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Update on the CISP

9/3/2018

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Here is another update on the Compound Income Scores Portfolio (CISP), this time on the monthly screening and recent announcements from companies in the portfolio.

Taking the announcements first, we had slightly underwhelming results from Headlam (HEAD) the flooring distribution company which struggled a bit for growth as one of its major customers cut back on orders and conditions in the UK were generally more difficult than the previous year as the squeeze on household budgets from falling real incomes presumably had its effect on demand for carpets etc. Having said that though the European performance was stronger and they also undertook some cost saving measures and made some add on acquisitions which helped to produce some modest 6 to 7% growth in profits and earnings despite the tougher domestic conditions. They also increased the dividend by 10%, helped by their robust balance sheet and their reasonably confident view of the future and a clear dividend policy based on a target level of cover. There was however no special dividend this year as there has been in the last few years given the outlook and the demands for capital investment that they see. Overall an OK set of numbers but the market didn't seem to like them that much and marked the shares down quite sharply on the day of the announcement. They have not recovered since and I note there have been a few small downgrades since then, so they may well continue to drift for now despite looking good value on 10x with a 5%+ dividend yield for the current year. So in summary good value and reasonable quality but lacking momentum and some concerns about the outlook, although their self help measures should help to alleviate the worst of this, so a hold for now but we will have to see how it scores come the next monthly screening to see if it remains in the portfolio. It does however, look like it has come back into a range of support between about 400 and 465p, see chart at the end.

On the same day we had better news from Bodycote (BOY) which saw strong growth, paid a special dividend and rose on the day as the market clearly liked these numbers and this helped to offset some of the weakness seen in the Headlam share price, which after all is the whole point of a portfolio. So we have something of an opposite here a quality cyclical which is benefiting from stronger demand and therefore is rated more highly (18x with a 2% yield or thereabouts) and which therefore has better price momentum which is supported too by earnings upgrades seen since the figures.

Moving onto the transactions this month these gave me something of a mental challenge as the scores challenged my preconceptions and natural inclination on some stocks as well as presenting some challenges in constructing a suitably diversified portfolio. Firstly on the sales the stocks that came as a result of the screening was Unilever (ULVR). Unilever is of course well know and a solid company which is a classic compounder and one which personally I'm happy to continue holding of a more broadly diversified income portfolio. I did decide to sell it for the CISP though to follow the process, as despite it being somewhat over sold in the short term, it still looks a bit of an expensive defensive, albeit not as expensive as it was given recent share price falls. It has however had earnings downgrades and I guess maybe investors generally are rotating towards more cyclical names given the improving economic situation globally if not in the UK.

The second sale candidate was XL Media (XLM), which even though it had only been in the portfolio for a short time, I decided to sell for a small profit despite the recent positive trading update. This was because the score had deteriorated on the recent re-rating and there had been some small downgrades. In addition to this the CISP still has exposure to this area via Taptica (TAP ) and they both seem to have come off recently as they have tapped the market for new capital and perhaps investor appetite for this area is satiated in the short term, so maybe you can have too much of a good thing.

Talking of having too much of a good thing that brings me onto the buys this month. Now back in January, which was poor timing with the benefit of hindsight, I did buy another market related stock in the shape of Miton (MGR), which gave the portfolio three positions in market sensitive stocks. Thus when Plus 500 (PLUS) came out top of the pops this month I didn't feel able to add it to the portfolio for that reason as well as being naturally biased against it myself. It does however look very cheap having just had a strong upgrades on the back of a positive trading update and it does trade on about half the rating of IG Group - so the scores are signalling that it should do well if you can stomach the risks. I note however that the directors have also placed a large slug of stock recently, although they do still retain quite substantial holdings - so even they are hedging their bets having tried to sell out previously at 400p to Playtech (PTEC). So in the end I bought some Amino Technologies (AMO) which helps TV networks with IPTV streaming and some Spectris SXS which helps companies with enhancing their productivity, see the name links for more details of their operations. Both these scored well and bring something different to the portfolio.

This now leave the portfolio looking reasonable value on around 14x with a 3.4% prospective yield based on the forecast dividend growth 15% for the current year, thereby hopefully it will deliver on the objective of delivering value, income and growth which the Compound Income Scores are designed to identify. So there you go that's it for this week and don't forget if you would like to find out more about the Scores and how you could gain access to them to help you with your portfolio monitoring and construction then check out the Scores page which has all the details.



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