We have had a trading & business update today from one of the stocks in the Compound Income Scores Portfolio (CISP) - namely Taptica (TAP) the £290m market cap. mobile advertising firm. It says that they expect to report EBITDA ahead of market expectations with Tremor Video DSP achieving profitability ahead of schedule. It is this last point that seems to be the main driver behind the expected beat as since its acquisition in August it has been integrated quicker and is now expected to report a profit in 2017 rather than in 2018 as had been expected.
In addition to this Taptica also continued to expand its Tier 1 client base as well as increase its business with its existing household-name clients. The growth was driven by the significant contribution to revenues from the Company's newly established international offices, primarily in the Asia-Pacific region, and, in particular, by the strong performance of Adinnovation in Japan, in which Taptica acquired a majority stake in 2017. They did say however that they expected revenues to be in line but did expect a higher EBITDA margin which also helps to explain the beat and probably helped by the early swing into profit from Tremor mentioned above.
Before any upgrades today on the back of this announcement the shares were still on a reasonable looking rating of around 14x for 2018 forecast eps, although they did say they are still confident of delivering solid year-on-year EBITDA growth for 2018 in line with market expectations which suggests these numbers may not be upgraded at this stage, although the current year 2017 forecasts obviously will be.
Thus despite the strong share price gains in the last two years it still looks reasonable value given the on going rapid growth in their market and the international and product expansion they have been undertaking. This probably reflect the volatility in profits that they have shown in the past and their Israeli base. They do however seem to be building a decent track record now and like XL Media seem to be enjoying something of a re-rating along with the growth. I guess this could go further, given the growth, if the market chooses to place a bit more trust in it, and in terms of momentum it is looking good as it is trading around all time highs and looks like breaking out again. It still looks good on the Compound Income Scores too.
With it being the first week of the new month and a New Year in this case I undertook the monthly re-screening of the portfolio having not done any trades on the back of the one in December given the likely thin market conditions and some marginal sales that came up at that time. There were however two natural sales this month, the first of which was the insurance broker Jardine Lloyd Thomson (JTL) which had only entered the portfolio at the end of October on the back of some upgrades. This time around the score had deteriorated to 69 as the previous upgrades seemed to have been reversed. This was now well below the 75 to 80 sale threshold that I normally use, having been just around it in December. Thus it was a natural sale on the process and therefore booked a small profit of around 6% on this as the share price had risen despite the downgrades. Personally I felt indifferent about it too as it is on close to 20x with a 2.6% yield and only had fairly modest dividend growth forecasts of 5.3% in the current year.
This was replaced with another financial in the shape of Miton Group (MGR) the small (£64m Market Cap.) fund management company, although the emerging market specialist City of London Group (CLIG) ran it a close second as it seems pretty stable, good value and emerging markets still seem relatively cheap. I did also debate this with myself as the portfolio already has a fund manager and a broking company, but hey we are in a bull market and global economies seem set fair so I let it go in as the highest scoring qualifying candidate after applying my value constraints. The other attraction with Miton, in contrast to JLT, was that it had already said they were going to beat forecasts and had upgrades accordingly. Despite this and a rise in the price post the announcement it seems to have drifted back since (on profit taking presumably), so it also seemed to be offering an attractive entry point. It also offers reasonable valuation characteristics of a PE under 12x and a yield of close to 4% based on next years (December 2018) forecasts which suggest dividend growth of 27% after this years forecast 10%. That does seem like quite a jump so maybe this years dividend could be better than expected as analysts often upgrade earnings but fail to adjust their dividend forecasts, plus they have a cash rich balance sheet too. Finally also worth noting that they only seem to pay the dividend once a year in May with an XD in March - so another reason why this may be an opportune moment to pick some up. However, given the small market cap. it may not be that liquid, but in the interests of full disclosure I have managed to buy some myself having booked a decent trading profit on some Polar Capital (POLR) that I picked up towards the end of last year after they had strong upgrades.
The second natural sale based on a decline in its score, also primarily on downgrades, was the expensive, quality, defensive(?) stock Diageo (DGE) where the score had fallen to 73 making it much more of a marginal call. The valuation is looking stretched though as the share price momentum it has displayed has left it with a PE of 22.2x, a yield of 2.55% and an earnings yield of less than 5%. So I decided to follow the process rather than my own feelings as personally I continue to hold it as part of a broader diversified income portfolio.
A couple of similar or defensive type stocks which came up as possible replacements were Stock Spirits (STCK) and AB Foods (ABF). Neither of these seemed particularly cheap either so in the end I replaced it with a much cheaper, but more cyclical company which scores highly. This was the equipment rental firm VP which trades on a sub 10x PE with a yield of 3.2% with dividend growth forecast to be 15% and a good track record on that front too. It had also seen upgrades recently on the back of an upbeat trading statement, although the shares had also drifted back a bit recently too. It does feel a bit like I'm coming late to this particular party, but then that's what following a quantitative process does, makes you take what feel like uncomfortable decisions. In this case I can probably rationalize it given the valuation and the strongish economic background generally.
Other candidates in a similar space were Ashtead (AHT), dismissed because it yielded under 2% and Somero (SOM) which was sold back in August for the portfolio, but which I picked up myself toward the end of last year. It looks pretty solid (pun intended) assuming they can deliver the promised second half recovery from poor weather related trading in H1. It didn't score as well as or look such good value as VP on a PE and yield basis, although it does offer a more attractive looking earnings yield, but personally I can see the attractions and they could also be a beneficiary of the recently proposed US tax changes.
So there ends the update on the trades & other ideas from the Compound Income Scores Portfolio monthly screening and don't forget if you would like to identify more opportunities like these yourself by using the Compound Income Scores as part of your investment research process too, then you can read more about them and gain access to them for the equivalent of just £1 a week by clicking here or on the Scores menu in the navigation menu toward the top of the site or the three bars if you are on a mobile / tablet. Here's to a Happy and Prosperous New Year.
Just a quick year end update on the UK Market timing indicators & the performance of the Compound Income Scores Portfolio (CISP). As I'm sure you are all aware it was a fairly benign year for investors despite all the political shenanigans in the UK and the various arguments about how bad or good the dreaded BREXIT is going to be, if indeed BREXIT does ever mean BREXIT. Consequently, unlike Mrs. May, UK equities proved to be quite stable despite this background and continued their bull run as project fear's worst nightmares failed to materialize. Indeed they ended the year in a strong fashion with unusually the FTSE 100 leading the way with a 5% total return. I say unusually, as for the rest of the year returns generally increased as you went down the size scale. For example for the full year FTSE returned just over 13% while the Fledgling Small Cap Index offered twice as much with total returns of over 26%, while the larger Mid & Small Cap Indices returned around 18% for the year.
Thus for Private Investors and others not tied to the indices by their jobs, it was a fruitful year for stock pickers who could dip in and out of or invest heavily into the smaller parts of the market more easily - if the returns of some of the Twitterati are anything to go by. I do however wonder if this might be the last hurrah of an elongated bull market and suspect that 2018 may be a lot tougher at some point. The market timing indicators do not however suggest that we should worry about that just yet, as given the strong end to the year, all the UK indices remain about 5% above their respective moving averages and the economic indicators that I analyse along side these are also still positive. So although there are always bearish voices out there, it seems we should continue to ignore them for now and continue to enjoy the ride.
So onto the CISP and its returns for the month of December which were +5.5%, unsurprisingly positive again given the above market background. This compared to 4% from the FTSE All Share. This meant a total return of 39.4% for the year which was 26.3% ahead of the total return from the FTSE All Share, but also the Mid Cap, Small Cap & AIM indices which it has about 75% exposure to. Since inception of this portfolio in April 2015 it is now up by 68.8% which equates to an annualised return of 25.3%, albeit that this has been achieved in a very favourable market background. Thus as I say it was a fruitful year for those able to invest heavily in the smaller & perhaps under researched parts of the market. I think this may become more of a feature in the year ahead with the MIFID directives meaning that there is likely to be less research available on smaller Companies.
Talking of research - I wouldn't worry too much about MIFID & lack of research though as from experience I know much of it was just marketing material and analysts were usually hopeless as forecasting and most of their recommendations were either Buy or Hold and hardly ever Sell as they didn't want to upset the Companies & or their clients. Having said that there are now some wonderful resources out there for Private Investors with the likes of Stockopedia and Sharepad etc. plus the availability of RNS's and other relevant news at the click of a mouse. Personally I'll be using the Compound Income Scores, together with Stockopedia Stock Ranks more in the future to manage my portfolios as I firmly believe that these models can be a great help in identifying shares that outperform, as demonstrated by various portfolios based on them for example. If you are not familiar with the Compound Income Scores you can read more about the background to them and how to get access to them if you want by clicking here.
Finally, as we approach the New Year I resolve to try and do better on my Blog next year as I know I rather lost interest in it this year as I found it was not a good use of my time, especially when people were spending such a short period of time actually reading it! So may I wish you all a Happy New Year (if you have read this far) and good luck with sticking to your resolutions and with your investing in the year ahead.
Lots of people are worrying about "the market" being expensive these days, which in the US may be true to a certain extent. In the UK however, this may not be so true as we struggle with BREXIT & a generally downbeat economic outlook post the budget. This may not be such a bad thing though as there has been research in the past showing that equities in countries with low GDP growth tended to outperform those in countries that high GDP growth rates.
Any way lets look at the evidence of the valuations attached to UK Equities. According to Stockopedia the FTSE 100 index for example has a Median trailing PE of 17.8x with a forecast PE of 15.3x, which is not far off the long term average. This is and based on forecast earnings growth of just under 10%. Looking at the yield side of the valuation on the FTSE 100 Index this shows a trailing yield of 2.9% and 3.3% forecast, which must therefore be factoring in similar or slightly higher rates of growth to the earning growth forecasts. That headline yield of around 3% does compare favourably with what you can get on Gilts and on cash in the bank. Given the forecast growth it should also protect your income from the current 3% inflation too in the short run and in the long run too I would argue.
It is worth remembering not so long ago before Central Banks really got going with manipulating interest rates, there was something called the reverse yield gap. That was the gap between equity yields and government bonds where equities yielded less (yes less that's not a typo) but these days as the old chines curse says - we live in interesting times.
Now the other interesting fact when looking at the FTSE and looking at the highest yielders is that there are 25 or a quarter of the index yielding more than 5%. Thus it should be possible to put together a diversified portfolio of say 20 FTSE stocks with an average yield of 6% if you equally weighted them. You could take your pick form the list below although the growth on offer is lower than the headline figure suggested above and the cover is quite low in a number of cases, so dividend cuts could be possible in a number of these.
Despite this though some such as Centrica (CNA) and Glaxo SmithKline (GSK) have indicated that they are prepared to run with low levels of cover and maintain their payouts. Indeed GSK is currently toward the bottom of its 5 year range (see graph at the end) and therefore may be offering an attractive entry point. Whether these yields prove to be sustainable in the long run though remains to be seen, especially if GSK should finally decide to split the business up. Meanwhile in a similar fashion on SSE, I suspect their proposed merger of their distribution business may well lead to a lower total distribution from the split business, if it does go ahead down the line. Like GSK though they are also trading toward the bottom of their 5 year range too (see graph at the end). I'll leave you to decide if you think that's a good entry point or not.
Any way just goes to show you can get quite a lot of value in the market at the moment, although I wouldn't necessarily suggest rushing out and buying all the names below as they are a bit of a mixed bag in terms of their scores on the Compound Income Scores, but as part of a diversified income portfolio some of them could do a good job for you.
As ever you should always do your own research and pay your money and take your choice or not as the case may be. Good luck with your investing and don't forget you can get this kind of information and more to help you identify good value, growing, quality yield stocks if you sign up for the Compound Income Scores. These are now available via Dropbox, Microsoft One Drive as well as Google drive / docs. Alternatively if you would prefer to receive them via e-mail in a spreadsheet of pdf form then please do get in touch & I'm sure we might be able to arrange that too.
October passed off positively for investors in the UK despite hurricane force winds and the 30th anniversary of the Black Monday Stock Market crash in 1987. The positive total return of 1.9% for the FTSE All Share on the month & slightly higher returns for the Mid and Small cap indices has left them all still 4 to 5% above their 10 month moving averages. This plus the fact that the economic indicators are still sending out positive signals, although it will interesting to see today if the US Non Farm Payrolls can bounce back from their hurricane driven decline last month. This all suggests that one should continue to ride this extended bull market despite its age and the stretched valuations in some cases, especially with the usual seasonally strong period to come too.
It was also another excellent month for the Compound income Scores Portfolio (CISP) which saw a total return of 4.8% on the month. This leaves the CISP up by 33.1% year to date and by 61.1% since inception in April 2015 compared to 9.8% & 22.5% from the FTSE All Share over the same time periods. This months performance was driven by 5 stocks which produced double digit gains with XL Media & XP Power both up over 20% on the month. At the other end of the scale there were fewer losers with just two stocks, Ferrexpro and Character Group down by double digits amounts. Somewhat surprisingly Character Group still scores well, despite the recent profits warning, as this years numbers were maintained and it was only next years numbers that were reduced, it therefore remains in the portfolio.
In light of the strong performance this year, some stocks had got rather large and meant a concentration risk in one sector, so breaking all the old adages about running winners, in addition to the regular sales based on a CIS score of less than 75, I also trimmed some of the winners like XP Power & XL Media on valuation grounds and sector concentration risk respectively. The proceeds of this re-balancing and the regular sales were then used to add five new holdings to take the total number up to 25 from 24 previously. You can see the full performance statistics and further details of the portfolio by clicking the highlighted link above.