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Just a brief mid month update again this month as we have had a bit of news flow from a couple of Gold mining related shares which are in the portfolio. Firstly we had Caledonia Mining (CMCL) with their Q3 production update. This saw record production levels of just under 19,000 ounces of gold in the quarter which was 25% up on the same quarter last year. They also firmed up their full year production guidance to the top of the range at 65 – 67,000 ounces as they approach their 20,000 ounces a quarter target. This meant they were confident in reiterating their production target of 80,000 ounces for 2022 too. This comes after their major investment in the central shaft in their main mining asset but has also allowed them to pay increasing dividends and start exploring further expansion opportunities as announced recently. This has been a slightly disappointing / frustrating holding, although the dividend increases have been good. Nevertheless it may repay some patience as long as the gold price can maintain the levels it has traded at this year. On that basis it trades very cheaply on 4x PE with a 5% yield. Now I’m sure gold mining stocks are not to every ones taste or risk appetite or for widows and orphans and I have surprised myself by holding some of them these past couple of years. Nevertheless the bull case remains the cheap valuations and the geared play they offer on the gold price if that should take off and break out again above say $1850-1900 in the current inflationary environment. The downside risk would come if gold should breakdown instead through support around $1700 which could then usher in quite a bit of weakness I suspect. The second update came as expected from one of this months new holdings Capital Limited (CAPD) the mining services company which was the value stock even cheaper than the housebuilder which was bought for the portfolio this month. Their Q3 update read well with their revenue guidance for the full year increased by around 8% and the interim dividend was raised by 33% from 0.9c to 1.2c. They were also positive on the outlook for sustained strong demand from their largely African Gold mining customer base, given the the gold price (as discussed above) remains at close to decade long highs. The shares have responded positively to this update this morning and look like they are trying to breakout of the top of their recent trading range between 73p and 84p. If they can manage to do this and sustain it then (see chart below) this should open up the possibility of a run up towards the 95p to 100p range where some resistance from old historic highs back in 2011 might kick in perhaps. Nevertheless prior to any estimate changes on the back of today’s increased guidance the shares continue to look very cheap on 7x PE with a modest but growing yield of around 2% based on the current full year dividend forecast of 2.4c. Meanwhile if that's not enough for you here are some Golden oldies at the end of this piece for you to enjoy or not as the case may be. 
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  Click to enlarge Compound Income Scores Portfolio Performance So the brief spell of Summer like weather gave way to a more soggy end to the month and so it proved in the Stock market too. The FTSE All share after a strong start in line with the weather sold off mid month before recovering somewhat toward the end and returned -1% for the month as a result. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. The authorities there seem to have that under control though, but on going inflation worries and supply constraints in certain areas also weighed on sentiment more generally. Meanwhile the long run of outperformance by the Compound Income Scores Portfolio since last November finally came to an end in a very disappointing fashion as it returned – 5.9% on the month. The Portfolio has outperformed by over 10% in the year to date with a total return of 24.4% and it has compounded at just over 15% per annum since inception just over 6 years ago. It is therefore perhaps not too surprising, given the strong run it had prior to this, that some underperformance at some point was probably inevitable. In addition the FTSE 100 held up better than the Mid and Small cap parts of the market where the portfolio has been and remains overweight. That’s just the nature of this investing game and you have to take the rough with the smooth as I always say and not get carried away when things are going well and equally not get panicky or depressed when you have a bad run. As long as you have confidence in your process and are prepared to accept some volatility in your capital in the short term for potential gains in the longer term, which is after all what investing is all about. There were quite a few contributors to the poor performance this month with 6 stocks underperforming by more than 10% on either fundamental news flow or profit taking in the main. The two worst examples were CMC Markets (CMCX) which fell by around 30% on the back of a poor trading update / profits warning as markets became calmer over the summer and they saw some relapse from the extra trading they had seen in the previous quarters and last year when the pandemic was in full swing. The other big faller to a similar extent was Luceco (LUCE) which succumbed to a heavy bout of profit taking as their excellent results didn’t lead to any further upgrading of forecasts. This profit taking was probably also prompted by their honesty in admitting that they had seen an extra boost from Covid trading and highlighting cost pressures, although they have been able to deal with those thus far. Their Score fell back to the lower end of the top quartile as they did see a few small downgrades on the month but it stays in the portfolio on that basis and it now also looks better value on a mid teens PE with a well covered 2.5% or so yield. On the positive side of things there were not too many, but S & U (SUS) put in a good performance after their trading update which led to upgrades which I covered in the mid month update post. While City Of London Investment Group (CLIG) responded well to their full year results reported in mid month which led to some upgrades. While the 10% increase in the dividend for the year was also presumably well received given the dividend background surrounding the pandemic. Monthly Screening British American Tobacco (BATS), EMIS, Strix Group (KETL) & Paypoint (PAY) all featured as holdings with scores in the second quartile this month & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt as their scores were not that far into the second quartile. BATS remains cheap as they continue to manage the decline of tobacco products and invest in new vaping products. While EMIS continues to trade well as reported in the results recently and they are confident of hitting their full year targets. So I’ll continue to run that one as a quality compounder for now although the rating has got a bit richer. I also decided to keep Paypoint again as they enter their close period ahead of the H1 results in November. A further director purchase by the General Council and Head of Compliance just before that helped to sway my decision, while the coming energy price hikes should help to boost their declining bills paying business. I did however decide to let Strix Group (KETL) go as a bit like Luceco, even though they did report good results they also struck a note of caution on current market conditions and saw a few small downgrades. In addition the rating was not that cheap on still over 21x PE and with a Score of less than 50. Nevertheless it does appear to be a good quality business with a well protected dominant market position, so I wouldn’t put you off holding it for the long term. That’s just the way the Scores process works and it also felt like the time to rotate into some better value given the inflation / interest rate outlook. With the proceeds from this sale and some cash which had accumulated from dividends over the summer I was able to add a couple of better value situations. One was a housebuilder, despite my own personal reservations about the timing of this, but as several had appeared towards the top of the list I decided to follow the Scores even if they may be a bit rear view mirror in this case. Housebuilders will probably never be highly rated given their cyclicity, but they currently look fairly cheap within their usual 7 to 10x PE rating ranges. This probably reflects concerns about over heating post the ending of the stamp duty holiday, affordability, plus labour costs and materials pricing and availability. Against that interest rates remaining low (for now) and the on going supply demand dynamics continue to offer support. So again I’d leave you to decide if this is a sector you want to participate in. There was also a good Podcast from Money Week which featured an interview with Gary Cannon of Phoenix Asset Management, who had some interesting comments on the builders and remains a bull of the sector. The other value stock I added, was even cheaper than the housebuilders and subscribers will have seen the details of this in their Scores sheet. In addition to this I also decided to sell CMC Markets (CMCX) on the back of their profits warning (even though it did not score outside the top quartile) and switch into the similar IG Group (IGG) where I prefer the business model and it scores more highly than CMC having had a positive update last month in contrast to CMC. Summary & Conclusion After a disappointing end to the summer in the UK we also had a disappointing start to the Autumn in markets and also for the Compound Income Scores Portfolio. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. On going inflation worries and supply constraints in certain areas also weighed on sentiment more generally. There seem to be concerns that this will retard the on going economic recovery and some of these pressure like supply shortages, commodity price increases and shortages of labour seem likely to put pressure on corporate margins which may well cause the market to continue to struggle in the short term until this picture becomes clearer. Some suggest that this could presage another leg of outperformance for value stocks in the short term if rates rise (or bonds sell off) on the back of higher inflation as hinted at by the US Federal Reserve. With that in mind I used this months Screening to add a couple of more value orientated shares to the portfolio after taking profits in the more quality growth situation, Strix Group – which had enjoyed a re-rating during its time in the portfolio. While in the UK more widely, the market, for once, seems better placed with its bigger exposure to energy and commodity sectors. While the UK economy seems to be suffering badly from the after effects of the Pandemic, the resultant supply shortages and the squeeze on energy prices. As a result stagflation fears have stirred given the hit to incomes and coming benefit cuts and tax rises. As a result some fear we might face a Winter of discontent much like the 1970’s which saw three day weeks and power cuts which I remember from my childhood. Despite this politicians have insisted there are no fuel shortages, that Christmas will be fine and that we won’t see power cuts even though some industry representatives claim otherwise. Given that and the inflation outlook, bonds remain a no go area for me and so personally I continue to rely on a mix of equities and other real & alternative assets to try and maintain and grow my capital and income in real terms. I would highly recommend reading the recent final results from Ruffer Investment Company in this regard and particularly the Investment Managers comments starting on page 19. After a recent visit to Thatcher’s farm to see their Cider production facilities, it put me in mind of Mrs Thatcher’s comment from the last time we had stagflation & as Maggie May have said "There is no alternative" in terms of sticking with equities. They are simply the best way for me, although I saw that Tina Turner has decided to cash in her royalties which may be the best way for her at her at the age of 81, although I do have a few Hipgnosis Songs Fund (SONG) as part of my alternative assets exposure. Any way that’s all for now as I must get off down to the shops and get some candles, a frozen turkey before they sell out or go up in price. I’ll leave you with some music appropriate to the above comments.  Compound Income Scores Portfolio Performance Further to the Mid Month Update - some masterly inactivity proved to be profitable again in August as the Compound Income Scores Portfolio outperformed again. This month it was by a more modest 0.72% versus the FTSE All Share Index which I use as a benchmark to measure the the performance against. This continues a run of monthly out performance since last November - so nine months in a row. So it is good to see the Portfolio delivering a scorching performance & plenty of blue even if summer in the UK has rather disappointing visage and tended to Fade to Grey. Of the top contributors two of the three that were mentioned in the last post on here namely: Strix Group (KETL) and Paypoint (PAY). While Luceco (LUCE) the LED lighting and electrical accessories provider continued its strong run and re-rating on the back of their strong operating performance and financial targets. On the downside the three largest detractors included a couple of mining stocks Sylvania Platinum (SLP) and Rio Tinto (RIO) on the back of mixed results in the case of the former and weaker metals prices which hit sentiment & triggered profit taking on both of them. While Jarvis Securities (JIM) also suffered some price weakness after going XD two dividends totalling 12p in late July & during August & probably saw some profit taking after a very strong share price response to their recent trading update. In terms of activity, looking back it is pleasing to note that the reduction to SLP at 131p on risk control grounds given the size the position had got to back in June worked well given it is now trading at just under 100p. This is especially so when one of the trades at that time included the initial purchase of LUCE at 344p vs the current 480p. Looking at the longer term, aside from the recent monthly run of out performance it is good to see a sea of blue in the returns bar chart shown towards the top of the page, but that's a bull market for you as a rising tide generally lifts all boats. Nevertheless it is encouraging as an indicator of the power of the Scores to help with selecting decent income growth stocks. As evidenced by the fact that assuming the portfolio doesn't have a massive under performance in the next four months, then it should have outperformed the FTSE All Share for five years running too. While since inception in April 2015 it has compounded at 16.4% per annum versus the 5.5% from the Index over the same time period. Finally on this I came across this graph which I think is quite useful in putting the above performance in context and probably helps to explain why the portfolio struggled from March to November last year during the inflection point / recovery phase, but has done better as we have moved into the expansion phase & they seem to have done OK in the other phases too.  Click to enalrge Monthly Screening This month I continued to await results on three stocks with second quintile scores - EMIS (mentioned last month), Renew Holdings (RNWH ) & Sureserve (SUR) whose scores this month had also drifted down on no news but have results shortly. I also exercised some judgement on one stock Paypoint (PAY) which again featured in the Scoring zone where I consider its position in the portfolio. Having given it the benefit of the doubt last month this had paid off as detailed in the Mid Month Update post thanks to the OFGEM situation and the subsequent multiple director purchases which led to a strong share price performance last month. Thus it was a closer call as they have re-rated more towards the sort of initial rating and levels that I outline when I presented it in the Stockslam back in May this year. If that event looks like something you'd be interested in there is another one due next week which you can sign up for here but I am not be presenting in this one. Thus it was a closer call as to whether to retain it this month after such a strong run had left the shares which had gone XD another 8.3p dividend too, looking overbought and vulnerable to some mean reversion potentially in the month ahead. On balance though I decided to keep given the directors buying & the proximity to the end of their latest interim period at the end of September. They do not normally put out an update on that but I'm gambling that given the directors buying, re-opening benefits and the pick up in card based transactions & imminent energy price hikes might force them to put out a positive trading update if they are trading more than 10% ahead of expectations. Technically they also seemed to have broken out of a tight range which could also target higher levels around 750p - 780p and previous rally highs in that range. So we will have to wait and see if that was some more masterly inactivity or if I have pushed my luck too far and get whacked by mean reversion & no positive update being forthcoming.  I did however break my run of masterly inactivity when I decided to lock in profits on the Ultra Electronics (ULE) bid situation which is not due to complete until Q1 2022. Now while there is still a fairly attractive return of around 9% or so available assuming the bid goes through at £35, there is also a small risk that it could be referred on national interest grounds etc. In that case I'd think the price could sink back towards £20 so the risk reward didn't look that favourable even if the risk is low. So on balance I took profits and reinvested in a similar space as Qinetiq (QQ.) made a return to the portfolio ahead of their September period end. Summary & Conclusion. So another positive month, helped by last months inactivity and some trades from earlier in the year & despite the summer doldrums in markets & on going concerns about inflation and the likely actions of the US Federal Reserve. This continues the run since last November and the vaccine led expansion phase in the economy which has suited the Scores more than the recovery phase from the initial inflection point from all the Central bank & government support. As a result the Portfolio is, barring a disaster in the next few months closing in on five straight years of out performance, which in the investing world is quite rare I believe. Any way if you'd like to access the Scores to help you with your stock selection then don't forget you can sign up via in the menu section titled Scores. If that's of any interest you'll be able to subscribe for a years access for the equivalent of just £1 a week - about the price of a single cup of coffee in McDonald's these days! There is also a short presentation about them in the sub menu of the Scores section there too, as well as the new feature for Subscribers to view the Scores in google sheets directly from the site if they wish. If any Dropbox subscribers would like to be able to access the Scores directly from the site like this then please get in touch via e-mail or the contact box on the site and I'll sort that for you. Any way that's all for now thanks for reading if you got this far and here's to hoping the promised Indian summer this weekend last more than a few days here in the UK. In the last monthly update I highlighted four positions that had flagged up as potential sales based on their Scores. Nevertheless I decided to hold onto them all based on awaiting forthcoming news flow on three of them and on the basis that nothing had really changed on the other.
We have had news flow on two of those so here is a brief update on that: S & U (SUS) had a trading update rather than results that I had expected, although those will be published on 28th September. The update was positive in the main with all the right metrics like profitability, collections and debt quality all moving in the right direction. Within that Advantage, the main car finance business, was likely to see profits ahead of budget and was seen as being on track to return to previous ROCE levels, despite a bit of a shortage of second had cars. While at Aspen the bridging loan business showed strong growth despite the limited supply of second hand properties too. On the back of this there have been 16% or so upgrades to this years forecasts which has catapulted the Score back into the top decile again. Paypoint (PAY) - where I hadn't expected any news put out an update on their outstanding OFGEM investigation. In this it seems that OFGEM are minded to accept Paypoint's suggested remedies and payment of compensation that they have already largely provided for. The price seems to have responded positively to this news rising by about 7% since then and a couple of directors have since purchased some shares. So again so profitable masterly inactivity there although slightly more fortuitous is this case. On Strix Group (KETL) - while there has been no news as such the shares continued to steam ahead another 5% or so on the back of a bullish initiation by Liberum in which they suggested substantial upside on a further re-rating on the increasing growth prospects here apparently. Finally, even dull old EMIS has managed to move up about 4% while we await their results in September. So here's to the success of masterly inactivity and long may it continue!   Compound Income Scores Portfolio Performance After nothing much in way of returns last month, July proved to be more productive in terms of investment returns for the Compound Income Scores Portfolio as shown in the table & graph above. This extends the out performing streak to eight months in a row since the end of November last year and leaves the portfolio up by a stonking 27.74% YTD compared to the still good 11.68% total return from the FTSE All Share which I use as a benchmark. The highlights behind this stonking performance in July were as follows: Ultra Electronics (ULE) - soared over 40% on the back of a possible VC bid. Jarvis Securities (JIM) - up around 30% after positive trading update led to upgrades. EMIS (EMIS) - up over 10% on a positive H1 update suggesting they were slightly ahead. On the downside the main laggards were as follows: Sylvania Platinum (SLP) - suffered profit taking as PGM fell & on mixed looking results. Wincanton (WIN) - No news, so maybe profit taking after strong run & stories about driver shortages and their wages being bid up perhaps? City Of London Group (CLIG) - fell H1 update saw outflows & volatility in Emerging markets probably didn't help either. On the income / dividend front it was notable that Rio Tinto (RIO) which is held in the portfolio announced a stonking dividend increase plus special which means they are yielding over 6% on these interim payments alone. It is interesting to note that even before those have gone XD / been paid the income in the year to date from the Compound Income Portfolio is already 18% higher than it received in the whole of last year. Looking at the latest Link Asset Services Dividend Monitor this seems like a stronger bounce back than the overall market as they suggest: On an underlying basis in Q2 2021 (ie excluding special dividends), pay outs rose 43.8% to £24.3bn, recovering to one sixth below the pre-pandemic Q2 2019. While in their outlook they suggest the following: • Stronger-than-expected Q2 and the removal of constraints on banking dividends mean an upgrade for 2021, more than offsetting negative second-half timing factors • Net effect is to upgrade 2021 headline forecast by £2.5bn to £79.5bn, up 24.4% year-on-year • Underlying dividends (ie excluding special dividends), upgraded by 3.9 percentage points or £2.7bn to £71.2bn, an increase of 13.4% year-on-year Monthly Screening After giving three stocks the benefit of the doubt last month as they were quite close to the cut off line it was good to see them all go onto outperform in July, although maybe I could have picked even bigger winners? Anyway one of them has seen its Score recover into the top quartile again while the other two Paypoint (PAY) and Strix Group (KETL, that ticker makes me smile) remain up for consideration as potential sales as their Scores of 60 & 67 respectively are outside the top quartile of the Scores and therefore in the zone where I consider if I should sell them if the fundamentals justify it or if they still have investment merit or the Score has just drifted due to lack of news. In the case of Paypoint, where the Score had slipped a bit further from last month, it is clearly trying my patience. The Q1 update that I waited for last month looked fine to me and showed some growth at the net revenue level as I had expected. They reported £28.1m v £23.2m in Q1 last year for growth of over 20% aided by last years acquisitions. This compares with £97.1m of net revenue at the full year stage. Thus with more to come from the acquisitions and re-opening benefits too and higher energy prices on the billing side it looks like they are well placed to show decent growth for the full year and they did see some modest upgrades post these figures. That picture is obscured by the financial websites etc showing the historic figures with the gross revenues and the forecasts, which I assume are based on the net numbers, making it look like they will see a fall in sales - when the opposite is true on the underlying net basis. So the investment case and indeed the price and rating have not changed much in the last few months since it was purchased for the portfolio. I therefore decided to give it the benefit of the doubt again and show some patience with this one while enjoying the 6% yield, although it is obviously not the most exciting situation in the short term. The other seemingly dull stock Strix Group, which mostly makes switches for kettles and has good quality metrics like Paypoint, has shown the potential benefits of steady growth and a re-rating if you have a little patience. This one was purchased for the portfolio in February 2020 at 181p when it was on around 14x with a 4% yield as it seemed likely that it would probably cope ok with the brewing Covid crisis at the time. Fast forward to today and it has reached 334p and trades on nearly 21x with a 2.5% yield. They had a positive update which I had held on for last month, but strangely some small downgrades but the price steamed away to a new high break out. They did promise more updates on the growth outlook with the results in September. So on that basis I decided to hang on again and run this winner and hope that it doesn't boil over, although I was also tempted to top slice and add another, albeit lower quality holding to the portfolio but I resisted the temptation on this occasion. The other two potential sale candidates also had Scores in the 60's with EMIS being very similar to Strix Group in so far as they had a positive update accompanied by some small downgrades and it is now trading above 20x too so not that cheap. I gave this the benefit of the doubt as a classic compounder & potential beneficiary of more NHS digitization etc. ahead of the actual results in September. Finally S&U (SUS) had seen its Score drift on little news so I decided to await the results from them in August to get a better picture. Summary & Conclusion. So a stonking July for the Compound Income Portfolio after a nothing month in June and some masterly inactivity. Dividends continue to recover well and probably more quickly than expected and the Portfolio is already ahead of last year on that front and its only July. While on the trading front I decided to be patient / lazy again as the silly season holiday month of August approaches and hope that some more masterly inactivity might add some more value again this month. Any way that's it for now thanks for reading if you got this far and have a great August and a good staycation or an overseas holiday if you are lucky enough to be able to get away with all the Covid traffic light lottery nonsense.   |
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