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International SIF: 3 big winners but the portfolio hits new lows

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New optimism about the likelihood of a Brexit deal has seen UK stocks with a domestic focus perform very strongly over the last couple of weeks. I hope your portfolios have enjoyed the same kind of bounce that I’ve seen in some of my holdings.

Unfortunately, this improved sentiment has not done anything to help the overseas stocks that populate my International SIF (Stock in Focus) portfolio. Indeed, this virtual portfolio has hit new lows since my last update one month ago, and has now lost nearly 25% in just under two years:

5daeae3597579S1.png

What next? I’ve previously said that I’ll give this experiment until the end of November, when it will be two years old. So I’ll undertake a more detailed review at the end of next month. 

Changes in October

This month is a selling month. So it’s time to look for stocks that have reached their 10-month minimum holding period and no longer pass my screening rules. Such stocks must be (virtually) sold from the International SIF folio.

Here’s a snapshot of how the portfolio looks at the time of writing, prior to any changes:

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The stocks that have been in the portfolio for 10 months or more are:

Interestingly, the top three stocks on this list are also those with the biggest running gains. This suggests that the timing of these purchases has worked in my favour. 

All three were added to the folio in December 2018, when markets lurched lower before recovering strongly from January onwards. This effect was particularly marked in US and German markets where these stocks trade. 

Here’s how Munich Re has performed against the DAX since it was added to the folio on 20 December 2018:

5daeaeb7e5c17S3.png

The DAX is up 18%, versus a gain of 33% for the big insurer. So this strong result is a mix of market gains and stock outperformance. 

And here’s how investment manager LPL Financial and office furniture group Steelcase have performed against the US indices over the same period:

5daeaed04ad2fS4.png

This performance does beg the question as to whether my screening rules and short holding periods rely too heavily on market momentum. I think that’s a possibility, but the same rules applied to UK stocks have performed more favourably. 

Let’s move on and take a look at each of these three stocks to see if they are still eligible to stay in the portfolio.

LPL Financial Holdings (NSQ:LPLA)

(Original coverage 21/12/2018)

This $5bn investment management firm appears to have performed well this year. It’s benefited from several broker upgrades during the folio’s holding period:

5daeaef18f5e0S5.png

However, this momentum does seem to have peaked. Based on the trend line above, analysts have started to trim their forecasts for both 2019 and 2020. This may not be hugely significant, but it does represent a possible trend reversal.

The other thing that’s changed is that while earnings per share are expected to rise by about 45% this year, they are expected to be largely flat in 2020:

5daeaf19de065S6.png

Indeed, we can see from the broker trend graph above that the expected rate of growth in 2020 has diminished (as the two lines have got closer together).

LPL Financial still looks like a decent stock to me. But the rising share price has pushed the dividend yield down below my 1.5% minimum. For this reason, the stock no longer qualifies for my screen and will leave the International SIF this month.

Verdict: Sell
Gain/loss: +29pc (+33pc excluding FX effects)

Muenchener Rueckversicherungs Gesellschaft AG (ETR:MUV2)

(Original coverage: 21/12/2018)

I quite like insurance stocks as income plays. If I owned Munich Re stock in my own long-term income portfolio, I wouldn’t be selling now. But the SIF concept is more of a trading portfolio and requires regular reviews. 

Munich Re shares have performed extremely well this year, gaining almost 32% since the start of 2019.

This has lifted the stock’s valuation to 13 times rolling forecast earnings, with a dividend yield of 4.1%. This compares to 10x earnings and 5.1% when they were added to the portfolio. 

For a large, mature insurance company, I would suggest that the current valuation is probably fair value, especially as earnings forecasts for 2020 have been cooling:

5daeaf31c59b0S7.png

Although cash generation is strong, Munich Re is not exceptionally profitable. According to the Stocko stats, return on equity has averaged 7.9% since 2013.

In any case, the decision is out of my hands. Munich Re fails a number of my screening rules. Among other factors, the stock’s Piotroski F-Score and rolling PEG ratio no longer meet my minimum requirements.

Verdict: Sell
Gain/loss: +25.5pc (+31.5pc excluding FX effects)

Steelcase Inc (NYQ:SCS)

(Original coverage: 21/12/2018)

Steelcase makes office furniture and other interior architectural products. It’s quite stylish stuff, from what I can see, not at all like the old-school metal furniture the name brings to mind!

Like the other stocks, Steelcase enjoyed a substantial earnings upgrade earlier this year, but 2020 growth forecasts have been cut (relative to 2019) and broker sentiment appears to be cooling. The average rating has been cut from Buy to Hold over the last three months:

5daeaf5a8904fS8.png

I guess the problem is that a company like this is quite highly cyclical. Sales crumble during  a recession, if customers stop fitting out new workspaces or upgrading existing ones. The share price chart since 1999 suggests that this is a stock that should be bought during periods of weakness:5daeaf75c7fa4S9.png

Interestingly, one of the reasons that Steelcase no longer qualifies for my screen is that its 1-year relative strength has fallen below zero. That means the stock has lagged the market over the last 12 months. It’s only a slight fail and could reverse, but it correlates with the cyclical concerns implied by the broker consensus ratings.

Verdict: Sell
Gain/loss: +20.7pc (+24.2pc excluding FX effects)

A worsening outlook?

I think it’s worth noting that all three of these shares still score highly with Stockopedia’s algorithms and have StockRanks ranging from 88 to 97. From a quantitative point of view, there’s still room for optimism. 

However, over the last 12 months, consensus forecasts for all three stocks have shown a reduction in expected earnings growth in 2020. 

It’s worth remembering that these have been the top-performing stocks in the portfolio. Many others are down by 20%-30% and appear to have suffered profit warnings or significant broker downgrades this year.

Analysts’ forecasts for next year seem to have become more cautious. I think it’s fair to assume that this is based on a more cautious macro outlook. Time will tell if this is correct. Economic data certainly seems more ambivalent in recent months, in my view.

That’s all for this week, but I’ll be back next week with the usual month-end review of my main UK SIF portfolio.

Stockopedia



Source: https://www.stockopedia.com/content/international-sif-3-big-winners-but-the-portfolio-hits-new-lows-522826/
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