Ten quality stocks to watch in 2015

Twelve months ago investors were reflecting on a year that saw many small and mid cap shares leap in price. Momentum and value strategies proved to be big winners, while quality stocks were often left lagging. But at the time it was starting to look like strong financial quality could play a much more influential role in 2014. After all, if frothy share prices were being driven by expectations of continuing earnings growth, any stock that dared to disappoint was at risk of being hit hard.

As it turns out, that was a fair assessment. Across the market this year, earnings fails have forced down prices. Just look at previously popular stocks like ASOS, down 59%, and Xaar, down 76%. There were times during earnings season when the number of small and mid cap profit warnings felt relentless. Meanwhile the 'junk' end of the market has been heavily marked down too, with pre-revenue oil and mining stocks being decimated.

Picking safer stocks

At the time of last year's Santa rally (which kicked off in early December) we took a look at mid-cap stocks that were perhaps best placed to withstand a fall in investor sentiment. Taking a similar approach to the likes of Joel Greenblatt and Warren Buffett, we went hunting for shares with the best combinations of value and quality. We did that using Stockopedia's Quality + Value (QV) Crossover Rank (subscribers can see the current screen here). As the name suggests, this rank pairs stocks with the best blend of attractive value and financial quality across a range of measures.

Topping the mid-cap list at the time was transport operator Go-Ahead Group, investment specialist Intermediate Capital, oil group Soco International, IT firm Micro Focus International and support services company Interserve.

As you can see from this table, the price performances of all five stocks over 12 months have been extreme. The falling oil price has dented already weak sentiment towards resource companies, which has been painful for Soco. But two 50% gainers in Go-Ahead and Micro Focus mean that the average return from this small basket of quality, value stocks was 13.8% over the year, excluding dividends. Not bad considering that the FTSE 250 is up just a couple of percent.

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Ben Hobson

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VegPatch

10th Dec '14

Mountview is a great little investment. It is property company which specialises in owning reversionary tenancies, a bit like Daejan (£DJAN) or Grainger Trust (£GRI). Optically it used to trade around 'fair value' for long periods, as its share price was close to its stated NAV. The trick however was to read the accounting treatment of the reversionary tenancies, which as they were classed as trading properties meant they were held at the LOWER of historical cost or written down value on the B/S. When the company sold the properties, as the tenants vacated them, the historical profit margin (todays sale price minus historical cost that they were held in the B/S) was close to 50%. The stated Net Asset Value was around £60/share but I always felt it was c£125/share on an open market post tax basis. The recent note in the accounts, where the company conducted an open market appraisal, I think points to a post tax NAV of £143/share. The secret is now out ! Still attractive trading around 35% discount IMHO.

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