Compound income Scores Portfolio Performance
April proved to be another positive month for the UK stock market and also the Compound Income Scores Portfolio (CISP) which continued it out performing streak again this month with a total return of 7.53% versus the 4.29% from the FTSE All share. This leaves the portfolio with a total return of 18.18% , 8.5% ahead of the index in the year to date.
As you can see in the table above the current / on going bull market in pretty much everything has helped the CISP to produce positive returns and be in the blue over every period shown & it has outperformed in all the periods shown too. Indeed after we saw a Pink moon last month seeing something like that in performance numbers is probably as rare as a blue moon. Since inception the CISP has now beaten the return from the FTSE All Share by over 100% and has delivered annualized returns of around 15% versus the 5% per annum from the index for 10% per annum outperformance. Not bad for a low stress once a month screened portfolio I'd say.
It is quite pleasing to see such a positive outcome / picture I'm not getting carried away with the success as pride often comes before a fall. In a bull market like this it is important to keep your feet on the ground as it is easy to get carried away and think you are an investing genius as the rising tide lifts all boats. Having said that though I'm pretty happy that the Compound Income Scores are a good way of identifying potentially interesting quality, income growth stocks which have the potential to outperform the market.
There were 3 potential candidates considered for sale based on their Scores with a couple of these having been considered and given the benefit of the doubt in the past. In the end I decided to just sell the one, Sage (SGE), that had fallen out of the top quartile of Scores, as it had recovered in price a little since I gave it the benefit of the doubt, but it has continued to see some earnings downgrades. While the valuation doesn't look that attractive with the PE of over 25x albeit with a yield of 2.8% but this is not that well covered. They have results due later this month so it remains to be seen if that was the right call or if I should have continued to hold while they struggle to grow as they transition to more of a cloud based subscription model.
To replace that there were 3 candidates that I considered from the top decile of the Scores. Firstly was Morgan Sindall (MGNS) which I could have / should have bought last month based on a similar score, but dismissed it given it is a low margin contractor and therefore has a lower than average quality score in the Scores. So I skipped buying it again this month after a strong performance last month post their positive trading update left it looking it over bought from where it might be vulnerable to some mean reversion in the short term.
The second candidate I seriously considered but passed on in the end was Kingfisher( KGF). Again perhaps I'll live to regret skipping it as they are trading well, have good momentum and continue to see upgrades as they benefit from the lock down buying as householders look to do up their homes and gardens as a result. As ever with such stocks the question is over the sustainability of that trend, although in this case they have some help measures in progress and the currently active housing market should also be good for their business. It trades on around 14x with a similar yield to that of Sage at 2.8% but again like Morgan Sindall it scores below average on quality given their relative low margins and return on capital employed. So on that basis I decided to pass on that opportunity too.
So the one I decided to add in the end was a higher quality stock (based on its operating metrics) Paypoint (PAY) which has been in the portfolio in the past but was sold based on its Score back in November 2016 at 1075p. It is struggling with a similar transition phase to Sage as they migrate their business away from serving cash customers and towards more card based, on line payments and a parcel delivery & collection network . Again this was a slightly tricky decision as it has quite poor price momentum and has seen fairly steady downgrades, although these may have just stopped in the last month. They also have results this month so it will be interesting to see how those come out, but last time they spoke on trading they implied they were pretty confident of hitting their numbers.
The valuation though was much better value than Sage with a PE of under 12x for March 2022 year end and a yield approaching 6% on the rebased dividend although again that is also not that well covered. They also offer a double digit EBIT / EV yield more than twice that of Sage. Thus the quality and value scores are both in the top decile as is the overall Score and it is looking oversold on the overbought / oversold indicator which is also included in the Scores data.
So on that basis I took the decision to add it to the portfolio as it plays into the current expensive growth into value trend that seems to be underway and both the businesses seem to be struggling with transitioning their business which both have some good quality metrics. The difference is that Paypoint is rated much lower and closer to a no growth type of rating and arguably maybe has less competition to its payment network in convenience stores than Sage has in its accounting software area.
Other things to note are that they have recently completed the sale of their Romanian business and are now UK focussed and are bedding in some recent card payment acquisitions. They may also have to pay a regulatory fine as part of an on going investigation which probably adds to the low rating / out of favour nature of the stock - so definitely a bit of a contrarian value idea too on that basis. I was also reasonably impressed by the names on the largest holders list shown below, although the one at the top, Astericos Group, who have 15% was not one I am familiar with. On checking though it seems they are absolute return investors with a value / quality approach which chimes with the Scores.
Summary & Conclusion
Another positive month for UK equities and also the Compound Income Scores portfolio which continued the outperforming streak it has been on this year and indeed over the last 1, 3, 5 years and since inception too. However, in a bull market such as this it pays not to get too carried away and indeed such a positive performance it probably as rare as a blue moon but the Scores do seem to be a good way of identifying suitable candidates for a successful quality, income growth portfolio.
As for the screening, while the Scores can direct one, you still need to implement decisions based on them which as ever may add or detract from performance but then that is always the case in any event. This month it was Sage into Paypoint rather than Kingfisher or Morgan Sindall but as ever time will tell on the success or otherwise of that.
Any way I'll leave it there as this has already taken me a while and having mentioned blue moons I'll leave you with some music this month based on that. It's a tricky decision so I'll put up three versions and leave you to decide which one you prefer. Personally, I prefer the one by the Marcels that featured in one of my favourite horror films - An American Werewolf in London.
March was another positive month for equity markets generally including the UK. As a result the FTSE All Share Index, which I use as a benchmark for the Compound Income Scores Portfolio (CISP), produced a total return of +4%. By comparison the CISP had another good month and delivered a third straight month of out performance in Q1 with a total return of +4.9%. This leaves it with a total return for the year to date of +9.9% which is 4.7% ahead of the +5.2% return from the FTSE All Share.
Over the 12 months since the Corona Virus hit the CISP has returned +48.3% versus +26.7% for the Index as the market recovered from its lows. So it is pleasing to be able to report that the Scores and the associated portfolio seem to have weathered the Covid storm and subsequent recovery successfully. This continues the decent run it has had over the last 5 years where it has practically doubled as it has managed to compound at around 14 to 15% per annum over the nearly six years since inception which compares to 4.4% per annum from the FTSE All Share over the same time frame, so about 10% per annum out performance.
This suggests that they are not a bad way for identifying attractive quality stocks with the potential to grow their dividends and your income and capital over time. You can see full details of the performance history in the Table of Returns drop down menu on the Portfolio tab in the site menu or just click the Table of returns link above if that is of interest to you. While if you would like to find out more about the Scores and how you can get access to them you can click the highlighted Scores link above or on the main menu and view a brief presentation about them here too if that is of interest.
This month there were five potential sale candidates based on where their Scores were. Of these two were repeat offenders with Scores well below my normal sale threshold (75% or top quartile CI Score) and the other three were more marginal being closer to the cut off line. So on balance and in the interests of avoiding costly / potentially unnecessary turnover I gave those the benefit of the doubt this month which subscribers will be able to read about in the Journal tab of their Scores sheets.
As for the two that were sold, the first was Unilever (ULVR) which I held last month as it appeared to be oversold. That proved to be a reasonable call as it outperformed the index by about 2% this month. While I pointed out last month that personally I wouldn’t put you off holding it for it’s longer term compounding potential, this portfolio’s process is to follow the Scores and try to maintain exposure to stocks scoring in the top quartile in the main – so on that basis I let it be sold this month after the bounce, as the the score remained well below that threshold at the month end. At least this seems to be in tune with the market where the song remains same. That is stocks over bonds, cyclicals over defensive stocks, value over growth and Small-caps over large – for now as the reflation / inflation trade continues to play out and resonate with investors.
The other sale was Qinetiq (QQ.) which has done quite well for the portfolio and has therefore seen its score come down as it has re-rated to leave it looking rather average overall. The portfolio also held another stock operating in similar markets and while they are likely to be reasonably steady growers, it doesn’t seem like a strong enough theme that I want to double up on the exposure, so out it goes. Results are due in a month or so and their pre-close update was reasonable so they may be worth looking out for if you decide to hold on to it yourself.
Against those Computacenter (CCC) was added as their trading has continued to be positive leading to numerous upgrades as they continue to benefit from the trend for businesses to increase spending on IT hardware and services, which was in place prior to the Virus and which was accelerated by it and which they seem to think should continue this year too. Thus it would seem that their improved performance should be sustained rather than sagging back like some other Covid beneficiaries. It is also one I have held personally for some time which made me more comfortable with adding it up here, hopefully that's not confirmation bias!
The other purchase to replace Unilever was in the General Insurance Sector, so a suitably boring replacement, although this one is also well managed but does offer a much greater yield and therefore a higher value score than Unilever, so again playing into one of the current themes that I mentioned earlier. Again subscribers will be able to see full details of that one and all the other trades in their sheets.
Summary & Conclusion
Another positive month to round off a positive quarter and 12 months for the market and the CISP. Who would have thought that would have been possible 12 months ago when Covid first struck? Nevertheless it is pleasing that the Scores seem to have helped to navigate these strange times successfully.
Meanwhile the current theme playing out in the market is to back the on going recovery / reflation and therefore potential inflation and higher bond yields / interest rates down the track. This has meant rotation from previous winners / beneficiaries of Covid / low rates and into losers from Covid plus value and recovery plays funded by sales of more expensive growth stocks which may suffer in valuation terms as growth becomes more plentiful and bond yields rise.
It remains to be seen how long this trend lasts, but for now both Central Banks and governments seem intent on pumping money out so it may well go on for longer than one might think and for now at least the trend is your friend as they say. The market does however seem to be getting a bit frothy with all these SPAC's in the US and quite a few IPO's being delivered to markets even if they were a bit cool on the Deliveroo offering in the UK. I note that the UK regulators are also trying to loosen the rules to allow more SPAC type listing over here so we don't miss out. I guess there is also a chance that the US Fed at some point may start with yield curve control to keep yields down and keep the recovery going, which would be bullish if it happens. Trying to call the top of the market is in any event a bit of a mugs game and as Keynes was quoted as saying: " Markets can remain irrational longer that you can stay solvent."
Having said that though the UK market does still appear to offer some value and still trades some way below previous highs unlike the US where ratings are higher and indices there are hitting new highs. You would also think that the UK market's larger exposure to Miners and banks etc. should also help it with the current rotation into more value laggards that is going on, but we'd still no doubt suffer if there was a US led sell off.
So for now for me the song remains the same and I'll carry on Compounding with attractive looking stocks identified by the Scores. I'll leave you to enjoy your Easter eggs or whatever outdoor excitement you might have planned for this Easter assuming it is not cancelled for you. Otherwise I hope that markets continue to be kind to you - rock on, ciao for now.
I thought I'd share a quick back of the envelope calculation I've done this morning on Jarvis Securities (JIM) which subscribers will know was bought for the Compound Income Scores Portfolio last April at around 94p as it Scored well and I saw it as benefiting from a pick up in trading by private investors that we were seeing at the time on the back of the market volatility.
The news today was the announcement by Equiniti of the disposal of their Share Dealing arm to Interactive Investors for £48.5m. Based on that Corporate sale price and the stated EBITDA of £3.3m for 2020 that equates to a 14.7x EV/EBITDA multiple and a 22.75% EBITDA margin on the stated turnover of £14.5m.
Looking at Jarvis they are forecast to have similar turnover of around £13-£14m for 2020 . I suspect these estimates may be on the low side as there don't seem to have been much in the way of upgrades since their last positive update. We won't have long to wait to find out though as I believe their final results for 2020 are due to be reported in the next week or so.
Digging further into Jarvis's numbers they are on an Enterprise value (EV) of about £97m or roughly twice what Equiniti has just been sold for in a corporate transaction which can sometimes be a good guide to valuation for similar businesses, which Jarvis is in this case. It does however earn EBITDA margins of roughly twice those indicated as being earned by Equiniti which I think should justify the EV being twice that achieved for the Equiniti business.
So the bottom line is that this leaves Jarvis looking perhaps fairly / fully valued on this basis but I'll await the results with interest in the near future to see if they can be current forecasts and hear what they might have to say about current trading and the sustainability or otherwise of the boom condition they have enjoyed in the last 12 months. The conventional wisdom seems to be that the trading boom will tail off or normalize in the year ahead.
Thus Jarvis may not be the bargain it was just over a year ago, but still looks reasonable value on around 17-18x with a yield of nearly 5% as they have raised the dividend by around 70% this year on the back of their successful trading. While on the chart at the top it appears that they are towards the top of their recent range and trend channel so it will also be interesting to see if this provides resistance or if they manage to break out of this range on the back of the results - one to watch out for this month for sure.
Update as at 11/3/21 post results announcement.
These were largely as forecasts suggested although turnover & eps were modestly ahead at £13.3m v £13.2m and 12.7p v 12.4p respectively, while the dividend had been announced previously. These figures did represent 43% growth or thereabouts on the previous year reflecting the boom conditions for share trading firms last year.
Encouragingly in the brief Chairman's statement he said the following: "I expect our trade volumes to continue at higher levels than we experienced in 2020 and the years leading up to that. I also see no signs of organic growth slowing as we move into 2021 with a healthy pipeline of potential new outsourcing contracts. Client numbers and cash under administration continue to increase, we are seeing profitable growth in international settlement and our relationship with Primary Bid."
This suggests to me that the 8% growth in earnings to 13.7p that are currently forecast should be achievable if growth does settle back and this would be more in line with the growth seen in 2019. While the dividend is forecast to rise by a similar amount to 12p. At the current price this morning of around 250p this leaves it on around 18x with a 4.8% yield. The yield is around the middle of the range of yields (roughly 3.5% to 6%) it has traded on in the past while the PE rating has peaked out at around 20x in the past. So that leaves it looking fairly / fully valued I'd say unless Mr. Market wants to move it on towards its peak rating of the past or even re-rate it beyond that towards the ratings it ascribes to the likes of AJ Bell and Hargreaves Lansdowne, but I wouldn't count on that.
I've just listened to an interesting podcast on an Investment Trust that I mentioned briefly in passing back in October when the UK was looking unloved and particularly cheap on a historic basis. Fortunately I also bought a few for myself at the end of September at a devilishly good price of 666p and it has done OK since then and the discount has narrowed too which is an added bonus.
The trust concerned is Temple Bar which had a pretty poor run under its previous manager who had to retire hurt, but the new managers have a good reputation as value managers and have some interesting insights on that and the current growth / quality versus value debate, including some interesting comments on M&S, Royal Mail and Microsoft along the way.
You can find the Podcast here and I hope you might find it interesting if you are looking for a way to play a resurgence in Value.
February proved to be a positive month for the UK market as investors and residents of the UK generally gained some hope and expectation that the successful and rapid roll out of the vaccines might bring forward the day when our lives and the economy might get back to some sort of normality. This is shown in the table on the site which can be accessed here as is the out performance by the CI Portfolio for the second month running. This leaves it 3.6% ahead of the FTSE All Share in the year to date and builds on the excellent relative performance shown in the last three and five years and since inception back in April 2015, as shown in the Chart above, which are more meaningful periods of time to look at rather than one month or year to date figures. This also shows that the portfolio has now made it back to an all time high value.
The performance so far this year comes as a pleasant surprise as market moves have in the main been a bit discombobulating as many poor and struggling Companies have soared in price while some quality names have been under pressure. This however is explained in part by the rush of liquidity provided by central banks finding its way into markets, especially it seems in the US, with the likes of Gamestop soaring thanks to Reddit forums and Robin Hood traders buying up call options and creating a short squeeze. More broadly it can be rationalised as reflecting hopes for a return to normality being discounted as the vaccine roll out seems to be going well. Thus plays on reflation, re-opening and recovery from Covid effects are being bought as the natural winners of that process and the lock down winners and more defensive / quality / growth plays being sold off in return as part of this rotation.
This month there were four potential sale candidates that came up based on where their Scores were aside from a couple that I gave the benefit of the doubt to. One of these was Moneysupermarket (MONY) which had results and saw downgrades as a result which led to a decline in the Score as the shares rallied against this background. The outlook statement was quite cautious, but I guess maybe the market is giving them the benefit of the doubt and perhaps perceives them as a potential beneficiary of re-opening and a consequent pick up in Money & Travel comparisons which they flagged. As ever time will tell on this but in the end I decided to go with the Scores and sell it along with another stock which I had waited for results this month which also seemed underwhelming. Since that was a stock I didn't have a strong feel for and there was no improvement in the Score this month, I let that one go through too.
Two more sale candidates that I found more tricky were decent steady businesses which one would might want to hold for their longer term compounding attributes. One of these was Watkins Jones (WJG), which as it is a property developer, some may not view as a quality operation. It does however operate with a capital light model in the main in some growth areas like student accommodation and build to rent and has a decent pipeline of work. As a result it has some attractive looking operating characteristics and should be fairly steady. Again I had waited for results and a subsequent management presentation. These were well received and the price did well despite some subsequent downgrades. While the webinar I watched did highlight a bit of a potential dip in their development pipeline after they had put things on hold post the first lock down. Again I think the market might be prepared to look through this so I wouldn't put you off holding it for the long term. Despite that, given the price move and the effects of the downgrades on the Score I decided to let that one go as well.
The second quality long term compounder that came up as a sell was Unilever (ULVR) after their results were not that well received and they also saw some downgrades which leaves them with a fairly pedestrian growth outlook in the short term. It was also no doubt sold off aggressively as part of the reflation / re-opening trades of selling the winners and buying the low quality losers / recovery plays discussed earlier. This had however left the shares looking very over sold in the short term (as shown by the OB/OS indicator in the Scores sheet) and I suspect might leave the possibility of some mean reversion in the short term if the recent market weakness should be extended or resume. Beyond that I guess it will remain fairly unloved in the short term so I'll review it again next month although personally I'd be more inclined to hold it for the long term as a classic quality compounder.
Against those sales three purchases were made for the portfolio this month. One of these was a specialist operational property REIT as a straight swap for the property type exposure forgone by selling Watkins Jones. A second one was a well run family lending business which operates in some specialist niches which should be a beneficiary of the re-opening and thus plays into that trend against the similar recovery prospects that Moneysupermarket may offer. It did however have a better Score as it offered better value and momentum and it is a business that I know well and hold myself, so I was happy to add that one.
Finally somewhat more controversially perhaps Games Workshop (GAW) made a belated return to the portfolio having been sold early (and badly as it turned out) in the pandemic when the score had deteriorated on downgrades and I was worried about operational gearing to the downside as they had shut all their operations at that time. Now with the shares at more than twice the price when it was sold it feels very uncomfortable to be buying it back up here, especially as it could be seen as a beneficiary of lock down and therefore vulnerable to a reversal of sentiment and fortunes thereafter perhaps? Nevertheless I followed the Scores as it now looks more reasonable value having come back in price from peaks above £100 despite some chunky upgrades. I also believe there should be another trading update this month in which they may still produce some forecast beating results, so it will be interesting to see if the market is more enthusiastic about those this time around if that should come to pass or if they end up disappointing this time around.
Subscribers can see details of these trades and some journal comments too plus the rest of the portfolio. If you are not familiar with the Scores and would like to know more about them and how to gain access, I put up a presentation on the site recently to try and explain the background to them in as clear a way as possible & how you can access them - you can find that here if that is of any interest.
Summary & Conclusion
So a better month for markets and another month of out performance for the Compound Income portfolio despite a dash for trash and recovery plays and a move away from quality / growth and lock down winners. Despite some of the moves (like Gamestop in the US) seeming pretty confusing and inexplicable, in the main the broader moves seem more understandable in the context of hopes for a recovery on the back of central bank & government money supporting the economy and the vaccine roll out and a subsequent re-opening unleashing pent up demand etc. - hopefully!
This also meant something of a switch from growth to value names depending on how you define those, although it remains to be seen if that has run it course now or if it has further to run. Valuations in the US continue to lead to some concerns about these bubble like moves in some stocks and things like Bit coin and especially at a time when inflation fears and bond yields are rising which may impact on valuations if these rates go too far up. For now these moves don't seem to be getting out of hand just yet. So I'll sign off for now but leave you with a couple of tunes that seem to my mind to sum up recent market activity and those that might be getting involved at this stage.