New Year NAPS - top stocks for 2016 and a few revelations

Tuesday, Jan 05 2016 by
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New Year NAPS  top stocks for 2016 and a few revelations

My 11 year old son turned to me a few days ago and asked the most wonderful question… “Dad, have you got any New Year’s Revelations ?” Aside from the sheer pleasure of the phrase, his comment really has got me thinking. What indeed did 2015 reveal ? And what should we resolve to take forwards through 2016 ?

For those who are new to the Stockopedia site, we’ve been on something of a journey in the last 12 months. Back on January 1st 2015 I selected the two highest ranking stocks in each sector according to their StockRank. This set of 20 stocks we titled the “New Year Naps” for reasons you can read up on in the original article. It was essentially my way of using a rules-based process to select some high expected return stocks without relying on any subjective decision making.

Amazing as it may seem, this very much mechanically selected set of stocks returned 43.4% in a year in which the major stock market indices sagged. As we’ve followed the strategy in various posts, the interest in the process has grown, which nudged me to run an hour long webinar last month reviewing the results, and the impact of diversification and rebalancing. You can catch up with the video here, transcript & performance results here and community discussion here.

So I now find myself in the rather precarious position of having set a precedent and I feel a duty to publish a similar set of 2016 NAPS. But before I do I’d like to invite readers to spend some time pondering with me about the nature of performance, process, skill and luck.

A brief 2015 performance review

Let’s put the 43% NAPS performance in perspective. The FTSE Small Cap index returned 5.8%, while the top 10% highest rated UK shares by StockRank returned 22%. Our selections have beaten the small cap benchmark and the general high StockRank peer group by a substantial margin.

As to individual stock performances, the following chart shows that two of the stocks more than doubled - International Greetings (LON:IGR) and Dart (LON:DTG) ; 4 others returned more than 50% - Adept Telecom (LON:ADT) ,

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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161 Comments on this Article show/hide all

hayashi22 1st Jun '16 142 of 161

In reply to Edward Croft, post #140

Hare?!

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ken lowes 1st Jun '16 143 of 161
3

In reply to Nick Ray, post #139

Thank you Nick for the thoughtful response to the current situation. There are no absolute winning systems but it can often take years for some to realise that. The problem is that new investors read all the books and then slavishly follow the purveyors of winning systems and when it doesn't go the way they were led to believe they quit and often say goodbye to hard earned money. I like stockopedia because it saves me enormous amounts of research time but sometimes I despair of the hype, it is easy to say DYOR and then proceed with the promotion as if caution is a dirty word. If anyone is in any doubt about the markets mercurial action all they need do is go to the Guru screens and see how they have performed. Making money in a rising market is child's play but sideways and down can be expensive and painful. It is not difficult to pick out the wise long term investors on this site and very easy to feel the pain of a injured acolyte. We live in scary times the correction started in January is far from over in my book. I have absolutely no idea what is going on in todays market, it is far from predictable. An exit on the 23rd looks like a two year recession and even if we stay in Europe it is in a mess and who knows where we will be if Trump wins the day. This together with unknown effect of quantative easing makes climbing the wall of worry so much more difficult.

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Edward Croft 1st Jun '16 144 of 161
1

In reply to Nick Ray, post #139

Nick - am interested as to how you created that chart ? To my eye some of those portfolios look like they are perhaps 3 to 5 stock portfolios ?

I wrote up the same concept a couple of years ago about how many stocks you should own in a portfolio... You can read it in this piece - http://www.stockopedia.com/content/how-many-stocks...

Basically the key point is that the more diversification you have in a portfolio, the more likely you are to end up with the return of the targeted decile.   Ultimately the costs of investing in more stocks depend on the size of one's portfolio.  Personally I always invest in a minimum of 25 stocks.... often 35.  It makes the volatility of the end results lower.

Blog: Follow @edcroft on Twitter
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Nick Ray 1st Jun '16 145 of 161
2

In reply to Edward Croft, post #144

Ed - they are not portfolios. It is just the individual NAPS 2015 stocks normalised to 1 at 2015-01-01.

Your piece about the number of stocks in a portfolio makes the key idea that you try to create a portfolio to reduce volatility and to reveal the mean return for your selection criteria. However conversely, there is no point worrying too much about the volatility of an individual stock. Even excellent quality stocks have a surprising amount of volatility - many good stocks will fall -20% and then recover +40%.

It drives people crazy because you can't help thinking "if only I could get in at the bottom and out at the top I would make significantly more money than if I just stay put". But that is the nature of volatility - it looks as if there are patterns but it is random and overall it sums to zero. If you try to play it you wind up "sampling" the underlying drift (mean return) of the stock while incurring trading costs.

There is a great analogy with the game of roulette. In roulette every bet has a house edge of -1/37 = -2.7%. So what is the "best" bet (assuming you bet at all)? Arguably it is 16 on RED, 16 on BLACK and 1 on ZERO. This bet returns 36 for a 37 stake regardless of the number which comes up, for a volatility of zero. Of course with a negative edge this seems crazy because it locks in a small loss exactly equal to the house edge every time. It reveals the underlying truth that in gambling you are trying to use volatility to give you a (temporary) gain. The higher the volatility the bigger the illusion. (Sucker stocks always have high volatility.)

In an imaginary version of roulette with an edge in favour of the player of +2.7% then a strategy which reduces volatility would make complete sense. Why risk a larger downside than is necessary - even temporarily?

On the stock market we don't know what the edge is and whether it is positive or negative, and it changes all the time. So reducing volatility not only reduces the bumpiness of the ride but it makes it a bit easier to see whether there is even an edge in our favour or not at the moment.

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LinnetIC 3rd Jun '16 146 of 161
2

I read your assessment of the 2015 NAPS portfolio, wherein you suggested that perhaps the excellent results were due 50% to luck and 50% to the “system”.
So I produced my own list using your amended “rules” about a week before you published 2016 NAPS. The only “rule" I ignored concerned only having one company from the same industry*. I thought it would be a useful exercise to follow the progress of both portfolios.

I was gratified to note that of your list of 20 equities I had managed to pick 13 that were the same! However, whereas you had selected Hilton Food, GlaxoSmithKline,
J Sainsbury , Indivior, Alumasc, Castings, and Cambria Automobiles,
instead, I had included Highland Gold Mining. SkyePharma, Wizz Air Holdings*, Dart*, Treatt, Persimmon, McBride, and Craneware.

On 29 May 2016 NAPS showed a loss of £746 on a £40K portfolio, whereas my NAPJan16CRG portfolio indicated a gain of £1475 (without dividends). The difference, £2,221, can only have been attributed to the 7 different shares in each portfolio…and it is not an insignificant sum.

I noted that, by inspection of the Value, Quality, Momentum and StockRank figures for each line of the respective portfolios that my NAPJan16CRG portfolio seemed to have some lower “Value” figures. So I worked out the average V, Q, M and StockRank figures for the 20 equities in each portfolio and found certain differences:

2016 NAPS - V= 72.2, Q= 80.7, M= 77.15, StockRank= 89.8
NAPJan16CRG V= 65.05, Q= 83.5, M= 82.75, StockRank= 90.

The average Value figures in my portfolio are lower by some 7 points, average Quality figures higher by 3 points, and the average Momentum figure is higher by some 5.6 points. Average StockRank figures are much the same.

Would it be fair to deduce, therefore, that one might better sacrifice VALUE for some QUALITY and MOMENTUM if the result might produce a gain of some £2.2K in a £40K portfolio, over 5 months? Or was it just pure luck!

R Geach

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cig 3rd Jun '16 147 of 161
3

In reply to LinnetIC, post #146

It's far too small a sample (in time and number of stocks) to draw any conclusion.

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pka 3rd Jun '16 148 of 161

In reply to LinnetIC, post #146

"On 29 May 2016 NAPS showed a loss of £746 on a £40K portfolio, whereas my NAPJan16CRG portfolio indicated a gain of £1475 (without dividends). The difference, £2,221, can only have been attributed to the 7 different shares in each portfolio…and it is not an insignificant sum.
I noted that, by inspection of the Value, Quality, Momentum and StockRank figures for each line of the respective portfolios that my NAPJan16CRG portfolio seemed to have some lower “Value” figures. So I worked out the average V, Q, M and StockRank figures for the 20 equities in each portfolio and found certain differences:
2016 NAPS - V= 72.2, Q= 80.7, M= 77.15, StockRank= 89.8
NAPJan16CRG V= 65.05, Q= 83.5, M= 82.75, StockRank= 90.
The average Value figures in my portfolio are lower by some 7 points, average Quality figures higher by 3 points, and the average Momentum figure is higher by some 5.6 points. Average StockRank figures are much the same.
Would it be fair to deduce, therefore, that one might better sacrifice VALUE for some QUALITY and MOMENTUM if the result might produce a gain of some £2.2K in a £40K portfolio, over 5 months? Or was it just pure luck!"

I believe that the difference in performance was just pure luck. If you construct portfolios by selecting 7 shares at random from a population of similarly high-ranking shares you are likely to get big differences in performance of each portfolio after 5 months, simply due to the variability of performance of individual shares and the fact that 7 is too small a number of shares in a portfolio to diversify away that variability.

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Edward Croft 3rd Jun '16 149 of 161
2

In reply to pka, post #148

There are quite a few people who've messaged me to say that the original rules from the 2015 NAPS are performing much better than my tweaks this year.

My point though was to reduce risk. Hindsight is always perfect vision. The original NAPS rules have much higher weighting to microcaps... and that makes me nervous. This year's set have more large caps and broader diversification - one of the impacts of this is that it's a lower beta portfolio too. It may lead to less upside, but it reduces the downside risk.

The churn in leadership & factors we've seen since the beginning of the year has proven that it's right to be cautious in this environment.

Blog: Follow @edcroft on Twitter
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Brigra 3rd Jun '16 150 of 161
2

In reply to Edward Croft, post #149

Following on from being in a particular environment, Jim O'Shaughnessy linked to this blog post yesterday;

http://www.factorinvestor.com/blog/2016/6/1/a-factor-investors-perspective-of-the-economic-cycle

The post analyses factor investing over the last five decades, and appears to demonstrate that different combinations of the QVM factors have varying effectiveness at different stages of the economic cycle.

As the author notes, it is sometimes easier to determine exactly where in the cycle we are after the event..



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catalogue 5th Aug '16 151 of 161
1

I last posted this portfolio on 31st May. I have not touched it since to give NAPS a fair chance. There is nothing that particularly stands out as an obvious error. Like Ed's NAPS of last year a couple of winners have saved the day. As a whole, so far, it seems to have followed the market and has performed poorly compared with Ed's NAPS. The sector allocation was obviously even at the outset and all selections had a stock rank greater than 90.

The selection method followed Ed's webinar as precisely as possible and as close to the beginning of the year as my broker could trade. 

Any comments would be welcome.


57a4fddab1554NAPS_-_PR___Portfolio_Asset

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Edward Croft 16th Aug '16 152 of 161
3

Nice to see the NAPS portfolio finally break out to new highs. It's up about 4% year to date. There are currently 9 winners and 11 losers in the portfolio, but the winners are doing better than the losers.   Indivior is the best selection year to date - up about 60%.

57b3026ba4918NAPS_2016___Portfolio_Analy

It's been a much tougher year than 2015 for stock market investors & the StockRanks in general - the market is in a state of churn and leadership is changing. But it's good to see that our diversification strategy has continued to add value.  

The NAPS have outperformed the top decile of StockRanks again, and since inception in January 2015, the annually rebalanced portfolio has returned more than 50% including dividends. That's a pretty solid return given the FTSE 100 has only managed 5% in the same period.   

Blog: Follow @edcroft on Twitter
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Ciaran 27th Oct '16 153 of 161

Hello,
Would it be possible to get an update on how well the Naps are doing?

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ken lowes 28th Oct '16 154 of 161

In reply to Ciaran, post #153

Currently up about 1.5%

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Edward Croft 29th Oct '16 155 of 161
1

In reply to Ciaran, post #153

The NAPS are up about 2.3% year to date in my tracker before dividends. So it's not been a patch on last year's performance. They are also lagging the overall top decile of StockRanks which are up about 7.5% year to date.

The Snaps are up 12% since end June which would put the semi-year rebalanced portfolio up 7.6% for the year (excluding transaction costs and dividends).

The FTSE 100 is up 14% year to date. Many strategies have lagged the indices this year due to the preference for large cap exporters post Brexit.

Blog: Follow @edcroft on Twitter
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catalogue 30th Nov '16 156 of 161
2

I posted the same portfolio on 31st May and 5th August. May was dire. This one is much improved compared with May but nothing like Ed's 2015 NAPS. Mine has not been rebalance or tampered with and is real so does not include stocks that you can't purchase on-line in the UK. Ed's 2016 includes Invidior, which was not offered when I was building mine and would surely have changed mine by a few percentage points. What is most significant is the change in stock rank over the year. Given that all selected stocks ranked higher than 85, 50% are now lower with INL at 25, ETL at 52, ACE at 69, ALDW at 74 and ZAGG at 76 - begs the question why should be fundamentals can change so quickly. Perhaps Momentum should be excluded because it is self fulfilling. If it gets marked down and gets sold its momentum falls so it gets sold more.


583eb7aec2048NAPS_-_PR___Portfolio_Asset

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herbie47 30th Nov '16 157 of 161

In reply to Edward Croft, post #155

I did a NAPs in early July it is up over 23%, it is mainly small to mid caps, 2 big winners are Avesco (LON:AVS) and Sopheon (LON:SPE), even without those 2 it would be up over 6%. My earlier NAPS have not really done anything in the last year.

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Edward Croft 30th Nov '16 158 of 161

Yes - I'll be writing a big post for 2017 that includes some key findings from this year's NAPS.

This year's NAPS have been quite unremarkable year to date (up 2%)... but the July SNAPS are up over 15% in 5 months. In theory rebalancing more frequently should have an impact, but the question is one of cost. Spreads and commissions can eat returns, especially in smaller caps.

My theory is that market dislocations (like during Brexit) cause a big change in leadership. We saw a lot of rankings changing quickly at that time. Rebalancing after a market dislocation may be sensible, so that a portfolio is more aligned with new leadership.

Anyway, the Jan NAPS are up 46% over 2 years so it's not too shabby.

@catalogue - StockRanks do move... which is the whole point really. Prices, valuations, fundamentals all change - nothing stays static. That's why rebalancing is essential.

Blog: Follow @edcroft on Twitter
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v2001 30th Nov '16 159 of 161

the naps would probably do well if there was no major events in the market like brexit, presendential elections etc. timing plays a keys also with rebalancing, but like ed said its not always feasible to keep rebalancing esp to keep up with changing stock ranks.
I like the idea of a naps, but my conclusion is that it wont work well in a changing market with lots of challenges

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JamesrWilson1989 30th Nov '16 160 of 161

I have really adopted the StockRanks system into my investment strategy. Everyone is different and I found better to work to certain criteria as opposed to my own ability to spot a bargain!

What I would say, is that the NAPS portfolio/StockRanks doesn't guarantee market-beating returns - nothing can! However the likelihood of them out-performing the market is greater, and thus will beat the market more often than not. Variance works for us and against us depending on the market/situation.

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Howard Adams 30th Nov '16 161 of 161
2

Hi

While I concur with the rebalancing strategy I have not yet clarified in my own mind what level of frequency will work for my investing style. What I have found useful in the meantime however, and something which has helped me a lot during volatile market movements is the support of three of the Stockopedia tools: StockRank movers, Alerts and Chart Signals.

I find a regular examination of the 'StockRank Movers' screens under the 'Ranks' tab to be really helpful. I sequence through the rank scores and the 'this week', 'this month' groupings to spot which of my holdings have moved. Then I examine each and form a view: hold, add to, slice or sell. (you could also use this tool to look for potential buys).

My second tool are the SP alerts which I set quite tightly, allow to trigger, re-set and then react quickly after a second trigger.

Last tool is the 'Chart signals' under the 'Tools' tab. Again a regular scan of some of the options has proved fruitful, first to de-risk my current holdings, second to spot new opportunities.

I think these three are particularly complimentary with a re-balancing strategy and offer support in volatile market conditions.

Regards
Howard

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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