have bought the dip and be anticipating a V shaped recovery and as such the longer term bullish trend still just about remains intact for now. Of course it remains to be seen if investors current expectations are realised or if something less positive comes to pass which might force a reassessment on markets. Aside from the the timing indicators for the lagging UK market still suggest that one should remain cautious but you might need to be patient to reap the benefit of that as thus far the markets seem to be remarkably chipper despite all the bad news that has been thrown at them recently. 

Avoiding all that angst the Compound Income Portfolio continues to, well Compound away quietly in the background, albeit in a losing fashion this year so far, but at a slower rate than the overall market. Time will tell if those loses will continue to shrink or expand again from here. To be honest I really don't know having been surprised by the robustness of the rally, but personally I still wouldn't rule out some more volatility as we go through the rest of this year and get a clearer view of the impact of the virus shut down and subsequent new normal on the economy and the Corporate sector. 

Whatever you do, mind how you go, stay alert and safe or whatever the latest sage advice is from the government and enjoy the hot / fine weather while it lasts. I hear that apparently there is a nice Castle in Durham which is worth a look if you fancy a drive and are feeling up to it!

I thought I'd share a stock idea with you that Scores well in the Compound Income Scores and currently sits in the portfolio based on these. I think it looks quite good in these unprecedented times, although as the title suggests I'm sure it may not be to everyone's taste. So with that in mind I'll flag up front that it is a well known FTSE stock called British American Tobacco (BATS) the well known cigarette manufacturer which is currently trading at around £31 per share.

So if that hasn't put you off what's the Score on this one? Well using the Scores as my prompt I'll take you through it. So first of all how does it stack up on value? Well on this front it ranks in the top quartile of the Scores at 78 as it has a decent dividend yield of 6 to 7% & an earnings yield in excess of 8%. While on more conventional value metrics it is on a PE of 9 to 10x. 

While on the dividend cover it Scores at just 38 as they are distributing about 65% of their net income or about 1.5x earnings cover. It is similar on cash flow cover too which is OK. So not brilliant on this front, but acceptable I would say, particularly at a time when many others are passing or scrapping their dividends. Plus it seems to be a pretty steady business which is still in the main operating at the time of writing.

On the growth front at their recent virtual AGM they did confirm their full year dividend for 2019 would rise by 3.6% based on the 65% pay out ratio. While for the coming year they suggested that they expect to see high single digit growth in earnings and therefore analysts seem to be expecting a similar rate of increase in the dividend. Thus with this and their 5 year historic growth rate of 6.5% per annum in the dividend means they Score 69 on the dividend growth factor. In reality it may well end up being better than this as more eventually cut and don't grow their dividends this year. On the back of that they have seen some upgrades in the last month which means that their Estimate revision Score is also in the top 10% of Companies, as most have been seeing downgrades recently. 

On the balance sheet or financial security they do have quite a bit of debt but its cost is well covered by their profits and cash flow, while their balance sheet has improved in the last year so it Scores in the top 20% here with a Score of 80. While in terms of the quality of the business it also Scores well here with a 91 as it has made decent operating margins of over 50% and a Return on Capital Employed of nearly 15% in the last 5 year. It is worth noting though that these figures have come down a bit in recent years as they have invested in their new generation of safer vaping / heating type products.

Putting that altogether that puts it on a Compound Income Score of 98 one of the highest Scoring, as 100 is good and 0 is bad. As such it remains in the Compound Income Scores portfolio and I've used some of the cash in my ISA to add it to that too as it looks like a pretty good steady income / growth stock to me in the current unprecedented environment. While looking at the rating and thinking about the dearth of income opportunities  I think there could also be scope for the market to have a re-think on this one and possibly re-rate it back up again a bit. Indeed just valuing it on this years forecast dividend of 220p at a 6% yield could equate to a price target in excess of £36 for example. 

Any way that is probably enough on such a big boring stock but you can learn more about it and their ESG credentials which they are trying to push with their new Better Tomorrow strategy at their Corporate website and do further research if you are not put off by what they do.

Finally I think this helps to show the value of watching out for Company announcements in the current environment. I would also say it also highlights the strength of the Compound Income Scores in quickly helping one to identify attractively valued, quality companies with which to grow and compound your income over time, although I'm biased, but that's the point of them. If you'd like to learn more about the Compound income Scores and how you can gain access to them then please click here or watch the video below. Thanks for reading if you got this far, take care, stay alert, get more exercise and stay well. 

Market Background
After the carnage of March we had something of a relief rally in April, or as I suggested last month the reflexive rebound stage which is quite common during bear markets. As a result the FTSE All Share managed to bounce back and provide a positive total return of 4.9% for the month. This does however leave it with a negative total return of 21.5% for the year and as you can see from the chart above, the UK market has lagged the recovery in other markets around the world. Some of this lag is probably explained by the make up of the various indices with Nasdaq obviously being helped by it tech bias and the FTSE 100 in the UK being held back in the main by its heavy exposure to more vulnerable sectors like Banks & Oil.

Talking of Oils and the headline on the chart about markets being detached from economic reality. I think we had a dose of that the other day as Royal Dutch Shell finally bowed to the inevitable and cut their dividend for the first time since the war. In addition results in the US from a couple of the market darlings, Apple & Amazon were somewhat underwhelming too.
Thus it looks like we may have seen the best of the rally for now and we might even be into the next down leg of the bear market or again as I suggested last month the drawn-out fundamental downtrend.

Indeed referring back to my FTSE ready reckoner that I shared in my recent webcast, with the Royal Dutch Shell dividend cut this week, this brings the 50% dividend cut for the market more into view and futures market is suggesting that too. This would also be in line with the worst case scenario foreseen by Link Asset Services in their Q1 2020 Dividend Monitor update. Thus the risk reward from where we were (briefly) above 6,000 on FTSE recently looks skewed to the downside I would suggest.

While it is worth remembering how bear markets pan out and there was a good reminder of that recently in a good post on the Real Investment website (see highlighted link above) that I recommended in a recent post and on Twitter. Below is their graphic on how the current one compares to the last two bear markets and the different phases discussed above.

Market Timing Indicators
As for the market timing indicators, which to remind you turned negative in February and were confirmed when the US Unemployment rate and other economic indicators indicated that a recession was coming in March. Despite the rally in April these still remain some way (about 12 to 14%) below their trend moving averages suggesting that one should still be cautious of the market from here. Indeed if you feel over exposed and didn't reduce before, the recent rally has probably given you a good opportunity to adjust if you don't want to ride it out for the long term.

With that in mind, on that same Real Investment Website mentioned earlier, there was a slightly alarming post about CSPA (crash statistical probability analyses) and Bull & Bear Tracker algorithms. These seem to have called the recent low and are now calling the end of the rally, as per previous bear markets. It is also making the following bold predictions:

• New lows for the markets of nine countries which have yet to penetrate their initial 34% March 2020 correction lows. The lows will occur between May 9 and May 22, 2020.
• 100% probability that world economic depression has already begun and will last until at least 2023. See “Worldwide 1930s Style Depression Has Begun”, April 27, 2020.
• The markets of the 13 of the countries to decline by 79% from their 2020 highs by Q4 of 2022.

Make of that what you will but probably best to be a bit cautious I would say and at least, given their precise prediction (breaking the first rule of forecasting about never giving a figure and a date) we won't have too long to see if they are right on the new lows front! While lets hope they are being too pessimistic about a Worldwide Depression on the back of the Global Virus Crisis and the likely falls in markets, although that is in line with the bursting of previous bubbles like Japanese equities in 1989 and Nasdaq in 1999. 

Compound Income Portfolio
Which leads me onto the Compound Income Portfolio (CIP) based on the Scores, which as discussed last month is throwing caution to the wind despite the above discussion and continuing to invest through this bear market to see how that compares with the Market timing signal. So far one month into the experiment it is 1-0 to time in the market versus timing the market, but this is likely to be a marathon rather than a sprint and an easy win for market timing if the alarming post above is to be believed. As ever time will tell on that I guess.

So after March's record fall of 22.2% the CIP saw a record monthly rise or total return of 13.5% versus the 4.9% from the FTSE All Share. This meant that it had clawed its way back ahead of the FTSE All Share Year to date by 4.5%, but that just means it has produced fewer losses with -17% versus -21.5%. Since inception just over five years ago the CIP is now up 68.1% versus 7% from the FTSE All Share or 10.8% per annum versus 1.3%, which is nice. If you would like to see the full history of that in table form then click here or you can see a graph of that below.
​

Much of this months performance was accounted for by the unwinding of the under performance by Mid and Small Cap names, where the portfolio is overweight versus large cap names and which had driven the fall in the previous month. In addition 3 of the 4 purchases last month did pretty well with two up by over 30% and another up by over 10%. As I mentioned on the Blog during the month one of these was Jarvis (JIM) which has since reassured and then put out a trading ahead of expectations update - which I had manged to predict. So I'd say it is definitely worth focusing on individual names and see if you can see how they might come through this OK and try and avoid those that might not rather than getting too hung up on market level. 

Against that 2 of the 3 sales I undertook last month didn't do much but one, Games Workshop (GAW) also went up by more than 30%. So you win some you lose some I guess. This was however on the basis that they were going to start selling on line again and despite some hefty downgrades which has now left it on over 30x earnings so I'm not sure I'd be buying that up here myself now. I maybe worried too much about the operational gearing on the down side. i also just wondered if all their customers would have as much disposable income to spend on their hobby and may even think more about spending their time on more important things like family and friends after all this perhaps? Any way fair play though to those that have held on, may you escape all your Dungeons and slay all your Dragons or whatever the hell it is that their games are all about?

Aside from that, as suggested last month, I did make one switch intra-month where one stock Ramsdens (RFX) had, I felt, recovered far enough and with downgrades it was now on a rather high 20x versus a more normal 10x maximum or so and it is still not operating. Now while Pawn Broking & gold trading might boom on the back of all this I felt that the FX business, which accounts for 40% of their profits, might be missing in action for longer through all this as it seem likely that foreign holidays and air travel may be slow to return, but I could be wrong as it went up another 13% since I sold it!

To replace that I bought a more defensive counter in the food manufacturing sector that came up with a good Score and which was in the main (80%) still trading. This was Finsbury Foods (FIF), which hasn't done much yet since, so maybe I shouldn't bother with the intra month trading? Nevertheless it looks pretty good value to me on around 6x their likely earnings this year (June year end), although they too have withdrawn their profits guidance and latest dividend for now.  I would however expect them to pay some kind of final and they should mostly be back up and running in their next financial year. It also looks pretty well invested and as a result does carry some debt, but they have confirmed that they have enough financial flexibility as things stand so shouldn't need to issue shares etc. Now it is not the highest quality operation but as I say it should be fairly defensive (bread and cakes to food retailers 80% and 20% food service) and as such I could see it re-rating back towards its more normal 10x or so and therefore I'd look for it to recover towards 80p to 100p levels from where it has come recently for a potentially decent return of 33 to 66%, although again I could be wrong.

In terms of the Monthly Screening a couple of semi-operative retailers came up as natural sales. One had not been as defensive as I'd hoped (although I didn't expect retailers to get shut down) and although it's not the highest quality, it is at least very financially robust so I was in two minds, but nevertheless let it go given the uncertainty surrounding when and how retailing might return. The other one had recovered more and is more exposed indirectly to housing activity and is more discretionary in nature in terms of the spend. So given the portfolio has a few names that are either directly or indirectly exposed to housing demand, which I think may well be weak going forward - I sold that one too. 

Against those I purchased a couple of Companies in different industries that are still operating and which are in the main not that badly affected by the Global Virus Crisis. Any way subscribers to the Scores will be able to see the detail of these and all the other transactions in their Scores sheets and be able to follow the success or otherwise of these. If you would like to join them for less than the price of a cup of coffee per week then click here to find out and sign up for access if that is of any interest to you.

Summary & Conclusion
Well we are certainly living through unprecedented times as everyone keeps saying. As a result we have seen unprecedented falls and rises in share prices in the last two months and May has already started with a down draught. Thus I won't be getting carried away with the bounce back in the market or the CI Portfolio this month. This is because based on my experience and prior bear markets we are probably in or have just gone through the reflexive rebound rally stage. We may already be in or may soon enter the drawn out fundamental downturn stage. 

The market timing indicators that I follow also suggest that it is too early to turn bullish too. While an article about some algorithms is also suggesting another down leg starting about now and being done potentially in double quick time again, which would at least tie in with the first two phases of the Global Virus Crash (GVC) a term I'm looking to coin after the GFC last time. Beyond that, if it comes to pass, we might then get a longer drawn out bottoming & recovery phase which could also include some sharp rallies along the way. One other depressing thing that has occurred to me is that west seems to be following Japan, but with about a 10 year delay, although I know this is not an original thought. So as the Japanese market is still below its bubble highs after 30 years, it is depressing to think that on that basis the FTSE might still be below 7,000 in another 10 years time.

Having said all that there are always opportunities for stock picking even in a bear market or sideways trading pattern, you just need to be active and nimble to take advantage of them, although I'm doubtful of any ones ability to perfectly time the market but I'm sure there are some exceptions out there who can claim to disprove that. Consequently I'm keeping the CI Portfolio pretty much fully invested throughout while trying to pick my way through the fall out from the GVC by trying to gravitate towards stocks that might benefit from it like Jarvis (JIM) last month and one of this months purchases.

Consequently it will hopefully be interesting to see how this plays out against the on going bear market and whenever the timing indicators / economic indicators suggest that it is safe to go back in the market. As I like to say, I guess time will tell on that. Talking of which thank you for taking the time to get this far and if you have as a reward or punishment (depending on your view of my musical taste) I'll leave you this month with a few more music tracks. Take care, stay safe and take your time in investing your cash I'd say if you have any to invest and good luck when you do!

Just a quick note to notify subscribers to the Scores that I have found what I think is a suitable replacement for the non operational stock that was sold last week. It scores well and although it is not the highest quality play,  I think it is should be a reasonably defensive play which is still in the main operating. It does look good value assuming their earnings do not take too big a hit although they have pulled their interim dividend like many others and it does have some debt.  It is however well invested and in a recent update they suggested that even though it has debt they felt they had enough financial flexibility to see them through, but again like others they were reluctant to give any guidance. So subscribers to the Scores should check out the portfolio and transactions sheets for details after today's update this evening after the market closes.

While I think we may potentially be approaching resistance and a possible reversal to what I would view to be a bear market rally, who knows - I could be wrong. In addition as I'm supposed to be seeing how the portfolio does against the market timing signal which went to negative / sell recently - I shouldn't really be trying to time the market!

Talking of markets and levels etc. I mentioned someone that I follow in a recent post so I thought readers of this might find the following sources useful in this regard: 

1) John Mauldin who I've followed since the early 2000's I think it is. He does an excellent weekly e-mail focused mostly on Economics and markets which comes through on a Saturday in the UK and you can find his latest thoughts here and sign up to get that for free if that appeals. 

2) An associate of his at CMG Wealth called Steve Blumenthal who I've followed in recent years also does a great weekly piece called On My Radar which covers economics,  market valuations and technical outlook etc. which is delivered with a nice personal touch too.
This week he also referenced the legendary hedge fund manager, Ray Dalio who has also been generous in sharing his thoughts on Big debt crises and the rise and fall of empires etc, in relation to that more recently and is someone worth following too.

​3) Lance Roberts at Real Investment Advice who seems to be quite good on the technical and valuation calls. His latest piece is called Is the Bear Market Rally Over - and makes for interesting reading too.

Any way I'm sure that is enough to be going on with for now. Mind how you go out there, stay strong, stay patient and healthy if you can, this will pass - we will get through this.