Of the 60-plus investing strategies tracked by Stockopedia, one of the consistently best performers in 2013 is one that really couldn’t be simpler. By picking those companies that qualify for the highest number of all our other long-only guru investing models, the Screen of Screens has produced a remarkable 36.4% return so far this year. So what’s the secret behind this potential profit factory - and can it be improved upon?
Ahead of the London Investor Show this Friday, when a lot of these strategies will be up for discussion, it’s worth recapping on a pretty surprising performance by the SoS this year, given that it can be a rather blunt instrument. After all, selecting shares just because they qualify for at least four other strategies (that may even appear to be at odds with each other) could seem tenuous. But look a little deeper and you’ll find an approach that takes an impartial view of investment style and manages to smooth out bumpy market conditions as a result.
Blending investment styles
It’s worth noting that our returns for the SoS are based on quarterly rebalancing but take no account of the trading costs that those portfolio changes might incur. Even so, there’s little doubt that it has a formidable record for finding hot stocks. And part of the reason is that it embraces the fact that one investor’s value stock can be another investor’s quality pick, income generator or momentum play. In fact, as Ed Croft will talk about at the show, the right blend of these approaches can be a highly effective way forward (if you’ve got the right tools).
Take Regenersis (LON:RGS), the AIM quoted company that repairs consumer electronics like mobile phones and laptops for big brand manufacturers. For most of this year it was only really flagging as a momentum stock, which wasn’t difficult for many small cap shares given the upward trajectory of the market. But in early October it qualified for a couple of growth screens in the form of James O'Shaughnessy's Cornerstone Growth (38.5%) and Jim Slater’s ZULU Principle (40.0%). Simultaneously, it made it on to the Charles Kirkpatrick Value screen (47.5%) and continues to be rated as a momentum stock as well. As you can see from the individual returns from those screens this year, each has delivered significant gains. So the appearance of Regenersis on the SoS is interesting because the rising price that might have made it interesting to momentum traders has now pushed it on to screens that focus on growth and value characteristics too. (I mentioned Regenersis in the recent Jim Slater article. I don’t hold any position in the company and, on that note, it’s essential to Do Your Own Research on stocks appearing on Stockopedia’s GuruModel screens !)
Another of the ways of reading the SoS is to see how qualifying companies change gear through different investing styles. Matchtech (LON:MTEC), the recruitment company, made it on to the SoS in mid-July just a couple of weeks before a trading update that sparked a re-rating in its price. But even as the company teeters on the edge of its 52-week high, the screens that it’s qualifying for are changing; in recent days it has appeared on Bill O’Neill’s CAN-SLIM growth and momentum model. For investors concerned about the scale of that recent price rise, the progression of Matchtech onto the CAN-SLIM screen may be some comfort - O’Neill himself gave little regard to P/E ratios, preferring instead to focus on the future.
Just add science
It’s fair to say that bullish sentiment this year has been kind to many investing strategies (a rising tide, etc) and that the SoS deserves a thorough test over the months and years ahead. Indeed, while the screen offers some really interesting insight into which stocks are ticking the boxes of various investment styles and models, it’s still fairly unwieldy (not least because shares can easily slip on and off quite quickly). So be warned - its performance may well take a turn for the worse at some point.
However, the underlying principle that great stocks can be found using a combination of investing styles really is the secret sauce behind the SoS. And with that in mind, the new StockRanks tool on Stockopedia really ratchets up the science behind the general concept. It does it by ranking the entire market for companies achieving the best composite scores based on their quality, value and momentum characteristics. In the case of Matchtech, for instance, a StockRank of 99 puts it in the top 1% of the market based on those QVM factors.
Until now, the SoS has offered some intriguing evidence that you can beat the market with stocks that score well across multiple investment models and styles. With StockRanks, investors can take a scientific approach to ranking the entire market in order to spot gaps and profit from opportunities that others fail to see.
Filed Under: Quality Investing,