SIF Folio: Market momentum review + 3 new international stocks

We’re seeing uncertain conditions for cyclical stocks in UK markets at the moment. Domestically, such problems are often being blamed on factors such as high housing prices (Help to Buy), Brexit and slowing new car sales.

These factors may be relevant. But as I’ll explain shortly, my Stock in Focus screens suggest that the situation in the UK market is being mirrored in overseas markets. Are we looking at more widespread cyclical weakness?

This week I’ll explain what I plan to do if these conditions persist. I’ll also introduce three new overseas stocks I’ve added to my experimental International SIF fund this month.

Failing momentum?

In the 3+ years I’ve been running the SIF fund, this isn’t the first time that my screen has dried up. Each time this happens, the main reason is that stocks which pass my tests for value and growth fail to meet my requirement for positive momentum.

The main element of this is that the shares must have a one-year relative strength reading that’s greater than zero. What this means in plain English is that they must have outperformed the wider market over the last 12 months.

With my relative strength rule in place, my UK SIF screen offers up just six stocks, none of which are suitable buys for the portfolio. If I disable the RS rule, the total rises to 16.

Although I hope to find some new stocks for my UK SIF fund in the coming weeks, I won’t be abandoning my momentum requirement. I believe it’s an important part of this strategy and I’m happy to allow the portfolio’s cash balance to rise in the absence of suitable stocks to buy.

However, as I mentioned at the top, I think it’s worth noting that this weak momentum doesn’t just seem to be a UK problem. At the time of writing, my international screen returns just 30 stocks from all the global markets covered by Stockopedia. But if I disable the relative strength rule, that total rises to 111.

Clearly we can’t blame Brexit or the outlook for UK car sales for the weak performance of overseas stocks. So is there a wider cyclical risk? Just before writing this I came across some headlines in the automotive trade press which suggests concerns about car sales aren’t restricted to the UK.

Apparently, new car sales fell by 16% in China in May. In India, the decline was 26%. Recent figures also showed a 3.1% fall in US light vehicle sales during the first quarter of this year. Forecasts suggest US new car sales will fall below 17m this year, for the first time since 2014.

Of course, car sales have been near record highs in most of these economies for several years. Some level of mean reversion might not be surprising. But if these trends continue, I’d imagine the cumulative impact on manufacturers, parts suppliers, dealers and finance firms could be significant.

Should I go defensive?

One obvious response to this situation might be to allocate more of my portfolios to defensive stocks. After all, we might expect these to provide a reasonably safe haven in troubled times.

The only problem is that everyone else has had that idea already! Good quality UK defensive stocks such as Unilever, Diageo and AG Barr have all made record highs this year and look fully priced to me. Although I wouldn’t sell if I was a long-term holder in such stocks, I don’t feel tempted to buy at these levels. These companies certainly don’t meet the valuation criteria for my SIF fund.

However, among international stocks there seems to be a wider choice of affordable defensives. My international portfolio is already overweight in consumer defensives versus the wider market:

This week I plan to increase that weighting further with a new US-listed firm. I’m also going to venture back into the Technology sector with two Asian stocks.

International SIF: 3 new stocks

My experimental International SIF portfolio has performed poorly so far and may be on borrowed time. But I’m persisting with this virtual folio a little longer, and have added three new stocks to the folio this week.

First of all, here’s a snapshot of the portfolio before this week’s additions:

As you can see, there’s still a wide spread between winners and losers. In fact, the situation may be worse than it appears.

At the bottom of the list, Singapore-listed skincare products firm Best World International has been suspended and is under investigation by the Singapore Stock Exchange. According to the Straits Times newspaper, it appears that there’s some question over “the veracity of the group’s sales in China”…

Moving swiftly on, let’s look at this week’s new stocks.

Cheap beer?

US-listed Compania Cervecerias Unidas SA (NYQ:CCU) is a brewer, importer and distributor of beer, spirits and soft drinks based in Chile.

In Chile, it owns, produces under licence or imports a wide range of domestic and international brands. Among the latter are Perrier, Pepsi, Coors Light, Heineken, Sol and Red Bull.

CCU also appears to operate in most major South American markets except Brazil. Alongside domestic brands, it licences or imports Heineken, Amstel, Miller and Sol in a number of markets.

Stockopedia rates CCU as a Super Stock, with a StockRank of 94. I can see why. In my view, this £4bn group appears to have an attractive financial profile for investors:

According to the Stocko data, the balance sheet shows net cash too (although I haven’t checked the accounts directly).

The outlook is a little mixed, but on this valuation I’m prepared to take the chance:

A famous name from film

US firm Kodak Eastman didn’t survive the digital camera. But former film rival Fujifilm Holdings (TYO:4901) remains a profitable £16bn company, thanks to product lines including digital cameras, photocopiers, medical imaging equipment and industrial printing systems.

Stockopedia gives the stock a risk rating of Conservative, signalling lower volatility. But the valuation looks more demanding, as signified by a High Flyer ranking.

This suggests that a slowdown in earnings growth could hit the shares hard, especially as they appear to be trading at all-time highs:

However, I’m reassured to some extent by the size and longevity of this business. I don’t think it’s likely to disappear anytime soon. I’m also reassured by a fairly strong broker consensus trend:

Fujifilm stock trades on a rolling forecast P/E of 13.7 with a 1.7% yield. That seems reasonable to me, based on forecasts for earnings growth of about 16% over the next 12 months.

Rugged equipment

My third new stock is probably the riskiest of the three. Taiwanese tech firm Getac Technology (TPE:3005) produces laptops, tablets and other related equipment. The company’s specialty appears to be ruggedised equipment. This is sold for use in markets such as energy, industrial manufacturing and military/emergency services.

Getac’s operating profit margin has hovered around 10% over the last few years, while return on capital employed is in the low teens.

Cash generation is fairly good and the business looks reasonably priced to me, although the high dividend payout ratio does seem a little surprising:

However, the payout level has been maintained for a number of years and the firm reports net cash each year. So perhaps it’s okay.

My decision: I’ve added all three of these stocks to the International SIF this week. Please remember this is a virtual portfolio. I don’t own any of these stocks and view this as an experiment.

Next week: I’ll be reviewing my main UK SIF fund portfolio, hopefully with a review to taking profits on some older holdings.

Stockopedia