Small Cap Value Report (16 Oct 2015) - PHD, CNCT, RSTR

16th Oct '15 by Paul Scott

39 comments 23189 reads

Good morning!

This market certainly feels buoyant at the moment. It's the GARP (growth at reasonable price) shares in my portfolio that are really zooming up. My value shares aren't budging much, so it's definitely growth that the market is most interested in right now.

The trouble is, quite a few of my GARP shares have now become GAFP (growth at full price), or even GAHP! So what to do next? Should I sell things once they become fully valued, which feels the logical thing to do? - but very often turns out to be a terrible mistake, as good growth stocks can continue rising for a long time, long after they start to look fully priced. The growth can mean that companies beat broker forecasts by a lot, so things you thought were fully priced, were actually still cheap - it just hadn't yet been reflected in results or forecasts.

It's a tricky balancing act. In my view it's just a question of carefully re-appraising each individual share. Is the growth potential real? What could go wrong? As several interviewees in my audiocasts have said - top-slicing a bit of your holding (say 20%-ish) when the price has risen a lot, works well - because you keep your core holding, but have banked a bit of the profit to reduce risk. Also you then have a pot of cash to buy back on any dips.

Proactis Holdings (LON:PHD)

Share price: 116.5p (up 13.7% today)
No. shares: 39.5m
Market cap: £46.0m

(at the time of writing, I hold shares in this company)

I see that Proactis Holdings (LON:PHD) shares have shot up today, to 116.5p, which is quite surprising. A reader asked me for feedback after my meeting with the CEO & FD earlier this week, so I'll give my thoughts about it here. I came away very impressed. It's a share I've held for a while now, and see as a core long-term holding in my personal portfolio.

Proactis (website here) is an acquisitive software group, which has made 3 small bolt on acquisitions in the last couple of years, all of which have gone very well. The strategy is to build a suite of software products all addressing various aspects of procurement - so it's about spend control for clients.

Proactis already has 500 "blue chip"

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cig

17th Oct '15

I find the paper a bit disingenuous in using 1991-2013 as their "out of sample" period, thereby not quite including the progressive adaptive effect of all the people trying to exploit this effect -- although adaptation applies to value as well, and on pretty much the same timeframe, so it's more a question of the returns of both strategies being lower in the future than the comparison being biased.

As an alternative out-of-sample period, I've just looked at all the paper's authors' company momentum funds on morningstar. Since inception, the 2009 vintage (AMOMX, ASMOX, AIMOX, QEMLX) is too close to their benchmarks to be distinguishable (though perf = fee + trading costs is not bad for active management, if uninteresting for punters), the 2012 vintage funds (ATMOX, ATSMX, ATIMX) outperformed somewhat, but it seems all of that outperformance is from a few months in late 2012 and they hug the index thereafter. This looks a bit like luck and contrary to their paper's assertion that momentum outperforms most of the time.

Besides, one could argue HML is a worse proxy for ideal value than UMD is for ideal momentum.

Finally the Sharpe Ratio is a risk metric that's flattering for momentum, because it doesn't account for rare but sharp systemic reversal in a psychologically accurate way. Value -- as managed by human investors -- would look better if that was taken into account.

That said I still agree with you that both momentum and value will probably outperform in the future, and that they are complementary, though my estimate is that the return will be less than half of what you expect it to be :-).

Rusty2

Looking on Stockopedia screens the best performing ones are values ones? The 52 high screen has produce about 15% pa not bad but some value screens are up 25-35% pa. It has been a fairly bull market over the last 4 years, not sure how momentum shares perform in a bear market. Interesting that that screen fell quite badily in first half of 2014, down from 75% to 50%. I agree that value and momentum are probably the best investment strategy. But that probably means buying into the momentum early. Look AT Xaar (LON:XAR) would you buy it at 500p a few months ago, yes it did go to 550 but is back down to 500p now, it was only 222p a year ago. Same with Clarkson (LON:CKN), value buy at 1900 and sell at 2800, momentum investor buy at 2700p? sell at ? share price now about 2200p. I really think it depends on the company, momentum works for shares that go up fairly continously like Next (LON:NXT), upward trend over the last 5 years, I don't imagine thats been classed as a value share.

AlanJenkins2

I suspect that quality screens may outperform value screens in bear market conditions ?

I don't agree, I think that is an over generalisation of value investors, I believe many do not sit waiting for the market to twig. Yes many may sell out when they have made their quick 30% or some will sell out at higher level like 100%, many of mine I have sold out at around 50% after that they seem to either fall back, see Ashtead (LON:AHT), Clarkson (LON:CKN), Vislink (LON:VLK) etc. All I know is my sales have performed worse than the ones I'm still holing, ie if I have not sold them I would have lost about 10% this year. So you can buy AHT at 1200p and CKN at 2800p and VLK at 60p. Yes some have gone up after I sold, one got a bid, one recovered, 2 builders have gone up about 15% more but overall I'm better off having sold. I'm sure momentum investors sell out too early or too late?

Maybe but I have found that low value shares ie ones that have gone up a lot are the biggest fallers and value as they are good value don't tend to fall that much. Value and quality are a good combination, many of my successful ones looking back would fall into that category.

Edward Croft

@pka ... in answer to this...

This begs the question of why you've given equal weighting to Quality, Value and Momentum in the QVM StockRank. If Momentum is the most profitable of all the factors, why not have a new StockRank in which Momentum is given twice the weighting of Quality and Value? You could call it the QVMM StockRank, to distinguish it from the present QVM one.

Imagine you are in a go-kart race and you find you've been free-wheeling for some time without losing speed. You might be inclined to say "hey looks like the engine we've got isn't needed - let's ditch the weight and we'll go a bit faster". The next hill that comes along might show the foolishness of that decision !

PhilHofGrowYourDough

Hi Herbie from your description it appears you buy using value criteria and sell based on momentum.

For a traditional value investor, the watch word is patience ... "I've spotted something the market hasn't and it's just a matter of time before I'm proved right! In fact I'm so confident I'll buy more if the price dips".

I've learnt that I can't trust my ability to make that assessment and to trust that assessment to others, even respected tipsters is folly. A suggestion has been made that momentum investors are 'lucky' or are gambling with hteir selctions. I'd suggest that most investors on ADVFN or MF or even here get sold the pup that they should be value investors so they try to follow that appraoch but their ability to form an accurate value assessment is poor and so in effect they too are lucky or gambling.

For me, farming for stock selections using quantitative characteristics of successful investment approaches has and is proving highly successful. Since switching approaches my investments are up 80% in 30 months. My goal is to double my investments every three years.

With respect to generalisations, I agree. I just roll my eyes at peoples desire to label in such coarse terms. For me I'd like to see every citizen take control of their investments and cut out the 'experts' in city that generate paltry returns. I'm a bright guy that can undertake detailed research, however I have a resistance to pour through accounts or to gain the necessary knowledge that is required to build an accurate value investor assessment of a company. And so most members of the general public would also struggle to do that too. However, you don't need to be a genius to follow a quantitative approach as long as you are disciplined in your approach.

The question one has to ask oneself is "Am I actually any good at analysing a company?" and does my approach fit with the amount of time and enthusiasm I have to devote to it.

No one else can answer those questions for you.

If you look at the Guru screens, it's true some Value screens produce good results, e.g. Bill Miller Contrarian Value Screen has produced an Annualised return of 37% however it generates very few selections and in fact at some stages there have been no selections generated. If you compare that with the Naked Trader strategy (annualised return 25%) you'll see that it generates a good number of selections and significantly there is much less volativity in performance.

Paul Scott

Balance sheets. All my stocks that crapped out last year, have spruced up this year!

SAL. FLYB. IND. BOO.

Last year's losers are this year's winners. DYOR.

PP.

Novice Investor

I won't requote what Buffett said about the level of intelligence required to invest successfully in the stockmarket, but I always bring it to mind when I hear the latest investment of some of my more feted work colleagues. I work with many extremely intelligent people (some generally accepted as geniuses), far more intelligent than I, but you'd be astonished at the investing/trading behaviour of some of them.

Whether you favour momentum, value or both, the development of more sophisticated screening software has made it ever easier to adopt a more consistent logical approach to investing. The most important factor, I believe, is consistency.

Buffy

pka

Hi Ed, you wrote in response to my earlier post:

"Imagine you are in a go-kart race and you find you've been free-wheeling for some time without losing speed. You might be inclined to say 'hey looks like the engine we've got isn't needed - let's ditch the weight and we'll go a bit faster'. The next hill that comes along might show the foolishness of that decision !"

It's a nice analogy, but I'm not suggesting ditching the go-kart's engine. I'm suggesting keeping the engine of value and quality, but making it more streamlined by doubling the weighting of momentum in my proposed QVMM StockRank (relative to its weighting in the present QVM StockRank). Momentum would then have the same weighting as Quality and Value combined, which I think would be a good approach because academic research suggests that Momentum provides better performance on average than either Quality or Value on their own. On those occasions when Momentum crashes, the Q and V components of a QVMM StockRank would still be in the engine to power the go-kart out of trouble.

I may appear that those companies were sold on momentum but all 3 were on value. Clarkson (LON:CKN) was on a target of over 2800p, some on here sold out earlier. Sometimes I buy on momentum and I confess I'm changing from value investing to other strategies, the problem with some value investing is you have to watch whats happening all the time. The problem with momentum is it can change pretty quickly, maybe worth having a trailing stop loss.

Re Naked Trader screen that is more of a mixture of Value and Momentum rather than just momentum, his real trades are more value trades I would say, having seen the prices he has bought in at, many are good calls at the bottom, I have bought a few of his like iomart (LON:IOM) which has done very well, note the Naked Trader screen is nothing like his actual trades, I think maybe it needs tweaking more towards value. He sets target prices about 30% higher but will hold if momentum continues. If you look at his blog you can see all his trades and targets and stop loss prices. Yes I agree about the Bill Miller screen but there are 3 others that have done well.

Re: Naked Trader ... if you read his book the value criteria is quite simple ... PE < 15, he looks for reasonable debt, etc. but most crucially is his timing of purchases and addons which is based on news (momentum of EPS growth through something new) and when the price is breaking out.

For me the naked trader integrates lots of VGM, he looks for growth drivers, he sets a value limit and he only buys when there is strong momentum. If the price appreciates and he likes the news flow he'll buy more and more.

I'm not sure about the strong momentum, he bought Poundland (LON:PLND) when it fell to 273p, not much momentum there, thats more bottom fishing. Also Regenersis (LON:RGS) at 140p, again that was at bottom. Quantum Pharma (LON:QP.) is also not a positive momentum?

He might well have a few special situation plays, e.g. he attempts to buy into shares that are going to break into the FTSE 100 as he knows they'll get an uplift from FTSE 100 trackers buying into them, but from my recollection of reading his book his main strategy was along the lines I described.

I had a quick look at some of these ...

Poundland ... he's been in/out of that stock since Mar 2014, he was in again in June and out again in Sept and back in again in Sept. On the day he bought back in there was an announcement of director purchases which is potentially positive momentum.

Regenersis is another share he's been on/out of so he clearly knows it well. I know he uses Level 2 analysis so perhaps he spotted something in the run up to the upcoming results. Potential positive momentum. However he did it he bought in just prior to a big leap.

Quantum ... he's been building a position with several buys, the latest of which was on the back on an announcement of a contract win ... I'm guessing he'd see that as having the potential to generate positive momentum. If analysts had translated the potential impact of the contract win through to the stock report you might have agreed that he bought the latest batch on a positive momentum shift.

iwright7

18th Oct '15

Hi,

Has anyone been to one of NT's investing seminars and if so what did you think of it? Ian

samg

Back to the knitting !

We are a "supplier" on the Proactis system with experience of implementing an integration to our system. It was nothing short of painful, longwinded and inflexible. Quite a few of our customers have bought into the Proactis promise of better purchasing but then lose the will/have the ability to implement it. That is not to say that Proactis do not make a nice wedge in the meantime and more people will continue to buy in.

19th Oct '15

Yes I know he has been in Poundland before usually when the price falls to 300p or less, but my point was its not strong share price momentum. I agree he seems to buy on news when he believes momentum will change from negative to positive, of course you will not always call that right hence his stop loss policy around 12%. A few of his have not done well like Shoezone, ETO and SSY. Yes his timing is usually very good, thats why following his updates which are about 2 weeks after is often too late.

Diploma (LON:DPLM) is also a recent purchase at 657p, year low is about 620p, directors buying. Price did go up to 700p but is back down to 640p.

Small Cap Value Report (16 Oct 2015) - PHD, CNCT, RSTR

Proactis Holdings (LON:PHD)

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Paul Scott

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