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INVESTMENT INSIGHTS ARCHIVE
Originally posted in February 2015
INVESTMENT IDEA #3 Surprise Miss – Stock Selection Re-cap
Regular readers may well have turned the page expecting to see HindeSight Dividend letter’s third monthly stock recommendation.
My apologies if I disappointed you, but there are only two additions to the portfolio this month.
The methodology for stock selection is based on the Hinde Dividend Value Matrix®. The main drivers of which are:
• Price performance, absolute and relative over preceding multiple time periods
• Level of potential dividends or return of capital expected
• Fundamental analysis, primarily based on a systematic screening process (see Appendices)
Each stock in the FTSE 350 will have a dynamic score subject to live changes. The higher the score, the better potential we believe there is for this stock to not only perform in absolute terms, but also relative to the index. While we do not recommend the % allocation each investor should make to a UK equity portfolio, we believe that any equity portfolio that targets an index outperformance is invaluable in this era of low interest rates and low volatility.
As you can see from the recommendations already made, there appears to be a threshold of around HDVM score of 54 to make the grade. Standard Life would be closer to 54 adjusted for the expected 73p of pre-announced, but no date has been yet specified for the return of capital. This is not written in stone and will be subject to the market cycles, but currently higher than 54 would mean that the 3 factors mentioned above are sufficient enough for the stock to be well within the top quartile of the FTSE 350.
Stocks with long histories and large market capitalisations have different characteristics to smaller, higher growth stocks. They tend to exhibit a tendency to operate in a sine wave motion to the index and themselves, with value fluctuating from cheap to rich, often on short-term phenomenon with a strong tendency to mean revert over time.
The typical stock that will make the grade in the portfolio is a combination of factors, but broadly speaking we would expect to see a stock have a high score when:
• It has performed poorly over the last year in absolute and relative terms and has a higher than expected average dividend, but its long-term fundamentals, which are based on valuation and earnings potential, are solid.
• OR the price has been quite static but the underlying potential to pay greater dividends from a higher earnings forecast has increased the expected value, which hasn’t been reflected yet in the price. Although this sounds very much like a growth stock, remember that all stocks are over £1bln in size and so growth, while being very important, will be single digit at best.
The portfolio rules of diversification dictate that it has to be balanced. At the moment, most supermarkets and miners score highly on HDVM® but usually only one from each sector will be permitted. Currently, Morrisons, Sainsbury’s and Tesco are higher than 54, and only Sainsbury’s has been chosen. It should be intuitive that the higher the score, the higher potential return, but from a margin of safety perspective, the importance of portfolio diversification is paramount.
Timing, as the saying goes, is everything. There is often no such thing as a bad stock, just a bad entry point. We endeavour to make sure that our stock picks not only focus on our extensive screening process, but are also very timely. Having the wind at your back can not only increase your winners but mitigates your losers as well. All our stock picks are subject to a 25% stop loss. If a large company has lost 25% of its price from our recommendation, then we would have to admit that something unknown but potentially catastrophic is in the making and an exit would be prudent portfolio wise.
Currently, while we are monitoring every stock daily, we feel there will be better entry points to add to the portfolio over the coming months, rather than choosing the 15th best one today. We will start to send out intra-month buy alerts, if necessary, with the full write up in the monthly.
UK PORTFOLIO #1 (ARCHIVED)
Originally posted in February 2015
Portfolio Update and Construction
Investors are currently waiting to find out when Standard Life will be paying the 73p per share that it has guaranteed them in capital return.
• GlaxoSmithKline has rallied 9.3% since our recommendation on the 2nd of October 2014. The pharmaceutical giant has moved strongly off the back of its plans to reduce costs through job cuts, as part of a wider restructuring programme.
The stock is due to go ex-dividend on the 19th of February 2015, expecting 23p after collecting 19p already in November. Over the past month, the company has been given good news after winning Phase III for its new shingles drug, which is the culmination of four years of research. The CEO has once again reiterated that investor’s dividends are safe.
• Centrica has fallen 3.91% since being recommended, having made a strong recovery in January.
Despite no real news, we suspect the US cold weather, coupled with lower oil prices, might well bring with it increased margins. It remains the cheapest utility stock.
• Rolls Royce has risen 8.34% since being recommended on the 18th of November 2014.
Early in the New Year, the firm announced record sales for 2014. Prior to this news, Rolls Royce also reported that Air Asia had recently increased the number of Airbuses they had ordered, which are all powered by Rolls Royce engines. The deal is said to be worth approximately £4bn. Additional contracts continue to expand their long-term order book
• IG Group has profited from the recent market volatility as transactional volumes would have risen over this period, although the SNB’s surprise move has been costly with an estimated loss of £30mn. The stock is up 14.19%(including 8.45p dividend on 29th January), as the firm made numerous announcements, including the fact that it will be launching a share-dealing platform.
The company has been very active lately, having opened its operations in Switzerland, established ADRs for its shares, added experience to its senior management team, hired Tal Zohar and launched a new stockbroking platform.
• Kingfisher has risen 12.18% since being recommended on the 18th of November 2014.
The firm has been streamlining its global business, having announced that it has sold its B&Q China stake for £140mm. This has been a strong trend with several western retailers exiting China in the past year.
The ECB’s QE announcement is supportive of companies like KGF with extensive European networks.
Royal Dutch Shell
• Royal Dutch Shell has risen 7.55% since being recommended on the 10th of December 2014.
The firm has continued to focus on streamlining the business. In December, it signed an agreement for the sale of its retail, commercial fuels and supply distribution businesses in Norway. The sale is subject to approval and will be completed in 2015. As the oil price stabilises, we would expect RDSB to recover.
• Sainsbury’s has risen 17.01% since being recommended on the 10th of December 2014. The grocer has now become the target of Activist investors, such as Crystal Amber who announced that they are close to acquiring shares in the firm.
The company also kick-started the New Year by announcing a price war with its larger competitors. Many others have followed suit. As last year’s negative headlines dissipate, we expect the stock to continue to improve.
• IMI plc has risen 12.61% since being recommended on the 10th of December 2014. It has benefited from increased ratings within the industrial sector.
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HINDESIGHT PORTFOLIO SELECTION
In our monthly HindeSight portfolio selection article we cover in-depth and in plain English, our reasons why we added the previous share to our portfolio with additional insights and performance data that's usually reserved for the trading floor.
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