Quarterly Strategies Review: Growth stocks rock in Q3

Friday, Sep 13 2013 by
8
Quarterly Strategies Review Growth stocks rock in Q3

Screening strategies that hunt down growth shares at reasonable prices were by far and away the best performers of all 60 of Stockopedia’s GuruModel screens during the third quarter of this year. With the quarterly rebalancing of those models due this weekend, we’ve been reviewing the 3-month returns, and while it’s clear that growth strategies have been the big winners, there were also a few other surprising successes along the way.

Our GuruModel screens were last rebalanced in mid-June, shortly before some sharp falls in the value of the FTSE. Since then those declines have been clawed back and the index is currently up by around 11.6% so far this year (6,588 points at the time of writing). Perhaps the biggest news of the quarter was the rule change at the start of August that means investors can now buy AIM-quoted shares using tax-efficient ISAs. Unsurprisingly, this has had a major impact on the junior market , with the AIM-100 currently trading up by 7.7% since then (and up by 12.7% for the year). While impressive, that performance is still way off the pace of the FTSE Smallcap index, which has risen by a remarkable 22.4% in 2013.

After the rollercoaster for equity prices early in Q3, the summer turned out to be comparatively quiet but that didn’t stop many of our screens from producing some exceptional results. Overall, the composite performance of the GuruModels during the past three months has been an 11.0% return against a modest 4.6% for the FTSE. Click here to see how the screens stacked up.


Taking top honours was our pure Growth at a Reasonable Price (GARP) screen, which returned a stunning 25.2% during the quarter. The GARP screen looks for companies with a medium-term track record of earnings growth, robust return on capital, improving margins, share price strength and a reasonable valuation versus the sector. We couldn’t resist having a closer look at that performance recently (read about it here), which has been driven by a number of shares that have enjoyed some spectacular price rises. Among them is Scottish TV production and broadcasting company STV (LON:STVG), which has produced an 82% gain for the GARP portfolio since it was bought in June.

Another high flying stock in the portfolio (and a number of other growth screens) is oilfield engineering group Kentz (LON:KENZ) , which saw its shares leap in August on news that it had received (and rejected) two separate takeover approaches. One of the suitors in question, Amec, has since pulled out of making a revised offer for the company (which caused the shares to fall back). Nevertheless, Kentz remains a notable contributor to this Growth portfolio over the past quarter, as have stocks including Pennant International (LON:PEN) (up 30%), Spaceandpeople (LON:SAL) (up 22%) and Tracsis (LON:TRCS) (up 20%).

Supporting the case for a GARP approach over the past three months was our Jim Slater-inspired Zulu Principle screen, which returned a stunning 23.0%. Slater’s model focuses on finding stocks that are undervalued relative to their growth rate and the portfolio enjoyed some huge successes. Among them was recruitment group Staffline (LON:STAF) and manufacturing components supplier Brammer (LON:BRAM) , both of which saw their shares rise by 48% during the quarter. Other gainers included software companies First Derivatives (LON:FDP) (up 34.7%) and Globo (LON:GBO) (up 32.5%) as well as stock broking firm Jarvis Securities (LON:JIM) (up 36.8%).

Interestingly, the stellar performance of the GARP screen was enough to usurp the Earnings Upgrade Momentum screen from overall top position in terms of returns in the year to date (45.7% versus 44.9%). The momentum screen could only manage a 10% return this quarter but it still remains a hugely impressive performer that illustrates why tracking broker estimate changes is such a valuable pursuit. Elsewhere among the growth investing screens ranking in the top ten performers this quarter were James O’Shaughnessy’s Cornerstone Growth, and the Naked Trader-esque screen.

Deep value pays off

In previous quarterly strategy updates, we’ve mentioned the rather neat way that top performing screens this year have generally matched the investing cycle - with value, then momentum, then growth proving to be effective at consecutive stages through the year. But in Q3 the harmony was wrecked when a couple of deep value bargain strategies crept their way into the top ten performing screens.

In early September we wrote about how small-cap mining companies, which make up nearly half of the Ben Graham Net Nets bargain stock portfolio, had produced an incredible performance over the summer (see chart below). Graham’s value-oriented approach to finding out-of-favour shares that are trading well below liquidation value was a strong performer earlier this year before momentum and growth strategies took over. But with companies like Red Rock Resources (LON:RRR) (up 189%), Minco (LON:MIO) (up 82%) and ECR Minerals (LON:ECR) (up 154%) in the portfolio, Net Nets stormed back in Q3 with a 21.2% return. And it wasn’t the only bargain screen going great guns; the Charles Kirkpatrick Bargain screen delivered a 17.3% return over the three months. At times criticised for being rather too specific with its criteria (read more about that here) the Kirkpatrick screen nevertheless flew with the help of holdings including Thomas Cook (LON:TCG) (up 37.2%) and Marshalls (LON:MSLH) (up 28.7%).

Quality offers comfort

As the quarters roll by, the impressive returns produced by Stockopedia’s Screen of Screens  look less and less like a fluke (see chart below). In Q3 the Screen of Screens (SoS) - which comprises shares that qualify for at least three other GuruModels - topped the performance of all our ‘quality investing’ screens with a return of 16.6%. Interestingly, while a number of holdings in the current portfolio are familiar names from the Growth screens (Staffline, Kentz, Globo) there is a lot more divergence with the SoS because it roots out potentially strong performing stocks across all investing disciplines. As a result, over the the past quarter it has also been buoyed by strong gains from shares including Cohort (LON:CHRT) (up 45%), Aviva (LON:AV.) (up 23.6%) and Burberry (LON:BRBY) (up 18.5%). This extremely simple approach to selecting stocks has produced a hugely impressive return of 42% over the past year - certainly validating the decision of David Stephenson to feature the process in the FT at the beginning of the year.

Looking ahead to Q4

While we never like to blow our own trumpet (much!), as predicted it was the Growth strategies (GARP) that went on to be the star performers during Q3. While price and earnings momentum screens have produced some incredibly impressive returns so far this year they were just off the pace over the summer. Even so, it still looks very likely that momentum strategies looking for broker upgrades, earnings surprises, value and price strength will be among the best performers of 2013 when we report back in December. Likewise, value screens have never really gone away, and it looks increasingly like at least one Ben Graham screen will be among those producing the highest returns this year. Finally, it’s worth mentioning that our tracking of Joel Greenblatt’s Magic Formula is finally back in the money after an extended period of underperformance. For investors chasing good quality, cheap companies, that’s a heartening development, and perhaps a signal that the fourth quarter of this year may see a gentle switch from ‘growth’ to ‘quality’ at a reasonable price (or GARP to QARP).


To see the stocks qualifying for all of our GuruModel investing strategies or to screen the market using Stockopedia’s tools, why not take a free trial?


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STV Group plc is engaged in the production and broadcasting of television programmes, Internet services and the sale of advertising airtime and space in these media. The Company focuses on its television and digital media business. The Company operates in two segments: Consumer and Production. The Company creates and produces content for broadcast networks in the United Kingdom and overseas. The content is delivered across multiple platforms, including digital terrestrial, cable and satellite, online and through connected devices, such as games consoles. STV Commercial offers creative communications solutions for a range of advertising clients. The Company’s consumer business consists all of its channels, platforms, products and services, through which the Company connect with its consumers and advertisers. STV Productions offers viewers programmes hitting Television screens in the United Kingdom and across the world with commissions for ITV1, Sky Real Lives, BBC2 and Channel 4. more »

Share Price (Full)
371p
Change
1.5  0.4%
P/E (fwd)
9.0
Yield (fwd)
1.0
Mkt Cap (£m)
144.7

Kentz Corporation Limited is engaged in the provision of engineering and construction services, and technical support services, principally in the oil services sector. The Company has six operating segments, being six regions, which include Middle East, Far East, Africa, Australasia, Americas and Europe. It has three business units, which include engineering, procurement and construction, which includes onshore modular production facilities, non-process infrastructure, turnkey utilities and offsite facilities, turnkey port facilities, and small capital project solutions, among others; construction, which includes structural, mechanical and piping construction, and electrical and instrumentation construction, and technical support services, which includes project management consultancy, remote construction services, completions and commissioning, shutdowns, turnarounds, and operations and maintenance, among others. On January 3, 2014, the Company acquired Valerus Field Solutions. more »

Share Price (Full)
934.08p
Change
0.5  0.1%
P/E (fwd)
14.3
Yield (fwd)
1.6
Mkt Cap (£m)
1,119

Staffline Group plc is a holding company. The Company is engaged in the provision of recruitment and outsourced human resource services to industry and services in the welfare to work arena. It has two operating segments: the provision of temporary staff to customers and the provision of welfare to work services. The contractors are supplied to, food growers and manufacturers, logistics and distribution businesses, call centre and administration staff, and many diverse manufacturing businesses producing items from motor vehicles to garden tools. Its brands include Staffline Express; OnSite; Driving Plus, which offers professional drivers; Elpis Training, a national training and consultancy organization; OSP, a recruitment call centre; Techsearch, which supplies graduates, and Select Recruitment Ltd. In July 2014, Staffline Group PLC announced the acquisition of of Softmist Ltd, based in Leicester, which trades as Skillspoint. more »

Share Price (AIM)
925.75p
Change
0.0  0.0%
P/E (fwd)
14.2
Yield (fwd)
1.4
Mkt Cap (£m)
255.4



  Is STV fundamentally strong or weak? Find out More »


4 Comments on this Article show/hide all

matti69 14th Sep '13 1 of 4

Hi Ben

To which 'investing cycle' are you referring?

Cheers

Matt

| Link | Share | 1 reply
Murakami 14th Sep '13 2 of 4

In reply to matti69, post #1

Re: the investing/investment cycle, and how that interacts with the economic cycle, see the diagram at the top of page 3 of this PDF:

http://www.arnhem.com.au/wp-content/uploads/2012/10/ARNHEM_Time-for-Growth-Investing_Online.pdf

| Link | Share
matti69 14th Sep '13 3 of 4

Thanks Murakami

| Link | Share
Richard Goodwin 17th Sep '13 4 of 4

Interesting article. Thanks.

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About Ben Hobson

Ben Hobson

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Strategies Editor at Stockopedia.  I make sure that Stockopedia is delivering the features that its members want to see.



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